Motorcar Parts of America, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019, filed November 12, 2019. The company supplies non-discretionary automotive aftermarket replacement parts and diagnostic equipment, primarily to North American retailers, warehouse distributors, and automobile manufacturers. Products include rotating electrical components, wheel hubs, brake products, turbochargers, diagnostics systems, and power electronics. Fiscal year ends March 31.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2019 | Three months ended Sept. 30, 2018 | Six months ended Sept. 30, 2019 | Six months ended Sept. 30, 2018 |
|---|---|---|---|---|
| Net sales | $150.4 million | $127.9 million | $259.5 million | $219.6 million |
| Gross profit | $36.6 million | $25.7 million | $54.2 million | $42.1 million |
| Gross margin | 24.3% | 20.1% | 20.9% | 19.2% |
| Operating income | $14.7 million | $10.4 million | $13.0 million | $8.5 million |
| Operating margin | 9.8% | 8.1% | 5.0% | 3.9% |
| Net income (loss) | $6.2 million | $3.5 million | $38,000 | $(2.0) million |
| Diluted EPS | $0.32 | $0.18 | $0.00 | $(0.10) |
| Net cash used in operating activities | $(8.4) million | $(5.5) million | $(26.7) million | $(6.4) million |
- At September 30, 2019, cash and cash equivalents were $6.5 million, short-term investments were $2.2 million, and working capital was $72.1 million. The current ratio was 1.2 to 1.0.
- Net inventory was $250.7 million, up from $233.7 million at March 31, 2019. Accounts receivable, net, was $69.9 million, up from $56.0 million.
- Revolving debt was $144.0 million and term-loan principal was $26.3 million. After contractual adjustments, $74.0 million was available under the revolving facility; $4.0 million of letters of credit was outstanding.
- Total liabilities were $431.2 million versus shareholders’ equity of $281.3 million. Adoption of the lease standard resulted in $49.3 million of operating lease assets and $52.4 million of operating lease liabilities at quarter-end.
- Capital expenditures were $6.9 million for the six-month period, with total capital expenditures including finance leases of $9.3 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 17.5%; six-month sales increased 18.2%. Growth reflected continued rotating electrical and wheel hub expansion, fiscal 2019 acquisitions, and the introduction of brake calipers in August 2019. Brake calipers generated $4.6 million of second-quarter sales.
- Gross margin improved by 4.2 percentage points in the quarter and 1.7 percentage points for the six-month period. Core inventory revaluation charges declined to $2.9 million in the quarter from $6.2 million and to $7.5 million for six months from $8.8 million.
- General and administrative expense rose 58.8% in the quarter and 24.6% for six months, reflecting acquisition-related costs, internal-control remediation, higher professional services, foreign-currency lease remeasurement losses, and increased intangible amortization.
- Interest expense increased 14.5% in the quarter and 17.8% for six months, primarily because of higher average borrowings supporting growth initiatives and inventory accumulation.
- Operating cash flow deteriorated materially, driven by inventory and receivables growth, Mexico expansion costs, customer core buy-backs, and lower accounts payable and accrued liabilities.
- The June 2019 credit-facility amendment increased the revolving facility to $238.6 million and modified borrowing-base and covenant provisions, including eligibility for brake-related inventory.
Guidance, Outlook, Risks, and Unusual Items
- Management expects cash, short-term investments, receivables discount programs, available credit, and other sources to fund working capital, debt repayments, leases, and capital expenditures for the next 12 months.
- For fiscal 2020, management expected approximately $7.1 million of capital expenditures for current operations and approximately $15.0 million for continued Mexico expansion.
- Management is pursuing organic growth and acquisitions, expanding manufacturing and distribution capacity in Mexico, and broadening diagnostic-testing capabilities for internal-combustion engines, electric vehicles, and aerospace applications.
- The company adopted ASC 842 lease accounting on April 1, 2019. Foreign-currency lease remeasurement produced general and administrative losses of $1.1 million in the quarter and $637,000 for six months.
- 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. The company disputes the claim and has not indicated that a liability has been accrued.
- Disclosure controls were not effective as of September 30, 2019 because of a previously reported material weakness involving accounting-policy review, technical accounting resources, subsidiary oversight, and documentation. Management expected remediation before the end of fiscal 2020, subject to testing.
- Key risks include customer concentration, working-capital requirements, inventory availability and obsolescence, customer payment terms, leverage and covenant compliance, interest rates, foreign exchange, tariffs, competition, acquisition integration, litigation and customs claims, and the continued availability of receivables discount programs.
- The three largest customers represented 84% of quarterly sales and 83% of six-month sales. Rotating electrical products represented 77% of quarterly sales and 76% of six-month sales.
Most Important Facts for Investors to Verify
- Whether operating cash flow improves as inventory and receivables growth moderates and whether the company can fund planned Mexico expansion without materially increasing leverage.
- The status, potential exposure, and accounting treatment of the approximately $17 million customs-duty claim.
- Progress toward remediation of the material weakness in internal control over financial reporting.
- Availability under the revolving credit facility, compliance with the maximum senior leverage ratio of 3.00 and minimum fixed-charge coverage ratio of 1.10, and sensitivity to interest-rate changes.
- Whether growth from brake calipers, acquisitions, and other new products offsets customer concentration, pricing pressure, core-return obligations, and inventory risks.
- The sustainability of improved gross margins after core revaluations, Mexico transition costs, tariffs, customer allowances, and other unusual items.