Motorcar Parts of America, Inc. — Form 10-Q Summary
Business context and reporting period
MPA supplies non-discretionary automotive aftermarket replacement parts and diagnostic equipment, primarily to North American automotive retailers, warehouse distributors, and automobile manufacturers. The filing covers the fiscal third quarter and nine months ended December 31, 2020; results are unaudited. The company operates as one reportable segment.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2020 | Prior year | Nine months ended Dec. 31, 2020 | Prior year |
|---|---|---|---|---|
| Net sales | $122.6 million | $125.6 million | $372.7 million | $385.1 million |
| Gross profit | $24.2 million | $27.7 million | $77.4 million | $81.8 million |
| Gross margin | 19.8% | 22.0% | 20.8% | 21.2% |
| Operating income | $15.9 million | $9.2 million | $41.2 million | $22.2 million |
| Net income | $8.5 million | $0.9 million | $20.6 million | $0.9 million |
| Diluted EPS | $0.44 | $0.04 | $1.07 | $0.05 |
| Cash flow from operations | $33.2 million | $22.3 million | $72.5 million | $(4.4) million |
Operating performance benefited materially from foreign-exchange gains related to lease liabilities and forward contracts: $12.5 million in the quarter and $21.3 million for the nine-month period, compared with $3.8 million and $2.5 million, respectively, in the prior-year periods. Interest expense declined to $4.1 million in the quarter and $12.1 million for nine months, primarily because of lower rates and lower average borrowings.
At December 31, 2020, cash and cash equivalents were $12.8 million, short-term investments were $1.5 million, and working capital was $96.3 million. Accounts receivable were $45.3 million and inventory was $296.3 million. The company had $59.0 million outstanding under its revolving facility, $21.6 million of term-loan principal, $5.9 million of letters of credit, and $127.2 million available under the revolving facility. The senior secured credit facility matures June 5, 2023.
The company repaid $95.8 million of debt during the first nine months of fiscal 2021. It was in compliance with its debt covenants, reporting a senior leverage ratio of 1.18 versus a maximum of 3.00 and fixed-charge coverage of 1.24 versus a minimum of 1.10.
Material changes versus the prior comparable period
- Quarterly sales declined 2.4%; nine-month sales declined 3.2%, primarily due to COVID-19-related supply-chain and logistics disruptions and approximately $17.0 million of delayed orders expected to be realized in the fiscal fourth quarter and first quarter of the next fiscal year.
- Quarterly gross margin declined 220 basis points to 19.8%; nine-month margin declined 40 basis points to 20.8%. Higher freight costs, COVID-19 costs, and Mexico expansion transition expenses pressured gross profit.
- Net income increased substantially, supported by foreign-exchange gains, lower interest expense, lower selling and marketing costs, and lower general and administrative expenses.
- Operating cash flow improved from a $4.4 million use in the prior-year nine-month period to $72.5 million provided, reflecting stronger collections and increased accounts payable, partially offset by inventory buildup.
- Inventory increased to $296.3 million from $234.7 million at March 31, 2020, while accounts receivable declined to $45.3 million from $91.7 million.
- Receivables discounted increased to $367.1 million from $341.3 million; the associated interest expense declined to $7.3 million from $11.6 million due mainly to a lower discount rate.
Guidance, outlook, risks and unusual items
Management stated that near-term demand appeared positive and that delayed orders were expected to be fulfilled between the fiscal fourth quarter and the first quarter of the following fiscal year. No formal revenue or earnings guidance was provided. The company expects approximately $4.9 million of capital expenditures for current operations and $12.4 million for continued Mexico expansion during fiscal 2021.
COVID-19 continues to create risks involving customer demand, supply chains, logistics, production efficiency, employee safety, and operating costs. COVID-related expenses were $1.6 million in the quarter and $6.0 million for nine months, partly offset by $0.3 million and $1.3 million, respectively, of government assistance. Furloughs, layoffs, and salary reductions initially implemented during the pandemic were reinstated as of September 30, 2020.
Other significant risks include customer concentration, reliance on receivable discount programs, inventory and core-return obligations, foreign-exchange movements, competition, access to used cores and component parts, debt covenant compliance, and the ability to maintain positive operating cash flow. Three customers represented 35%, 26%, and 24% of quarterly sales, respectively.
The company faces a disputed claim from U.S. Customs and Border Protection for approximately $17 million of additional duties relating to imports from Mexico during 2011 through mid-2018. Management disagrees with the claim and intends to contest it; the filing states that the company cannot assure that it will not ultimately accrue or pay additional amounts.
An R&D milestone related to the E&M acquisition was achieved, requiring a $1.25 million payment in the fiscal fourth quarter. The company also expects to pay approximately $8,000 related to the Dixie acquisition obligation.
Important facts for investors to verify
- Whether the approximately $17.0 million of delayed orders were realized in the fiscal fourth quarter and subsequent first quarter.
- Whether COVID-19, freight, Mexico expansion, and supply-chain costs continue to compress gross margins.
- The sustainability of operating cash flow after the significant inventory buildup and continued capital spending.
- Availability and future cost of receivable discount programs and revolving credit capacity.
- Progress on debt reduction, covenant headroom, and the June 2023 credit-facility maturity.
- Resolution and potential accrual or payment related to the approximately $17 million customs-duty dispute.
- Exposure to customer concentration, core-return liabilities, foreign-exchange gains, and other nonrecurring or non-cash items affecting reported earnings.