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 retailers, warehouse distributors, and automobile manufacturers. Products include rotating electrical parts, wheel hubs and bearings, brake-related products, and diagnostics and other power-electronic products. The filing covers the quarter and six months ended September 30, 2020, within fiscal 2021. Results were affected by COVID-19, operational expansion in Mexico, foreign-exchange movements, tariffs, and a customer distribution-center inventory realignment.
Key financial metrics
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Six months ended September 30, 2020 | Six months ended September 30, 2019 |
|---|---|---|---|---|
| Net sales | $154.7 million | $150.4 million | $250.1 million | $259.5 million |
| Gross profit | $39.7 million | $36.6 million | $53.1 million | $54.2 million |
| Gross margin | 25.7% | 24.3% | 21.2% | 20.9% |
| Operating income | $24.9 million | $14.7 million | $25.3 million | $13.0 million |
| Net income | $15.2 million | $6.2 million | $12.2 million | $38 thousand |
| Diluted earnings per share | $0.78 | $0.32 | $0.63 | $0.00 |
| Operating cash flow | $16.9 million | $(8.4) million | $39.3 million | $(26.7) million |
- At September 30, 2020, cash and cash equivalents were $20.9 million and short-term investments were $1.2 million.
- Working capital was $94.2 million, compared with $90.6 million at March 31, 2020; the current ratio was 1.3 to 1.0.
- Inventory was $240.0 million, up from $234.7 million at March 31, 2020. Total contract assets were $267.9 million, including $234.6 million classified as long term.
- Debt included $94.0 million outstanding under the revolving facility and $22.5 million of term-loan principal. Revolving debt declined from $152.0 million at March 31, 2020.
- The company had $97.0 million of availability under the revolving facility after contractual adjustments and $5.96 million of outstanding letters of credit.
- Capital expenditures were $6.8 million for the six months. Including finance leases and non-cash capital expenditures, total capital expenditures were $8.8 million.
Material changes versus the prior comparable period
- Second-quarter sales increased 2.9%, but six-month sales decreased 3.6%, reflecting the sharp April 2020 demand decline and subsequent recovery.
- Second-quarter gross margin expanded 140 basis points, while six-month gross margin improved 30 basis points. Gross profit benefited from a $2.85 million revised-tariff benefit and a net $3.50 million gain from core revaluation and inventory realignment in the quarter.
- Six-month net income increased substantially from near break-even in the prior year. Operating income more than doubled, supported by lower operating expenses, favorable foreign-exchange effects, and lower interest expense.
- Interest expense declined 44.6% in the quarter and 36.8% for the six months, primarily due to lower rates and lower average borrowings.
- Foreign-exchange impacts produced operating expense gains of $4.0 million in the quarter and $8.8 million for the six months, compared with losses in the prior-year periods. These gains were substantially non-cash.
- Operating cash flow improved by $66.1 million for the six months, partly due to improved operating results, higher accounts-payable balances, and working-capital management.
- The company reduced outstanding debt by $59.875 million during the six months and repurchased no shares during the second quarter. As of September 30, $21.3 million remained under the authorized share-repurchase program, subject to credit-facility limits.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that the near-term outlook appeared positive, but it could not reliably predict the ultimate long-term effects of COVID-19. Additional shutdowns, infection spikes, supply-chain disruption, production outbreaks, and reduced customer demand could adversely affect results.
- COVID-19-related costs were $2.05 million in the quarter and $4.34 million for the six months, included in cost of goods sold and operating expenses. Government wage subsidies totaled $528 thousand in the quarter and $986 thousand for the six months.
- The company implemented furloughs, layoffs, salary reductions, hiring and salary-increase freezes, travel restrictions, and other expense controls. Affected salaries were reinstated at various dates through September 30, 2020.
- Management expects fiscal 2021 capital expenditures of approximately $4.9 million for current operations and $12.4 million for continued expansion in Mexico.
- The company believes cash, short-term investments, receivable-discount programs, available borrowing capacity, and other sources will satisfy expected working-capital, debt-repayment, lease, and capital-expenditure needs over the next 12 months.
- The senior secured credit facility matures June 5, 2023. The company was in compliance with its covenants at September 30, 2020; the senior leverage ratio was 1.56 versus a maximum of 3.00, and fixed-charge coverage was 1.35 versus a minimum of 1.10.
- Receivable-discount programs accelerated collections on $222.3 million of receivables during the six months and generated $4.8 million of interest expense. Management cautioned that these programs may not continue and that their cost could rise.
- U.S. Customs and Border Protection asserted that approximately $17 million of additional duties may be owed for imports from Mexico from 2011 through mid-2018. The company disputes the amount and intends to defend the matter vigorously; no clear ultimate exposure is provided.
- Customer concentration is significant: three customers represented 89% of quarterly sales and 88% of six-month sales. The company also faces risks from customer payment delays, inventory and core availability, competition, tariffs, foreign currencies, interest rates, taxes, cybersecurity, and regulatory changes.
- The company adopted the expected-credit-loss accounting model on April 1, 2020 without a material financial-statement impact. Management reported effective disclosure controls as of September 30, 2020.
Important facts for investors to verify
- Whether the sales recovery after April 2020 is sustainable and how much of quarterly sales benefited from the $12.8 million customer inventory realignment.
- The effect of COVID-19 costs, Mexico expansion and transition expenses, tariff benefits, core revaluations, and foreign-exchange gains on normalized margins and earnings.
- Liquidity after considering only $6.0 million of cash credit in the senior-leverage calculation, scheduled term-loan repayments, lease commitments, and planned Mexico capital expenditures.
- The continuation, pricing, and concentration risks of receivable-discount programs and the company’s ability to collect customer receivables.
- The potential financial impact and timing of the approximately $17 million customs-duty dispute, along with other litigation and contingencies.
- Exposure to the three major customers, inventory and contract-asset levels, warranty-return accruals, and the company’s ability to convert these assets into cash.