Motorcar Parts of America, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020. The filing also provides unaudited fourth-quarter data for the quarter ended March 31, 2020; the request’s “2019 Q4” label does not match the filing period.
Business Context
Motorcar Parts of America supplies non-discretionary automotive aftermarket replacement parts and diagnostic equipment. Products include rotating electrical components, wheel hubs and bearings, brake products, and diagnostic and electrification equipment. Approximately 98% of fiscal 2020 sales were in North America.
- Approximately 36,000 SKUs and 4,012 full-time employees at March 31, 2020.
- Major customers include AutoZone, Advance, Genuine Parts/NAPA, and O’Reilly. The three largest customers represented 84% of fiscal 2020 sales; AutoZone represented 38%.
- Fiscal 2020 included the full-year contribution from fiscal 2019 acquisitions and the launch of brake calipers, which generated $28.1 million of sales.
Financial Performance and Liquidity
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $535.8 million | $472.8 million | +13.3% |
| Gross profit | $118.4 million | $89.2 million | +32.8% |
| Gross margin | 22.1% | 18.9% | +3.2 percentage points |
| Operating income | $16.7 million | $15.6 million | +7.0% |
| Net loss | $7.3 million | $7.8 million | Improved by $0.6 million |
| Diluted loss per share | $0.39 | $0.42 | Improved |
| Cash flow from operations | $18.8 million | $(40.3) million | Improved by $59.1 million |
| Capital expenditures | $14.2 million | $11.1 million | +27.0% |
- Net sales growth reflected expansion across product lines, brake caliper sales, and the full-year effect of acquisitions.
- Gross margin benefited primarily from a lower non-cash revaluation of cores held at customer locations: $10.8 million in fiscal 2020 versus $18.8 million in fiscal 2019.
- Operating expenses increased to $101.7 million from $73.5 million. General and administrative expense rose 55.4% to $71.4 million, including $11.7 million from remeasurement of foreign-currency lease liabilities and $6.5 million from forward foreign-currency contracts.
- Interest expense increased to $25.0 million from $23.2 million, primarily because of higher average borrowings supporting inventory and growth initiatives.
- The company recorded a $1.0 million income tax benefit, partly reflecting net operating loss carrybacks under the CARES Act.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents increased to $49.6 million from $9.9 million.
- Working capital increased to $90.6 million from $73.5 million; the current ratio was 1.3:1.0.
- Net accounts receivable increased to $91.7 million from $56.0 million. Net inventory was $225.7 million versus $233.7 million.
- Long-term contract assets increased to $239.5 million from $221.9 million, primarily reflecting remanufactured cores held at customer locations.
- Revolving borrowings increased to $152.0 million from $110.4 million. Term debt was $24.1 million, net of financing fees.
- The amended revolving facility increased to $238.6 million. At March 31, 2020, $58.5 million was available after adjustments and $3.6 million was reserved for letters of credit.
- The company was in compliance with its debt covenants. Reported senior leverage was 2.23 versus a maximum of 3.00; fixed-charge coverage was 1.44 versus a minimum of 1.10.
- Receivables discounted through customer programs totaled $461.5 million, with a weighted-average collection period of 346 days and $14.8 million of related interest expense.
Material Changes Versus the Prior Comparable Period
- Sales increased 13.3%, led by brake calipers and acquisitions; brake-related products rose to 8.9% of sales from 3.1%.
- Rotating electrical products declined to 73.3% of sales from 78.9%, indicating greater product diversification.
- Gross margin improved, but general and administrative expense grew substantially because of foreign-currency and lease-related losses, growth investments, professional fees, and control-remediation costs.
- Operating cash flow turned positive after a significant use of cash in fiscal 2019, when inventory was built and $28.3 million was paid for customer core buybacks.
- Fiscal 2020 included adoption of ASC 842, resulting in operating lease assets of $53.0 million and operating lease liabilities of $66.5 million at year-end.
- The previously reported material weakness in internal control over financial reporting was remediated during the fourth quarter. Management and Ernst & Young concluded that internal controls were effective as of March 31, 2020.
Fourth-Quarter Fiscal 2020
| Metric | Q4 Fiscal 2020 | Q4 Fiscal 2019 |
|---|---|---|
| Net sales | $150.7 million | $129.1 million |
| Gross profit | $36.6 million | $26.0 million |
| Operating income | $(5.5) million | $5.5 million |
| Net income | $(8.2) million | $(2.8) million |
| Diluted loss per share | $0.43 | $0.15 |
Fourth-quarter sales and gross profit increased year over year, but operating results were pressured by $34.5 million of general and administrative expense, including significant foreign-currency and lease remeasurement losses.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that COVID-19 did not materially affect fiscal fourth-quarter results, but expected a potentially significant and currently unquantifiable effect on fiscal 2021 and later periods.
- Automotive repair and parts distribution were generally treated as essential businesses, but facilities in Mexico, China, Malaysia, Singapore, and India experienced restrictions or temporary closures. Customer demand softened in April 2020.
- Management implemented cost and cash-preservation measures, including production reductions, potential capital-expenditure reductions, employee layoffs or furloughs, at least 25% executive salary reductions, and deferred board compensation.
- In April 2020, the company collected $59.7 million of receivables through discount programs, incurring $1.6 million of interest expense.
- Fiscal 2021 expected capital expenditures were approximately $17.3 million, including $11.0 million for continued Mexico expansion.
- U.S. Customs and Border Protection asserted that approximately $17 million of additional duties may be owed for products imported from Mexico during 2011 through mid-2018. The company disputes the amount and intends to defend the matter; no outcome is assured.
- The company’s customer concentration, reliance on core availability and offshore operations, variable-rate debt, foreign-currency exposure, supply-chain disruptions, tariffs, and competition are significant risks.
- Long-term customer contracts require substantial marketing allowances, core purchases, inventory, and personnel commitments. Contractual marketing-allowance commitments totaled $44.0 million at March 31, 2020.
- Goodwill of $3.2 million and finite-lived intangible assets were tested for impairment after COVID-19 indicators emerged and were not impaired at March 31, 2020. Future deterioration could result in impairment charges.
Investor Verification Checklist
- Verify the sustainability of positive operating cash flow after COVID-19-related demand, production, and supply-chain effects.
- Assess liquidity after considering $152.0 million of revolver borrowings, variable interest rates, receivable discounting, lease obligations, and covenant restrictions.
- Review the company’s estimates for core returns, customer allowances, contract assets, inventory reserves, and customer payment periods.
- Monitor exposure to AutoZone and the other two largest customers, including pricing concessions, payment terms, and marketing allowances.
- Track the $17 million customs-duty dispute and any related accruals or settlement obligations.
- Evaluate whether planned Mexico expansion and fiscal 2021 capital expenditures remain appropriate under revised demand assumptions.
- Confirm the effectiveness of the remediated internal controls in subsequent filings.
- Compare fiscal 2021 results with management’s COVID-19 assumptions, including the effect of closures, furloughs, cost reductions, and increased receivable discounting.