Business Context and Reporting Period
Motorcar Parts of America, Inc. manufactures, remanufactures and distributes aftermarket automotive parts, including rotating electrical products, wheel hubs and bearings, and brake master cylinders. The company reports one operating segment and sells primarily in North America through large retail chains, warehouse distributors and original-equipment-service channels.
This Form 10-K covers the fiscal year ended March 31, 2016. The source also provides unaudited fourth-quarter data for the quarter ended March 31, 2016; it does not represent a fiscal 2015 fourth-quarter filing.
Financial Performance and Position
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $369.0 million | $301.7 million | +22.3% |
| Gross profit | $100.9 million | $81.6 million | +23.7% |
| Gross margin | 27.4% | 27.0% | +0.4 percentage points |
| Operating income | $38.3 million | $33.6 million | +14.0% |
| Income from continuing operations | $10.6 million | $11.5 million | -7.8% |
| Diluted EPS from continuing operations | $0.55 | $0.65 | Decrease |
| Operating cash flow | $15.3 million | $(9.5) million | Improved |
| Capital expenditures | $3.7 million | $3.7 million | Approximately unchanged |
- Net income was $10.6 million, compared with $11.5 million in FY2015. FY2014 net income included $100.9 million from discontinued operations and is not comparable without adjustment.
- Operating expenses increased to $62.6 million from $48.0 million. General and administrative expense increased 31.2% to $49.7 million.
- Interest expense increased 24.3% to $16.2 million, primarily because of a $5.1 million write-off of debt issuance costs when the prior financing agreement was refinanced.
- The effective tax rate increased to 52.1% from 44.2%, principally because of nondeductible warrant fair-value adjustments and executive compensation.
- Cash and cash equivalents declined to $21.9 million from $61.2 million. Working capital declined to $8.7 million from $66.7 million.
- Long-term core inventory increased to $241.1 million from $189.0 million, reflecting inventory requirements associated with growth and customer programs.
- Total debt consisted of a $7.0 million revolving loan and $23.0 million net term loan at March 31, 2016. The company reported $91.97 million of availability under the revolving facility and compliance with all financial covenants.
Fourth-Quarter FY2016 Data
- Net sales were $97.4 million, gross profit was $24.2 million and operating income was $9.6 million.
- Net income was $2.3 million, or $0.12 diluted earnings per share.
- Fourth-quarter general and administrative expense was $11.3 million and net interest expense was $2.7 million.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected the full-year contribution from new rotating electrical business awarded in January 2015 and the launch of remanufactured brake master cylinders in July 2015.
- Wheel hub products increased to 19.6% of FY2016 sales from 16.9%; brake master cylinders increased to 1.7% from 1.0%. Rotating electrical products declined to 78% from 82% of sales.
- Gross margin improved modestly because of lower per-unit costs and better overhead absorption, but results were reduced by customer allowances, returns, core inventory purchases and product start-up costs.
- FY2016 general and administrative expense included a $9.25 million net litigation settlement expense, a $5.14 million increase in the fair value of a warrant liability, and $4.22 million of increased bad-debt expense related to a customer bankruptcy. These were partly offset by a $5.8 million litigation recovery.
- Receivables discounted under customer programs increased to $331.2 million from $261.0 million, and related discount interest expense increased to $7.3 million from $4.9 million.
- The company acquired OE Plus, Ltd. in May 2015 for $2.7 million and recorded $2.1 million of goodwill and $2.6 million of finite-lived intangible assets, with contingent consideration of up to $2.0 million.
- The company completed a core buy-back program with a major customer and transferred $25.8 million from long-term core inventory deposits to long-term core inventory.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $4.0 million of FY2017 capital expenditures, plus additional investment for expansion in Mexico. The company also expected to launch a new product line in the second quarter of FY2017.
- Management stated that cash, short-term investments, receivable discount programs, credit-facility availability and other sources should be sufficient for expected working capital, debt repayments, capital leases and capital expenditures over the following twelve months.
- In May 2016, the revolving credit facility was amended to increase borrowing capacity from $100 million to $120 million, subject to borrowing-base restrictions and a $15 million letter-of-credit sublimit.
- Customer concentration is substantial: AutoZone represented 48% of FY2016 sales, while the three largest customers represented 87%. Loss of a major customer, pricing concessions or adverse payment terms could materially affect results and liquidity.
- The business requires significant investment in core inventory and is exposed to customer returns, marketing allowances, warranty claims, inventory obsolescence and changes in core availability.
- Long-term marketing-allowance commitments totaled $68.2 million, including $48.8 million due in FY2017. Total contractual obligations were $141.9 million.
- The company recorded a $1.1 million reserve for an investment-bank lawsuit and a $218,000 reserve related to a discontinued-subsidiary supplier settlement. The $1.1 million settlement was paid in May 2016.
- Foreign operations expose the company to currency, political, supply-chain and regulatory risks. A 10% adverse movement in relevant exchange rates was estimated to increase general and administrative expense by approximately $1.7 million.
- Ernst & Young issued unqualified audit opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of March 31, 2016.
Investor Verification Checklist
- Verify the sustainability of sales growth and margins after the initial contribution from new customer programs and product launches.
- Assess customer concentration, particularly AutoZone exposure and the renewal, pricing and allowance terms of major customer agreements.
- Reconcile operating cash flow with the substantial increase in long-term core inventory and evaluate whether core assets can ultimately be monetized as expected.
- Review liquidity after debt repayments, accrued core payments, marketing-allowance commitments and planned Mexico expansion spending.
- Evaluate the effect of receivable discount programs, variable interest rates and the availability and terms of the amended credit facility.
- Monitor warranty returns, customer returns, bad-debt reserves, inventory obsolescence reserves and litigation or tax contingencies.
- Separate recurring operating performance from unusual items, including litigation settlements, warrant remeasurement, debt refinancing costs and customer bankruptcy-related charges.