Motorcar Parts of America, Inc. — Q1 FY2023 Form 10-Q Summary
Business context and reporting period
MPA supplies non-discretionary automotive aftermarket replacement parts, including rotating electrical, wheel hub, brake-related and other products, as well as test solutions and diagnostic equipment for automotive and electric-vehicle applications. The filing covers the unaudited three months ended June 30, 2022, compared with the three months ended June 30, 2021. Fiscal year-end is March 31.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $164.0 million | $149.0 million | +10.0% |
| Gross profit | $30.3 million | $23.6 million | +28.6% |
| Gross margin | 18.5% | 15.8% | +2.7 percentage points |
| Operating income | $7.3 million | $5.7 million | +27.6% |
| Interest expense, net | $6.9 million | $3.9 million | +75.6% |
| Net income (loss) | $(0.2) million | $0.9 million | Declined |
| Diluted EPS | $(0.01) | $0.04 | Declined |
| Net cash used in operations | $1.0 million | $4.7 million | Improved |
Operating margin was approximately 4.5% versus 3.9% in the prior-year quarter. The company recorded a 142.3% effective tax rate, primarily because tax benefits were not expected for losses in certain jurisdictions, foreign tax-rate differences and nondeductible executive compensation.
Cash and cash equivalents were $9.2 million at June 30, 2022, compared with $23.0 million at March 31, 2022. Short-term investments were $2.0 million. Working capital was $115.1 million, with a current ratio of approximately 1.3:1.0.
Total debt consisted primarily of $146.0 million outstanding under the revolving facility and $15.9 million of term-loan principal. The revolving facility had $86.3 million of availability after contractual adjustments, and letters of credit outstanding totaled $6.4 million. The credit facility matures May 28, 2026. Interest rates at June 30, 2022 were 4.20% on the revolving facility and 3.82% on the term loans. The company was in compliance with its debt covenants, including a senior leverage ratio of 2.53 versus a maximum of 3.00 and fixed-charge coverage of 1.26 versus a minimum of 1.15.
Material changes versus the prior comparable period
- Sales increased $15.0 million, reflecting strong product demand despite continuing supply-chain and logistics disruptions.
- Gross profit increased $6.7 million. Margin benefited from higher sales and improved year-over-year freight and supply-chain costs, although inflation and logistics costs remained significant.
- Interest expense increased $3.0 million because of higher interest rates and increased average borrowings.
- Operating expenses increased $5.1 million. General and administrative expense rose 9.2%, research and development expense rose 24.5%, and the foreign-exchange line changed from a $2.5 million gain to a $0.7 million loss.
- Cash used in operations improved by $3.8 million, but the company continued to use operating cash, principally because of inventory investment.
- Inventory increased to $405.2 million from $385.5 million at March 31, 2022. Management said the increase was intended to address supply-chain disruptions and anticipated future sales. Annualized finished-goods turnover declined to 3.1 from 4.5.
- Financing cash flow changed from $16.1 million provided in the prior-year quarter to $11.3 million used, reflecting lower borrowings and higher repayments.
- Receivables discounted were $142.6 million, compared with $146.7 million, while the annualized average discount rate increased to 3.7% from 1.8%. Related interest expense increased to $4.9 million from $2.5 million.
Guidance, outlook, commentary, risks and unusual items
Management stated that the near-term outlook appeared positive and that cash, short-term investments, receivable-discounting programs, available credit and other sources were expected to be sufficient for working capital, debt repayments, lease obligations and capital expenditures over the next 12 months. The company expects approximately $9.5 million of capital expenditures during fiscal 2023, primarily for current operations and growth initiatives.
- COVID-19 and related supply-chain, logistics, labor and facility disruptions remain material uncertainties. COVID-related costs were $0.7 million in the quarter.
- Gross margin included higher freight costs, supply-chain disruption costs, $3.0 million of amortization for core and finished-goods premiums paid to customers, and a $0.6 million noncash revaluation of cores held at customer locations.
- Foreign-exchange volatility affected results. Forward contracts had a notional value of $46.5 million, and the company recorded a $0.7 million noncash foreign-exchange loss.
- Customer concentration is significant: three customers accounted for 37%, 25% and 20% of quarterly sales, respectively. The two largest represented 43% and 22% of trade accounts receivable at quarter-end.
- U.S. Customs and Border Protection has asserted that the company may owe approximately $17 million in additional duties relating to imports from Mexico during 2011 through mid-2018. The company disputes the claim and intends to defend it, but states that it cannot assure that no accrual or payment will ultimately be required.
- The company had $17.9 million accrued for warranty returns at June 30, 2022. The filing also discloses substantial contract assets of $334.7 million and contract liabilities of $216.7 million, largely related to core programs and customer arrangements.
- The share-repurchase authorization had $18.3 million remaining, but no shares were repurchased during the quarter. Credit-facility restrictions permit up to $29.0 million of fiscal 2023 dividends and repurchases, subject to covenant compliance.
Important facts for investors to verify
- Whether higher interest rates, revolving borrowings and receivable-discounting costs continue to pressure earnings and cash flow.
- Whether inventory growth converts into sales and improved turnover without additional obsolescence reserves or working-capital strain.
- The status and potential financial exposure of the approximately $17 million customs-duty dispute.
- Whether customer concentration and reliance on receivable-discounting programs create liquidity or counterparty risk.
- Whether supply-chain, freight, inflationary and COVID-related costs continue to affect margins.
- Future compliance with the credit facility’s leverage and fixed-charge coverage covenants and the amount of borrowing availability.
- The company’s ability to fund approximately $9.5 million of fiscal 2023 capital expenditures while maintaining adequate cash liquidity.