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. Products include rotating electrical, wheel hub, brake-related, diagnostic, and other products. The report covers the three months ended June 30, 2020, the first quarter of fiscal 2021, and was filed August 10, 2020.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $95.4 million | $109.1 million | Down 12.6% |
| Gross profit | $13.4 million | $17.6 million | Down 23.9% |
| Gross margin | 14.0% | 16.1% | Down 210 basis points |
| Operating income (loss) | $0.4 million | $(1.7) million | Improved |
| Interest expense, net | $4.4 million | $6.2 million | Down 28.6% |
| Net loss | $(3.0) million | $(6.2) million | Improved |
| Net loss per share | $(0.16) | $(0.33) | Improved |
| Cash flow from operations | $22.4 million | $(18.4) million | Improved by $40.8 million |
Cash and cash equivalents were $27.5 million at June 30, 2020, compared with $49.6 million at March 31, 2020. Total assets were $760.0 million and shareholders’ equity was $272.1 million. Working capital was $87.4 million, with a current ratio of approximately 1.3:1.0.
Inventory totaled $241.3 million, including $231.3 million of net inventory and $9.9 million of inventory unreturned. Contract assets totaled $264.8 million, including $213.5 million of remanufactured cores held at customers’ locations.
Total debt included $112.0 million outstanding under the revolving facility and $23.4 million of term-loan principal. The company had $85.1 million available under the revolving facility after contractual adjustments and $5.7 million of outstanding letters of credit. The credit facility matures June 5, 2023. Management reported compliance with all debt covenants; the senior leverage ratio was 1.82 versus a maximum of 3.00, and the fixed-charge coverage ratio was 1.38 versus a minimum of 1.10.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of COVID-19-related economic effects. Brake-related product expansion contributed $2.9 million of quarterly sales.
- Gross margin declined to 14.0% from 16.1%. COVID-19-related costs reduced gross profit by approximately $1.8 million, and transition costs related to Mexico operations were $3.3 million versus $1.4 million.
- Operating expenses declined 32.5% to $13.0 million, driven by lower general and administrative, sales and marketing, and research and development costs.
- General and administrative expense benefited from non-cash foreign-exchange contract gains of $2.8 million and foreign-currency lease remeasurement gains of $2.0 million.
- Operating cash flow improved substantially because of increased accounts-receivable collections and more limited inventory growth. The company repaid $40.0 million of revolving debt and $0.9 million of term debt during the quarter.
- Receivables discounted increased to $111.4 million from $96.9 million, while the weighted-average discount rate declined to 2.5% from 3.9%.
- The company adopted the expected-credit-loss accounting model and related fair-value disclosure guidance on April 1, 2020. Management reported no material financial-statement impact.
Guidance, Outlook, Risks, and Unusual Items
Management stated that customer demand fell significantly in April 2020 but substantially recovered. The near-term outlook was described as positive, although the company could not predict the ultimate long-term effects of COVID-19. Operations continued because the company was deemed essential, but supply-chain disruptions, temporary shutdowns in Mexico and Asia, reduced production efficiency, safety measures, and increased employee and protective-equipment costs affected results.
COVID-19-related expenses were approximately $2.3 million in the quarter. Government assistance totaled approximately $0.5 million, consisting of Canadian and Asian wage-support programs. The company also deferred $0.4 million of employer social-security taxes. Cost controls included furloughs, layoffs, salary reductions affecting 175 employees, a hiring and salary-increase freeze, and travel restrictions.
Fiscal 2021 capital-expenditure expectations were approximately $6.3 million for current operations and $11.0 million for continued expansion in Mexico. Management believed cash, short-term investments, receivable discount programs, available borrowing capacity, and other resources were sufficient for expected working-capital, debt repayment, lease, and capital-expenditure needs over the next 12 months.
Key risks include the duration and severity of COVID-19, customer and supplier concentration, working-capital requirements, reliance on receivable discount programs, covenant compliance, foreign-exchange volatility, availability and cost of used cores and components, tariffs, competition, and the company’s ability to maintain positive operating cash flow. Three customers represented 45%, 26%, and 17% of net sales, respectively, in the quarter.
U.S. Customs and Border Protection has asserted that the company may owe approximately $17 million of additional duties relating to products imported from Mexico from 2011 through mid-2018. The company disputes the amount and intends to defend the matter vigorously; the filing does not state a clear accrued liability for this claim.
Unusual items included a $1.4 million non-cash write-down of cores held at customers, foreign-currency gains, a $1.0 million share-based compensation expense, and a $1.4 million reduction in the carrying value of remanufactured cores held at customer locations.
Important Facts for Investors to Verify
- Whether COVID-19 demand recovery continued and whether additional shutdowns or supply-chain disruptions affected subsequent quarters.
- The sustainability of the 14.0% gross margin after excluding or normalizing COVID-19 costs, Mexico transition costs, core revaluations, and foreign-exchange gains.
- Revolving-facility availability, borrowing-base capacity, covenant headroom, and the June 2023 maturity.
- The company’s dependence on receivable discount programs, including whether those programs remain available and at what cost.
- Inventory and contract-asset realization, particularly the $213.5 million of remanufactured cores held at customer locations.
- The status and potential financial exposure of the approximately $17 million customs-duty dispute.
- Customer concentration and the credit quality of major customers, especially as economic conditions remain uncertain.
- Actual fiscal 2021 capital expenditures and progress of the Mexico expansion relative to the stated $17.3 million expectation.