Motorcar Parts of America, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Motorcar Parts of America, Inc. manufactures, remanufactures, and distributes aftermarket automotive parts, including rotating electrical products, wheel hub assemblies and bearings, and brake master cylinders. The company sells primarily in North America through retail chains, warehouse distributors, and original-equipment service programs. The filing covers the quarter ended June 30, 2016, the first quarter of fiscal 2017, and is unaudited.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $85.4 million | $85.8 million | Down 0.5% |
| Gross profit | $20.4 million | $26.0 million | Down 21.5% |
| Gross margin | 23.9% | 30.3% | Down 6.4 percentage points |
| Operating income | $13.3 million | $11.6 million | Up 14.2% |
| Operating margin | 15.5% | 13.5% | Improved |
| Net income | $7.5 million | $1.9 million | Up 293% |
| Diluted earnings per share | $0.39 | $0.10 | Up $0.29 |
| Cash flow from operations | $(13.8) million | $3.3 million | Down $17.2 million |
- General and administrative expense declined to $3.6 million from $11.4 million, primarily because of a $5.6 million gain from the change in fair value of the supplier warrant liability and lower legal fees.
- Interest expense declined to $2.8 million from $8.4 million, largely because the prior-year period included a $5.1 million write-off of debt issuance costs.
- The effective tax rate was 28.1%, compared with 39.9% in the prior-year quarter. The current-period rate benefited from a non-taxable warrant gain and $391,000 of excess tax benefits from early adoption of new share-based compensation guidance.
- Cash and cash equivalents were $19.7 million at June 30, 2016, compared with $21.9 million at March 31, 2016. Working capital was $3.2 million, with a current ratio of 1.0:1.
- Total term-loan principal was $22.7 million and revolving borrowings were $21.0 million at quarter-end. Approximately $98.0 million was available under the revolving facility, subject to borrowing-base adjustments and other limitations.
- Capital expenditures were $1.6 million, compared with $0.6 million in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Sales were broadly stable, but gross profit declined materially because of $8.4 million of customer allowances and initial inventory-return accruals associated with new business, together with $124,000 of start-up costs for a new product line.
- Lower per-unit production and purchasing costs partially offset the adverse impact of the new-business allowances and start-up costs.
- Operating income and net income increased despite the lower gross profit, principally because of the warrant fair-value gain, lower legal expense, and the absence of the prior-year debt-cost write-off.
- Operating cash flow turned negative as the company paid customer allowances related to new business and increased inventory to support expected growth. Non-core inventory increased to $73.3 million from $58.1 million at March 31, 2016, while long-term core inventory increased to $243.8 million from $241.1 million.
- The company early adopted revised share-based compensation accounting effective April 1, 2016, recording an $892,000 cumulative-effect adjustment to retained earnings and deferred tax assets.
- In May 2016, the company amended its credit facility, increasing revolving borrowing capacity from $100 million to $120 million and modifying EBITDA, capital-expenditure, and other provisions.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that cash, short-term investments, receivable discount programs, credit-facility availability, and other sources are expected to cover working-capital needs, scheduled debt repayments, capital leases, and capital expenditures for the next 12 months.
- Fiscal 2017 capital expenditures are expected to be approximately $4.0 million, excluding additional investments under consideration for expansion in Mexico. Management expects to use working capital and incur additional capital lease obligations to fund these expenditures.
- The company approved a stock-repurchase program of up to $10.0 million. At the filing date, $9.611 million remained available under the replacement program.
- The company was in compliance with all credit-facility covenants. The reported senior leverage ratio was 0.52 versus a maximum of 2.50, and the fixed-charge coverage ratio was 1.31 versus a minimum of 1.05.
- The supplier warrant liability was $10.1 million at June 30, 2016, down from $15.6 million at March 31, 2016. The resulting $5.6 million gain materially benefited reported earnings but was non-cash and subject to valuation assumptions.
- Receivable discount programs accelerated collections on $80.6 million of receivables during the quarter. The annualized weighted-average discount rate increased to 2.7% from 2.1%, and related interest expense increased to $2.1 million from $1.6 million.
- Customer concentration is significant: three customers represented 52%, 14%, and 21% of quarterly sales, respectively. The largest customer represented 39% of trade receivables at quarter-end.
- Key risks include dependence on major customers, customer pricing and payment-term pressure, substantial inventory and core requirements, availability and cost of Used Cores, negative operating cash flow, foreign-exchange exposure, borrowing-base and covenant restrictions, competition, and the continued availability of receivable discount programs.
- The filing reports no material changes to previously disclosed litigation or risk factors, no defaults under senior securities, and effective disclosure controls as of June 30, 2016.
Important Facts for Investors to Verify
- Whether the new-business allowances and inventory-return accruals are nonrecurring or will continue to pressure gross margin.
- Whether inventory growth converts into sales and operating cash flow without increased reserves, returns, or working-capital financing.
- The sustainability of earnings excluding the $5.6 million warrant fair-value gain and other unusual items.
- The continued availability, cost, and terms of customer receivable discount programs.
- Customer concentration and the effect of any change in the financial condition, purchasing patterns, or payment terms of the three largest customers.
- Progress, timing, and funding requirements for the planned Mexico expansion and fiscal 2017 capital expenditures.
- Compliance with debt covenants and the company’s ability to manage revolving borrowings, scheduled term-loan repayments, and its $10.0 million repurchase authorization.