MOTORCAR PARTS OF AMERICA INC quarterly report, Q2 FY2024

Motorcar Parts of America, Inc. — Form 10-Q Summary

Reporting period: Quarterly and year-to-date periods ended September 30, 2023, representing the second quarter and first six months of fiscal 2024. Results are unaudited. MPA supplies automotive aftermarket replacement parts, test solutions, and diagnostic equipment, primarily in North America.

Financial performance and position

Metric	Three months ended Sept. 30, 2023	Three months ended Sept. 30, 2022	Six months ended Sept. 30, 2023	Six months ended Sept. 30, 2022
Net sales	$196.6 million	$172.5 million	$356.3 million	$336.5 million
Gross profit	$41.1 million	$26.5 million	$67.7 million	$56.8 million
Gross margin	20.9%	15.4%	19.0%	16.9%
Operating income	$13.9 million	$1.9 million	$24.4 million	$9.2 million
Net loss	$2.0 million	$6.5 million	$3.4 million	$6.7 million
Loss per diluted share	$0.10	$0.34	$0.17	$0.35

Second-quarter sales increased 14.0%; first-half sales increased 5.9%. Management attributed growth primarily to strong demand for rotating electrical and brake-related products.
Gross margin expansion reflected partial benefits from price increases and product mix. Supply-chain disruption costs were $3.2 million in the quarter and $5.2 million year to date.
Interest expense increased to $15.4 million in the quarter and $27.1 million year to date, driven by higher variable borrowing and receivables-discount rates and interest on the new convertible notes.
Second-quarter operating cash flow was $15.3 million, compared with cash used of $16.0 million in the prior-year quarter. For the six-month period, cash used in operating activities was $5.2 million versus $17.0 million in the prior year.
Six-month investing cash use was $0.1 million, including $0.2 million of capital expenditures. Financing activities provided $4.0 million.
Cash and cash equivalents were $10.3 million at September 30, 2023, compared with $11.6 million at March 31, 2023. Working capital was $163.2 million, with a current ratio of 1.4 to 1.0.

Debt, liquidity, and balance sheet

Revolving Facility borrowings were $165.0 million at September 30, 2023, up from $145.2 million at March 31, 2023. Letters of credit totaled $6.4 million, and contractual availability was $67.3 million. The revolving interest rate was 8.68%.
MPA repaid the remaining Term Loans on August 3, 2023. The repayment generated a $0.2 million loss on extinguishment of debt.
The senior secured Credit Facility matures May 28, 2026 and is secured by substantially all company assets. MPA was in compliance with its minimum fixed-charge coverage and undrawn-availability covenants at September 30, 2023.
The company had $32.0 million of related-party convertible notes bearing 10.0% annual interest and maturing March 30, 2029. The notes have an initial conversion price of approximately $15.00 per share and may be settled through conversion or redemption subject to the agreement.
Accounts receivable discount programs accelerated collection of $255.3 million of receivables during the first six months. The annualized weighted-average discount rate rose to 6.6% from 4.4%, producing $15.9 million of interest expense.
Inventory totaled $366.4 million and contract assets totaled $343.6 million, including $269.4 million of remanufactured cores held at customer locations.

Material changes versus the prior comparable period

Revenue and gross profit increased substantially, while operating expenses declined excluding higher foreign-exchange impacts in the second quarter.
Operating income improved by $12.1 million in the quarter and $15.2 million year to date.
Net losses narrowed despite materially higher interest expense. The quarter also included a $0.4 million non-cash loss from revaluing the compound derivative liability and the $0.2 million debt-extinguishment loss.
Foreign-exchange operating expense was $4.8 million in the quarter, compared with $1.1 million in the prior-year quarter. Year-to-date foreign-exchange expense declined to $0.5 million from $1.8 million.
Accounts receivable increased to $161.1 million from $119.9 million at March 31, 2023, while inventory increased to $366.4 million from $356.3 million.
Segment reporting was revised beginning in the fourth quarter of fiscal 2023. Hard Parts generated $184.4 million of second-quarter external sales and $15.2 million of operating income; all other segments generated $12.2 million of sales and a $1.3 million operating loss.

Outlook, commentary, risks, and unusual items

Management stated that cash, receivables-discount programs, available credit, and other sources are expected to satisfy working-capital, lease, and capital-expenditure obligations over the next 12 months.
Fiscal 2024 capital expenditures are expected to be approximately $4.0 million.
Management is focused on expanding the North American aftermarket business and growing test solutions and diagnostic equipment, supported by expanded manufacturing and distribution infrastructure.
Key risks include customer concentration, reliance on receivables-discount programs, variable interest rates, inventory and supply-chain complexity, foreign-exchange volatility, competitive conditions, demand variability, and the ability to execute growth and operational initiatives.
Customers A through C represented 85% of second-quarter sales and 82% of first-half sales. Customer A alone represented 37% and 35%, respectively.
MPA is subject to various lawsuits, claims, regulatory examinations, and proceedings involving areas including environmental matters, information security, taxes, tariffs, and levies. The filing does not provide a quantified material loss contingency.
The company was under examination by the State of California for fiscal years 2021 and 2022; it reported no other material examinations and expected no significant change in unrecognized tax benefits within 12 months.
The company did not repurchase shares during the quarter. As of September 30, 2023, $18.3 million remained available under the authorized repurchase program, subject to credit-facility limits.
Management reported effective disclosure controls as of September 30, 2023 and no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether higher pricing and product mix can sustain the improved gross margin after supply-chain costs, core-premium amortization, and core revaluations.
The effect of higher interest rates, increased revolving borrowings, and the 6.6% cost of receivables discounting on future earnings and cash flow.
Availability and continued access to receivables-discount programs and compliance with the amended Credit Facility covenants.
Cash conversion, particularly the substantial accounts receivable, inventory, and contract-asset balances.
Potential dilution, repayment, or cash-interest requirements associated with the $32.0 million convertible notes and related warrants.
Customer concentration and the impact of any changes in purchasing, payment terms, returns, or core-return activity by major customers.
Foreign-exchange exposure, including the $52.3 million notional value of forward contracts and foreign-currency lease liabilities.
Developments in litigation, regulatory matters, the California tax examination, and other contingencies, for which the filing provides no clear quantified exposure.