Motorcar Parts of America, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2018; fiscal year ending March 31, 2019. The filing is unaudited. MPA manufactures, remanufactures, and distributes aftermarket automotive, light-truck, heavy-duty, industrial, and agricultural parts, as well as diagnostic and power-electronics systems. The company reports one operating segment.
Financial Performance and Position
| Metric | Three months ended December 31 | Nine months ended December 31 |
|---|---|---|
| Net sales | $124.1 million, up 20.6% | $343.7 million, up 11.7% |
| Gross profit | $21.2 million | $63.2 million |
| Gross margin | 17.0%, versus 25.3% | 18.4%, versus 25.3% |
| Operating income | $1.6 million | $10.2 million |
| Net income (loss) | $(3.1) million; $(0.16) diluted EPS | $(5.1) million; $(0.27) diluted EPS |
| Interest expense, net | $5.8 million | $16.5 million |
| Cash flow from operations | $(13.9) million | $(20.3) million |
Balance sheet at December 31, 2018: Cash and cash equivalents were $8.6 million, short-term investments were $2.9 million, and total assets were $605.8 million. Net inventory was $205.1 million, including a $9.8 million excess and obsolete inventory reserve. Working capital was $79.1 million, with a 1.3-to-1 current ratio.
Debt and liquidity: Revolving borrowings were $78.4 million and term-loan carrying value was $28.8 million. The amended senior secured credit facility includes a $200 million revolving facility and $30 million of term loans, maturing June 5, 2023. Approximately $117.3 million was available under the revolving facility after adjustments, with $0.9 million reserved for letters of credit. The company was in compliance with its financial covenants, including a 1.56 senior leverage ratio versus a 3.00 maximum and a 1.23 fixed-charge coverage ratio versus a 1.10 minimum.
Material Changes Versus the Prior Comparable Period
- Sales increased primarily from higher replenishment orders, new rotating-electrical business, market-share gains, and diagnostic-equipment sales. Wheel-hub and brake-master-cylinder sales remained softer.
- Gross margin declined materially because of $5.7 million of Mexico transition expenses, $4.1 million of customer allowances and stock-adjustment costs, $3.0 million of core buyback-premium amortization, $1.5 million of net tariff costs, higher freight and wages, increased returns, overtime, and other growth-related costs.
- Operating expenses increased to $53.1 million from $41.2 million for the nine-month period, driven by growth initiatives, acquisitions, sales and marketing, research and development, depreciation, professional fees, and share-based compensation.
- Interest expense increased 53.3% for the nine-month period, reflecting greater use of receivable discount programs, higher borrowings and interest rates, and debt-issuance-cost write-offs. Receivables discounted increased to $287.2 million, with an annualized discount rate of 4.2% versus 3.2%.
- Operating cash use increased to $20.3 million from $9.8 million, largely because of inventory expansion, Mexico-related spending, and $21.4 million of payments to customers for prior core buybacks.
- Cash used in investing activities was $13.2 million, including $8.5 million of capital expenditures and $4.4 million for the acquisition of Mechanical Power Conversion, LLC.
Accounting, Acquisitions, Outlook, and Risks
- MPA adopted ASC 606 revenue recognition on April 1, 2018 using full retrospective application. This created substantial contract-asset and contract-liability balances related to core exchanges, customer allowances, upfront payments, and core premiums.
- The company corrected previously issued immaterial errors involving core-related allowances, inventory, bonuses, and taxes. Comparative periods are presented as revised and adjusted; investors should use the adjusted figures for comparisons.
- Mechanical Power Conversion was acquired on December 21, 2018 for an initial cash price of $4.4 million, with contingent consideration having a preliminary fair value of $3.6 million and potential additional payments of up to $5.2 million.
- After quarter-end, MPA acquired Dixie Electric for an initial purchase price of $8.0 million, subject to adjustments, with potential additional payments of up to $1.1 million.
- Management expected approximately $4 million to $5 million of additional capital expenditures during the remainder of fiscal 2019, primarily to support growth and Mexico expansion. Management stated that available cash, investments, receivable discount programs, and credit availability should cover expected needs over the next 12 months.
- The company completed its SAB 118 accounting for the Tax Cuts and Jobs Act, but tax estimates remain subject to future changes in tax guidance and interpretations.
- Key risks include customer concentration, dependence on core availability and return estimates, working-capital requirements, inventory obsolescence, customer payment delays, reliance on receivable discount programs, leverage and covenant compliance, higher interest rates, tariffs, foreign-exchange volatility, competition, acquisitions, and potential future accounting-control issues.
- The company identified no material litigation changes and stated that disclosure controls were effective as of December 31, 2018. A new risk factor addresses potential tariffs, which could require price increases or reduce gross margins.
Important Facts for Investors to Verify
- Whether the sharp gross-margin decline is temporary and whether Mexico transition costs, tariffs, customer allowances, returns, and core-premium amortization moderate.
- Inventory growth, the $9.8 million obsolescence reserve, core-return assumptions, and the sustainability of the $250.0 million total contract-asset balance.
- Operating cash-flow conversion and the company’s continued reliance on revolving debt and receivable discount programs.
- Compliance with credit-facility covenants, borrowing-base availability, interest-rate exposure, and restrictions on repurchases, dividends, and acquisitions.
- Purchase accounting and contingent consideration for Mechanical Power Conversion and Dixie Electric.
- The effect of ASC 606 and the corrected prior-period errors on future revenue, margins, contract balances, and comparability.
- Exposure to additional tariffs, foreign-exchange movements, customer concentration, and potential changes in tax estimates.