MOTORCAR PARTS OF AMERICA INC quarterly report, Q3 FY2013

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

Business context and reporting period

MPA manufactures, remanufactures, and distributes aftermarket automobile parts through two reportable segments: rotating electrical products and undercar products. The filing covers the quarter and nine months ended December 31, 2012, within fiscal 2013. Results include the Fenco business acquired in May 2011.

Financial performance and position

Metric	Three months ended December 31	Nine months ended December 31
Net sales	$116.3 million, versus $84.1 million	$316.9 million, versus $262.2 million
Gross profit	$24.0 million versus $(1.6) million	$52.9 million versus $20.4 million
Gross margin	20.7% versus (1.9%)	16.7% versus 7.8%
Operating income (loss)	$7.8 million versus $(16.6) million	$5.5 million versus $(21.4) million
Net income (loss)	$0.9 million versus $(21.8) million	$(17.9) million versus $(35.6) million
Diluted earnings (loss) per share	$0.06 versus $(1.74)	$(1.25) versus $(2.86)

Quarterly rotating electrical sales increased 20.9% to $50.7 million; undercar sales increased 55.5% to $65.6 million. The undercar increase included approximately $50.8 million of revenue from releasing a customer core-credit obligation.
For the nine months, rotating electrical gross margin was 33.0%; undercar gross margin was 1.0%, improving from negative 14.8% in the prior-year period.
Net cash used in operating activities was $27.7 million for the nine months, compared with $45.3 million used in the prior-year period. Capital expenditures were $3.0 million.
Cash was $25.1 million at December 31, 2012, compared with $32.6 million at March 31, 2012. Current assets were $141.3 million and current liabilities were $169.3 million, resulting in negative working capital of approximately $27.9 million.
Total assets were $442.6 million and total liabilities were $372.4 million. Long-term core inventory declined to $160.9 million from $194.4 million, while the related customer core returns accrual declined to $49.7 million from $113.7 million.

Debt, liquidity, and material changes

Term loan balances were $94.2 million, including the current portion, and the Fenco revolving loan balance was $49.7 million at December 31, 2012. No parent-company revolving loans were outstanding.
Available borrowing was approximately $15.1 million under the parent revolving facility and $3.8 million under the Fenco revolving facility, subject to borrowing-base and other restrictions.
The parent-company term loans bear interest at either LIBOR plus 8.5% or a base rate plus 7.5%, and mature January 17, 2017. Fenco’s amended credit agreement extends its maturity to October 6, 2014.
Fenco had approximately $19.0 million outstanding under a supplier credit line, recorded in accounts payable. The line matures July 31, 2017 and carries a 1% monthly rate on overdue amounts.
Management reported compliance with all debt covenants at December 31, 2012. Parent-company covenant metrics included a 2.04 senior leverage ratio versus a 3.30 maximum, a 1.70 fixed-charge coverage ratio versus a 1.10 minimum, and $41.7 million of consolidated EBITDA versus a $28.5 million minimum.
In April 2012, MPA raised $15.0 million gross, or $14.0 million net, through a private placement of 1.936 million shares at $7.75 per share. The resale registration statement became effective January 7, 2013; liquidated damages of $0.6 million were recorded for the delay.

Management commentary, outlook, risks, and unusual items

Management is implementing a 24-month turnaround plan for Fenco’s undercar business, focused on customer service, product profitability, manufacturing and logistics productivity, ERP implementation, and cost reduction. The plan was approximately 20 months underway at December 31, 2012.
Management expects the initiatives to be substantially completed in the first quarter of fiscal 2014, but stated that financial benefits may take longer to appear. The plan has taken longer and cost more than initially anticipated.
MPA discontinued supplying certain unprofitable undercar products and exited a major unprofitable customer relationship. This produced approximately $50.8 million of revenue and $19.1 million of gross profit from releasing the related core obligation, offset by $31.6 million of core inventory recognized as cost of goods sold. This unusual item materially affects comparability.
Third-quarter undercar results included a $7.9 million accrual and $5.1 million of cost of goods sold associated with customer inventory-mix changes, approximately $1.6 million of manufacturing under-absorption, $0.9 million of inventory write-downs and reserves, and $1.4 million of logistics termination fees recorded earlier in fiscal 2013.
Fenco continues to face capital and liquidity concerns. MPA stated that its ability and authorization to support Fenco are limited and that Fenco may not obtain sufficient capital to execute the turnaround plan.
Key risks include negative working capital, recurring operating cash outflows, high interest expense, substantial customer concentration, dependence on receivable discount programs, core-inventory obligations, covenant compliance, interest-rate and foreign-exchange exposure, and difficulty obtaining used cores and component parts.
Disclosure controls and procedures were not effective as of December 31, 2012 because a material weakness in Fenco’s financial statement close process had not been remediated. Management cited inadequate systems, reconciliation and review procedures, and insufficient U.S. GAAP expertise and staffing.
Goodwill of $68.4 million was not impaired based on the company’s interim assessment. Warrant liabilities totaled $2.45 million and generated a $0.9 million third-quarter loss from fair-value changes.
Management expected fiscal 2013 capital expenditures of approximately $3.0 million to $4.0 million.

Most important facts for investors to verify

Whether Fenco achieves sustained profitability and positive operating cash flow after completion of the turnaround plan.
The recurring earnings impact after excluding the approximately $50.8 million core-obligation revenue recognition and related $19.1 million gross profit.
Availability and continuation of receivable discount programs, supplier credit, and revolving borrowing capacity.
Future compliance with parent and Fenco debt covenants and scheduled principal repayments.
Progress in remediating the Fenco internal-control material weakness and the effect on future filings.
Customer concentration and the financial consequences of additional customer exits, returns, allowances, or fill-rate penalties.
Actual cash needs associated with core inventory, customer returns, inventory reserves, and Fenco support.