Motorcar Parts of America, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended June 30, 2012, the first quarter of fiscal 2013. Motorcar Parts of America manufactures, remanufactures, and distributes aftermarket automotive parts through two reportable segments: rotating electrical products and under-the-car products. The under-the-car segment includes the Fenco business acquired in May 2011.
The interim financial statements are unaudited and should be read with the fiscal 2012 Form 10-K. The company filed the report on November 28, 2012 and disclosed that it was not filed timely because of a material weakness in Fenco’s financial close and reporting processes.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $89.0 million | $70.5 million |
| Gross profit | $12.1 million | $7.0 million |
| Gross margin | 13.6% | 10.0% |
| Operating loss | $(3.4) million | $(4.5) million |
| Interest expense, net | $5.1 million | $1.9 million |
| Loss before taxes | $(8.5) million | $(6.5) million |
| Income tax expense | $1.4 million | $1.8 million |
| Net loss | $(9.9) million | $(8.3) million |
| Basic and diluted loss per share | $(0.71) | $(0.68) |
| Cash flow from operations | $(16.8) million | $(26.8) million |
| Capital expenditures | $0.6 million | $0.4 million |
Cash was $36.1 million at June 30, 2012, compared with $32.6 million at March 31, 2012. Working capital was $7.9 million, compared with negative working capital of $2.2 million at March 31, 2012. Current assets and current liabilities were $161.3 million and $153.5 million, respectively.
Total debt consisted principally of $94.4 million of term loans, including current maturities, and $46.6 million outstanding under the Fenco revolving facility. The parent-company revolving facility had no outstanding balance and approximately $14.7 million of availability; the Fenco revolving facility had approximately $1.1 million of availability, subject to borrowing-base restrictions.
Long-term core inventory was $195.4 million, and the related customer core returns accrual was $113.4 million. Receivables discounted under customer programs totaled $77.5 million during the quarter, generating $1.9 million of interest expense.
Material Changes Versus the Prior Comparable Period
- Sales increased $18.5 million, or 26.3%, primarily because Q1 FY2013 reflected a full quarter of Fenco operations and rotating electrical sales increased 17.6%.
- Gross margin improved to 13.6% from 10.0%, but the under-the-car segment remained loss-making, with a gross margin of negative 6.4% versus negative 17.5%.
- The rotating electrical segment generated $6.7 million of operating income, while the under-the-car segment produced a $10.1 million operating loss.
- Operating expenses increased to $15.5 million from $11.6 million, mainly because of higher professional, consulting, marketing, and other Fenco-related costs. Acquisition costs of $0.4 million recorded in the prior-year quarter did not recur.
- Net interest expense increased $3.2 million, or 165.6%, reflecting higher debt balances, higher borrowing costs, and a full quarter of Fenco-related financing and receivables-discount expense.
- Operating cash usage improved by $10.1 million year over year, primarily because inventory management reduced the cash investment in inventory. Cash flow nevertheless remained materially negative.
- Financing activities provided $20.9 million, including $10.0 million of additional term debt and $14.0 million of net proceeds from a private placement of 1.936 million common shares at $7.75 per share.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected fiscal 2013 capital expenditures of approximately $3.0 million to $4.0 million. It stated that cash, receivables-discount programs, available credit, the Fenco Credit Line, and equity proceeds were expected to cover anticipated needs over the next twelve months, but emphasized dependence on operating cash flow, customer and supplier conditions, and successful execution of the Fenco turnaround.
The under-the-car turnaround plan focused on customer service, product quality, product-line rationalization, manufacturing productivity, logistics, and cost reductions. Management expected the initiatives to be substantially completed in the first quarter of fiscal 2014, but acknowledged that implementation had taken longer and cost more than initially anticipated.
- After quarter-end, the company discontinued supplying a major unprofitable under-the-car customer that represented approximately 30.2% of that segment’s Q1 FY2013 sales. Management identified the loss as a potential trigger for impairment testing of goodwill and intangible assets.
- The company agreed to terminate a Pennsylvania logistics-provider arrangement, including an approximately $1.4 million termination fee and an $95,000 monthly rental charge for up to eight months.
- Fenco had approximately $51 million of past-due accounts payable to suppliers and vendors as of November 12, 2012. The outcome of negotiations was uncertain.
- In August 2012, Fenco’s revolving facility was amended to permit availability of up to $55 million through December 31, 2012 and $50 million thereafter through maturity. A new supplier credit line provided up to $22 million for parts purchases, with a 1% monthly interest charge on overdue amounts and company guarantees.
- The company issued a supplier warrant for up to 516,129 shares at an initial exercise price of $7.75. The preliminary fair value was approximately $1.0 million and was to be recorded as a warrant liability.
- The company was accruing liquidated damages under the private-placement registration rights agreement because the resale registration statement had not become effective. Damages were 1% of the purchase price per 30-day period, subject to the agreement’s terms.
- The company remained in compliance with the parent-company and Fenco credit-agreement covenants at June 30, 2012. Future compliance depended on operating performance, demand, pricing, working capital, and execution of the turnaround plan.
- Disclosure controls and procedures were deemed ineffective because of the untimely filing and an unresolved material weakness at Fenco involving systems, personnel, reconciliations, oversight, and U.S. GAAP expertise.
Most Important Facts for Investors to Verify
- Whether the under-the-car turnaround plan achieved profitability and positive operating cash flow, particularly after losing the major customer.
- The results of the planned interim impairment test for the $68.4 million of goodwill and related intangible assets.
- Current supplier arrears, the outcome of payment negotiations, and the company’s ability to maintain adequate parts supply.
- Compliance with revised debt covenants, borrowing-base requirements, scheduled principal repayments, and available liquidity.
- The extent to which receivables-discount programs remain available and the resulting interest expense and refinancing dependence.
- Whether the Fenco material weakness was remediated and whether subsequent filings were timely and reliable.
- The amount of registration-rights liquidated damages and whether they were settled in cash or equity.
- Customer concentration, core-inventory valuation, warranty-return accruals, and potential additional unusual costs from the logistics termination and turnaround activities.