Motorcar Parts of America, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended December 31, 2011, within the fiscal year ending March 31, 2012. The company remanufactures, manufactures and distributes automotive replacement parts through rotating electrical and under-the-car product lines.
The May 6, 2011 acquisition of Fenco materially expanded the company into steering components, brake calipers, master cylinders, hub assemblies, bearings, clutches and related products. Fenco results are included from the acquisition date and substantially affect year-over-year comparability.
Key financial metrics
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Nine months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Net sales | $84.1 million | $41.3 million | $262.2 million | $118.5 million |
| Gross profit (loss) | $(2.4) million | $13.2 million | $22.2 million | $37.4 million |
| Gross margin | (2.8%) | 31.9% | 8.5% | 31.6% |
| Operating income (loss) | $(17.8) million | $6.6 million | $(20.8) million | $19.5 million |
| Net income (loss) | $(23.0) million | $3.8 million | $(34.9) million | $9.8 million |
| Diluted earnings per share | $(1.84) | $0.30 | $(2.81) | $0.80 |
| Net cash provided by (used in) operating activities | $(0.1) million | $(1.4) million | $(45.3) million | $7.6 million |
At December 31, 2011, cash was $3.1 million and short-term investments were $0.3 million. Current assets were $175.2 million versus current liabilities of $228.9 million, producing negative working capital of $53.6 million and a current ratio of 0.8:1. Total assets were $491.3 million and shareholders’ equity was $86.9 million.
Major balance-sheet increases versus March 31, 2011 included net inventory of $123.8 million versus $29.7 million, long-term core inventory of $187.5 million versus $80.6 million, goodwill of $40.3 million, and intangible assets of $44.2 million. The balance sheet included a $103.1 million customer core returns accrual.
At December 31, 2011, the old parent revolving loan had $40.5 million outstanding with $4.0 million available after reserves. The Fenco revolving facility had $47.7 million outstanding and approximately $1.1 million available; the Fenco term loan had $10.0 million outstanding. Receivables discounted during the nine months totaled $197.0 million, generating $5.0 million of discount expense.
Material changes versus the prior comparable period
- Sales more than doubled, primarily because of the Fenco acquisition. Pro forma nine-month sales were $288.8 million in 2011 versus $273.9 million in 2010, while pro forma net loss was $37.6 million versus a $0.4 million loss.
- The under-the-car segment generated $135.6 million of nine-month sales but a $18.2 million gross loss and a $43.2 million net loss. The rotating electrical segment generated $126.6 million of sales, $40.5 million of gross profit and $8.3 million of net income.
- Consolidated gross margin declined sharply because of low under-the-car selling prices, customer allowances, high manufacturing costs, overhead under-absorption, product discontinuations and inventory-related charges.
- Operating cash flow changed from $7.6 million provided in the prior-year nine-month period to $45.3 million used, primarily due to the under-the-car segment’s losses and increased inventory and core requirements.
- The company discontinued its CV axle product line and shut down the related New Hampshire facility. The company recorded a $1.0 million fixed-asset impairment and reported a $7.3 million nine-month negative gross-profit impact from the discontinued line, including a $4.5 million inventory reserve and $0.7 million of severance.
- Fenco acquisition accounting remained provisional. Third-quarter retrospective adjustments increased goodwill by $2.9 million to $40.3 million and affected accounts receivable, inventory, inventory unreturned and customer returns accruals.
Guidance, outlook, risks and unusual items
Management’s turnaround plan for the under-the-car business focuses on customer service, product quality, manufacturing and logistics productivity, product rationalization and cost savings. Management expects the initiatives to be substantially completed in the first quarter of fiscal 2014 and to result in positive EBITDA, but timing and success depend on customer and vendor support and available financing.
Management reported approximately $25 million of additional under-the-car inventory purchased to improve customer service and expected to reduce those levels as the supply chain normalized. Fiscal 2012 capital expenditures were expected to be approximately $2 million.
In January 2012, the company replaced the old parent facility with $75 million of term loans and a revolving facility of up to $20 million, subject to borrowing-base restrictions. The new term loans mature January 17, 2017 and carry margins of 7.0% over the reference rate or 8.0% over the Eurodollar rate. In April 2012, the company raised approximately $15 million through a private placement of 1,936,000 common shares at $7.75 per share.
The Fenco borrowers were not in compliance with minimum EBITDA and interim-reporting covenants as of December 31, 2011. A waiver was obtained on May 11, 2012, and the Fenco debt maturity was extended from October 6, 2012 to May 13, 2013.
The filing identifies a material weakness in Fenco’s internal control over financial reporting involving core transaction accounting, account reconciliations, oversight and accounting personnel. The weakness contributed to delayed quarterly filings. Remediation and systems integration were underway, but management could not assure that additional deficiencies or material weaknesses would not be identified.
Other significant risks include customer concentration, dependence on core inventory and receivable-discount programs, substantial leverage, covenant compliance, foreign suppliers and currency exposure, execution of the Fenco turnaround, possible goodwill or long-lived-asset impairment, and the ability to generate positive operating cash flow. The largest customer represented 48% of fourth-quarter sales and 45% of nine-month sales.
Important facts for investors to verify
- Whether the under-the-car turnaround achieves positive EBITDA by the stated fiscal 2014 target and whether gross margins normalize.
- Fenco’s post-waiver covenant compliance, debt refinancing needs and availability under its borrowing-based facility.
- The sufficiency and terms of the January 2012 refinancing and April 2012 equity proceeds to fund working capital and Fenco integration.
- Whether the material weakness in Fenco’s internal controls is remediated without restatements, further filing delays or additional control deficiencies.
- The recoverability of $40.3 million of goodwill, $44.2 million of intangible assets and elevated inventory balances, including core inventory and customer return obligations.
- The sustainability of receivable-discount programs and the company’s ability to reverse negative operating cash flow.
- The impact of customer concentration, allowances, returns, pricing pressure and foreign sourcing on future revenue and margins.