Motorcar Parts of America(MPAA) - 2020 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for the period ended September 30, 2019, covering financial position, operations, and cash flows Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights | Metric | September 30, 2019 ($) | March 31, 2019 ($) | | :-------------------------- | :----------------- | :--------------- | | Total Assets | $712,558,000 | $632,362,000 | | Total Liabilities | $431,213,000 | $352,607,000 | | Total Shareholders' Equity | $281,345,000 | $279,755,000 | | Operating Lease Assets | $49,262,000 | - | | Revolving Loan | $144,000,000 | $110,400,000 | | Inventory — net | $250,667,000 | $233,726,000 | | Accounts Receivable — net | $69,914,000 | $56,015,000 | Condensed Consolidated Statements of Operations Three Months Ended September 30 (YoY) | Metric | 2019 ($) | 2018 ($) | Change ($) | % Change (%) | | :----------------------- | :----------- | :----------- | :----------- | :--------- | | Net sales | $150,374,000 | $127,939,000 | $22,435,000 | 17.5% | | Gross profit | $36,573,000 | $25,711,000 | $10,862,000 | 42.2% | | Operating income | $14,692,000 | $10,393,000 | $4,299,000 | 41.4% | | Net income | $6,189,000 | $3,513,000 | $2,676,000 | 76.2% | | Basic EPS | $0.33 | $0.19 | $0.14 | 73.7% | | Diluted EPS | $0.32 | $0.18 | $0.14 | 77.8% | Six Months Ended September 30 (YoY) | Metric | 2019 ($) | 2018 ($) | Change ($) | % Change (%) | | :----------------------- | :----------- | :----------- | :----------- | :--------- | | Net sales | $259,522,000 | $219,607,000 | $39,915,000 | 18.2% | | Gross profit | $54,156,000 | $42,063,000 | $12,093,000 | 28.7% | | Operating income | $12,984,000 | $8,526,000 | $4,458,000 | 52.3% | | Net income (loss) | $38,000 | $(1,982,000) | $2,020,000 | N/A | | Basic EPS | $0.00 | $(0.10) | $0.10 | N/A | | Diluted EPS | $0.00 | $(0.10) | $0.10 | N/A | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive Income (Loss) | Period | 2019 ($) | 2018 ($) | | :----------------------- | :----------- | :----------- | | Three Months Ended Sep 30 | $5,758,000 | $3,511,000 | | Six Months Ended Sep 30 | $206,000 | $(2,699,000) | - Foreign currency translation resulted in a gain of $168,000 for the six months ended September 30, 2019, compared to a loss of $(717,000) in the prior year[19] Condensed Consolidated Statements of Shareholders' Equity Shareholders' Equity Changes (March 31, 2019 to September 30, 2019) | Item | Amount ($) | | :------------------------------------ | :----------- | | Balance at March 31, 2019 | $279,755,000 | | Compensation recognized under employee stock plans | $2,041,000 | | Issuance of common stock upon vesting of RSUs, net | $(1,062,000) | | Foreign currency translation | $168,000 | | Net income (six months) | $38,000 | | Balance at September 30, 2019 | $281,345,000 | Condensed Consolidated Statements of Cash Flows Cash Flows (Six Months Ended September 30) | Activity | 2019 ($) | 2018 ($) | | :------------------------------------ | :------------- | :------------- | | Net cash used in operating activities | $(26,736,000) | $(6,409,000) | | Net cash used in investing activities | $(5,701,000) | $(5,481,000) | | Net cash provided by financing activities | $29,059,000 | $5,112,000 | | Net decrease in cash and cash equivalents | $(3,456,000) | $(6,874,000) | | Cash and cash equivalents — End of period | $6,455,000 | $6,175,000 | Notes to Condensed Consolidated Financial Statements 1. Company Background and Organization - Motorcar Parts of America, Inc. is a leading supplier of automotive aftermarket non-discretionary replacement parts and diagnostic equipment, primarily in North America[28] - The company's product portfolio includes rotating electrical products, wheel hub assemblies, brake master cylinders, and newly introduced brake calipers (August 2019), along with other products like turbochargers and diagnostic systems[28] - The company completed the acquisition of Dixie Electric, Ltd in January 2019 and aggregates its three operating segments into one reportable segment[30][31] 2. Basis of Presentation and New Accounting Pronouncements - The company adopted new lease accounting guidance (ASC 842) on April 1, 2019, recognizing operating lease liabilities of $53,043,000 and corresponding operating lease assets of $50,773,000[35] - The adoption of ASC 842 resulted in losses of $1,139,000 (three months) and $637,000 (six months) in general and administrative expenses due to the remeasurement of foreign currency-denominated lease liabilities[35] - The company is evaluating the impact of new accounting pronouncements on credit losses on financial instruments (effective April 1, 2020) and fair value measurements (effective after December 15, 2019)[36][37] 3. Accounts Receivable — Net Accounts Receivable — Net | Metric | September 30, 2019 ($) | March 31, 2019 ($) | | :-------------------------- | :----------------- | :--------------- | | Accounts receivable — trade | $86,974,000 | $75,847,000 | | Allowance for bad debts | $(4,187,000) | $(4,100,000) | | Customer payment discrepancies | $(1,169,000) | $(854,000) | | Customer returns RGA issued | $(11,704,000) | $(14,878,000) | | Total accounts receivable — net | $69,914,000 | $56,015,000 | 4. Inventory Inventory — Net | Metric | September 30, 2019 ($) | March 31, 2019 ($) | | :--------------------------------- | :----------------- | :--------------- | | Raw materials | $104,180,000 | $95,757,000 | | Work-in-process | $4,720,000 | $3,502,000 | | Finished goods | $154,901,000 | $146,366,000 | | Less allowance for excess and obsolete inventory | $(13,134,000) | $(11,899,000) | | Total inventory — net | $250,667,000 | $233,726,000 | | Inventory unreturned | $8,684,000 | $8,469,000 | 5. Contract Assets Contract Assets | Metric | September 30, 2019 ($) | March 31, 2019 ($) | | :------------------------------------ | :----------------- | :--------------- | | Short-term contract assets | $19,471,000 | $22,183,000 | | Long-term contract assets | $224,329,000 | $221,876,000 | | Remanufactured cores held at customers' locations (Long-term) | $203,024,000 | $196,914,000 | 6. Significant Customer and Other Information Significant Customer Concentrations (Six Months Ended September 30, 2019) | Customer | Net Sales (%) | Accounts Receivable - Trade (%) | | :--------- | :-------- | :-------------------------- | | Customer A | 40% | 33% | | Customer B | 21% | 15% | | Customer C | 22% | 23% | Product Sales Breakdown (Six Months Ended September 30, 2019) | Product Category | Percentage of Net Sales (%) | | :----------------------- | :---------------------- | | Rotating electrical products | 76% | | Wheel hub products | 16% | | Brake caliper products | 2% | | Brake master cylinders products | 2% | | Other products | 4% | - No single supplier accounted for more than 10% of inventory purchases for the three and six months ended September 30, 2019 and 2018[45] 7. Debt - The company's Credit Facility was amended in June 2019, increasing the Revolving Facility to $238,620,000 and modifying financial covenants, including the borrowing base definition to include brake-related products[48] Debt Outstanding and Interest Rates (September 30, 2019) | Metric | Amount/Rate | | :-------------------------- | :------------ | | Revolving Loan Outstanding | $144,000,000 | | Term Loan Principal | $26,250,000 | | Revolving Facility Interest Rate | 4.84% | | Term Loan Interest Rate | 4.86% | - The company was in compliance with all financial covenants under the Credit Facility as of September 30, 2019[50] 8. Contract Liabilities Contract Liabilities | Metric | September 30, 2019 ($) | March 31, 2019 ($) | | :-------------------------- | :----------------- | :--------------- | | Short-term contract liabilities | $24,064,000 | $30,599,000 | | Long-term contract liabilities | $49,327,000 | $40,889,000 | | Long-term customer core returns accruals | $38,841,000 | $25,722,000 | 9. Leases Lease Balance Sheet Information (September 30, 2019) | Metric | Amount ($) | | :-------------------------- | :----------- | | Operating lease assets | $49,262,000 | | Finance lease assets (Plant and equipment) | $7,079,000 | | Total leased assets | $56,341,000 | | Operating lease liabilities (Current) | $4,487,000 | | Finance lease liabilities (Current) | $2,036,000 | | Long-term operating lease liabilities | $47,925,000 | | Long-term finance lease liabilities | $4,149,000 | | Total lease liabilities | $58,597,000 | Total Lease Cost (Six Months Ended September 30, 2019) | Component | Amount ($) | | :-------------------------- | :----------- | | Operating lease cost | $3,885,000 | | Short-term lease cost | $698,000 | | Variable lease cost | $287,000 | | Amortization of finance lease assets | $730,000 | | Interest on finance lease liabilities | $141,000 | | Total lease cost | $5,741,000 | - Weighted-average remaining lease terms are 3.4 years for finance leases and 12.0 years for operating leases, with corresponding weighted-average discount rates of 4.8% and 5.6%[61] 10. Accounts Receivable Discount Programs Accounts Receivable Discount Programs (Six Months Ended September 30) | Metric | 2019 ($) | 2018 ($) | | :------------------------------------ | :------------- | :------------- | | Receivables discounted | $205,882,000 | $191,849,000 | | Annualized weighted average discount rate | 3.6% | 4.1% | | Amount of discount recognized as interest expense | $7,196,000 | $7,441,000 | 11. Net Income (Loss) Per Share Net Income (Loss) Per Share (Three Months Ended September 30) | Metric | 2019 ($) | 2018 ($) | | :-------------------------- | :----- | :----- | | Basic net income (loss) per share | $0.33 | $0.19 | | Diluted net income (loss) per share | $0.32 | $0.18 | Net Income (Loss) Per Share (Six Months Ended September 30) | Metric | 2019 ($) | 2018 ($) | | :-------------------------- | :----- | :----- | | Basic net income (loss) per share | $0.00 | $(0.10) | | Diluted net income (loss) per share | $0.00 | $(0.10) | - Potential common shares considered anti-dilutive and excluded from diluted EPS calculations were 1,221,744 for the three months and 1,166,432 for the six months ended September 30, 2019[66] 12. Income Taxes Income Tax Expense and Effective Tax Rate | Period | 2019 Expense (Benefit) ($) | 2019 Effective Rate (%) | 2018 Expense (Benefit) ($) | 2018 Effective Rate (%) | | :-------------------------- | :--------------------- | :-------------------- | :--------------------- | :-------------------- | | Three Months Ended Sep 30 | $1,980,000 | 24.2% | $1,181,000 | 25.2% | | Six Months Ended Sep 30 | $250,000 | 86.8% | $(266,000) | 11.8% | - The effective tax rate for the six months ended September 30, 2019, was significantly impacted by valuation allowances recorded in connection with the July 2017 and January 2019 acquisitions[67] 13. Financial Risk Management and Derivatives - The company uses forward foreign currency exchange contracts to mitigate market risk from fluctuations in the Mexican peso and Chinese yuan, not for speculation[69][70] - The U.S. dollar equivalent notional value of these contracts was $36,791,000 at September 30, 2019[71] Effect of Derivative Instruments on General and Administrative Expenses | Period | 2019 Gain (Loss) ($) | 2018 Gain (Loss) ($) | | :-------------------------- | :--------------- | :--------------- | | Three Months Ended Sep 30 | $(663,000) | $1,898,000 | | Six Months Ended Sep 30 | $(628,000) | $(768,000) | 14. Fair Value Measurements - Financial assets and liabilities measured at fair value include Level 1 mutual funds ($2,192,000), Level 2 forward foreign currency exchange contracts ($421,000 liability), and Level 3 contingent consideration ($4,851,000 liability) at September 30, 2019[74][75][76][85] - Contingent consideration liabilities from the E&M and Dixie acquisitions are Level 3 liabilities, valued using probability-weighted methods or Monte Carlo simulations with specific assumptions for risk-free rates, volatility, and discount rates[77][78][79][80][81][83] - Changes in revaluations of contingent consideration included in earnings for the six months ended September 30, 2019, amounted to $130,000[85] 15. Share-based Payments - During the six months ended September 30, 2019, the company granted 300,039 stock options with a weighted average fair value of $8.28 and 79,851 Restricted Stock Units (RSUs) with an estimated grant date fair value of $1,591,000[87][88][90] - Total unrecognized compensation expense for unvested stock options was $4,037,000 (over ~2.2 years) and for RSUs was $3,175,000 (over ~2.1 years) at September 30, 2019[89][91] 16. Accumulated Other Comprehensive Loss - Accumulated other comprehensive loss was $(6,719,000) at September 30, 2019, primarily due to foreign currency translation losses[92] - Foreign currency translation resulted in a gain of $168,000 for the six months ended September 30, 2019, compared to a loss of $(717,000) in the prior year[92] 17. Commitments and Contingencies - The warranty return accrual was $16,575,000 at September 30, 2019[94] - The company is disputing an approximate $17 million claim from U.S. Customs and Border Protection for additional duties from 2011 through mid-2018[95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results for the three and six months ended September 30, 2019, covering sales growth, profitability, liquidity, and internal control matters Disclosure Regarding Private Securities Litigation Reform Act of 1995 - The report contains forward-looking statements subject to various risks and uncertainties, including customer concentration, changes in customer financial condition, increased competition, difficulty in obtaining Used Cores, political/economic instability, currency exchange fluctuations, potential tariffs, and the impact of new accounting pronouncements[98] Management Overview - The company is focused on a multi-pronged growth platform in the non-discretionary automotive aftermarket through organic growth and acquisitions, with investments in infrastructure and manufacturing capacity expansion in Mexico[99] - Product expansion includes turbochargers, brake power boosters, diagnostic systems (for internal combustion engines, electric vehicles, and aerospace), advanced power emulators, custom power electronic products, and newly introduced brake calipers in August 2019[101][102] - The company's business comprises three operating segments, which are aggregated into one reportable segment[103] Results of Operations for the Three Months Ended September 30, 2019 and 2018 - Net sales increased by $22,435,000 (17.5%) to $150,374,000, driven by growth in rotating electrical and wheel hub products, $4,572,000 from new brake calipers, and $5,893,000 from fiscal 2019 acquisitions[106] - Gross profit percentage improved to 24.3% from 20.1%, despite a lower non-cash core revaluation write-down of $2,908,000 (1.9% of gross margin) compared to $6,221,000 (4.9% of gross margin) in the prior year[105][108] - General and administrative expenses increased by $5,288,000 (58.8%) due to a foreign currency exchange contract loss ($663,000), lease liability remeasurement loss ($1,139,000), acquisition-related expenses ($565,000), and internal controls remediation ($489,000)[110] - Sales and marketing expenses increased by $911,000 (20.1%), and research and development expenses increased by $364,000 (20.4%), both primarily due to fiscal 2019 acquisitions and growth initiatives[111][112] - Interest expense, net, increased by $824,000 (14.5%) due to increased average outstanding borrowings[114] Results of Operations for the Six Months Ended September 30, 2019 and 2018 - Net sales increased by $39,915,000 (18.2%) to $259,522,000, reflecting continued growth across all product lines, $11,151,000 from fiscal 2019 acquisitions, and $4,572,000 from new brake calipers[118] - Gross profit percentage improved to 20.9% from 19.2%, with a non-cash core revaluation write-down of $7,472,000 (2.9% of gross margin) in 2019[117][119] - General and administrative expenses increased by $5,197,000 (24.6%) due to fiscal 2019 acquisitions ($1,348,000), increased professional services ($1,278,000), foreign currency-denominated lease liabilities remeasurement loss ($637,000), and internal control remediation ($489,000)[121] - Sales and marketing expenses increased by $1,438,000 (16.1%), and research and development expenses increased by $1,000,000 (28.4%), both primarily driven by fiscal 2019 acquisitions and personnel for growth initiatives[122][123] - Interest expense, net, increased by $1,922,000 (17.8%) due to increased average outstanding borrowings to support growth initiatives and inventory build-up[125] Liquidity and Capital Resources - Working capital decreased slightly to $72,107,000 at September 30, 2019, from $73,528,000 at March 31, 2019, primarily due to increased borrowing under the credit facility[127] - Net cash used in operating activities was $(26,736,000) for the six months ended September 30, 2019, significantly impacted by growth initiatives, Mexico operations expansion, and inventory build-up[132] - The Credit Facility was amended in June 2019, increasing the Revolving Facility to $238,620,000. The company was in compliance with all financial covenants at September 30, 2019, with a maximum senior leverage ratio of 2.33 (limit 3.00) and a minimum fixed charge coverage ratio of 1.46 (limit 1.10)[128][136][138][139] - As of September 30, 2019, $21,308,000 remained available under the $37,000,000 authorized share repurchase program, subject to the Credit Facility's annual limit of $20,000,000 for dividends and share repurchases[130][168] - The company utilized receivable discount programs, discounting $205,882,000 in receivables at a 3.6% annualized weighted average discount rate for the six months ended September 30, 2019[142] Off-Balance Sheet Arrangements - As of September 30, 2019, the company had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships[143] Capital Expenditures and Commitments - Total capital expenditures, including finance leases, were $9,251,000 for the six months ended September 30, 2019, primarily for equipment and the expansion of operations in Mexico[144] - The company expects to incur approximately $7,125,000 for current operations and $15,000,000 for continued expansion in Mexico during fiscal year 2020[144] Litigation - There have been no material changes to the company's litigation matters as presented in its Annual Report on Form 10-K for the year ended March 31, 2019[145] Critical Accounting Policies - The company adopted new lease accounting guidance (ASC 842) on April 1, 2019, which resulted in balance sheet recognition of operating lease assets and liabilities and foreign currency remeasurement losses in general and administrative expenses[147][148] - The company is currently evaluating the impact of new accounting pronouncements on the measurement of credit losses on financial instruments (effective April 1, 2020) and fair value measurements (effective after December 15, 2019)[149][150] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes occurred in the company's market risk profile compared to the disclosures in its Annual Report on Form 10-K as of March 31, 2019 - No material changes in market risk from the information provided in the Annual Report on Form 10-K as of March 31, 2019[151] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2019, due to material weaknesses, with remediation efforts underway and expected to conclude by fiscal year 2020 Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2019[152] - Material weaknesses identified include insufficient review of certain accounting policies, inconsistent application, inadequate analysis, deficient documentation for certain accounts (e.g., inventory), and inadequate oversight of process level controls at a subsidiary due to a lack of sufficient technical accounting resources[154] Management's Remediation Efforts - Remediation steps include hiring additional finance and accounting personnel, formalizing assessment and documentation of accounting and financial reporting policies, enhancing internal control training for subsidiaries, and improving the risk assessment process and internal control design at subsidiaries[160] - Management expects the remediation plan to extend over multiple financial reporting periods throughout fiscal year 2020, with completion anticipated prior to the end of fiscal year 2020[156] Inherent Limitations on Effectiveness of Controls - Internal control over financial reporting is designed to provide reasonable assurance, not absolute, regarding the reliability of financial reporting[158] - Projections of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions or deterioration of compliance[161] Changes in Internal Control Over Financial Reporting - The company is taking actions to remediate the material weakness in internal controls over financial reporting, and no other material changes occurred during the three months ended September 30, 2019[162] PART II — OTHER INFORMATION Item 1. Legal Proceedings No material changes occurred in the company's legal proceedings compared to the disclosures in its Annual Report on Form 10-K as of March 31, 2019 - No material changes to legal proceedings from the Annual Report on Form 10-K[165] Item 1A. Risk Factors No material changes occurred in the company's risk factors compared to the disclosures in its Annual Report on Form 10-K as of March 31, 2019 - No material changes in the risk factors set forth in Item 1A to Part I of the Annual Report on Form 10-K[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased during the three months ended September 30, 2019, with $21,308,000 remaining available under the share repurchase program, subject to Credit Facility limits - No shares were repurchased during the three months ended September 30, 2019[168] - As of September 30, 2019, $21,308,000 remained available under the $37,000,000 authorized share repurchase program[168] - The Credit Facility permits up to $20,000,000 of dividends and share repurchases per fiscal year[167] Item 5. Other Information This section contains no additional information to report - No other information to report[169] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, incentive plans, certifications, and XBRL taxonomy documents - Exhibits include Certificate of Incorporation, Amended and Restated By-Laws, various Incentive Award Plans, and certifications from the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer[171][172] - XBRL Instance Document and Taxonomy Extension Documents are also filed[172] SIGNATURES SIGNATURES The Form 10-Q report is officially signed by the Chief Financial Officer and Chief Accounting Officer on November 12, 2019 - The report was signed by David Lee, Chief Financial Officer, and Kevin Daly, Chief Accounting Officer, on November 12, 2019[176]