Motorcar Parts of America(MPAA) - 2020 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements (unaudited) Unaudited financial statements for December 31, 2019, reflect increased assets and liabilities, improved net income, and reduced operating cash outflow Condensed Consolidated Balance Sheets Total assets increased to $726.7 million by December 31, 2019, driven by higher inventory and new operating lease assets, with total liabilities also growing Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Mar 31, 2019 | | :--- | :--- | :--- | | Total Assets | $726,742 | $632,362 | | Inventory - net | $256,482 | $233,726 | | Operating lease assets | $65,652 | - | | Long-term contract assets | $224,569 | $221,876 | | Total Liabilities | $442,416 | $352,607 | | Revolving loan | $130,000 | $110,400 | | Operating lease liabilities (Current & Long-term) | $66,796 | - | | Total Shareholders' Equity | $284,326 | $279,755 | Condensed Consolidated Statements of Operations For the three months ended December 31, 2019, net sales slightly increased, gross profit improved, and the company reported net income of $865,000 Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | Nine Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $125,574 | $124,113 | $385,096 | $343,720 | | Gross profit | $27,661 | $21,161 | $81,817 | $63,224 | | Operating income | $9,246 | $1,627 | $22,230 | $10,153 | | Net income (loss) | $865 | $(3,102) | $903 | $(5,084) | | Diluted EPS | $0.04 | $(0.16) | $0.05 | $(0.27) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly improved to $4.4 million for the nine months ended December 31, 2019, with financing activities providing $13.5 million Cash Flow Summary (Nine Months Ended Dec 31, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,410) | $(20,328) | | Net cash used in investing activities | $(9,650) | $(13,244) | | Net cash provided by financing activities | $13,546 | $29,290 | | Net decrease in cash and cash equivalents | $(453) | $(4,458) | Notes to Condensed Consolidated Financial Statements Key notes detail the adoption of ASC 842, significant customer concentration, and a pending $17 million customs duty claim - The company adopted the new lease guidance (ASC 842) on April 1, 2019, recording operating lease liabilities of $53.0 million and corresponding assets of $50.8 million[34] Significant Customer Concentration (as % of Net Sales) | Customer | Nine Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Customer A | 39% | 36% | | Customer B | 21% | 23% | | Customer C | 23% | 23% | - The company is disputing a claim from U.S. Customs and Border Protection for approximately $17 million in additional duties from 2011 through mid-2018[93] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 12.0% increase in net sales, improved gross margins, and increased operating expenses, with liquidity supported by an amended credit facility Results of Operations Q3 net sales rose 1.2% to $125.6 million, driven by new products and acquisitions, with gross margin expanding to 22.0% due to product mix - For Q3 FY2020, the introduction of brake calipers contributed $6.9 million in net sales, and acquisitions from fiscal 2019 added $6.1 million[104] - Q3 gross profit margin improved by 5.0 percentage points year-over-year, primarily due to a change in product mix and a smaller non-cash revaluation write-down of cores[105] - For the nine months ended Dec 31, 2019, net sales increased by $41.4 million (12.0%), with acquisitions contributing $17.3 million and the new brake caliper line adding $11.5 million[115] Liquidity and Capital Resources Working capital was $75.1 million as of December 31, 2019, with liquidity supported by an amended $238.6 million revolving credit facility and receivable discount programs - In June 2019, the company amended its credit facility, increasing the revolving loan facility from $200.0 million to $238.6 million[124][132] - At December 31, 2019, the company had $130.0 million outstanding under its revolving facility and $73.8 million available for borrowing[136] - The company's share repurchase program had $21.3 million remaining available as of December 31, 2019, though no shares were repurchased during the quarter[126][165] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk exposures have occurred since the Annual Report on Form 10-K for the fiscal year ended March 31, 2019 - There have been no material changes in market risk since the Annual Report on Form 10-K as of March 31, 2019[148] Controls and Procedures Management concluded that disclosure controls were ineffective due to a material weakness in internal control over financial reporting, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019, due to a previously identified material weakness[149] - The material weakness stems from an insufficient review of accounting policies and a lack of technical accounting resources, leading to inconsistent application and inadequate analysis[156] - Remediation efforts are underway, including hiring more experienced personnel and enhancing training and monitoring, with a target completion before the end of fiscal year 2020[152][153] PART II — OTHER INFORMATION Legal Proceedings No material changes to litigation matters have occurred since the Annual Report on Form 10-K for the fiscal year ended March 31, 2019 - No material changes to litigation matters have occurred since the last annual report[162] Risk Factors No material changes to risk factors have occurred since the Annual Report on Form 10-K for the fiscal year ended March 31, 2019 - No material changes to risk factors have occurred since the last annual report[163] Unregistered Sales of Equity Securities and Use of Proceeds No equity securities were repurchased during the quarter, with $21.3 million remaining available under the authorized share repurchase program - No shares were repurchased during the three months ended December 31, 2019[165] - As of December 31, 2019, $21.3 million remained available under the company's authorized share repurchase program[165] Other Information No additional material information is reported for this item - None[166] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and Sarbanes-Oxley Act certifications - Exhibits filed with this report include certifications from the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act[169]