Aug 9, 2013
Executives
Gary Maier Selwyn H. Joffe - Chairman, Chief Executive Officer and President David Lee - Chief Financial Officer
Analysts
Jimmy Baker - B. Riley Caris, Research Division Philip Shen - Roth Capital Partners, LLC, Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America's Fiscal 2014 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Mr. Gary Maier of Investor Relations.
Please go ahead.
Gary Maier
Thank you. Thank you, Kate.
Thanks, everyone, for joining us for the call. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer; and David Lee, the company's Chief Financial Officer, I'd like to remind everyone of the Safe Harbor statement included in today's press release.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements, including statements made during the course of today's call. Such forward-looking statements are based on the company's current expectations and beliefs concerning future developments and their potential effects on the company.
There can be no assurance that future developments affecting the company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in the forward-looking statements.
These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the company, and are subject to change based upon various factors. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's various filings with the Securities and Exchange Commission. We'd now like to begin the call, and I'll turn it over to Selwyn.
Selwyn H. Joffe
Thank you, Gary. I appreciate everyone joining us today for our fiscal first quarter call.
We're off to an excellent start for fiscal 2014, and a new beginning with the de-consolidation of our previous undercar business segment. We are now completely focused on enhancing value within MPA and very excited about our opportunities.
We are pleased to report that our rotating electrical business is strong, and we certainly expect it to remain strong, barring significant unforeseen changes. Once again, my belief is that the macroeconomic conditions of our economy, along with the aging of the car fleet, will continue to provide strong demand for our products.
Latest data from Polk shows the average age of vehicles has increased to 11.4 years. In addition, the number of cars in the 12-plus-year-old category is growing.
And of course, as we've said before, replacement rates for these vehicles go up exponentially for our products. Our customer base remains stable and is performing quite well.
I'm excited to announce that the company has entered into the wheel hub business. The size of this category is approximately $1.2 billion in the North American marketplace.
This is a fast growing and evolving category for a number of significant reasons: first, the wheel hub assembly contains the anti-lock braking mechanisms. This technology has become more mainstream on vehicles during the last decade, and these vehicles are reaching prime replacement age for wheel hubs.
Secondly, more recently, anti-lock braking technology is being applied to the rear wheels, which should enhance the category growth rate. This category has similar failure rate characteristics as rotating electrical.
As cars age, failure rates grow exponentially. Industry research indicates that this category will grow at a 7% annual compound rate as the car population with anti-lock brakes grows and ages.
As we announced this morning, we reported sales for the quarter of $50.2 million for rotating electrical, representing a 7.4% increase from the same period a year ago. Adjusted EBITDA for the quarter increased approximately 25.6% to $9.8 million, including the adjustment for warrants and forward currency contracts and certain expenses related to our previous subsidiary as detailed in today's financial release.
Our liquidity remains strong, especially in light of the tax refunds and credits of $30 million-plus that we expect to receive. I'll turn it over to David now who will discuss our financials.
David Lee
Thank you, Selwyn. Net sales for the first quarter were $50.2 million, representing a $3.4 million or 7.4% increase compared with the prior year first quarter, and adjusted EBITDA was approximately $9.8 million for the first quarter.
The first quarter results were impacted by several factors, including the following 4 items: first, a $2.3 million noncash mark-to-market loss related to forward foreign exchange contracts and warrant liability; second, $2.4 million of expenses related to previous subsidiaries; third, MPA de-consolidated the assets and liabilities of the previous undercar segment from the consolidated financial statements effective May 31, 2013, so income from continuing operations for the full quarter ended June 30, 2013 excludes the previous undercar segment operations; and fourth, for the statement of operations, there is a separate line item for discontinued operations, which primarily consists of a $118 million gain from the de-consolidation of the previous undercar segment, which was offset by approximately $20 million loss in connection with guarantees of obligations to certain suppliers of a previous subsidiary. We will now review the financial results for the first quarter.
Net sales increased by $3.4 million or 7.4% to $50.2 million in the fiscal first quarter compared with net sales of $46.8 million for the prior period a year earlier. Increase in net sales was due to increased sales to our existing customers.
The gross profit percentage increased slightly to 31.9% from 31.7% during the 3 months ended June 30, 2013. General and administrative expenses increased $3.7 million to $9.6 million for the first quarter compared to $5.9 million for the prior year first quarter.
First quarter G&A expenses include: $1.57 million of noncash loss recorded due to the changes in the fair value of warrant liability; $733,000 of noncash loss recorded due to the change in the fair value of forward foreign currency exchange contracts; and approximately $2.1 million of expenses, including legal, professional fees, Sarbanes-Oxley compliance costs and other costs related to the previous subsidiaries. Sales and marketing expenses decreased $41,000 compared to the prior year first quarter, and research and development expenses increased $113,000 compared to prior year first quarter, primarily due to consulting expenses of $75,000 related to previous subsidiaries.
Operating income for the fiscal 2014 first quarter increased to $9.1 million compared with $7 million a year ago, adjusted to exclude professional fees incurred in connection with the restructuring of previous subsidiaries; mark-to-market items recorded due to the change in the fair value of warrant liability and forward foreign currency exchange contracts; FAS 123(R) share-based compensation expense and Sarbanes-Oxley implementation costs; legal, professional and consulting and other costs related to the previous subsidiaries; as well as accruals such as stock adjustments. EBITDA for the first quarter was $9.8 million, adjusted for various items as previously explained.
And depreciation and amortization expense was $733,000 for the first quarter. Interest expense was $3.9 million for the first quarter compared with $2.9 million for the prior year first quarter, primarily due to PIK interest income of $895,000 recorded for the prior year first quarter.
In the future, we expect to reduce interest expenses with lower interest rates. Income from discontinued operations was approximately $101 million during the 3 months ended June 30, 2013, compared with a loss from discontinued operations of $12.2 million for the prior year 3 months ended June 30, 2012.
The income from discontinued operations during the 3 months ended June 30, 2013, consists of: a $118.1 million gain on the de-consolidation of the previous undercar business segment; a loss of approximately $20.5 million in connection with guarantees of obligations to certain suppliers of a previous subsidiary; and losses of approximately $5.9 million incurred by previous subsidiaries from April 1, 2013 to May 31, 2013. In addition, we've recorded income tax benefits of $9.2 million during the 3 months ended June 30, 2013.
Net income for the first quarter, adjusted for the items explained above and previous subsidiary-related adjustments, increased by over 60% to $3.2 million or $0.22 per diluted share, compared with $2 million or $0.14 per diluted share for the comparable period a year earlier. It should also be noted that MPA started the wheel hubs business in mid-June, and as such, contributions from this business were immaterial to the quarter.
At June 30, 2013, we had an $83.9 million term loan and approximately $15.2 million cash, resulting in net bank debt of approximately $69 million. There was availability of $18 million on the $20 million revolving credit facility, reflecting $2 million of outstanding letters of credit.
Additionally, MPA had a $20 million loan payable related to a guarantee of obligations to a certain supplier of a previous subsidiary. At June 30, 2013, MPA had $277 million in total assets.
Current assets were $94 million and current liabilities were $64 million. To recap cash flows from operations.
During the 3 months ended June 30, 2013, cash used in operations was approximately $3.1 million, which was impacted by approximately $5 million in working capital for building inventory and core buybacks. Additionally, MPA expects to realize tax benefits of cash and credits of approximately $30 million as a result of the losses incurred for the investment in previous subsidiaries, which should further enhance liquidity.
I will now walk you through the income statement exhibits in our press release distributed this morning, which we believe will make it far easier to understand the various expenses and adjustments for the first quarter ended June 30, 2013. If you can take a moment to turn to the income statement exhibits in the press release starting with Exhibit 1, we can begin.
So when you eliminate the effect of financing, severance and other fees related to the previous subsidiaries, FAS 123(R) share-based compensation, noncash mark-to-market items recorded due to the changes in the fair value of warrant liability and forward foreign currency exchange contracts and revolving credit line interest related to a previous subsidiary supplier, as well as accruals such as stock adjustments, diluted earnings per share was $0.22 for the 3 months ended June 30, 2013. It's calculated by taking the reported net income from continuing operations of $103,000 and adjusting for: warranty and stock adjustment accruals of $712,000; the cost of stock adjustment accrual of $354,000; previous subsidiaries-related financing, severance and other fees of $2.1 million; FAS 123(R) share-based compensation expense of $125,000; and noncash mark-to-market loss of $2.3 million related to the change in the fair value of warrants and forward foreign currency exchange contracts; sales and marketing expenses of $21,000; consulting expenses of $75,000; and revolving credit line interest of $189,000 related to previous subsidiaries and a 39% tax rate.
So by adjusting the above-mentioned items from the reported net income of $103,000, adjusted net income was $3,242,000 or $0.22 per diluted share for the 3 months ended June 30, 2013. Additionally, at the bottom of the exhibit, there is a calculation for EBITDA for the 3 months ended June 30, 2013.
Starting with reported operating income of $4,102,000 and adjusting for the impact of the previous subsidiary-related financing, severance and other fees and noncash items as previously mentioned, and depreciation and amortization expense of $733,000, adjusted EBITDA is $9,784,000. The adjusted EBITDA of $9,784,000 is also calculated by starting with adjusted net income of $3,242,000 and adding income tax expense of $2,073,000, interest expense of $3,736,000 and depreciation and amortization of $733,000.
Exhibit 2 represents the adjusted calculations for the prior year quarter ended June 30, 2012, showing adjusted earnings per share of $0.14 and adjusted EBITDA of $7.8 million. I will now turn the call back to Selwyn.
Selwyn H. Joffe
Thank you, David. Going forward, MPA will continue to focus on continuous improvement of our excellent levels of customer service, which enhances customer loyalty, brand equity and ultimately, shareholder value.
We expect these fundamental qualities to translate well into our new wheel hub assembly product lines. So we'll now open the call to questions.
I'll turn it back to the operator.
Operator
[Operator Instructions] Our first question comes from the line of Jimmy Baker with B. Riley & Co.
Jimmy Baker - B. Riley Caris, Research Division
First, what's a reasonable range of expected contribution for the full fiscal year from your new wheel hubs assembly business? And then, are you actually manufacturing that product or serving more as a distributor?
Selwyn H. Joffe
We're in the distribution business, primarily with -- in a strategic relationship of a Chinese supplier. And the margins there are generally lower when you're in the distribution business.
Of course, expense is a lot lower as well. So that is a little bit of a different margin at this point.
And I think, looking forward, we should start seeing some impact from the wheel hub business this quarter. We've been quite successful in signing up business, and I think the -- again, I think I've mentioned this before but generally, distribution margin is in the 8% to 12% range.
So I would assume the lowest for purposes of monitoring at this point.
Jimmy Baker - B. Riley Caris, Research Division
Okay, that's helpful. But just trying to gauge the size of the revenue contribution, whether you want to talk about it on a quarterly basis or for the full fiscal year?
Selwyn H. Joffe
Yes. I think I'll be in a better position to give more accurate guidance at the end of this quarter.
But we certainly expect that to be fairly significant, starting -- again, starting at the end of this quarter.
Jimmy Baker - B. Riley Caris, Research Division
Okay, I suppose I'll wait on that, then. So could you also just talk about how close you are to potentially refinancing your term loan?
And do you expect to change the size of the balance of that when you refinance? And any preliminary expectations for the rate you could receive?
Selwyn H. Joffe
Yes, so we're in the process. We are certainly looking for fairly significant rate reductions.
I'm not sure what the timing will be. Again, it's fairly early in the process as we start reporting clean numbers now without the effect of the former subsidiary.
But I think the savings are going to be substantial. Outstanding debt, we'll -- again, we'll track the outstanding debt.
We'd like to do -- to have adequate liquidity in the new facility or amended facilities so that there's no impact on operations. But from a net debt perspective, I don't think anything material is going to change.
Jimmy Baker - B. Riley Caris, Research Division
Okay. And so any near-term plans to repay or otherwise reconcile the loan and warrants from Fenco's former supplier?
Selwyn H. Joffe
We're working through that as well. I mean, so we should be making progress on that sometime this quarter as well.
Jimmy Baker - B. Riley Caris, Research Division
Okay. Last one for me, and I'll pass it off.
I'm just interested to hear your expectations for full year free cash flow? And if you -- if we should be thinking about a material impact to that from launching the new wheel hubs assembly business?
Selwyn H. Joffe
Well, I think that near term, you've seen inventory growth, certainly, in our current quarter's numbers. There should be some marginal continuing inventory growth this quarter and then, we expect it all to reverse out.
So we don't think that the cash effect during this fiscal year will be material from starting the business.
Operator
[Operator Instructions] Our next question comes from the line of Philip Shen with Roth Capital Partners.
Philip Shen - Roth Capital Partners, LLC, Research Division
I'd like to start off with O'Reilly. They posted some really nice Q2 results and a really robust quarter a couple of weeks back.
They're talking about adding 190 new locations and 2 distribution centers in 2013. I think in the quarter, they posted same-store sales of plus 6.5%.
They actually indicated that they were investing a tremendous amount of capital on inventory, and that's a quote. How did the positive Q2 results from them impact you in the quarter?
And going forward, given your exposure to them, how do you see that benefiting your business?
Selwyn H. Joffe
Well, let me just back up a little bit. I mean, we're not in a position to comment on any of our customer's performance.
But having said that, our customer base, in general, have very favorable results. Register sales for our products were very, very good.
Demand for our products, based on all of the things that you read about, the various customers in the market remains very strong. And we expect a strong year in our categories this fiscal and certainly, in the next fiscal in terms of near-term outlook.
Information that O'Reilly and any of the other retailers publish I mean, certainly, is valuable in understanding our business but we really don't comment on any of our customers specifically.
Philip Shen - Roth Capital Partners, LLC, Research Division
That's fair. Obviously, there's a clear read-through for you.
I just want to get a feel for it. Can you give us a sense for -- in the Fenco bankruptcy, where are we in that bankruptcy?
Has the trustee provided some initial or interim reports? And what's your latest expectation as to when you expect that process to wind down?
Selwyn H. Joffe
Yes, that's a very good question. It's a very, very slow process.
We're not aware of anything specifically from the trustee that's happening. It is in a liquidation mode.
And that's as much as I really know at this point. We're waiting to see ourselves.
Philip Shen - Roth Capital Partners, LLC, Research Division
Okay. And congrats on the new wheel hub business, it sounds exciting and like it's a good opportunity.
I was wondering if you might be able to provide and just touch more color beyond what you've provided. So can you talk to us about, have you started to book -- I mean, do you have contracts in place already with customers?
How do you expect that business to develop in between now and through the fiscal year?
Selwyn H. Joffe
Yes. So the answer is yes, we do, we have some strong customer opportunities.
We have begun shipping. We're ramping up that program right now.
We certainly expect to see double-digit millions of revenue in this quarter in that category. And I just don't want to jump ahead of myself, and I'd like to see -- get 1 quarter of stability in supply under our belt.
And then, I think at the next quarter, I'll be able to give you a little more guidance. But our long-term outlook for this business is significant.
We think we can be a fantastic supplier. We think we have incredible technical expertise in-house, the infrastructure to monitor quality on a global basis.
We have a pretty significant Chinese quality group in place, and we have our Chinese management team in place. And we think we'll offer a lot of value to the market in our supplier -- in this category.
And the category is a very vibrant category. It is probably less mature than rotating electrical so there's, I think, probably more upside in the growth rates that are being projected.
And so we think over the next couple of years, this is going to be a major contributor to our business. We don't expect to have any overhang in terms of the startup costs.
There's as a positive return on invested capital. And it's a distribution business, so there's not massive amounts of capital expenditures involved with it.
It's mostly inventory build. Once we start moving that inventory out to the customers, you'll see a rebound in the amount of cash that's being generated from that business.
So we think it will be cash-positive. We think it'll be profitable, and we think it will contribute accretively to our EBITDA.
And we think it will be significant. But I would like to hold off just for a quarter and just get a better idea of where we are as we launch the program.
Operator
And I'm not showing any further questions in the queue at this time. I'd like to turn the call back over to management for closing remarks.
Selwyn H. Joffe
Well, thank you, everybody. I appreciate everybody's interest in MPA.
I can tell you we're focused on our business and committed to our customers in terms of excellent customer service, industry-leading fill rates and tremendous technical expertise in supporting our products. And we expect that, that will translate into building shareholder value quite quickly.
And we appreciate everyone's interest. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.
Everyone, have a great day.