Motorcar Parts of America, Inc. Announces Auditors Have Withdrawn Opinion Pending Review of MPA's Restated Financial Statements; Provides Unreviewed Results for Second Quarter FY 2005
LOS ANGELES--Nov. 2, 20043, 2004--Motorcar Parts of America, Inc. ("MPA") (OTC:MPAA), a leading provider of remanufactured starters and alternators for the automotive aftermarket, today reported that, following MPA's announcement last week that investors and others should not rely on certain of MPA's financial statements, Grant Thornton LLP, MPA's auditors, has withdrawn its opinion included in the Form 10-K for the year ended March 31, 2004. MPA and Grant Thornton continue to work together to complete the audit of the restated periods included in March 31, 2004 Form 10-K and the review of the subsequent quarterly periods. As the audit and review of the restatement made to effect this correction to MPA's accounting policies remains incomplete, MPA announced that it did not file its Form 10-Q for the period ended September 30, 2004 on November 22, 2004, the extended filing deadline.MPA previously reported that it intended to correct its accounting policy with respect to accounting for sales to customers and the recognition of the related core revenues and costs. The core refers to the portion of the used alternator or starter that is typically returned by the aftermarket customer and is a key component of the remanufacturing process. MPA will now account for revenues and cost of sales on a net-of-core-value basis. As a result, MPA will reissue its annual report for the fiscal year ended March 31, 2004 and its quarterly report for the three month period ended June 30, 2004. As previously disclosed, MPA believes this change will result in a material decrease in net revenues and cost of sales but will not have an impact on its gross profit, operating profit, net income or cash flow from operations.
FINANCIAL RESULTS
Today MPA announced unreviewed restated financial results for the six month period ended September 30, 2004 and unreviewed results for the three month period ended September 30, 2004.
Financial Highlights:
-- Q2 FY 05 revenues increased 6.8% to $23.5 million over Q2 of FY 04.
-- Pay-on-scan (POS) shipments in excess of sales recorded grew by $4.7 million during Q2 of FY 05 over those recorded in Q1 of FY 05.
-- Q2 FY 05 net income of $2 million, or $0.23 per diluted share, versus $1.90 million, or $0.23 per diluted share in Q2 of FY 04.
-- Six months revenues for FY 05 up 5.9% to $41.8 million, from $39.5 million in FY 04.
-- POS shipments in excess of sales recorded grew by $9.6 million for the first six months of FY 05 over those recorded during the first six months of FY 04.
-- Net income for the first six months of FY 05 decreased to $2.1 million, or $0.24 per diluted share, versus $2.6 million, or $0.32 per diluted share for the first six months of FY 04.
-- Operating cash flow decreased to $9.9 million in the first six months of FY 05 versus $16.3 million in the first six months of FY 04 primarily as a result of MPA's inventory buildup to support anticipated sales.
Operational Highlights:
-- Significant expansion of relationship with our largest customer under the POS program.
-- Winner of Frost and Sullivan Product Quality Leadership Award.
-- Initial sales success to the traditional warehouse and professional installer aftermarket segment.
-- Entered into an agreement for 125,000 square ft. premises in Mexico scheduled to be in production in Q1 FY 06.
Q2 FY 05 Results
"In the second quarter of fiscal 2005, we continued to make progress in growing our market share and building an industry leading cost structure," said Selwyn Joffe, Chairman and CEO. "We continue to execute on our strategy to expand MPA's growth horizons, improve our profitability, and add value to our customers in both the retail and professional installer marketplaces."
Second quarter 2005 revenues increased by 6.8% to $23.5 million, as compared to $22 million in the second quarter of fiscal 2004. Reported sales to our largest customer have yet to reflect the full increase in products shipped because of the pay-on-scan (POS) arrangement covering those sales.
In Q2 FY 05 gross margin decreased to $6.8 million, or 29.2% of sales, from $7 million, or 32% of sales, in the second quarter of the 2004 fiscal year. Gross margin was negatively impacted by a number of expenses associated with the transition of business to a POS basis.
General and administrative expenses were $2.4 million for the second quarter of FY 05, as compared to $2.9 million in the prior year period. This decrease was mainly due to a decrease in legal fees, partially offset by accounting expense increases and start-up expenses relating to the opening of a new manufacturing facility in Mexico.
Operating income was $3.66 million or 15.6% of net sales in the second quarter of FY 05, as compared to $3.56 million, or 16.2% of sales, in the second quarter of FY 04,
Net income for the second quarter of FY 05 was $2 million, or $0.23 per diluted share, compared to $1.9 million, or $0.23 per diluted share, in the same period in fiscal 2004.
Reconciliation of Net Sales and Cost of Goods Sold to Reflect
Correction of Accounting Policy
To provide additional information concerning the impact of the correction of its accounting policies to account for net sales and cost of goods sold on a net-of-core-value basis, MPA is releasing the following reconciliation:
Results for the six months ended September 30, 2004 (unaudited):
Sales reported on Adjustments As restated;
gross basis(a) net basis of
reporting
Net sales $87,640,000 $(45,840,000) $41,800,000
Cost of goods sold 76,876,000 (45,840,000) 31,036,000
----------------- ---------------- ----------------
Gross margin $10,764,000 0 $10,764,000
(a) Includes the results for the three months ended June 30, 2004, as
previously reported.
Financial Condition
During the six months ended September 30, 2004, the Company generated $9.9 million in cash from operating activities, as compared with $16.3 million during the six months ended September 30, 2003. The reduction was in part due to the buildup of inventories.
Shareholders' equity was $46.2 million at September 30, 2004, compared to $43.6 million at year end March 31, 2004. The Company had over $14 million in cash and no amounts outstanding under its line of credit as of September 30, 2004; at March 31, 2004, the end of fiscal year 2004, the Company had $7.6 million in cash and $3.0 million outstanding on the line of credit. At September 30, 2004, the Company had recognized an obligation to issue $12.9 million in credits to our largest customer over the next 18 months in connection with the transition of the Company's expanded business with this customer to a POS basis.
The Company is aggressively seeking to conclude all open issues related to its financial statements, including concluding the audit of its restated financial statements and the review of its interim financial statements.
About MPA
Motorcar Parts of America, Inc. is a leading manufacturer of replacement alternators and starters for imported and domestic cars and light trucks in the United States and Canada. MPA has facilities in the United States in Torrance, California, Nashville, Tennessee, and Charlotte, North Carolina, as well as overseas in Singapore and Malaysia. The Company websites are located at www.motorcarparts.com and www.quality-built.com.
Disclosure Regarding Private Securities Litigation Reform Act of
1995:
This press release may contain certain forward-looking statements with respect to the future performance of the Company that involve risks and uncertainties. Various factors could cause actual results to differ materially from those projected in such statements. The financial results for the second quarter of Fiscal 2005 contained above and the impact of the anticipated restatement on prior periods' financial results are based upon preliminary information and are subject to change. These factors include, but are not limited to, the Company's ability to timely finalize its interim financial statements for the quarter ended September 30, 2004, as anticipated, the concentration of sales to certain customers, changes in the Company's relationship with any of its customers, including the increasing customer pressure for lower prices and more favorable payment terms, our failure to meet the financial covenants or the other obligations set forth in our bank credit agreement and the bank's refusal to waive any such defaults, the potential for changes in consumer spending, increases in interest rates, changes in the financial condition of any of our major customers, consumer preferences and general economic conditions, increased competition in the automotive parts remanufacturing industry, unforeseen increases in operating costs and other factors discussed herein and in the Company's filings with the Securities and Exchange Commission.
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, March 31,
2004 2004
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $14,154,000 $7,630,000
Short term investments 398,000 288,000
Accounts receivable -- net 10,438,000 14,626,000
Inventory -- net 46,696,000 28,744,000
Deferred income tax asset 6,929,000 8,124,000
Prepaid income tax 69,000 172,000
Prepaid expenses and other current
assets 1,270,000 880,000
------------- -------------
Total current assets 79,954,000 60,464,000
------------- -------------
Plant and equipment -- net 4,069,000 4,758,000
Other assets 762,000 774,000
------------- -------------
TOTAL ASSETS $84,785,000 $65,996,000
============= =============
LIABILITIES
Current liabilities:
Accounts payable $20,248,000 $13,456,000
Accrued liabilities 2,887,000 2,851,000
Line of credit -- 3,000,000
Deferred compensation 361,000 260,000
Current portion of credit due to
customer 11,750,000 --
Current portion of capitalized lease
obligations 378,000 409,000
Other current liabilities 80,000 62,000
------------- -------------
Total current liabilities 35,704,000 20,038,000
Deferred income taxes 689,000 1,016,000
Deferred income -- 100,000
Credit due to customer, less current
portion 1,162,000 --
Capitalized lease obligations, less
current portion 1,066,000 1,247,000
------------- -------------
Total liabilities 38,621,000 22,401,000
SHAREHOLDERS' EQUITY
Preferred stock; par value $.01 per share,
5,000,000 shares authorized; none issued -- --
Series A junior participating preferred
stock; no par value, 20,000 shares
authorized; none issued -- --
Common stock; par value $.01 per share,
20,000,000 shares authorized; 8,173,955
and 8,085,955 shares issued and
outstanding at September 30, 2004 and
March 31, 2004 81,000 81,000
Additional paid-in capital 53,578,000 53,096,000
Accumulated other comprehensive loss (83,000) (78,000)
Accumulated deficit (7,412,000) (9,504,000)
------------- -------------
Total shareholders' equity 46,164,000 43,595,000
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $84,785,000 $65,996,000
============= =============
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Six Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
As Restated As Restated As Restated
Net sales $41,800,000 $39,477,000 $23,491,000 $21,991,000
Cost of goods sold 31,036,000 28,339,000 16,642,000 14,955,000
------------ ------------ ------------ ------------
Gross margin 10,764,000 11,138,000 6,849,000 7,036,000
------------ ------------ ------------ ------------
Operating
expenses:
General and
administrative 5,037,000 5,283,000 2,416,000 2,921,000
Sales and
marketing 1,133,000 707,000 511,000 414,000
Research and
development 442,000 281,000 263,000 137,000
------------ ------------ ------------ ------------
Total operating
expenses 6,612,000 6,271,000 3,190,000 3,472,000
------------ ------------ ------------ ------------
Operating income 4,152,000 4,867,000 3,659,000 3,564,000
Interest expense -
net 800,000 581,000 449,000 288,000
------------ ------------ ------------ ------------
Income before
provision for
income taxes 3,352,000 4,286,000 3,210,000 3,276,000
Provision for
income taxes 1,260,000 1,708,000 1,209,000 1,378,000
------------ ------------ ------------ ------------
Net income $2,092,000 $2,578,000 $2,001,000 $1,898,000
============ ============ ============ ============
Basic net income
per share $.26 $.32 $.25 $.24
============ ============ ============ ============
Diluted net income
per share $.24 $.32 $.23 $.23
============ ============ ============ ============
Weighted average
number of shares
outstanding
- basic 8,125,982 7,998,326 8,157,172 7,995,350
- diluted 8,590,254 8,125,339 8,603,916 8,227,735
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
September 30,
------------------------
2004 2003
------------ -----------
Cash flows from operating activities:
Net income $2,092,000 $2,578,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,006,000 1,195,000
Provision for deferred income taxes 868,000 1,461,000
Tax benefit from employee stock options 240,000 --
(Increase) decrease in:
Accounts receivable 4,189,000 5,081,000
Inventory (17,955,000) 2,255,000
Prepaid expenses and other current
assets (389,000) --
Income tax refund receivable 102,000 28,000
Other assets 5,000 44,000
Increase (decrease) in:
Accounts payable and accrued
expenses 6,824,000 2,638,000
Deferred compensation 101,000 15,000
Credit due to customer 12,912,000 172,000
Other current liabilities (82,000) 879,000
------------ -----------
Net cash provided by operating
activities 9,913,000 16,346,000
------------ -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (310,000) (642,000)
Change in short-term investments (108,000) (61,000)
------------ -----------
Net cash used in investing activities (418,000) (703,000)
------------ -----------
Cash flows from financing activities:
Net repayments under line of credit (3,000,000) (6,932,000)
Exercise of stock options 242,000 72,000
Payments on capital lease obligation (212,000) (403,000)
Repurchase of warrants, stock options and
shares -- (1,009,000)
------------ -----------
Net cash used in financing activities (2,970,000) (8,272,000)
------------ -----------
Effect of exchange rate changes on cash (1,000) (17,000)
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,524,000 7,354,000
CASH AND CASH EQUIVALENTS- BEGINNING OF
PERIOD 7,630,000 1,307,000
------------ -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $14,154,000 $8,661,000
============ ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $830,000 $586,000
Income taxes $50,000 $142,000
Non-cash investing and financing
activities:
Property acquired under capital lease -- $755,000
Restatement:
As reported in a Current Report on Form 8-K filed on November 16, 2004, we have concluded that we must reissue our financial statements for the year ended March 31, 2004 and the three months ended June 30, 2004 to correct our policy with respect to accounting for our sales to customers and the recognition of the related core revenues and costs. We have decided to account for revenues and cost of sales on a net-of-core-value basis, which we have concluded reflects the proper application of generally accepted accounting principles. This change will result in a material decrease in net revenues and cost of sales, but will not impact our gross profit, operating profit, net income or cash flow from operations. The results for the period ended September 30, 2004 have been prepared in accordance with this new policy, and the Company has restated its previously reported results for the period ended September 30, 2003 to reflect this change.
Our review of accounting policies, and the resulting reissuance, was precipitated in part by comments that we received from the Securities and Exchange Commission's Division of Corporation Finance in connection with the SEC's review of our financial information contained in prior periodic report filings. We have not yet provided a formal, comprehensive response to the SEC's most recent comment letter. Upon receipt and review of that letter, the SEC may have further comments.
The impact on our previously filed Consolidated Statements of Operations, as a result of the adjustments for three months ended June 30, 2004, years ended March 31, 2004, 2003 & 2002 and the periods beginning with June 30, 2003 through March 31, 2004 are as follows:
For the Three Months Ended June 30, 2004
(unaudited)
-----------------------------------------
Amount
Previously Adjustments As Restated
Reported
------------- ------------- -------------
Statements of Operations:
Net sales 41,128,000 (22,818,000) 18,310,000
Cost of goods sold 37,429,000 (23,034,000) 14,395,000
------------- ------------- -------------
Gross margin 3,699,000 216,000 3,915,000
------------- ------------- -------------
Operating expenses:
General and administrative 2,405,000 216,000(b) 2,621,000
Sales and marketing 622,000 622,000
Research and development 179,000 179,000
------------- ------------- -------------
Total operating expenses 3,206,000 216,000 3,422,000
------------- ------------- -------------
Operating income 493,000 -- 493,000
============= ============= =============
(b) The $216,000 adjustment reflects the correction of an error in
that amount and represents general and administrative expenses which
were improperly included in cost of goods sold.
Fiscal Year Ended March 31, 2004 (unaudited)
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Net sales, as
reported $37,102,000 $46,424,000 35,578,000 $33,532,000
Adjustments (19,616,000) (24,433,000) (16,824,000) (15,204,000)
------------ ------------ ------------ ------------
Net sales, as
restated 17,486,000 21,991,000 18,754,000 18,328,000
Cost of goods
sold, as reported 33,000,000 39,388,000 30,409,000 26,703,000
Adjustments (19,616,000) (24,433,000) (16,824,000) (15,204,000)
------------ ------------ ------------ ------------
Cost of goods
sold, as restated 13,384,000 14,955,000 13,585,000 11,499,000
------------ ------------ ------------ ------------
Gross Margin $4,102,000 $7,036,000 $5,169,000 $6,829,000
------------ ------------ ------------ ------------
Fiscal Year Ended March 31, 2003 (unaudited)
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Net sales, as
reported $48,405,000 $44,456,000 $40,115,000 $34,590,000
Adjustments (25,461,000) (23,022,000) (20,656,000) (19,626,000)
------------ ------------ ------------ ------------
Net sales, as
restated 22,944,000 21,434,000 19,459,000 14,964,000
Cost of goods
sold, as reported 43,224,000 39,598,000 34,921,000 32,432,000
Adjustments (25,461,000) (23,022,000) (20,656,000) (19,626,000)
------------ ------------ ------------ ------------
Cost of goods
sold, as restated 17,763,000 16,576,000 14,265,000 12,806,000
------------ ------------ ------------ ------------
Gross Margin $5,181,000 $4,858,000 $5,194,000 $2,158,000
------------ ------------ ------------ ------------
Fiscal Year Ended March 31,
-----------------------------------------
2002 2003 2004
(unaudited) (unaudited) (unaudited)
------------- ------------- -------------
Net sales, as reported $172,040,000 $167,566,000 $152,636,000
Adjustments (88,728,000) (88,765,000) (76,077,000)
------------- ------------- -------------
Net sales, as restated 83,312,000 78,801,000 76,559,000
Cost of goods sold, as
reported 151,465,000 150,175,000 129,500,000
Adjustments (88,728,000) (88,765,000) (76,077,000)
------------- ------------- -------------
Cost of goods sold, as
restated 62,737,000 61,410,000 53,423,000
------------- ------------- -------------
Gross Margin $20,575,000 $17,391,000 $23,136,000
------------- ------------- -------------