MOTORCAR PARTS OF AMERICA INC

Motorcar Parts of America, Inc. operates in the $130 billion automotive aftermarket for replacement hard parts in North America, the $11 billion-plus rapidly emerging global market for automotive test solutions and diagnostic equipment, and the $40 billion market for medium and heavy-duty automotive aftermarket replacement parts for truck, industrial, marine, and agricultural applications. The company's products are distributed to both the do-it-yourself (DIY) market and the professional installer (do-it-for-me, or DIFM) market, with the distinction between these two markets having become less defined over the years as retail outlets leverage their distribution strength and store locations to attract customers. Demand for replacement parts generally increases with the age of vehicles and miles driven, and the current population of light-duty vehicles in the U.S. is approximately 296 million, with the average age of these vehicles approximately 13 years and expected to continue to grow.

The company competes with several large and medium-sized companies, including Terrepower and DRiV for hard parts, Burke Porter and Langdi Measurement Control for test solutions and diagnostic equipment, and a large number of smaller regional and specialty companies, as well as overseas manufacturers particularly those located in Asia who are increasing their operations. Sales to the three largest customers in the aggregate represented 85% ¹ of net sales during fiscal 2026, and sales to the largest customer represented 42% ² of net sales during fiscal 2026. The company believes its advanced power emulators are protected by U.S. patents that provide a strong competitive barrier for a large segment of the market and allow it to be lower cost and more efficient.

The company generates revenue by supplying automotive aftermarket non-discretionary replacement parts and test solutions and diagnostic equipment, with products sold under customers' widely recognized private label brand names and the company's own brand names including Quality-Built, Pure Energy, D&V Electronics, Dixie Electric, and DelStar. Revenue is recognized when performance obligations under the terms of a contract with customers are satisfied, generally with the transfer of control of products, measured as the amount of consideration expected in exchange for transferring goods or providing services, and recognized net of all anticipated returns, marketing allowances, volume discounts, and other forms of variable consideration. The company sells hard parts products to the largest automotive chains including Advance Auto Parts, AutoZone, Genuine Parts (NAPA), and O'Reilly Auto Parts with an aggregate of approximately 25,000 retail outlets, and also sells to warranty replacement programs (OES) customers, professional installers, and a diverse group of automotive warehouse distributors.

The company's Hard Parts segment includes light duty rotating electrical products such as alternators and starters, and brake-related products including brake calipers, brake boosters, brake rotors, brake pads, brake master cylinders, and wheel hub assemblies and bearings. During fiscal 2026, rotating electrical products represented 68% ³ of consolidated net sales by product mix, brake-related products represented 28% ⁴, and other products represented 4% ⁵. The company carries approximately 44,000 stock keeping units (SKUs) to support automotive aftermarket non-discretionary replacement parts.

The Test Solutions and Diagnostic Equipment segment includes applications for combustion engine vehicles including bench-top testers for alternators and starters, equipment for the pre- and post-production of electric vehicles, and software emulation of power system applications for the electrification of all forms of transportation including automobiles, trucks, the emerging electrification of systems within the aerospace industry, and electric vehicle charging stations. The Heavy Duty segment includes non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications. Both the Test Solutions and Diagnostic Equipment and Heavy Duty segments are not material and are not required to be separately reported.

During fiscal 2026, the company repurchased 955,608 ⁶ shares of its common stock for $11,351,000 ⁷, and in December 2025 the board of directors approved an increase in the share repurchase program from $37,000,000 ⁸ to $57,000,000 ⁹ of common stock. The company awarded significant new business commitments, expanded product coverage with more than 237 ¹⁰ new part numbers covering more than approximately 54 million ¹¹ vehicles in operation in North America for Hard Parts products, successfully executed tariff mitigation programs including sourcing from lower tariff countries, commenced the relocation of certain operations to its lower cost operation in Mexico, continued sales growth in the emerging Mexican market, continued market share gains for its JBT-1 bench-top testers with the majority of retail stores in North America deploying its diagnostic units, and commenced direct shipments from its distribution center in Malaysia.

Net sales increased 4.3% ¹² to a record $789,806,000 ¹³ in fiscal 2026 compared to $757,354,000 ¹⁴ in fiscal 2025. Gross profit increased 3.9% ¹⁵ to a record $159,901,000 ¹⁶ from $153,828,000 ¹⁷ in the prior year, with gross profit percentage of 20.2% ¹⁸ compared to 20.3% ¹⁹. Operating income increased 64.9% ²⁰ to $65,835,000 ²¹ from $39,923,000 ²² in the prior year. Net income increased to $12,400,000 ²³ from a net loss of $19,500,000 ²⁴ in the prior year. The company generated cash from operating activities of approximately $19,158,000 ²⁵.

The company continues to focus on strategic growth by leveraging its competitive advantage and growing its industry position by providing innovative and intuitive solutions to customers. Key growth initiatives for Hard Parts include growing current product lines both with existing and potential new customers, introduction of new product lines (while noting no new product lines have been introduced recently, the company has expanded new product introduction in existing product lines), creating value for customers through supply management initiatives, demand analytics, inventory management services, online training guides, and market share and retail store layout information, technological innovation through in-house technologies and advanced testing methods, and leveraging manufacturing capacity and supply chain sourcing including capitalizing on existing operations in Mexico with volume and efficiency benefits and ongoing focus on lowering supply chain sourcing particularly lower-tariff cost locations.

For Test Solutions and Diagnostic Equipment, the company provides industry-leading test solutions and diagnostic equipment to both original equipment manufacturers and the aftermarket, continuously upgrading equipment to accommodate testing for the latest alternator and starter technology for both existing and new customers, with software and hardware upgrades also available for existing products. The company offers products and services that cater to automotive test solutions and diagnostic equipment for inverter and electric motors for both development and production, as well as power supply hardware and emulation software diagnostic products, with a strategy to market these products on a global basis to original equipment manufacturers as well as suppliers to the original equipment manufacturers for development and production of electric vehicles and electric vehicle charging systems, and believes it is well-positioned to supply the aerospace industry to support its shift to electric power-driven control systems in airplanes. For Heavy Duty, the company continues to develop and improve product performance, ease of installation, and coverage simplification to deliver installation-ready products to provide extended service life and reduced downtime for customers.

The company's gross profit percentage fluctuates due to numerous factors including the timing and level of marketing allowances provided to customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions. The company's gross margin for fiscal 2026 compared with fiscal 2025 was impacted by continued amortization of core and finished goods premiums of $11,901,000 ²⁶ and $10,738,000 ²⁷ respectively, the non-cash quarterly revaluation of cores that are part of the finished goods on customers' shelves resulting in a write-down of $3,590,000 ²⁸ and $2,805,000 ²⁹ respectively, transition expenses of $2,571,000 ³⁰ and $1,298,000 ³¹ respectively in connection with the on-going strategy to utilize the global footprint to enhance operating efficiencies, and net tariff costs paid for products sold before price increases were effective of $2,124,000 ³² and $4,607,000 ³³ respectively.

The company expects to incur approximately $9,000,000 ³⁴ of capital expenditures primarily to support operations in fiscal 2027, and has used and expects to continue using working capital and additional capital lease obligations to finance these capital expenditures. The company's total capital expenditures were $6,915,000 ³⁵ in fiscal 2026 and $6,066,000 ³⁶ in fiscal 2025, including cash paid for the purchase of plant and equipment, plant and equipment acquired under finance leases, and accrued capital expenditures, with capital expenditures in fiscal 2026 primarily including the purchase of equipment for current operations.

As of March 31, 2026, $34,928,000 ³⁷ has been utilized and $22,072,000 ³⁸ remains available to repurchase shares under the authorized share repurchase program, subject to the limit in the Credit Facility and Convertible Notes. The company retired the 2,334,749 ³⁹ shares repurchased under this program through March 31, 2026. The share repurchase program does not obligate the company to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

The company faces structural headwinds from unfavorable economic conditions including inflation, slower economic growth and the potential for a recession, increased fuel prices, rapid changes in trade policy, new or increased tariffs including retaliatory tariffs, global trade disruptions, unemployment levels, decreased availability of consumer credit, taxation or instability in financial markets or credit markets which may either lower demand for products or increase operational costs. The company is affected by trade policy including global tariffs, and the U.S. government has indicated it intends to negotiate changes to the USMCA in 2026 with the Mexican and Canadian governments, which may negatively impact operations in Mexico and Canada and may significantly and materially increase costs by increasing the cost of shipping products from the distribution center or remanufacturing facilities in Mexico and subsidiaries in Canada.

The company faces execution risks from its reliance on a few customers for a majority of its business, with sales to the three largest customers in the aggregate representing 85% ⁴⁰ and sales to the largest customer representing 42% ⁴¹ of net sales during fiscal 2026, and the loss of or a significant decline in sales to any of these customers could adversely affect business. The company also faces risks from the highly competitive nature of the industry, with competitors that may have larger customer bases and significantly greater financial, technical and marketing resources, and from increasing competition from overseas manufacturers particularly those located in China and other regions with lower labor and production costs who are investing heavily in advanced automated manufacturing technologies.

The company's net sales are concentrated among a small number of customers, with sales to the three largest customers in the aggregate representing 85% ⁴² and sales to the largest customer representing 42% ⁴³ of net sales during fiscal 2026, and the loss of or a significant decline in sales to any of these customers could adversely affect business. The company faces significant risk from the imposition of tariffs, with the U.S. government having placed increased tariffs on certain goods imported from China and other countries, and the company has experienced net tariff costs paid for products sold before price increases were effective of $2,124,000 ⁴⁴ in fiscal 2026. The company's offshore remanufacturing and logistic activities expose it to increased political and economic risks, with approximately 29% ⁴⁵ of total expenses in currencies other than the U.S. dollar in fiscal 2026, primarily the Mexican peso. The company had $94,668,000 ⁴⁶ of debt outstanding under its credit facility at variable interest rates as of March 31, 2026, and $32,000,000 ⁴⁷ in aggregate principal amount of 10.0% ⁴⁸ convertible notes due in 2029, and fluctuations in interest rates could impact operating results and cash flows. The company faces increasing competition from overseas manufacturers, particularly those located in China and other regions with lower labor and production costs who are investing heavily in advanced automated manufacturing technologies, which could result in loss of market share or pressure on margins.

Management's message emphasizes a focus on strategic growth, improving profitability, and leveraging the company's industry position within a rapidly changing competitive environment for non-discretionary aftermarket parts and solutions, expressing optimism about further capitalizing on distinctive qualities in fiscal 2027. Key strategic priorities emphasized include growing current product lines with existing and potential new customers, introduction of new product lines, creating value for customers through supply management initiatives and technological innovation, and leveraging manufacturing capacity and supply chain sourcing including capitalizing on operations in Mexico with volume and efficiency benefits and lowering supply chain sourcing particularly lower-tariff cost locations. Management highlighted significant accomplishments including net sales increasing 4.3% ⁴⁹ to a record $789,800,000 ⁵⁰, gross profit increasing 3.9% ⁵¹ to a record $159,900,000 ⁵², operating income increasing 64.9% ⁵³ to $65,800,000 ⁵⁴, net income increasing to $12,400,000 ⁵⁵ from a net loss of $19,500,000 ⁵⁶ in the prior year, and generating cash from operating activities of approximately $19,200,000 ⁵⁷.