Motorcar Parts of America, Inc. (MPAA) 10-K Review

Introduction

Motorcar Parts of America, Inc. ("MPAA" or "the Company") is a leading supplier of automotive aftermarket non‐discretionary replacement parts and test solutions & diagnostic equipment. MPAA operates across three segments:

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1. Hard Parts: Rotating electrical products (alternators, starters), brake components, wheel hubs, and turbochargers.
2. Test Solutions & Diagnostic Equipment: Bench testers for combustion engines, simulation and test hardware/software for electric vehicles, and power emulation for aerospace and EV charging.
3. Heavy Duty: Replacement parts for heavy‐duty truck, industrial, marine, and agricultural applications.

This review examines MPAA’s business, financial results for fiscal year ended March 31, 2025, risks, and ESG initiatives to arrive at an investment score.

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1. Business Overview

Hard Parts (Reportable Segment)

• Automotive Aftermarket: MPAA services a $130 billion North American market for hard parts.
• Core Exchange Programs: The Company’s remanufacturing process relies on Used Cores returned under core exchange, supplemented by broker purchases.
• Customers: Major retail chains (AutoZone, Advance Auto Parts, NAPA, O’Reilly), professional installers, warehouse distributors.
• Product Lines: Alternators, starters, brake calipers/rotors/pads/boosters/master cylinders, wheel hubs, and turbochargers.

Test Solutions & Diagnostic Equipment

• Combustion & Electric: Bench-top alternator/starter testers and EV inverter/motor emulators.
• Global Opportunity: MPAA aims to capture growth in EV powertrain and grid hardware, as well as electrification in aerospace.
• R&D & Upgrades: Continuous hardware/software upgrades to support OEMs and aftermarket installers.

Heavy Duty

• Applications: Replacement products for trucks, industrial machinery, marine engines, and agricultural equipment.
• Focus: Quality, ease of installation, extended service life, and reduced downtime.

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2. Industry Dynamics & Growth Strategies

Market Tailwinds

• Aging vehicle fleet (average age 13 years, 292 million light-duty vehicles in the U.S.) supports aftermarket parts demand.
• Miles driven recovering post-pandemic, supporting brake and rotating electrical replacement cycles.
• EV and aerospace electrification offers long-term runway in test equipment and diagnostic solutions.

Key Initiatives

1. Product Line Expansion: 629 new SKUs added in FY 2025, covering 130 million vehicles in operation.
2. Customer Value Creation: Analytics, inventory management, online training, and core inventory services.
3. Operational Scale & Efficiency: 410k sq. ft. distribution center in Tijuana, new Malaysia facility, core re‐induction and sorting plants.
4. Technology & Quality: In-house testing methods, ISO 9001:2015 and IATF 16949 quality programs.

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3. Financial Performance

Net Sales & Growth

• FY 2025 net sales: $757.4 million, up 5.5% vs. FY 2024 ($717.7 million).
• Product Mix:
• Rotating electrical: 67% of sales
• Brake-related: 21%
• Wheel hubs: 8%
• Other (Test equipment & turbochargers): 4%

Gross Profit & Margins

• Gross profit: $153.8 million (20.3% margin) vs. $132.6 million (18.5%) in FY 2024.
• Margin expansion (+180 bps) driven by cost‐saving relocation efforts, favorable product mix, and price actions. Tariff costs, onboarding expenses, and transition costs partially offset the improvement.

Operating Expenses

• G&A: $64.0 million (8.5% of sales) vs. $57.8 million (8.0%); impact from FX translation and severance.
• Sales & Marketing: Flat at $22.6 million (3.0%).
• R&D: $11.4 million (1.5%) vs. $10.0 million (1.4%); investments in EV and test technology.
• FX & Derivative: Loss of $15.9 million vs. gain of $3.8 million.

Operating Income & Net Loss

• Operating income: $39.9 million vs. $46.1 million (FY 2024).
• Interest: $55.6 million of net interest (down from $60.0 million), reflecting lower debt and reduced rates on A/R financing (6.2% vs. 6.8%) and bank facility (7.46% vs. 8.43%).
• Change in fair value of derivatives: Loss of $60k vs. gain of $1.02 million.
• Net loss: $(19.5) million vs. $(49.2) million; EPS $(0.99).

Cash Flow & Capital

• Operating cash: $45.5 million vs. $39.2 million.
• CapEx: $6.1 million (global footprint, maintenance).
• Share repurchase: 542k shares for $4.8 million completed; $13.4 million authorization remaining.
• Debt reduction: Revolver down from $128 million to $90.8 million; no term loans outstanding.

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4. Balance Sheet & Liquidity

• Working capital: $160.4 million vs. $156.0 million; current ratio ~1.5x.
• Debt: $90.8 million under revolver; $27.7 million net Convertible Notes (compound derivative $7.47m).
• Receivables discount: $643.9 million in FY 2025 at 6.2% cost, ~343 days average balance.
• Supplier finance: $33.7 million outstanding; $30 million capacity.
• Credit facility covenant: Tested only if undrawn <22.5%; available capacity $135.2 million.

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5. Risk Factors

1. Customer Concentration: Top-three customers represent 86% of sales; largest customer 39%.
2. Competitive Landscape: Fierce pricing pressures, ERP and OEM competition, low‐cost Asian entrants.
3. Supply Chain & Tariffs: Reliance on foreign suppliers; 2021–23 tariffs and trade disruptions raise costs and lead‐times.
4. FX Volatility: Mexican peso and Chinese yuan fluctuations drove $15.9 million loss.
5. Indebtedness: High interest obligations; $32 million 10% Convertible Notes due 2029.
6. Technological Shifts: Rise of EV drivetrains and mobility‐as‐a‐service may disrupt aftermarket patterns.

Mitigation: Scale in Mexico, global facilities, forward‐contracts, supplier finance, R&D in EV test equipment.

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6. ESG & Human Capital

• Environmental: Remanufacturing conserves raw materials, reduces waste, recycles water and metals.
• Social & Governance:
• Workforce: 5,700 employees (85% in Mexico); unionized production in Mexico (~4,900).
• Diversity: 37% women globally; 66% ethnic minorities in U.S.
• Safety & Wellness: Health benefits, training programs, subsidized food.
• Cybersecurity: Board-level oversight, ISO-based program, regular testing and monitoring.

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7. Investment Outlook & Risks

MPAA is structurally profitable for Hard Parts, with consistent aftermarket demand on aging vehicles. Gross margin improvement and cash flow generation demonstrate operational leverage. EV-related test solutions offer high‐growth optionality, while heavy‐duty parts add diversification.

Counterbalances include high customer concentration, legacy debt interest, and tariff and FX risks. Net losses are narrowing; managements cost‐saving initiatives are working, but execution risk persists. The Convertible Notes structure adds dilution risk post‐conversion. Liquidity is adequate with revolver availability and positive cash flow.

Potential Upside

• Margin expansion via footprint relocation
• Accelerated EV test equipment sales
• Deleveraging through cash flow and share repurchase

Potential Downside

• Tariff escalation and supply chain disruptions
• Further deterioration in customer credit profiles
• Conversion price volatility on 10% Notes

Investment Score: 6.5 / 10

MPAA presents a moderate risk/reward profile: established aftermarket cash flow, margin trends improving, but near-term debt service and loss position temper upside. The stock may appeal to value investors comfortable with turnaround situations in the auto parts sector.