MOTORCAR PARTS OF AMERICA INC - Annual Report: 2023 (Form 10-K)

---

Washington, D.C. 20549

For the fiscal year ended March 31, 2023

 

OR

 

For the transition period from _____________ to ______________

Commission File No. 001-33861

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (310) 212-7910

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

As of September 30, 2022, which was the last business day of the registrant’s most recently completed fiscal second quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $285,989,000 based on the closing sale price as reported on the NASDAQ Global Select Market.

There were 19,494,615 shares of common stock outstanding as of June 6, 2023.

DOCUMENTS INCORPORATED BY REFERENCE:

In accordance with General Instruction G (3) of Form 10-K, the information required by Part III hereof will either be incorporated into this Form 10-K by reference to the registrant’s Definitive Proxy Statement for the registrant’s next Annual Meeting of Stockholders filed within 120 days of March 31, 2023 or will be included in an amendment to this Form 10-K filed within 120 days of March 31, 2023.

---

Item 1. Business	5
Item 1A. Risk Factors	12
Item 1B. Unresolved Staff Comments	21
Item 2. Properties	21
Item 3. Legal Proceedings	21
Item 4. Mine Safety Disclosures	21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6. Selected Financial Data	25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	46
Item 8. Financial Statements and Supplementary Data	47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	47
Item 9A. Controls and Procedures	47
Item 9B. Other Information	48
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	48
PART III
Item 10. Directors, Executive Officers and Corporate Governance	49
Item 11. Executive Compensation	49
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	49
Item 13. Certain Relationships and Related Transactions, and Director Independence	49
Item 14. Principal Accountant Fees and Services	49
PART IV
Item 15. Exhibits, Financial Statement Schedules	50
Item 16. Form 10-K Summary	55
SIGNATURES	56

Item 1.

Business

•

Grow our current product lines both with existing and potential new customers.  We continue to develop and offer current and new sales programs to ensure that we are supporting our customers’ businesses. We remain dedicated to managing growth and continuing to focus on enhancements to our infrastructure and making investments in resources to support our customers. We have globally positioned manufacturing and distribution centers to support our continuous growth.

•

Introduction of new product lines.  We continue to strive to expand our business by exploring new product lines, including working with our customers to identify potential new product opportunities.

•

Creating value for our customers.  A core part of our strategy is ensuring that we add meaningful value for our customers. We consistently support and pilot our customers’ supply management initiatives in addition to providing demand analytics, inventory management services, online training guides, and market share and retail store layout information to our customers.

•

Technological innovation.  We continue to expand our research and development teams as we further develop in-house technologies and advanced testing methods. This elevated level of technology aims to deliver our customers high quality products and support services.

•

We provide industry-leading test solutions and diagnostic equipment to both original equipment manufacturers and the aftermarket. We are continuously upgrading our equipment to accommodate testing for the latest alternator and starter technology for both existing and new customers. These software and hardware upgrades are also available for existing products that the customer is using. In addition, we provide industry leading maintenance and service support for our test solutions and diagnostic equipment to provide a better end-user experience and value to our customers.

•

Market and grow our new product lines on a global basis. We offer products and services that cater to automotive test solutions and diagnostic equipment for inverter and electric motors for both development and production. In addition, we provide power supply hardware and emulation software diagnostic products. Our strategy is 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. We believe this is a rapidly emerging business, and see the opportunity for accelerating growth rates. In addition, we are well-positioned to supply test solutions and diagnostic equipment to the aerospace industry to support its shift to electric power driven control systems in airplanes.

•

Market and grow our innovative design solutions and commitment to quality. We continue to develop and improve product performance, ease of installation or coverage simplification to deliver installation-ready products to provide extended service life and reduced downtime for our existing and new customers.

•

Hard Parts, including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters, brake rotors, brake pads and brake master cylinders, and (iv) turbochargers,

•

Test Solutions and Diagnostic Equipment, including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) test solutions and diagnostic equipment for the pre- and post-production of electric vehicles, (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trucks and the emerging electrification of systems within the aerospace industry, such as electric vehicle charging stations), and

•

Heavy Duty, including non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications.

•

sorting the Used Cores returned by customers utilizing an innovative and efficient core-sorting process;

•

reconditioning and re-utilizing durable components after passing rigorous testing processes;

•

savings of raw materials due to a reduction in the required materials used in the remanufacturing production process, compared with new product processes; and

•

recycling of water, cardboard, and metal.

Item 1A.

Risk Factors

•

supply chain delays or stoppages due to shipping delays (cargo ship, train and truck shortages as well as staffing shortages) resulting in increased freight costs, closed supplier facilities or distribution centers, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;

•	change in demand for or availability of our products as a result of our customers modifying their restocking, fulfillment, or shipping practices;

•	increased raw material, and other input costs resulting from market volatility;

•	increased working capital needs and/or an increase in trade accounts receivable write-offs as a result of increased financial pressures on our suppliers or customers; and

•	fluctuations in foreign currency exchange rates or interest rates resulting from market uncertainties.

•	respond more quickly than we can to new or emerging technologies and changes in customer requirements by devoting greater resources than we can to the development, promotion and sale of automotive aftermarket products;

•	engage in more extensive research and development; and

•	spend more money and resources on marketing and promotion.

●	significant delays in the delivery of cargo due to port security and over-crowding considerations;

●	imposition of duties, taxes, tariffs or other charges on imports;

●	financial or political instability in any of the countries in which our product is manufactured;

●	potential recalls or cancellations of orders for any product that does not meet our quality standards;

●	disruption of imports by labor disputes or strikes and local business practices;

●	inability of our non-U.S. suppliers to obtain adequate credit or access liquidity to finance their operations; and

●	natural disasters, disease epidemics and health related concerns, which could result in closed factories,  reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas.

●	imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the U.S. from countries or regions where we do business;

●	political or military conflict involving foreign countries or the U.S., which could cause a delay in the transportation of our products and an increase in transportation costs;

●	heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods; and

●	our ability to enforce any agreements with our foreign suppliers.

•	raw material shortages;

•	problems with oceanic shipping, including shipping container shortages;

•	increased customs inspections of import shipments or other factors causing delays in shipments; and

•	increases in shipping rates, all of which we experienced.

•	work stoppages;

•	strikes and political unrest;

•	economic crises;

•	international disputes and wars;

•	loss of “most favored nation” trading status by the U. S. in relations to a particular foreign country;

•	import duties; and

•	import quotas and other trade sanctions.

•	exchange controls and currency restrictions;

•	currency fluctuations and devaluations;

•	changes in local economic conditions;

•	repatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries);

•	global sovereign uncertainty and hyperinflation in certain foreign countries;

•	laws and regulations relating to export and import restrictions;

•	exposure to government actions;

•	increased required employment related costs; and

•	exposure to local political or social unrest including resultant acts of war, terrorism or similar events.

•	the difficulty in integrating newly-acquired businesses and operations in an efficient and effective manner;

•	the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions;

•	the potential loss of key employees of the acquired businesses;

•	the risk of diverting the attention of senior management from our operations;

•	risks associated with integrating financial reporting and internal control systems;

•	difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses; and

•	future impairments of any goodwill of an acquired business.

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(1)

As of March 31, 2023, $18,745,000 of the $37,000,000 was utilized and $18,255,000 remains available to repurchase shares under the authorized share repurchase program, subject to the limit in our Credit Facility. We retired the 837,007 shares repurchased under this program through March 31, 2023. Our share repurchase program does not obligate us to acquire any specific number of shares and shares may be repurchased in privately negotiated and/or open market transactions.

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted-average exercise price of outstanding options warrants and rights (b)					Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c )
Equity compensation plans approved by security holders			1,854,795	(1	)	$	20.20	(2	)			871,432	(3	)
Equity compensation plans not approved by security holders			N/A				N/A					N/A
Total			1,854,795			$	20.20					871,432

(1)

Consists of (i) 6,000 stock options issued under the 2004 Non-Employee Director Stock Option Plan, (ii) 366,169 restricted stock units and restricted stock (collectively “RSUs”), 192,696 performance stock units (PSU’s), and 1,226,745 stock options issued under the Fourth Amended and Restated 2010 Incentive Award Plan (the “2010 Plan”), (iii) 10,417 RSUs issued under our 2014 Non-Employee Director Incentive Award Plan (the “2014 Plan”), and (iv) 52,768 RSUs issued under our 2022 Incentive Award Plan (the “2022 Plan”).

(2)	The weighted average exercise price does not reflect the shares that will be issued in connection with the settlement of RSUs and PSUs, since RSUs and PSUs have no exercise price.

(3)	Consists of shares available for future issuance under our 2022 Plan.

Item 6.

Selected Financial Data

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

•

We achieved record fiscal fourth quarter and full-year sales, which increased 18.8 percent and 5.0 percent, respectively, with solid demand across multiple categories;

•

We experienced meaningful traction with our customers and consumers since last year’s launch of a comprehensive line of brake pads utilizing an industry-leading formulation, and brake rotors – serving the professional installer market under our Quality-Built® brand;

•

We expanded sales with additional product line offerings and customers in Mexico;

•

We continued to improve efficiencies with expected ongoing benefits through increased production volume and pricing;

•

We focused on reduction in inventory levels following a strategic build up to meet demand during recent global supply chain challenges;

•

We enhanced our liquidity and capital resources with a $32 million strategic convertible note investment that supports us at an exciting pivotal point in our evolution;

•

We received increasing interest and orders for our Test Solutions and Diagnostic Equipment, including our emerging contract testing center, from major automotive retailers, major global automotive, aerospace and research institutions;

•

We continued our social responsibility initiatives with the successful launch of an Agri-farm organic food and community program in Mexico and a continued focus on opportunities to enhance our Environmental, Social and Governance practices on a global basis.

•

Hard Parts, including (i) light duty rotating electric products such as alternators and starters, (ii) wheel hub products, (iii) brake-related products, including brake calipers, brake boosters, brake rotors, brake pads and brake master cylinders, and (iv) turbochargers,

•

Test Solutions and Diagnostic Equipment, including (i) applications for combustion engine vehicles, including bench top testers for alternators and starters, (ii) test solutions and diagnostic equipment for the pre- and post-production of electric vehicles, (iii) software emulation of power systems applications for the electrification of all forms of transportation (including automobiles, trusts and the emerging electrification of systems within the aerospace industry, such as electric vehicle charging stations), and

•

Heavy Duty, including non-discretionary automotive aftermarket replacement hard parts for heavy-duty truck, industrial, marine, and agricultural applications.

•

Net realizable value for finished goods by customer, by product line are determined based on the agreed upon selling price with the customer for a product in the trailing 12 months. We compare the average selling price, including any discounts and allowances, to the finished goods cost of on-hand inventory, less any reserve for excess and obsolete inventory. Any reduction of value is recorded as cost of goods sold in the period in which the revaluation is identified.

•

Net realizable value for Used Cores are determined based on current core purchase prices from core brokers to the extent that core purchases in the trailing 12 months are significant. Remanufacturing consumes, on average, more than one Used Core for each remanufactured unit produced since not all Used Cores are reusable. The yield rates depend upon both the product and customer specifications. We purchase Used Cores from core brokers to supplement our yield rates and Used Cores not returned under the core exchange programs. We also consider the net selling price our customers have agreed to pay for Used Cores that are not returned under our core exchange programs to assess whether Used Core cost exceeds Used Core net realizable value on a by customer, by product line basis. Any reduction of core cost is recorded as cost of goods sold in the period in which the revaluation is identified.

•

We record an allowance for potentially excess and obsolete inventory based upon recent sales history, the quantity of inventory on-hand, and a forecast of potential use of the inventory. We periodically review inventory to identify excess quantities and part numbers that are experiencing a reduction in demand. Any part numbers with quantities identified during this process are reserved for at rates based upon our judgment, historical rates, and consideration of possible scrap and liquidation values which may be as high as 100% of cost if no liquidation market exists for the part. As a result of this process, we recorded reserves for excess and obsolete inventory of $16,436,000 and $13,520,000 at March 31, 2023 and 2022, respectively. This increase in the reserve was primarily due to excess inventory of certain finished goods on hand at March 31, 2023 compared with March 31, 2022.

(1)

Finished goods turnover is calculated by dividing the cost of goods sold for the year by the average between beginning and ending non-core finished goods inventory values, for each fiscal year. We believe that this provides a useful measure of our ability to turn our inventory into revenues. Our finished goods turnover for fiscal 2023 was impacted by our investment in inventory during the prior year to address disruptions related to the worldwide supply chain and logistics challenges to meet higher anticipated future sales.

(1)	Finance lease obligations represent amounts due under finance leases for various types of equipment.

(2)	Operating lease obligations represent amounts due for rent under our leases for all our facilities, certain equipment, and our Company automobile.

(3)	Obligations under our Revolving Facility mature on May 28, 2026. This debt is classified as a short term liability on our balance sheet as we expect to use our working capital to repay the amounts outstanding under our revolving loan.

(4)	Term Loan obligations represent the amounts due for principal payments as well as interest payments to be made. Interest payments were calculated based upon the interest rate for our Term Loan using the SOFR option at March 31, 2023, which was 8.02%.

(5)

Obligations under our Convertible Notes mature on March 30, 2029. There are no future payments required under the Convertible Notes prior to their maturity, therefore, the carrying value of the notes plus interest payable in kind, assuming no early redemption or conversion has occurred, is included in the above table based on their maturity date of March 30, 2029.

(6)	Accrued core payment represents the amounts due for principal of $12,227,000 and interest payments of $1,062,000 to be made in connection with the purchases of Remanufactured Cores from our customers, which are held by these customers and remain on their premises.

(7)	The core bank liability represents the amounts due for principal of $15,268,000 and interest payments of $880,000 to be made in connection with the return of Used Cores from our customers.

(8)	Finished goods liabilities represents the amounts due for principal of $1,690,000 and interest payments of $20,000 to be made in connection with the purchase of finished goods from our customers.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item 10.

Directors, Executive Officers and Corporate Governance

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

Item 15.

Exhibits, Financial Statement Schedules

a.	Documents filed as part of this report:

(1)

Index to Consolidated Financial Statements:

Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42)	58
Consolidated Balance Sheets	F-1
Consolidated Statements of Operations	F-2
Consolidated Statements of Comprehensive Income	F-3
Consolidated Statements of Shareholders’ Equity	F-4
Consolidated Statements of Cash Flows	F-5
Notes to Consolidated Financial Statements	F-6

Schedule II — Valuation and Qualifying Accounts

S-1

(3)

Exhibits:

Item 16.

Form 10-K Summary

	MOTORCAR PARTS OF AMERICA, INC.
Dated: June 13, 2023	By:	/s/ David Lee
		David Lee
		Chief Financial Officer
Dated: June 13, 2023	By:	/s/ Kamlesh Shah
		Kamlesh Shah
		Chief Accounting Officer

/s/ Selwyn Joffe	Chief Executive Officer and Director	June 13, 2023
Selwyn Joffe	(Principal Executive Officer)
/s/ David Lee	Chief Financial Officer	June 13, 2023
David Lee	(Principal Financial Officer)
/s/ Kamlesh Shah	Chief Accounting Officer	June 13, 2023
Kamlesh Shah	(Principal Accounting Officer)
/s/ Rudolph Borneo	Director	June 13, 2023
Rudolph Borneo
/s/ David Bryan	Director	June 13, 2023
David Bryan
/s/ Joseph Ferguson	Director	June 13, 2023
Joseph Ferguson
/s/ Philip Gay	Director	June 13, 2023
Philip Gay
/s/ Jeffrey Mirvis	Director	June 13, 2023
Jeffrey Mirvis
/s/ Jamy Rankin	Director	June 13, 2023
Jamy Rankin
/s/ Douglas Trussler	Director	June 13, 2023
Douglas Trussler
/s/ Patricia Warfield	Director	June 13, 2023
Patricia Warfield
/s/ Barbara Whittaker	Director	June 13, 2023
Barbara Whittaker

MOTORCAR PARTS OF AMERICA, INC.

AND SUBSIDIARIES

CONTENTS

	Page
Reports of Independent Registered Public Accounting Firm	58
Consolidated Balance Sheets	F-1
Consolidated Statements of Operations	F-2
Consolidated Statements of Comprehensive Income	F-3
Consolidated Statements of Shareholders’ Equity	F-4
Consolidated Statements of Cash Flows	F-5
Notes to Consolidated Financial Statements	F-6
Schedule II — Valuation and Qualifying Accounts	S-1

	/s/ Ernst & Young LLP
Los Angeles, California
June 13, 2023

	Contractual Agreements with Core Exchange Programs
Description of the Matter	As more fully described in Note 2 to the consolidated financial statements, the Company enters into contractual arrangements with customers (core exchange programs) which represent the majority of the Company’s sales for products that contain remanufactured cores. At March 31, 2023, contract assets and contract liabilities related to core exchange programs recorded on the consolidated balance sheet were $343,824,000 and $233,946,000, respectively. Auditing contract assets and contract liabilities related to the core exchange programs involved complex auditor judgment due to the unique terms of each customer arrangement which impact the completeness, existence, valuation and classification of contract assets and liabilities.

How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s review of contracts with customers, management’s assessment of the accounting for core exchange programs, including unique contractual terms, and management’s review of the related contract assets and liabilities including controls over the completeness and accuracy of data.   Our audit procedures to test the contract assets and contract liabilities related to core exchange programs included, among others, (i) reviewing agreements and amendments for significant customers, (ii) testing the completeness of management’s identification of contractual terms, (iii) evaluating the consistency of the accounting treatment with the Company’s policies; and (v) testing the completeness and accuracy of the underlying data used in management’s analyses.
	Marketing Allowances
Description of the Matter	As more fully described in Note 2 and Note 14 to the consolidated financial statements, revenue is recognized net of applicable marketing allowances. These marketing allowances vary by contract and can include (i) the issuance of a specified amount of credits against receivables, (ii) support for research or marketing efforts, (iii) discounts granted in connection with shipments of product, and (iv) other marketing, research, store expansion or product development support. At March 31, 2023, marketing allowances recorded on the Company’s consolidated balance sheet was $19,997,000, which is presented within contract liabilities. Auditing the completeness of marketing allowances was complex because marketing allowances vary by contract and could be impacted by unrecorded marketing allowances provided to customers.
How We Addressed the Matter in Our Audit	We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the marketing allowances processes. For example, we tested controls over management’s review of contracts with customers containing marketing allowances, management’s review of the completeness and accuracy of data used in the marketing accrual analysis at period end and management’s review of credits issued to customers subsequent to the balance sheet date. Our audit procedures to test marketing allowances included, among others, reviewing significant contracts with customers, obtaining confirmations of contractual terms and conditions from a sample of the Company’s customers, and testing credits issued or payments made to customers throughout the year and subsequent to year-end. We tested the completeness and accuracy of data used in the calculation of the marketing allowance by agreeing contractual terms to the underlying agreements. In addition, we evaluated the relationship between revenue and marketing allowances and assessed subsequent events to determine whether there was any new information that would require adjustments to the amounts recorded.

	/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Los Angeles, California
June 13, 2023

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

The accompanying notes to consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

The accompanying notes to consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

The accompanying notes to consolidated financial statements are an integral part hereof.

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity