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Motorcar Parts America Inc (MPAA) SEC Filing 10-K Annual Report for the fiscal year ending Thursday, March 31, 2022

Motorcar Parts America Inc

CIK: 918251 Ticker: MPAA

Exhibit 99.1



NEWS RELEASE

CONTACT:
Gary S. Maier
(310) 972-5124

MOTORCAR PARTS OF AMERICA REPORTS 20.3 PERCENT SALES INCREASE FOR FISCAL 2022
— Company Resumes Annual Guidance with Top-Range Sales Target Reaching $700 Million, a year-over- year increase of approximately $50 million —

LOS ANGELES, CA – June 14, 2022 Motorcar Parts of America, Inc. (Nasdaq: MPAA) today reported results for its fourth quarter and 2022 fiscal year ended March 31, 2022 – reflecting record annual sales with strong demand for non-discretionary aftermarket parts and the completion of a multi-year build-out program for the company’s brake-related manufacturing operations.

Fiscal 2022 Highlights


Net sales reached a record $650.3 million, an increase of $109.5 million, or 20.3 percent year-over-year.

Gross profit was $117.9 million, an increase of $8.4 million, or 7.7 percent year-over-year.  Gross profit for fiscal 2022 was impacted by $16.6 million of non-cash items and $15.8 million of other items, primarily due to transitory cost pressures from supply chain disruptions.

Net income was $7.4 million, or $0.38 per diluted share, compared with $21.5 million, or $1.11 per diluted share a year ago.  Net income for fiscal 2022 was impacted by $0.86 per diluted share of non-cash items, and $0.72 per diluted share of other items, primarily due to transitory cost pressures related to supply chain disruptions.  Net income for fiscal 2021 was impacted by $0.00 per diluted share of non-cash items, and $0.77 per diluted share of other items, primarily due to transitory costs related to the Mexico expansion.

EBITDA (defined below) was $41.6 million, which was impacted by $22.3 million of non-cash items and $18.5 million of other items, primarily due to transitory cost pressures, versus $57.8 million a year earlier, which was impacted by $107,000 of non-cash gains and $19.4 million of other items, primarily due to transitory cost pressures.

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Motorcar Parts of America, Inc.
2-2-2
Fiscal 2022 Considerations


Global supply chain challenges and inflationary costs impacted margins.

Future margin expansion expected from additional price increases and operating efficiencies as the new fiscal year progresses.

Strategic inventory investments to support growth and mitigate supply chain logistics impacted cash flow for fiscal year.

“We reported record sales for fiscal 2022, despite continued global supply chain constraints and fluctuations from historical customer order patterns during the fiscal fourth quarter. Demand for replacement parts remains strong, and we are confident in the long-term demand dynamics given tailwinds from an aging car fleet.  Additionally, we anticipate accelerating momentum from our emerging brake-related products -- including brake calipers and in particular pads and rotors, which were formally launched subsequent to year end and are experiencing strong demand.  This highlights the success of our investments in the brake-related categories that we have made over the past several years to tap into the large market for both internal combustion engines and emerging electrical vehicles.  We are optimistic as we start a new fiscal year and resume financial guidance, as discussed below,” said Selwyn Joffe, chairman, president, and chief executive officer.

Joffe emphasized the company is keenly focused on gross profit growth.  Upside opportunities are expected to be realized by increasing sales through product-line growth in each category, including the recently announced brake line expansion.  In addition, the company expects to benefit from leveraging the company’s cost discipline, and mitigating increases in freight rates, freight surcharges, wage increases and other inflationary costs with operational efficiencies.  As noted last quarter, price increases are also being implemented and continuously assessed.

“We built higher than normal overall inventory levels during fiscal 2022 to meet expected demand and address an unstable supply chain.  These levels should stabilize as fiscal 2023 evolves and customer order patterns are realigned, which should contribute to positive annual cash flow targets,” Joffe said.

Joffe noted that after a multi-year period of elevated capital expenditures to fund expansion, with the formal launch of brake-related products, he expects a return to more normalized ranges.

Net sales for the fiscal 2022 fourth quarter were $163.9 million compared with $168.1 million in the prior-year period -- impacted by softness in January and February offset by strength in the last month of the quarter.

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Motorcar Parts of America, Inc.
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          Net loss for the same period was $332,000, or $0.02 per share, compared with net income of $835,000, or $0.04 per diluted share, a year ago -- impacted by approximately $1.9 million, or $0.10 per share, of non-cash items as detailed in Exhibit 1. The company also was impacted by approximately $3.2 million, or $0.17 per share, of other costs, primarily due to increased shipping rates, higher tariffs, and other transitory cost pressures related to supply chain disruptions due to COVID-19.

Net income for the prior-year fourth quarter was impacted by $6.9 million of non-cash items, or $0.35 per diluted share. Net income for the prior-year fourth quarter was also impacted by $6.8 million, or $0.35 per diluted share, of other costs, primarily due to brake caliper start-up costs, product relocation expenses related to the expansion in Mexico, and other costs associated with COVID-19. 

Gross profit for the fiscal 2022 fourth quarter was $25.8 million compared with $32.1 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2022 fourth quarter was 15.7 percent compared with 19.1 percent a year earlier. Gross margin for the fiscal 2022 fourth quarter was impacted by 2.5 percent by the aforementioned non-cash items and 2.0 percent by the transitory supply chain disruptions that affected net loss, as detailed in Exhibit 3.  In addition to the items mentioned above, gross margin for the fourth quarter was further impacted by inflationary costs and new product line growth initiatives.

Fiscal 2022 Twelve-Month Results

Net sales increased 20.3 percent to a record $650.3 million from $540.8 million a year earlier. Net sales included $13.3 million in core revenue compared with $12.8 million in the prior-year period, due to a realignment of inventory at customer distribution centers with expected future sales benefits as product mix changes.

Net income for fiscal 2022 was $7.4 million, or $0.38 per diluted share, compared with net income of $21.5 million, or $1.11 per diluted share, a year ago. Net income was impacted by approximately $16.8 million, or $0.86 per diluted share, of non-cash items compared with only $80,000 in non-cash gains for the prior year, as detailed in Exhibit 2. The company also incurred approximately $14.1 million, or $0.72 per diluted share, of costs from supply chain disruptions, brake caliper start-up costs, and other product relocation expenses related to the expansion in Mexico. The start-up costs primarily related to the brake calipers expansion in Mexico during the first half of fiscal 2022, with no costs incurred during the second half of fiscal 2022. In addition, results for the twelve-month period were impacted by other transitory cost pressures related to supply chain disruptions due to COVID-19.

Net income for the prior-year period was impacted by other costs totaling $15.0 million, or $0.77 per diluted share, primarily due to brake caliper start-up costs, product relocation expenses related to the expansion in Mexico, and other costs associated with COVID-19.
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Motorcar Parts of America, Inc.
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Gross Profit for fiscal 2022 was $117.9 million compared with $109.5 million a year earlier. Gross profit as a percentage of net sales for fiscal 2022 was 18.1 percent compared with 20.2 percent a year earlier. Gross margin for fiscal 2022 was impacted by 2.6 percent of non-cash items and 2.8 percent for other costs, primarily by the transitory supply chain disruptions that affected net income, as detailed in Exhibit 4

Net cash used in operating activities was $44.9 million during the twelve months ended March 31, 2022 -- reflecting changes in working capital, including inventory increases to support business growth and strategic investments designed to address potential supply chain disruptions.

Fiscal 2023 Guidance

Motorcar Parts of America expects net sales for its fiscal year ending March 31, 2023 to be between $680 million and $700 million, representing between 4.6 and 7.6 percent year-over-year growth -- ramping up throughout the year.  Excluding $13.3 million of core revenue realized in fiscal year 2022 (which the company does not expect in fiscal 2023), net sales are expected to increase between 6.8 and 9.9 percent in fiscal year 2023.  Operating income is expected to be between $57 million and $61 million, before the non-cash foreign exchange impact of lease liabilities and forward contracts, the non-cash impact of revaluation of cores on customers’ shelves, and supply chain disruptions and costs related to COVID-19.  The company estimates other non-cash items will be approximately $21 million, including core and finished goods premium amortization and share-based compensation, and cash expenses will be approximately $2 million for special EV-related research and development expenses, impacting operating income.  The company estimates depreciation and amortization will be approximately $13 million.

Use of Non-GAAP Measure

This press release includes the following non-GAAP measure – EBITDA, which is not a measure of financial performance under GAAP and should not be considered as an alternative to net income as a measure of financial performance. The company believes this non-GAAP measure, when considered together with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to the company’s results of operations. However, this non-GAAP measure has significant limitations in that it does not reflect all the costs and other items associated with the operation of the company’s business as determined in accordance with GAAP. In addition, the company’s non-GAAP measures may be calculated differently and are therefore not comparable to similar measures by other companies. Therefore, investors should consider non-GAAP measures in addition to, and not as a substitute for, or superior to, measures of financial performance in accordance with GAAP. For a definition and reconciliation of EBITDA to net income, its corresponding GAAP measure, see the financial tables included in this press release. Also, refer to our Form 8-K to which this release is attached, and other filings we make with the SEC, for further information regarding this measure.

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Motorcar Parts of America, Inc.
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Earnings Conference Call and Webcast

Selwyn Joffe, chairman, president and chief executive officer, and David Lee, chief financial officer, will host an investor conference call today at 10:00 a.m. Pacific time to discuss the company’s financial results and operations. The call will be open to all interested investors either through a live audio webcast at www.motorcarparts.com or live by calling (888)-440-5584 (domestic) or (646)-960-0457 (international). For those who are not available to listen to the live broadcast, the call will be archived on Motorcar Parts of America’s website www.motorcarparts.com. A telephone playback of the conference call will also be available from approximately 1:00 p.m. Pacific time on June 14, 2022 through 8:59 p.m. Pacific time on June 21, 2022 by calling (800)-770-2030 (domestic) or (647)-362-9199 (international) and using access code: 1545314.

About Motorcar Parts of America, Inc.

Motorcar Parts of America, Inc. is a remanufacturer, manufacturer, and distributor of automotive aftermarket parts -- including alternators, starters, wheel bearings and hub assemblies, brake calipers, brake pads, brake rotors, brake master cylinders, brake power boosters, turbochargers, and diagnostic testing equipment utilized in imported and domestic passenger vehicles, light trucks, and heavy-duty applications. Its products are sold to automotive retail outlets and the professional repair market throughout the United States, Canada, and Mexico, with facilities located in California, New York, Mexico, Malaysia, China and India, and administrative offices located in California, Tennessee, Mexico, Singapore, Malaysia, and Canada. In addition, the company’s electrical vehicle subsidiary designs and manufactures testing solutions for performance, endurance, and production of multiple components in the electric power train – providing simulation, emulation, and production applications for the electrification of both automotive and aerospace industries, including electric vehicle charging systems. Additional information is available at www.motorcarparts.com.
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. The statements contained in this press release that are not historical facts are forward-looking statements based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company. 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. Reference is also made to the Risk Factors set forth in the company’s Form 10-K Annual Report filed with the Securities and Exchange Commission (SEC) in June 2022 and in its Forms 10-Q filed with the SEC for additional risks and uncertainties facing the company. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise.
 
# # #
 
(Financial tables follow)

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MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations

   
Three Months Ended March 31,
   
Year Ended March 31,
 
   
2022
   
2021
   
2022
   
2021
 
   
(Unaudited)
             
                         
Net sales
 
$
163,916,000
   
$
168,128,000
   
$
650,308,000
   
$
540,782,000
 
Cost of goods sold
   
138,148,000
     
136,021,000
     
532,443,000
     
431,321,000
 
Gross profit
   
25,768,000
     
32,107,000
     
117,865,000
     
109,461,000
 
Operating expenses:
                               
General and administrative
   
15,943,000
     
15,637,000
     
57,499,000
     
53,847,000
 
Sales and marketing
   
5,671,000
     
4,800,000
     
22,833,000
     
18,024,000
 
Research and development
   
2,871,000
     
2,549,000
     
10,502,000
     
8,563,000
 
Foreign exchange impact of lease liabilities and forward contracts
   
(3,442,000
)
   
3,651,000
     
(1,673,000
)
   
(17,606,000
)
Total operating expenses
   
21,043,000
     
26,637,000
     
89,161,000
     
62,828,000
 
Operating income
   
4,725,000
     
5,470,000
     
28,704,000
     
46,633,000
 
Interest expense, net
   
4,045,000
     
3,696,000
     
15,555,000
     
15,770,000
 
Income before income tax expense
   
680,000
     
1,774,000
     
13,149,000
     
30,863,000
 
Income tax expense
   
1,002,000
     
939,000
     
5,788,000
     
9,387,000
 
                                 
Net (loss) income
 
$
(322,000
)
 
$
835,000
   
$
7,361,000
   
$
21,476,000
 
Basic net (loss) income per share
 
$
(0.02
)
 
$
0.04
   
$
0.38
   
$
1.13
 
Diluted net (loss) income per share
 
$
(0.02
)
 
$
0.04
   
$
0.38
   
$
1.11
 
Weighted average number of shares outstanding:
                               
Basic
   
19,104,198
     
19,044,407
     
19,119,727
     
19,023,145
 
Diluted
   
19,104,198
     
19,585,638
     
19,559,646
     
19,387,555
 


MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

   
March 31, 2022
   
March 31, 2021
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
23,016,000
   
$
15,523,000
 
Short-term investments
   
2,202,000
     
1,652,000
 
Accounts receivable — net
   
85,075,000
     
63,122,000
 
Inventory — net
   
370,503,000
     
288,361,000
 
Inventory unreturned
   
15,001,000
     
14,552,000
 
Contract assets
   
27,500,000
     
26,940,000
 
Income tax receivable
   
301,000
     
405,000
 
Prepaid expenses and other current assets
   
13,387,000
     
12,301,000
 
Total current assets
   
536,985,000
     
422,856,000
 
Plant and equipment — net
   
51,062,000
     
53,854,000
 
Operating lease assets
   
81,997,000
     
71,513,000
 
Deferred income taxes
   
26,982,000
     
19,381,000
 
Long-term contract assets
   
310,255,000
     
270,213,000
 
Goodwill
   
3,205,000
     
3,205,000
 
Intangible assets — net
   
3,799,000
     
5,329,000
 
Other assets
   
1,413,000
     
1,531,000
 
TOTAL ASSETS
 
$
1,015,698,000
   
$
847,882,000
 
LIABILITIES AND SHAREHOLDERS’  EQUITY
               
Current liabilities:
               
Accounts payable
 
$
147,469,000
   
$
129,331,000
 
Accrued liabilities
   
20,966,000
     
23,404,000
 
Customer finished goods returns accrual
   
38,086,000
     
31,524,000
 
Contract liabilities
   
42,496,000
     
41,072,000
 
Revolving loan
   
155,000,000
     
84,000,000
 
Other current liabilities
   
11,930,000
     
6,683,000
 
Operating lease liabilities
   
6,788,000
     
6,439,000
 
Current portion of term loan
   
3,670,000
     
3,678,000
 
Total current liabilities
   
426,405,000
     
326,131,000
 
Term loan, less current portion
   
13,024,000
     
16,786,000
 
Contract liabilities, less current portion
   
172,764,000
     
125,223,000
 
Deferred income taxes
   
126,000
     
73,000
 
Operating lease liabilities, less current portion
   
80,803,000
     
70,551,000
 
Other liabilities
   
7,313,000
     
7,973,000
 
Total liabilities
   
700,435,000
     
546,737,000
 
Commitments and contingencies Shareholders’ equity:
               
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued
   
-
     
-
 
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued
   
-
     
-
 
Common stock; par value $.01 per share, 50,000,000 shares authorized;
   
-
 

-
 
19,104,751 and 19,045,386 shares issued and outstanding at March 31, 2022 and 2021, respectively
   
191,000
     
190,000
 
Additional paid-in capital
   
227,184,000
     
223,058,000
 
Retained earnings
   
92,954,000
     
85,593,000
 
Accumulated other comprehensive loss
   
(5,066,000
)
   
(7,696,000
)
Total shareholders’ equity
   
315,263,000
     
301,145,000
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,015,698,000
   
$
847,882,000
 


Additional Information and Non-GAAP Financial Measures

To supplement the consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”), the company has included the following additional information and non-GAAP financial measures for the three and twelve months ended March 31, 2022 and 2021. Among other things, the company uses such additional information and non-GAAP adjusted financial measures in addition to and together with corresponding GAAP measures to help analyze the performance of its business.
 
The company believes this information helps provide a more complete understanding of the company’s results of operations and the factors and trends affecting the company’s business. However, this information should be considered as a supplement to, and not as a substitute for, or superior to, information contained in the company’s financial statements prepared in accordance with GAAP. In addition, the company’s non-GAAP measures may be calculated differently and are therefore not comparable to similar measures by other companies.

The company defines EBITDA as earnings before interest, taxes, depreciation, and amortization. A reconciliation of EBITDA to net income is provided below along with information regarding such items.


Items Impacting Net (Loss) Income for the Three Months Ended March 31, 2022 and 2021
Exhibit 1

   
Three Months Ended March 31,
 
   
2022
   
2021
 
   
$
     
Per Share
   
$
     
Per Share
 
GAAP net (loss) income
 
$
(322,000
)
 
$
(0.02
)
 
$
835,000
   
$
0.04
 
                                 
Non-cash items impacting net (loss) income
                               
Core and finished goods premium amortization and new business return accruals
 
$
2,947,000
   
$
0.15
   
$
2,422,000
   
$
0.12
 
Revaluation - cores on customers’ shelves
   
1,154,000
     
0.06
     
1,020,000
     
0.05
 
Share-based compensation expenses and earn-out accruals
   
1,830,000
     
0.10
     
2,123,000
     
0.11
 
Foreign exchange impact of lease liabilities and forward contracts
   
(3,442,000
)
   
(0.18
)
   
3,651,000
     
0.19
 
Tax effect (a)
   
(622,000
)
   
(0.03
)
   
(2,304,000
)
   
(0.12
)
Total non-cash items impacting net (loss) income
 
$
1,867,000
   
$
0.10
   
$
6,912,000
   
$
0.35
 
                                 
Cash items impacting net (loss) income
                               
Supply chain disruptions and costs related to COVID-19 (b)
 
$
3,938,000
   
$
0.21
   
$
2,825,000
   
$
0.14
 
New product line start-up costs and transition expenses, and severance (c)
   
358,000
     
0.02
     
5,940,000
     
0.30
 
Impact of tariffs
   
-
     
-
     
306,000
     
0.02
 
Tax effect (a)
   
(1,074,000
)
   
(0.06
)
   
(2,268,000
)
   
(0.12
)
Total cash items impacting net (loss) income
 
$
3,222,000
   
$
0.17
   
$
6,803,000
   
$
0.35
 

(a)
Tax effect is calculated by applying an income tax rate of 25.0% to items listed above; this rate may differ from the period’s actual income tax rate.
(b)
For the three-months ended March 31, 2022, consists of $3,337,000 impacting gross profit and $601,000 included in operating expenses. For the three-months ended March 31, 2021, consists of of $2,305,000 impacting gross profit and $520,000 included in operating expenses.
(c)
For the three-months ended March 31, 2022, consists of $358,000 included in operating expenses. For the three-months ended March 31, 2021, consists of $4,781,000 included in cost of goods sold and $1,159,000 included in operating expenses.



Items Impacting Net Income for the Twelve Months Ended March 31, 2022 and 2021
Exhibit 2

   
Twelve Months Ended March 31,
 
   
2022
   
2021
 
   
$
     
Per Share
   
$
     
Per Share
 
GAAP net income
 
$
7,361,000
   
$
0.38
   
$
21,476,000
   
$
1.11
 
                                 
Non-cash items impacting net income
                               
Core and finished goods premium amortization and new business return accruals
 
$
11,960,000
   
$
0.61
   
$
6,998,000
   
$
0.36
 
Revaluation - cores on customers’ shelves
   
4,671,000
     
0.24
     
4,600,000
     
0.24
 
Share-based compensation expenses and earn-out accruals
   
7,384,000
     
0.38
     
5,901,000
     
0.30
 
Foreign exchange impact of lease liabilities and forward contracts
   
(1,673,000
)
   
(0.09
)
   
(17,606,000
)
   
(0.91
)
Tax effect (a)
   
(5,586,000
)
   
(0.29
)
   
27,000
     
0.00
 
Total non-cash items impacting net income
 
$
16,756,000
   
$
0.86
   
$
(80,000
)
 
$
(0.00
)
                                 
Cash items impacting net income
                               
Supply chain disruptions and costs related to COVID-19 (b)
 
$
20,195,000
   
$
1.03
   
$
9,101,000
   
$
0.47
 
New product line start-up costs and transition expenses, and severance (c)
   
3,425,000
     
0.18
     
18,504,000
     
0.95
 
Gain due to realignment of inventory at customer distribution centers
   
(4,862,000
)
   
(0.25
)
   
(4,391,000
)
   
(0.23
)
Impact of tariffs
   
-
     
-
     
(3,229,000
)
   
(0.17
)
Tax effect (a)
   
(4,690,000
)
   
(0.24
)
   
(4,996,000
)
   
(0.26
)
Total cash items impacting net income
 
$
14,068,000
   
$
0.72
   
$
14,989,000
   
$
0.77
 

(a)
Tax effect is calculated by applying an income tax rate of 25.0% to items listed above; this rate may differ from the period’s actual income tax rate.
(b)
For the twelve-months ended March 31, 2022, consists of $17,894,000 impacting gross profit and $2,301,000 included in operating expenses. For the twelve-months ended March 31, 2021, consists of $7,053,000 impacting gross profit and $2,048,000 included in operating expenses.
(c)
For the twelve-months ended March 31, 2022, consists of $2,744,000 included in cost of goods sold and $681,000 included in operating expenses. For the twelve-months ended March 31, 2021, consists of $16,353,000 included in cost of goods sold and $2,151,000 included in operating expenses.


Items Impacting Gross Profit for the Three Months Ended March 31, 2022 and 2021
Exhibit 3

   
Three Months Ended March 31,
 
   
2022
   
2021
 
   
$
   
Gross
Margin
   
$
   
Gross
Margin
 
GAAP gross profit
 
$
25,768,000
     
15.7
%
 
$
32,107,000
     
19.1
%
                                 
Non-cash items impacting gross profit
                               
Core and finished goods premium amortization and new business return accruals
 
$
2,947,000
     
1.8
%
 
$
2,422,000
     
1.4
%
Revaluation - cores on customers’ shelves
   
1,154,000
     
0.7
%
   
1,020,000
     
0.6
%
Total non-cash items impacting gross profit
 
$
4,101,000
     
2.5
%
 
$
3,442,000
     
2.0
%
                                 
Cash items impacting gross profit
                               
Supply chain disruptions and costs related to COVID-19
 
$
3,337,000
     
2.0
%
 
$
2,305,000
     
1.4
%
New product line start-up costs and transition expenses
   
-
     
-
     
4,781,000
     
2.8
%
                                 
Impact of tariffs
   
-
     
-
     
306,000
     
0.2
%
Total cash items impacting gross profit
 
$
3,337,000
     
2.0
%
 
$
7,392,000
     
4.4
%


Items Impacting Gross Profit for the Twelve Months Ended March 31, 2022 and 2021
Exhibit 4

   
Twelve Months Ended March 31,
 
   
2022
   
2021
 
   
$
   
Gross
Margin
   
$
   
Gross
Margin
 
GAAP gross profit
 
$
117,865,000
     
18.1
%
 
$
109,461,000
     
20.2
%
                                 
Non-cash items impacting gross profit
                               
Core and finished goods premium amortization and new business return accruals
 
$
11,960,000
     
1.8
%
 
$
6,998,000
     
1.3
%
Revaluation - cores on customers’ shelves
   
4,671,000
     
0.7
%
   
4,600,000
     
0.9
%
Total non-cash items impacting gross profit
 
$
16,631,000
     
2.6
%
 
$
11,598,000
     
2.1
%
                                 
Cash items impacting gross profit
                               
Supply chain disruptions and costs related to COVID-19
 
$
17,894,000
     
2.8
%
 
$
7,053,000
     
1.3
%
New product line start-up costs and transition expenses
   
2,744,000
     
0.4
%
   
16,353,000
     
3.0
%
Gain due to realignment of inventory at customer distribution centers (a)
   
(4,862,000
)
   
-0.4
%
   
(4,391,000
)
   
-0.3
%
Impact of tariffs
   
-
     
-
     
(3,229,000
)
   
-0.6
%
Total cash items impacting gross profit
 
$
15,776,000
     
2.8
%
 
$
15,786,000
     
3.4
%

(a)
gross margin reflecting impact to net sales and cost of goods sold


Items Impacting EBITDA for the Three and Twelve Months Ended March 31, 2022 and 2021
Exhibit 5

   
Three Months Ended March 31,
   
Twelve Months Ended March 31,
 
   
2022
   
2021
   
2022
   
2021
 
GAAP net (loss) income
 
$
(322,000
)
 
$
835,000
   
$
7,361,000
   
$
21,476,000
 
Interest expense, net
   
4,045,000
     
3,696,000
     
15,555,000
     
15,770,000
 
Income tax expense
   
1,002,000
     
939,000
     
5,788,000
     
9,387,000
 
Depreciation and amortization
   
3,295,000
     
3,054,000
     
12,886,000
     
11,144,000
 
EBITDA
 
$
8,020,000
   
$
8,524,000
   
$
41,590,000
   
$
57,777,000
 
                                 
Non-cash items impacting EBITDA
                               
Core and finished goods premium amortization and new business return accruals
 
$
2,947,000
   
$
2,422,000
   
$
11,960,000
   
$
6,998,000
 
Revaluation - cores on customers’ shelves
   
1,154,000
     
1,020,000
     
4,671,000
     
4,600,000
 
Share-based compensation expenses and earn-out accruals
   
1,830,000
     
2,123,000
     
7,384,000
     
5,901,000
 
Foreign exchange impact of lease liabilities and forward contracts
   
(3,442,000
)
   
3,651,000
     
(1,673,000
)
   
(17,606,000
)
Total non-cash items impacting EBITDA
 
$
2,489,000
   
$
9,216,000
   
$
22,342,000
   
$
(107,000
)
                                 
Cash items impacting EBITDA
                               
Supply chain disruptions and costs related to COVID-19
 
$
3,938,000
   
$
2,825,000
   
$
20,195,000
   
$
9,101,000
 
New product line start-up costs and transition expenses, and severance (a)
   
358,000
     
5,706,000
     
3,194,000
     
17,941,000
 
Gain due to realignment of inventory at customer distribution centers
   
-
     
-
     
(4,862,000
)
   
(4,391,000
)
Impact of tariffs
   
-
     
306,000
     
-
     
(3,229,000
)
Total cash items impacting EBITDA
 
$
4,296,000
   
$
8,837,000
   
$
18,527,000
   
$
19,422,000
 

(a)
Excludes depreciation, which is included in the depreciation and amortization line item.




The following information was filed by Motorcar Parts America Inc (MPAA) on Tuesday, June 14, 2022 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2022
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________

Commission File No. 001-33861

MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)

New York
 
11-2153962
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2929 California Street, Torrance, California
 
90503
(Address of principal executive offices)
 
Zip Code

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

Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share MPAA The Nasdaq Global Select Market

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):
 
Large accelerated filer 
 
Accelerated filer
Non-accelerated filer 
 
Smaller reporting company 
 
 
Emerging growth company 
 
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, 2021, 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 $368,703,000 based on the closing sale price as reported on the NASDAQ Global Select Market.

There were 19,118,651 shares of common stock outstanding as of June 7, 2022.

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, 2022 or will be included in an amendment to this Form 10-K filed within 120 days of March 31, 2022.



TABLE OF CONTENTS
PART I
 
5
12
21
21
21
21
PART II
 
22
24
25
40
41
41
41
42
42
PART III
 
43
43
43
43
43
PART IV
 
44
48
49

MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

The following terms are frequently used in the text of this report and have the meanings indicated below.

“Used Core” — An automobile part which has previously been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts, which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange programs. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores are not available from our customers, we purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange programs, and which have been physically received by us, are part of our raw material and work-in-process inventory. Used Cores returned by consumers to our customers but not yet returned to us are classified as contract assets until we physically receive these Used Cores.

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Remanufactured Cores held for sale at our customer locations are included in long-term contract assets. The Remanufactured Core portion of stock adjustment returns are classified as contract assets until we physically receive them.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless the context otherwise requires, all references in this Annual Report on Form 10-K to “the Company,” “we,” “us,” “MPA,” and “our” refer to Motorcar Parts of America, Inc. and its subsidiaries.

This Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our future performance that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, expectations for economic conditions and recovery and future business and financial performance, as well as statements regarding underlying assumptions related thereto. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business and factors related to the current global COVID-19 pandemic. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. Therefore, you should not place undue reliance on those statements. Please refer to Item 1A. Risk Factors” included in this report and other filings made by us with the Securities and Exchange Commission (“SEC”) for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

PART I
Item 1.
Business

General

We are a leading supplier of automotive aftermarket non-discretionary replacement parts and test solutions and diagnostic equipment.

Consistent with our strategic vision statement to be “The Global Leader for Parts and Solutions that Move Our World Today and Tomorrow”, we have implemented a multi-pronged platform for growth in hard parts and test solutions and diagnostic equipment, which are discussed further in the sections below. We operate in the $130 billion market for non-discretionary automotive aftermarket replacement hard parts business in North America. Our current products in the hard parts business include a significant presence in the rotating electrical category (alternators and starters). In January 2019, we expanded our presence into the non-discretionary automotive aftermarket replacement parts for heavy-duty truck, industrial, marine and agricultural applications category with the acquisition of Dixie Electric, Ltd (“Dixie”), a privately held manufacturer and remanufacturer of alternators and starters, based in Ontario, Canada. This acquisition added an estimated $698 million market opportunity for heavy-duty rotating electrical to our existing rotating electrical business.

We have a scalable infrastructure, and our growth opportunities remain abundant. Our growth strategy relating to hard parts includes growing market share in all of our existing hard parts product lines with a significant focus on our expanding line of brake products.

Our premium non-discretionary automotive aftermarket replacement parts for light-duty applications are primarily sold to automotive retail chain stores and warehouse distributors throughout North America, and to major automobile manufacturers for both their aftermarket programs and warranty replacement programs (“OES”). The current population of light-duty vehicles in the U.S. is approximately 280 million, and the average age of these vehicles is approximately 12 years and is expected to continue to grow, in particular during recession years. The aged vehicle population provides favorable opportunities for sales of our products. Although miles driven can fluctuate for various reasons, including fuel prices, they have been generally increasing for several years prior to 2020. Demand for replacement parts generally increases with the age of vehicles and miles driven.

The automotive aftermarket is divided into two markets. The first is the do-it-yourself (“DIY”) market, which is generally serviced by the large retail chain outlets and on-line resellers. Consumers who purchase parts from the DIY market generally install parts into their vehicles themselves. In most cases, this is a less expensive alternative than having the repair performed by a professional installer. The second is the professional installer market, commonly known as the do-it-for-me (“DIFM”) market. Traditional warehouse distributors, dealer networks, and commercial divisions of retail chains service this market. Generally, the consumer in this market is a professional parts installer. Our products are distributed to both the DIY and DIFM markets. The distinction between these two markets has become less defined over the years, as retail outlets leverage their distribution strength and store locations to attract customers.

Our non-discretionary automotive aftermarket replacement parts for heavy-duty truck, industrial, marine, and agricultural applications, which have some overlap with the automotive aftermarket, are also sold via specialty distribution channels through OES, fleet, and auto electric outlets.

In addition to our hard parts business, our position within the test solutions and diagnostic equipment market is particularly promising. We are focused on expanding our test solutions and diagnostic equipment for performance, endurance, and production of multiple components in the electric power train – providing simulation, emulation, and production applications for the electrification of both automotive and aerospace industries, including electric vehicle charging systems. We have expanded our test solutions and diagnostic equipment applications for combustion engine vehicles, including bench top testers for alternators and starters, and offer test solutions and diagnostic equipment for the pre- and post-production of electric vehicles, as well as software emulation of power systems applications for the electrification of all forms of transportation, including automobiles, trucks and the emerging electrification of systems with the aerospace industry including electric vehicle charging systems.

The global automotive component and powertrain test solutions and diagnostic equipment market represents a multi-billion-dollar market, and solidly establishes our growth for today and the future, as electrification becomes increasingly important around the world.

Growth Strategies and Key Initiatives

As noted above, we have a multi-pronged growth strategy: first, we are focused on growing our aftermarket hard parts business in the North American marketplace; second, we are focused on growing our leadership position in test solutions and diagnostic equipment by providing innovative and intuitive solutions to our customers; and third, we are focused on growing our electric vehicle testing business servicing original equipment manufacturers for automotive and aerospace applications on a global basis.

To accomplish our strategic vision, we are focused on the following key initiatives:

Hard Parts
 

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.
 
Test Solutions and Diagnostic Equipment
Rotating Electrical
 

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.
 
Electric Vehicle and Aerospace
 

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.
 
Products

We carry approximately 37,000 stock keeping units (“SKUs”) to support automotive replacement parts and test solutions and diagnostic equipment. Our products are sold under our customers’ widely recognized private label brand names and our own brand names including Quality-Built®, Pure Energy™, D&V Electronics, Dixie Electric, DelStar®, and Select Power Source™.

Our products include: (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, (iii) brake-related products, which include brake calipers, brake boosters, brake rotors, brake pads, and brake master cylinders, and (iv) other products, which include (a) turbochargers and (b) test solutions and diagnostic equipment used for electric vehicle powertrain development and manufacturing including electric motor test systems, e-axle test systems, advanced power emulators, charging unit test systems, test systems for alternators and starters, belt starter generators, bench-top testers, and specialized test services for electric vehicle inverters.

Segment Reporting

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, we have identified our chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that our business comprises three separate operating segments. All of the operating segments meet all the aggregation criteria, and are aggregated.

Sales, Marketing and Distribution

We sell our products to the largest automotive chains, including Advance (inclusive of Carquest, Autopart International, and Worldpac), AutoZone, Genuine Parts (NAPA), and O’Reilly with an aggregate of approximately 25,000 retail outlets. In addition, our products are sold to OES customers, professional installers, and a diverse group of automotive warehouse distributors. We also sell test solutions and diagnostic equipment via direct and indirect sales channels, technical conferences, and trade shows to some of the world’s leading automotive companies, and to the aerospace/aviation sector. We also offer testing services at our technical center located in Detroit, Michigan. During fiscal 2022, we sold approximately 99% of our products in North America, with approximately 1% of our products sold in Asian and European countries.

We publish printed and electronic catalogs with part numbers and applications for our hard parts products along with a detailed technical glossary and informational database. In addition, we publish printed and electronic product and service brochures and data sheets for our test solutions and diagnostic equipment and service offerings. We believe that we maintain one of the most extensive catalog and product identification systems available to the market.

We primarily ship our products from our facilities and various third-party warehouse distribution centers in North America, including our 410,000 square foot distribution center in Tijuana, Mexico.

Customers: Customer Concentration. While we continually seek to diversify our customer base, we currently derive, and have historically derived, a substantial portion of our sales from a small number of large customers. Sales to our three largest customers in the aggregate represented 85%, 87%, and 84%, and sales to our largest customer, AutoZone, represented 38%, 42%, and 38% of our net sales during fiscal 2022, 2021 and 2020, respectively. Any meaningful reduction in the level of sales to any of these customers, deterioration of the financial condition of any of these customers or the loss of any of these customers could have a materially adverse impact on our business, results of operations, and financial condition.

Customer Arrangements; Impact on Working Capital. We have various length agreements with our customers. Under these agreements, which in most cases have initial terms of at least four years, we are designated as the exclusive or primary supplier for specified categories of our products. Because of the very competitive nature of the market and the limited number of customers for these products, our customers have sought and obtained price concessions, significant marketing allowances and more favorable delivery and payment terms in consideration for our designation as a customer’s exclusive or primary supplier. These incentives differ from contract to contract and can include: (i) the purchase of Remanufactured Core inventory on customer shelves, (ii) the issuance of a specified amount of credits against receivables in accordance with a schedule set forth in the relevant contract, (iii) support for a particular customer’s research or marketing efforts provided on a scheduled basis, (iv) discounts granted in connection with each individual shipment of product, and (v) store expansion or product development support. These contracts typically require that we meet ongoing performance standards.

While these longer-term agreements strengthen our customer relationships, the increased demand for our products often requires that we increase our inventories and personnel. Customer demands that we purchase and maintain their Remanufactured Core inventory also requires the use of our working capital. The marketing and other allowances we typically grant our customers in connection with our new or expanded customer relationships adversely impact near-term revenues, profitability and associated cash flows from these arrangements. However, we believe the investment we make in these new or expanded customer relationships will improve our overall liquidity and cash flow from operations over time.

Competition

Our business is highly competitive. We compete with several large and medium-sized companies, including BBB Industries and Cardone Industries for hard parts, and AVL and Horiba for test solutions and diagnostic equipment, and a large number of smaller regional and specialty companies. We also compete with other overseas manufacturers, particularly those located in China who are increasing their operations and could become a significant competitive force in the future.

We believe that the reputations for quality, reliability, and customer service that a supplier provides are significant factors in our customers’ purchase decisions. We continuously strive to increase our competitive and technical advantages as the industry and technologies rapidly evolve. Our advanced power emulators are protected by U.S. patents that provide us a strong competitive barrier for a large segment of the market and allow us to be lower cost and more efficient.

We believe our ability to educate also helps to distinguish us from many of our competitors. We have created an online library of video courses, aimed at supporting our customers as they seek to train the next generation of technicians. We also offer live and web-based training courses via our education center within our Torrance, California headquarters. We believe our ability to provide quality replacement automotive parts, rapid and reliable delivery capabilities as well as promotional support also distinguishes us from many of our competitors. In addition, favorable pricing, our core exchange programs, and extended payment terms are also very important competitive factors in customers’ purchase decisions.

We seek to protect our proprietary processes and other information by relying on trade secret laws and non-disclosure and confidentiality agreements with certain of our employees and other persons who have access to that information.

Operations

Production Process for Non-discretionary Replacement Parts. The majority of our products are remanufactured at our facilities in Mexico, Canada, and to a lesser extent in Malaysia. We continue to maintain production of certain remanufactured units that require specialized service and/or rapid turnaround in our Torrance, California facility. We also manufacture and assemble new products at our facilities in Malaysia and India. Our remanufacturing process begins with the receipt of Used Cores from our customers or core brokers. The Used Cores are evaluated for inventory control purposes and then sorted by part number. Each Used Core is completely disassembled into its fundamental components. The components are cleaned in an environmentally sound process that employs customized equipment and cleaning materials in accordance with the required specifications of the particular component. All components known to be subject to major wear and those components determined not to be reusable or repairable are replaced by new components. Non-salvageable components of the Used Core are sold as scrap.

After the cleaning process is complete, the salvageable components of the Used Core are inspected and tested as prescribed by our IATF 16949 and ISO 9001:2015 approved quality programs, which have been implemented throughout the production processes. IATF 16949 and ISO 9001:2015 are internationally recognized, world class, quality programs. Upon passage of all tests, which are monitored by designated quality control personnel, all the component parts are assembled in a work cell into a finished product. Inspection and testing are conducted at multiple stages of the remanufacturing process, and each finished product is inspected and tested on equipment designed to simulate performance under operating conditions. To maximize remanufacturing efficiency, we store component parts ready for assembly in our production facilities.

Our remanufacturing processes combine product families with similar configurations into dedicated factory work cells. This remanufacturing process, known as “lean manufacturing,” eliminated a large number of inventory moves and the need to track inventory movement through the remanufacturing process. This lean manufacturing process has been fully implemented at our existing production facilities and we expect to implement this process at our recently acquired facilities. This manufacturing enables us to significantly reduce the time it takes to produce a finished product. We continue to explore opportunities for improving efficiencies in our remanufacturing process.

Production Process for Test Solutions and Diagnostic Equipment. Our test solutions and diagnostic equipment are engineered and manufactured in North America at facilities in Toronto, Canada and Binghamton, New York, U.S. Our facility in Canada is certified under ISO 9001:2015 quality management system, which mandates that we foster continuous improvement to our manufacturing processes. Materials for custom systems are purchased in a “just-in-time” environment while materials for standard systems are purchased in economic quantities. All materials and components are inspected and tested when required. Certain components require certificates of compliance or test results from our vendors prior to shipping to us. Our manufacturing process combines skilled labor from certified and licensed technicians with raw materials, manufactured components, purchased components, and purchased capital components to complete our test solutions and diagnostic equipment. All test solutions and diagnostic equipment are inspected and tested per our quality control program, which has been approved by the ISO 9001:2015 quality management system.

Our facility in New York, U.S., manufactures test solutions and diagnostic equipment using purchased electronic and custom components that are primarily assembled at this facility. While some circuit card assemblies are handled by outside subcontractors, most of the assemblies are manufactured in-house along with the fabrication of electronic subassemblies. Quality control and testing is completed on these subassemblies prior to their final installation into the overall equipment rack that includes mechanical, electrical and thermal management operations. Final inspection and acceptance testing are performed to predefined procedures prior to the equipment being packaged in a crate for shipment.

Used Cores. The majority of our Used Cores are obtained from customers through the core exchange programs. To supplement Used Cores received from our customers we purchase Used Cores from core brokers. Although this is not a primary source of Used Cores, it is a critical source for meeting our raw material demands. 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 recycle materials, including metal from the Used Cores and corrugated packaging, in keeping with our focus as a remanufacturer to lessen our footprint on the environment.

Purchased Finished Goods. In addition to our remanufactured goods, we also purchase finished goods from various approved suppliers, including several located in Asia. We perform supplier qualification, product inspection and testing according to our IATF 16949 or ISO 9001:2015 certified quality systems to assure product quality levels. We also perform periodic site audits of our suppliers’ manufacturing facilities.

Environmental, Social and Governance (ESG) and Human Capital

Our Culture. Our Company was founded in 1968 on the values of integrity, common decency and respect for others.  Our core values are Excellence, Passion/Productivity, Innovation/Integrity, Community and Quality (“EPICQ”) and characterize our daily corporate focus. These values are embodied in our Code of Ethics, which has been adopted by our Board of Directors to serve as a statement of principles to guide our decision-making and reinforce our commitment to these values in all aspects of our business. We believe that our commitment to our Company, our employees and the communities within which we operate has led to high employee satisfaction and low employee turnover, and our commitment to our customers, suppliers and business partners has resulted in high customer satisfaction, as evidenced by the customer awards that we routinely win, and decades-long customer relationships.

Environmental. Environmental and sustainable processes have been our hallmark since the Company’s establishment. We take our commitment to environmental stewardship seriously. The use of Remanufactured Cores results in a substantial reduction of raw materials and energy consumption. With the potential to significantly reduce material and energy consumption, industry sources believe that remanufacturing is the most efficient and sustainable process for producing aftermarket replacement parts – making our business practices green by nature. See more information on this at investors.motorcarparts.com/esg. Highlights of our eco-friendly remanufacturing processes include:


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.

Human Capital. We regard our team members as integral to our strategic growth and success. We recognize that safety, inclusion, and offering exciting opportunities are fundamental to facilitating high retention and satisfaction of high performance team members. Equally important, we provide competitive compensation and excellent benefit programs, and support numerous programs that build connections between our team members and their communities. We believe our team members share our corporate ethics and values, as demonstrated in their daily interactions with customers, co-workers, vendors, and the public at large.

As of March 31, 2022, we employed approximately 5,800 people, with 400 people in the United States, 4,900 people in Mexico, 200 people Canada, and 300 people in Malaysia and China. Approximately 5,400 people are production employees. We have non-union and unionized facilities. Approximately 4,800 production employees are covered by a local union. We believe we have a strong relationship with the union that represents our employees.

Our facilities are located in labor markets with readily available access to skilled and unskilled workers. Our relationship and communication with our unionized and non-represented workforce is good.

Inclusion and Diversity. Our board is ethnically diverse and comprised of 10 independent directors, including three women. We believe an inclusive workforce is critical to our success, with an ongoing focus on the hiring, retention, and advancement of women and other underrepresented ethnic groups. The Company employs 37% women and 63% men globally. In the United States, 76% of our workforce are considered ethnic minorities.

Health, Safety and Wellness.  The success of our business is connected to the safety and well-being of our team members and their families. We provide our employees and their families with flexible and convenient health and wellness programs – including protection and security to lessen concerns about missing work and the potential financial impact.  Our programs are intended to support the physical and mental well-being with the tools and resources for employees to improve or maintain their health, and we encourage engagement in healthy behaviors for team members and their families.

In response to the COVID-19 pandemic, we implemented numerous changes in the interest of our team members. All of these changes meet and/or exceed Centers for Disease Control, World Health Organization, and other government regulations. These programs involve providing employees with flexible working arrangements – including, where appropriate, the ability to work from home, and the implementation of numerous safety policies and practices at all of our facilities. Please see the discussion in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in Item 1A “Risk Factors” for further information regarding the COVID-19 pandemic.

Compensation and benefits. We provide competitive compensation and benefit programs that meet the needs of our employees, and are tailored to their local markets. In addition to wages and salaries, these programs may include annual cash bonuses, stock awards, a 401(k) Plan, healthcare, and insurance, and implemented methodologies to manage performance, provide feedback and develop talent.

Social Responsibility. We are firmly committed to social responsibility. While safety, respect, and inclusion have always been fundamental to our company, these qualities are more important than ever given the global pandemic and the impact it is having on our employees, family members, and the community at large. Medical professionals are onsite or within close proximity to our operations, and management is doing everything possible to address the challenges. In addition, our socially responsible initiatives include subsidized food programs for certain employees, donations to community organizations, sponsorship of sport teams and weekend family events, which hopefully, will become possible again as our Company and the world recovers. In addition, we have plans to launch an Agri-farm organic food and community program in Mexico to enhance our social responsibility practices on a global basis.

Information Security and Risk Oversight

We have an information security risk program committed to regular risk management practices surrounding the protection of confidential data. This program includes various technical controls, including security monitoring, data leakage protection, network segmentation and access controls around the computer resources that house confidential or sensitive data. We have also implemented employee awareness training programs around phishing, malware, and other cyber risks. We continually evaluate the security environment surrounding the handling and control of our critical data and have instituted additional measures to help protect us from system intrusion or data breaches.

Our Board of Directors appointed the Audit Committee with direct oversight of Company’s: (i) information security policies, including periodic assessment of risk of information security breach, training program, significant threat changes and vulnerabilities and monitoring metrics and (ii) effectiveness of information security policy implementation. Our Audit Committee is comprised entirely of independent directors, one of whom has significant work experience related to information security issues or oversight. Management will report information security instances to the Audit Committee as they occur, if material, and will provide a summary multiple times per year to the Audit Committee.

Governmental Regulation

Our operations are subject to various regulations governing, among other things, emissions to air, discharge to waters, and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our businesses, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. Potentially significant expenditures, however, could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.

Access to Public Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available free of charge to the public over the Internet at the SEC’s website at www.sec.gov. In addition, our SEC filings and Code of Ethics are available free of charge on our website www.motorcarparts.com. The information contained on the websites referenced in this Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.

Item 1A.
Risk Factors

While we believe the risk factors described below are all the material risks currently facing our business, additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our financial condition or results of operations could be materially and adversely impacted by these risks, and the trading price of our common stock could be adversely impacted by any of these risks. In assessing these risks, you should also refer to the other information included in or incorporated by reference into this Form 10-K, including our consolidated financial statements and related notes thereto appearing elsewhere or incorporated by reference in this Form 10-K.

Risks Related to Economic, Political and Health Conditions

Developments in global and local conditions, such as slowing growth, inflation, the Russia/Ukraine conflict and the COVID-19 pandemic, have a material impact on our results of operations and financial condition, and the continuation of or worsening of such conditions could have a similar or worse impact.

Several conditions have led to adverse impacts on the U.S. and global economies and created uncertainty regarding the potential effects on our employees, supply chain, operations, and customer demand. These conditions impact our operations and the operations of our customers, suppliers, and vendors because of quarantines, facility closures, travel, logistics restrictions and supply chain issues. The extent to which these conditions impact us will depend on numerous factors and future developments, which are highly uncertain and cannot be predicted, including, but not limited to: (i) general economic and growth conditions, (ii) the impact of inflation on our expenses, (iii) the effects of the Russia/Ukraine conflict on international trade, customers, suppliers, and vendors, (iv) public health crises, such as the COVID-19 pandemic, (v) actions and stimulus measures adopted by local, state and federal governments, and (vi) the extent to which normal economic and operating conditions can resume. Even if some of these conditions subside, we may continue to experience adverse impacts to our business because of an economic recession or depression that has occurred or may occur in the future, as well as the lingering effects on logistics, supply chain and the social norms of society. We could experience adverse impacts from these conditions in a number of ways, including, but not limited to, the following which have occurred to some extent during this fiscal year:

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;
reduced and/or deferred consumer demand for our products as a result of the economic downturn;
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.

At this time, we are unable to predict accurately the impact these conditions will have on our business and financial condition in the future.

Unfavorable economic conditions may adversely affect our business.

Adverse changes in economic conditions, including inflation, recession, increased fuel prices, tariffs, and unemployment levels, availability of consumer credit, taxation or instability in the financial markets or credit markets may either lower demand for our products or increase our operational costs, or both. In addition, elections and other changes in the political landscape could have similar effects. Such conditions may also materially impact our customers, suppliers and other parties with whom we do business. Our revenue will be adversely affected if demand for our products declines. The impact of unfavorable economic conditions may also impair the ability of our customers to pay for products they have purchased. As a result, reserves for doubtful accounts and write-offs of accounts receivables may increase and failure to collect a significant portion of amounts due on those receivables could have a material adverse effect upon our business, results of operations, and financial condition.  In addition, we also get pressure from our suppliers to pay them faster and our customers to pay us slower, which could impact our cash flows.

Risks Related to Our Business and Industry

We rely on a few large customers for a majority of our business, and the loss of any of these customers, significant changes in the prices, marketing allowances or other important terms provided to any of these customers or adverse developments with respect to the financial condition of these customers could reduce our net income and operating results.

Our net sales are concentrated among a small number of large customers. Sales to our three largest customers in the aggregate represented 85%, and sales to our largest customer represented 38% of our net sales during fiscal 2022. We are under ongoing pressure from our major customers to offer lower prices, extended payment terms, increased marketing and other allowances and other terms more favorable to these customers because our sales to these customers are concentrated, and the market in which we operate is very competitive. These customer demands have put continued pressure on our operating margins and profitability, resulted in periodic contract renegotiation to provide more favorable prices and terms to these customers and significantly increased our working capital needs. In addition, this customer concentration leaves us vulnerable to any adverse change in the financial condition of these customers. Changes in terms with, significant allowances for and collections from these customers could affect our operating results and cash flows. The loss of or a significant decline in sales to any of these customers could adversely affect our business, results of operations, and financial condition.

Failure to compete effectively could reduce our market share and significantly harm our financial performance.

Our industry is highly competitive, and our success depends on our ability to compete with suppliers of automotive aftermarket products, some of which may have substantially greater financial, marketing and other resources than we do. The automotive aftermarket industry is highly competitive, and our success depends on our ability to compete with domestic and international suppliers of automotive aftermarket products. Due to the diversity of our product offering, we compete with several large and medium-sized companies, including BBB Industries and Cardone Industries for hard parts, and AVL and Horiba for test solutions and diagnostic equipment and a large number of smaller regional and specialty companies and numerous category specific competitors. In addition, we face competition from original equipment manufacturers, which, through their automotive dealerships, supply many of the same types of replacement parts we sell.

Some of our competitors may have larger customer bases and significantly greater financial, technical and marketing resources than we do. These factors may allow our competitors to:

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.

In addition, other overseas competitors, particularly those located in China, are increasing their operations and could become a significant competitive force in the future. Increased competition could put additional pressure on us to reduce prices or take other actions, which may have an adverse effect on our operating results. We may also lose significant customers or lines of business to competitors.

If we do not respond appropriately, the evolution of the automotive industry could adversely affect our business.

The automotive industry is increasingly focused on the development of hybrid and electric vehicles and of advanced driver assistance technologies, with the goal of developing and introducing a commercially-viable, fully-automated driving experience. There has also been an increase in consumer preferences for mobility on demand services, such as car and ride sharing, as opposed to automobile ownership, which may result in a long-term reduction in the number of vehicles per capita. In addition, some industry participants are exploring transportation through alternatives to automobiles. These evolving areas have also attracted increased competition from entrants outside the traditional automotive industry. If we do not continue to innovate and develop, or acquire, new and compelling products that capitalize upon new technologies in response to consumer preferences, it could have an adverse impact on our results of operations.

Work stoppages, production shutdowns and similar events could significantly disrupt our business.

Because the automotive industry relies heavily on just-in-time delivery of components during the assembly and manufacture of vehicles, a work stoppage or production shutdown at one or more of our manufacturing and assembly facilities could have adverse effects on our business. During fiscal 2022, our production capacity at our Malaysian facility was impacted due to local government mandated restrictions in connection with the ongoing COVID-19 pandemic. Due to this reduction in production capacity, we were required to outsource certain finished goods purchases to meet demand, which resulted in incremental tariffs. Similarly, if one or more of our customers were to experience a work stoppage, that customer would likely halt or limit purchases of our products. We have also experienced significant disruptions in the supply of several key components from Asia due to work stoppages, production shutdowns, government closures, and other supply chain issues at many of our suppliers, leading to an adverse effect on our financial results.

Interruptions or delays in obtaining component parts could impair our business and adversely affect our operating results.

In our remanufacturing processes, we obtain Used Cores, primarily through the core exchange programs with our customers, and component parts from third-party manufacturers. To supplement Used Cores received from our customers we purchase Used Cores from core brokers. Historically, the Used Core returned from customers together with purchases from core brokers have provided us with an adequate supply of Used Cores. If there was a significant disruption in the supply of Used Cores, whether as a result of increased Used Core acquisitions by existing or new competitors or otherwise, our operating activities could be materially and adversely impacted. In addition, a number of the other components used in the remanufacturing process are available from a very limited number of suppliers. We are, as a result, vulnerable to any disruption in component supply, and any meaningful disruption in this supply would materially and adversely impact our operating results.

Increases in the market prices of key component raw materials could increase the cost of our products and negatively impact our profitability.

In light of the continuous pressure on pricing which we have experienced from our large customers, we may not be able to recoup the higher costs of our products due to changes in the prices of raw materials, including, but not limited to, aluminum, copper, steel, and cardboard. If we are unable to recover a substantial portion of our raw materials from Used Cores returned to us by our customers through the core exchange programs, the prices of Used Cores that we purchase may reflect the impact of changes in the cost of raw materials. Sustained raw material price increases has had an impact on our product costs and profitability to date, but we are unable to determine the overall impact, in the future, at this time.

Our financial results are affected by automotive parts failure rates that are outside of our control.

Our operating results are affected over the long term by automotive parts failure rates. These failure rates are impacted by a number of factors outside of our control, including product designs that have resulted in greater reliability, the number of miles driven by consumers, and the average age of vehicles on the road. A reduction in the failure rates of automotive parts would adversely affect our sales and profitability.

Our reliance on foreign suppliers for some of the automotive parts we sell to our customers or included in our products presents risks to our business.

A significant portion of automotive parts and components we use in our remanufacturing process are imported from suppliers located outside the U.S., including China and other countries in Asia. As a result, we are subject to various risks of doing business in foreign markets and importing products from abroad, such as the following, which we have experienced in the last fiscal year:

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.

It is also possible, in the future, that we may experience the following risks related to doing business in foreign markets and importing products from abroad, such as the following:

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 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.

Any of the foregoing factors, or a combination of them, could increase the cost or reduce the supply of products available to us and materially and adversely impact our business, financial condition, results of operations or liquidity.

In addition, because we depend on independent third parties to manufacture a significant portion of our wheel hub, brake-related products, and other purchased finished goods, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production deadlines or increases in manufacturing costs.

An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.

Merchandise manufactured offshore represents a significant portion of our total product purchases. A disruption in the shipping or cost of such merchandise may significantly decrease our sales and profits. In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet our demands. Merchandise from alternative sources may also be of lesser quality and more expensive than those we currently import. Risks associated with our reliance on imported merchandise include disruptions in the shipping and importation or increase in the costs of imported products. For example, common risks include:

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.

As well as the following common risks, which we may experience in the future:

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.

Products manufactured overseas and imported into the U.S. and other countries are subject to import restrictions and duties, which could delay their delivery or increase their cost. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that we owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that we imported from Mexico. We do not believe that this amount is correct and believe that we have numerous defenses and are disputing this amount vigorously. We cannot assure you that the U.S. Customs and Border Protection will agree or that we will not need to accrue or pay additional amounts in the future.

Our operating results may continue to fluctuate significantly.

We have experienced significant variations in our annual and quarterly results of operations. These fluctuations have resulted from many factors, including shifts in the demand and pricing for our products, general economic conditions, including changes in prevailing interest rates, and the introduction of new products. Our gross profit percentage fluctuates due to numerous factors, some of which are outside of our control. These factors include the timing and level of marketing allowances provided to our customers, actual sales during the relevant period, pricing strategies, the mix of products sold during a reporting period, and general market and competitive conditions. We also incur allowances, accruals, charges and other expenses that differ from period to period based on changes in our business, which causes our operating income to fluctuate.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals”, originating from the Democratic Republic of Congo (“DRC”) and adjoining countries. These rules could adversely affect the sourcing, supply, and pricing of materials used in our products, as the number of suppliers who provide conflict-free minerals may be limited. We may also suffer reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to modify our products to avoid the use of such materials. We may also face challenges in satisfying customers who may require that our products be certified as containing conflict-free minerals.

The products we manufacture or contract to manufacture contain small quantities of Tin and Gold. We manufacture or contract to manufacture one product with small quantities of Tantalum. For the reporting year ending December 31, 2021, we surveyed 283 smelters, refiners, or metal processing facilities for these minerals that are, or could be, in our supply chain. Of these, 69% were validated as conflict-free, per publicly available information on the Conflict Free Sourcing Initiative website. We have not been able to ascertain the conflict-free status of the remaining smelters or refiners.

Our strategy for managing risks associated with conflict minerals in products includes continuing to encourage our suppliers to engage in conflict-free sourcing and obtaining data from our suppliers that is more applicable to the products we purchase. We continue to monitor progress on industry efforts to ascertain whether some facilities that suppliers identified are actually smelters. We do not believe conflict minerals pose risk to our operations. We are a member of the Automobile Industry Action Group (AIAG) and support their efforts in the conflict minerals area.

Natural disasters or other disruptions in our business in California and Baja California, Mexico could increase our operating expenses or cause us to lose revenues.

A substantial portion of our operations are located in California and Baja California, Mexico, including our headquarters, remanufacturing and warehouse facilities. Any natural disaster, such as an earthquake, or other damage to our facilities from weather, fire or other events could cause us to lose inventory, delay delivery of orders to customers, incur additional repair-related expenses, disrupt our operations or otherwise harm our business. These events could also disrupt our information systems, which would harm our ability to manage our operations worldwide and compile and report financial information. As a result, we could incur additional expenses or liabilities or lose revenues, which could exceed any insurance coverage and would adversely affect our financial condition and results of operations.

Our past material weakness, and any future failure to maintain effective internal control over financial reporting, may affect our ability to accurately report our financial results and could materially and adversely affect the market price of our common stock.

Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over financial reporting, which requires significant resources and management oversight. Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot assure you that our internal control over financial reporting will be effective in the future or that other material weakness will not be discovered in the future. Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with the NASDAQ Global Select Market or subject us to adverse regulatory consequences. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our stock.

Risks Related to Our Overseas Operations

Our offshore remanufacturing and logistic activities expose us to increased political and economic risks and place a greater burden on management to achieve quality standards.

Our overseas operations, especially our operations in Mexico, increase our exposure to political, criminal or economic instability in the host countries and to currency fluctuations. Risks are inherent in international operations, including:

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.

These and other factors may have a material adverse effect on our offshore activities and on our business, results of operations and financial condition. Our overall success as a business depends substantially upon our ability to manage our foreign operations. We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business, and failure to do so could materially and adversely impact our business, results of operations, and financial condition.

Unfavorable currency exchange rate fluctuations could adversely affect us.

We are exposed to market risk from material movements in foreign exchange rates between the U.S. dollar and the currencies of the foreign countries in which we operate. In fiscal 2022, approximately 24% of our total expenses were in currencies other than the U.S. dollar. As a result of our extensive operations in Mexico, our primary risk relates to changes in the rates between the U.S. dollar and the Mexican peso. To mitigate this currency risk, we enter into forward foreign exchange contracts to exchange U.S. dollars for Mexican pesos. We also enter into forward foreign exchange contracts to exchange U.S. dollars for Chinese yuan in order to mitigate risk related to our purchases and payments to our Chinese vendors. The extent to which we use forward foreign exchange contracts is periodically reviewed in light of our estimate of market conditions and the terms and length of anticipated requirements. The use of derivative financial instruments allows us to reduce our exposure to the risk that the eventual net cash outflow resulting from funding the expenses of the foreign operations will be materially affected by changes in the exchange rates. We do not engage in currency speculation or hold or issue financial instruments for trading purposes. These contracts generally expire in a year or less. Any change in the fair value of foreign exchange contracts is accounted for as an increase or decrease to “foreign exchange impact of lease liabilities and forward contracts” in the consolidated statements of operations. We recorded a non-cash loss of $316,000 and a non-cash gain of $7,713,000 due to the change in the fair value of the forward foreign currency exchange contracts during fiscal 2022 and 2021, respectively. In addition, we recorded gains of $1,989,000 and $9,893,000 in connection with the remeasurement of foreign currency-denominated lease liabilities during fiscal 2022 and 2021, respectively.

Changes in trade policy and other factors beyond our control could materially adversely affect our business.

The former presidential administration advocated for greater restrictions on international trade generally, including with respect to the North American Free Trade Agreement (“NAFTA”) and the World Trade Organization (the “WTO”). In December 2019, the United States, Mexico and Canada signed the amended United States-Mexico-Canada Agreement (the “USMCA”), which replaced NAFTA. In July 2020, the U.S. notified the United Nations of its intention to withdraw from the WTO. While the current presidential administration has rejoined the WTO, it remains difficult to predict what affect the USMCA, the WTO or other trade agreements and organizations will have on our business. If the U.S. were to withdraw from or materially modify any other international trade agreements to which it is a party or if the U.S. imposes significant additional tariffs on imports from China or other restrictions, it could have an adverse impact on our business.

Possible new tariffs that might be imposed by the United States government could have a material adverse effect on our results of operations.

The U.S. government has placed tariffs on certain goods imported from China and may impose new tariffs on goods imported from China and other countries, including products that we import. In retaliation, China has responded by imposing tariffs on a wide range of products imported from the U.S. and by adjusting the value of its currency. If renegotiations of existing tariffs are unsuccessful or additional tariffs or trade restrictions are implemented by the U.S. or other countries in connection with a global trade war, the resulting escalation of trade tensions could have a material adverse effect on world trade and the global economy. Even in the absence of further tariffs or trade restrictions, the related uncertainty and the market’s fear of an economic slowdown could lead to a decrease in consumer spending and we may experience lower net sales than expected. Reduced net sales may result in reduced operating cash flows if we are not able to appropriately manage inventory levels or leverage expenses.

Risks Related to Our Indebtedness

Our debt can impact our operating results and cash flows and limit our operations.

As of March 31, 2022, we had $171,694,000 of debt outstanding, most of which is at variable interest rates.  Fluctuations in those rates could impact our operating results and cash flows. In particular, interest rates have been rising recently, which increases our interest expense. In addition, our credit facility has covenants that limit aspects of our operations. We may also incur additional debt in the future, which could further increase our leverage, reduce our cash flow or further restrict our business.

Our lenders may not waive future defaults under our credit agreements.

Our credit agreement with our lenders contains certain financial and other covenants. If we fail to meet any of these covenants in the future, there is no assurance that our lenders will waive any such defaults. If obtained, any such waiver may impose significant costs or covenants on us. In addition, as the capital markets get more volatile, it may become more difficult to obtain such waivers or refinance our debt.

Risks Related to Owning Our Stock

Our stock price may be volatile and could decline substantially.

Our stock price has fluctuated in the past and may decline substantially in the future as a result of developments in our business, the volatile nature of the stock market, and other factors beyond our control. Our stock price and the stock market generally has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our common stock to decline, including: (i) our operating results failing to meet the expectations of securities analysts or investors in any period, (ii) downward revisions in securities analysts’ estimates, (iii) market perceptions concerning our future earnings prospects, (iv) public or private sales of a substantial number of shares of our common stock, (v) adverse changes in general market conditions or economic trends, and (vi) market shocks generally or in our industry, such as what has recently occurred.

General Risk Factors

We may continue to make strategic acquisitions of other companies or businesses and these acquisitions introduce significant risks and uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions.

In order to position ourselves to take advantage of growth opportunities, we have made, and may continue to make, strategic acquisitions that involve significant risks and uncertainties. These risks and uncertainties include:

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.

We may also incur significant expenses to pursue and consummate acquisitions. Any of the foregoing, or a combination of them, could cause us to incur additional expenses and materially and adversely impact our business, financial condition, results of operations, or liquidity.

Increasing attention to environmental, social, and governance matters may impact our business, financial results, or stock price.

In recent years, increasing attention has been given to corporate activities related to environmental, social, and governance (“ESG”) matters in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, universities, and other members of the investing community. These activities include increasing attention and demands for action related to climate change and promoting the use of energy saving building materials. A failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could also cause reputational harm to our business and could have a material adverse effect on us.

If our technology and telecommunications systems were to fail, or we were not able to successfully anticipate, invest in or adopt technological advances in our industry, it could have an adverse effect on our operations.

We rely on computer and telecommunications systems to communicate with our customers and vendors and manage our business. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating malfunction, software virus or service provider failure, could disrupt our operations. In addition, our future growth may require additional investment in our systems to keep up with technological advances in our industry. If we are not able to invest in or adopt changes to our systems, or such upgrades take longer or cost more than anticipated, our business, financial condition and operating results may be adversely affected.

Cyber-attacks or other breaches of information technology security could adversely impact our business and operations.

The incidence of cyber-attacks and other breaches of information technology security have increased worldwide. Cyber-attacks or other breaches of network or information technology security may cause equipment failure or disruption to our operations. Such attacks, which include the use of malware, computer viruses and other means for disruption or unauthorized access, on companies have increased in frequency, scope and potential harm in recent years. While, to the best of our knowledge, we have not been subject to cyber-attacks or to other cyber incidents which, individually or in the aggregate, have been material to our operations or financial conditions, the preventive actions we take to reduce the risk of cyber incidents and protect our information technology and networks may be insufficient to repel a major cyber-attack in the future. To the extent that any disruption or security breach results in a loss or damage to our data or unauthorized disclosure of confidential information, it could cause significant damage to our reputation, affect our relationship with our customers, suppliers and employees, and lead to claims against us and ultimately harm our business. Additionally, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. While we maintain specific cyber insurance coverage, which may apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage.

Weakness in conditions in the global credit markets and macroeconomic factors could adversely affect our financial condition and results of operations.

Any weakness in the credit markets could result in significant constraints on liquidity and availability of borrowing terms from lenders and accounts payable terms with vendors. Modest economic growth in most major industrial countries in the world and uncertain prospects for continued growth threaten to cause tightening of the credit markets, more stringent lending standards and terms, and higher interest rates. The persistence of these conditions could have a material adverse effect on our borrowings and the availability, terms and cost of such borrowings. In addition, deterioration in the U.S. economy could materially and adversely impact our operating results.

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

The following sets forth the location, type of facility, square footage and ownership interest in each of our material facilities.

Location
 
Type of Facility
 
Approx.
Square
Feet
 
Leased
or
Owned
 
Expiration
                 
Torrance, CA
 
Remanufacturing, Warehouse, Administrative, and Office
 
        231,000
 
Leased
 
March 2032
Tijuana, Mexico
 
Remanufacturing, Warehouse, and Office
 
        312,000
 
Leased
 
August 2033
Tijuana, Mexico
 
Distribution Center and Office
 
        410,000
 
Leased
 
December 2032
Tijuana, Mexico
 
Remanufacturing, Warehouse, and Office
 
        199,000
 
Leased
 
December 2032
Tijuana, Mexico
 
Core Induction, Warehouse, and Office
 
        173,000
 
Leased
 
December 2032
Ontario, Canada
 
Remanufacturing, Warehouse, and Office
 
        157,000
 
Leased
 
May 2023
Ontario, Canada
 
Manufacturing, Warehouse, and Office
 
          35,000
 
Leased
 
December 2022
Singapore & Malaysia
 
Remanufacturing, Warehouse, and Office
 
        114,000
 
Leased
 
Various through July 2024
Shanghai, China
 
Warehouse and Office
 
          27,000
 
Leased
 
March 2023

We believe the above mentioned facilities are sufficient to satisfy our current and foreseeable operations.

Item 3.
Legal Proceedings

We are subject to various lawsuits and claims in the normal course of business. In addition, government agencies and self-regulatory organizations have the ability to conduct periodic examinations of and administrative proceedings regarding our business. Following an audit in fiscal 2019, the U.S. Customs and Border Protection stated that it believed that we owed additional duties of approximately $17 million from 2011 through mid-2018 relating to products that we imported from Mexico. We do not believe that this amount is correct and believe that we have numerous defenses and are disputing this amount vigorously. We cannot assure you that the U.S. Customs and Border Protection will agree or that we will not need to accrue or pay additional amounts in the future.

Item 4.
Mine Safety Disclosures

Not applicable.

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the trading symbol MPAA. As of June 7, 2022, there were 19,118,651 shares of common stock outstanding held by 11 holders of record.

Purchases of Equity Securities by the Issuer

Share repurchase activity during the fourth quarter of fiscal 2022 was as follows:

Periods
 
Total Number of
Shares Purchased
   
Average Price Paid Per Share
   
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs (1)
 
                         
January 1 - January 31, 2022:                                
Open market and privately negotiated purchases
   
-
   
$
-
     
-
   
$
18,255,000
 
February 1 - February 28, 2022:                                
Open market and privately negotiated purchases
   
-
   
$
-
     
-
     
18,255,000
 
March 1 - March 31, 2022:                                
Open market and privately negotiated purchases
   
-
   
$
-
     
-
     
18,255,000
 
                                 
Total
   
0
             
0
   
$
18,255,000
 



(1)
As of March 31, 2022, $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, 2022. 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.

Equity Compensation Plan Information

The following summarizes our equity compensation plans as of March 31, 2022:

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
   
2,179,155
(1)
 
$
17.53
(2)
   
682,788
(3)


                         
Equity compensation plans not approved by security holders
   
N/A
     
N/A
     
N/A
   
                           
Total
   
2,179,155
   
$
17.53
     
682,788
   


(1)
Consists of (i) stock options issued under the 2004 Non-Employee Director Stock Option Plan, (ii) restricted stock units and restricted stock (collectively “RSUs”), performance stock units (PSU’s), and stock options issued under the Fourth Amended and Restated 2010 Incentive Award Plan (the “2010 Plan”), and (iii) RSUs issued under our 2014 Non-Employee Director Incentive Award Plan (the “2014 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 2010 Plan and 2014 Plan.

Stock Performance Graph

The following graph compares the cumulative return to holders of our common stock for the five years ending March 31, 2022 with the NASDAQ Composite Total Returns Index and the Zacks Retail and Wholesale Auto Parts Index. The comparison assumes $100 was invested at the close of business on March 31, 2017 in our common stock and in each of the comparison groups, and assumes reinvestment of dividends.

graphic

Item 6.
Selected Financial Data

None.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements, including, without limitation, our expectations and statements regarding our outlook and future revenues, expenses, results of operations, liquidity, plans, strategies and objectives of management and any assumptions underlying any of the foregoing. Our actual results may differ significantly from those projected in the forward-looking statements. Our forward-looking statements and factors that might cause future actual results to differ materially from our recent results or those projected in the forward-looking statements include, but are not limited to, those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update the forward-looking statements or our risk factors for any reason.

Management Overview

We have a multi-pronged platform for growth within the automotive aftermarket for non-discretionary replacement hard parts and test solutions. In addition, we offer diagnostic equipment applications focused on the fast-evolving electric mobility markets. Our investments in infrastructure and human resources during the past few years reflects the significant expansion of manufacturing capacity to support multiple product lines and continues to be transformative and scalable. These investments included (i) a 410,000 square foot distribution center, (ii) two buildings totaling 372,000 square feet for remanufacturing and core sorting of brake calipers, and (iii) the realignment of production at our initial 312,000 square foot facility in Mexico.

New products introduced through our growth strategies include: (i) the addition of brake calipers in August 2019; (ii) alternators and starters for heavy-duty truck, industrial, marine, and agriculture applications, through an acquisition in January 2019; (iii) brake power boosters in August 2016; and (iv) turbochargers through an acquisition in July 2016. In addition, our test solutions and diagnostic equipment include: (a) the design and manufacture of test solutions and diagnostic equipment for alternators, starters, belt-start generators (stop start and hybrid technology), and electric power trains for electric vehicles through an acquisition in July 2017 and (b) the design and manufacture of advanced power emulators (AC and DC) and custom power electronic products for the automotive and aerospace industries through an acquisition in December 2018.

Highlights and Accomplishments in Fiscal 2022

During fiscal 2022, we accomplished the following significant successes despite ongoing worldwide supply chain and logistics challenges and inflationary pressures:


We achieved organic sales growth of more than 20 percent;

We developed 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 secured multi-year new business commitments and opportunities of more than $100 million, primarily across multiple brake-related products;

We successfully expanded sales through additional product line offerings in Mexico;

We completed a multi-year expansion program of our facilities in Mexico, including completion of a new brake caliper remanufacturing facility;

We added capacity to support anticipated future growth with limited additional capital investment;

We extended the maturity date of our Credit Facility from June 2023 to May 2026 to enhance our liquidity and capital resources;

We secured inventory which enabled us to support our customers, meet demand and obtain new business -- despite worldwide supply chain and logistics challenges;

We secured purchase orders from all major automotive retailers for rotating electric bench-top testing equipment;

We opened an electric vehicle (“EV”) contract testing center in Detroit, Michigan;

We continued a series of prestigious Tier-1 wins for our EV technology with orders from major global automotive, aerospace and research institutions;


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

Impact of the Novel Coronavirus (“COVID-19”)

The COVID-19 pandemic has spread globally and created significant volatility, uncertainty and economic disruption in many countries, including the countries in which we operate. National, state and local governments in these countries continue to implement a variety of measures in response that have the effect of restricting or limiting, among other activities, the operations of certain businesses.

We continue to experience disruptions with worldwide supply chain and logistics services. We are unable to predict accurately the ultimate long-term impact that COVID-19 will have on our business and financial condition. While the near-term outlook appears positive, any additional government shutdowns or the emergence and spread of new variants of the virus, including the Delta or Omicron variant, the likelihood of a resurgence of positive cases, the development, availability and public acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, could negatively impact our business and financial condition.

There have been no serious outbreaks in any of our production facilities; however, a serious outbreak could affect our production capabilities. We experienced inefficiencies in operations due to the implementation of additional personnel safety measures throughout our facilities.

Enhanced levels of communication at all levels within the organization are critical to address the ever-changing landscape brought on by COVID-19, especially with most of our office staff continuing to work from home partially. Such efforts have included, additional board check-in meetings, executive committee meetings, and town hall style communications with all employees, as appropriate.

We continue to incur costs as a result of COVID-19, including employee costs, such as expanded benefits and frontline incentives, and other operating costs associated with the provision of personal protective equipment, which have negatively impacted our profitability. These expanded benefits, supply costs and other COVID-19 related costs resulted in total expense, included in cost of goods sold and operating expenses in the consolidated statements of operations, of $3,368,000 and $7,316,000 during fiscal 2022 and 2021, respectively. Our Asian subsidiaries received $71,000 and $171,000 from their local assistance programs during fiscal 2022 and 2021, respectively. We received payments from the Canadian Government under the Canadian Emergency Wage Subsidy program of $1,130,000 during fiscal 2021. These payments are recorded as a reduction of cost of goods sold and operating expenses in the consolidated statements of income.

Segment Reporting

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for segment reporting, we have identified our chief operating decision maker (“CODM”), reviewed the documents used by the CODM, and understand how such documents are used by the CODM to make financial and operating decisions. We have determined through this review process that our business comprises three separate operating segments. All of the operating segments meet all the aggregation criteria, and are aggregated.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. Our significant accounting policies are discussed in detail below and in Note 2 of the notes to consolidated financial statements.

In preparing our consolidated financial statements, we use estimates and assumptions for matters that are inherently uncertain. We base our estimates on historical experiences and reasonable assumptions. Our use of estimates and assumptions affect the reported amounts of assets, liabilities and the amount and timing of revenues and expenses we recognize for and during the reporting period. Actual results may differ from our estimates.

There continues to be uncertainty and disruption in the global economy and financial markets in connection with the COVID-19 pandemic. We are not currently aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as of March 31, 2022. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Our remanufacturing operations include core exchange programs for the core portion of the finished goods. The Used Cores that we acquire and are returned to us from our customers are a necessary raw material for remanufacturing. We also offer our customers marketing and other allowances that impact revenue recognition. These elements of our business give rise to more complex accounting than many businesses our size or larger.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application. This guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2020. The adoption of this guidance on April 1, 2021 did not have any material impact on our consolidated financial statements.

Inventory

Inventory is comprised of: (i) Used Core and component raw materials, (ii) work-in-process, and (iii) remanufactured and purchased finished goods.

Used Core, component raw materials, and purchased finished goods are stated at the lower of average cost or net realizable value.

Work-in-process is in various stages of production and is valued at the average cost of Used Cores and component raw materials issued to work orders still open, including allocations of labor and overhead costs. Historically, work-in-process inventory has not been material compared to the total inventory balance.

Remanufactured finished goods include: (i) the Used Core cost and (ii) the cost of component raw materials, and allocations of labor and variable and fixed overhead costs (the “Unit Cost”). The allocations of labor and variable and fixed overhead costs are based on the actual use of the production facilities over the prior 12 months which approximates normal capacity. This method prevents the distortion in allocated labor and overhead costs that would occur during short periods of abnormally low or high production. In addition, we exclude certain unallocated overhead such as severance costs, duplicative facility overhead costs, start-up costs, training, and spoilage from the calculation and expenses these unallocated overhead costs as period costs. Purchased finished goods also include an allocation of fixed overhead costs.

The estimate of net realizable value is subjective and based on our judgment and knowledge of current industry demand and management’s projections of industry demand. The estimates may, therefore, be revised if there are changes in the overall market for our products or market changes that in our judgment impact our ability to sell or liquidate potentially excess or obsolete inventory. Net realizable value is determined at least quarterly as follows:

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 $13,520,000 and $13,246,000 at March 31, 2022 and 2021, respectively.

We record vendor discounts as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.

Inventory Unreturned

Inventory unreturned represents our estimate, based on historical data and prospective information provided directly by the customer, of finished goods shipped to customers that we expect to be returned, under our general right of return policy, after the balance sheet date. Inventory unreturned includes only the Unit Cost of a finished goods. The return rate is calculated based on expected returns within the normal operating cycle, which is generally one year. As such, the related amounts are classified in current assets. Inventory unreturned is valued in the same manner as our finished goods inventory.

Contract Assets

Contract assets consists of: (i) the core portion of the finished goods shipped to customers, (ii) upfront payments to customers in connection with customer contracts, (iii) core premiums paid to customers, (iv) finished goods premiums paid to customers, and (v) long-term core inventory deposits.

Remanufactured Cores held at customers’ locations as a part of the finished goods sold to the customer are classified as long-term contract assets. These assets are valued at the lower of cost or net realizable value of Used Cores on hand (See Inventory above). For these Remanufactured Cores, we expect the finished good containing the Remanufactured Core to be returned under our general right of return policy or a similar Used Core to be returned to us by the customer, under our core exchange programs, in each case for credit. Remanufactured Cores and Used Cores returned by consumers to our customers but not yet returned to us are classified as “Cores expected to be returned by customers”, which are included in short-term contract assets until we physically receive them during our normal operating cycle, which is generally one year.

Upfront payments to customers represent the marketing allowances, such as sign-on bonuses, slotting fees, and promotional allowances provided to our customers. These allowances are recognized as an asset and amortized over the appropriate period of time as a reduction of revenue if we expect to generate future revenues associated with the upfront payment. If we do not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue. Upfront payments expected to be amortized during our normal operating cycle, which is generally one year, are classified as short-term contract assets.

Core premiums paid to customers represent the difference between the Remanufactured Core acquisition price paid to customers generally in connection with new business, and the related Used Core cost, wh