Executive Summary / Key Takeaways

• Motorcar Parts of America is leveraging its global manufacturing footprint and operational efficiencies to capitalize on favorable automotive aftermarket trends, particularly the aging vehicle fleet in North America.
• Record net sales of $757.4 million and gross profit of $153.8 million in fiscal 2025 demonstrate top-line momentum and initial benefits from cost-saving initiatives, despite facing headwinds from tariffs and foreign exchange volatility.
• Strong cash flow generation from operations ($45.5 million in FY2025) and significant net bank debt reduction ($32.7 million in FY2025) highlight improving financial health and provide flexibility for capital allocation.
• Strategic growth drivers include accelerating market share gains in brake-related products, expanding presence in the Mexican market, and increasing adoption of diagnostic equipment like the JBT-1 tester, alongside ongoing new part number introductions.
• Management forecasts continued organic growth in fiscal 2026, with net sales expected between $780 million and $800 million and operating income between $86 million and $91 million (before certain non-cash/one-time items and tariffs), signaling confidence in the execution of efficiency and growth strategies.

Setting the Scene: A Remanufacturing Powerhouse Adapting to a Changing Market

Motorcar Parts of America, Inc. (MPAA) stands as a significant player in the roughly $130 billion North American automotive aftermarket for replacement hard parts. Founded in 1968, the company built its foundation on the environmentally sustainable practice of remanufacturing non-discretionary automotive parts – components essential for a vehicle's operation that owners cannot easily defer replacing when they fail. This core business, centered around obtaining, disassembling, reconditioning, and reassembling Used Cores, inherently promotes resource efficiency and reduces waste compared to manufacturing new parts.

Over its history, MPAA has strategically expanded its product portfolio and global operational footprint. Key acquisitions, such as DV Electronics and Mechanical Power Conversion, brought test solutions and diagnostic equipment into the fold, while the Dixie Electric acquisition added heavy-duty applications, broadening the company's reach beyond light-duty vehicles into trucks, industrial, marine, and agricultural sectors. A significant operational shift has been the multiyear relocation process, culminating in the cessation of manufacturing at the Torrance, California facility in fiscal 2025, consolidating production into lower-cost global facilities, primarily in Mexico and Canada, with additional manufacturing in Malaysia and India. This strategic move is designed to enhance operating efficiencies and reduce costs, with the Torrance relocation alone expected to generate approximately $7.1 million in annualized savings, 90% of which will impact the cost of goods sold.

MPAA's strategy is centered on leveraging this scalable global infrastructure and its deep customer relationships to drive growth in the North American aftermarket and expand its leadership in the test solutions market. This involves growing existing product lines, introducing new part numbers to expand coverage, creating value for customers through various support services, and investing in technological innovation.

A key technological differentiator lies in MPAA's advanced testing methods and in-house technologies. This is particularly evident in their Test Solutions segment, which provides equipment for both combustion engine and emerging electric vehicle applications. Their advanced power emulators, protected by U.S. patents, offer a strong competitive barrier, enabling lower costs and greater efficiency in testing. While specific quantifiable performance metrics for these emulators compared to alternatives are not detailed, the company highlights their role in delivering high-quality products and supporting services. In the remanufacturing process itself, MPAA employs rigorous IATF 16949 and ISO certified quality programs and utilizes lean manufacturing principles to improve efficiency and reduce production time. The company also invests in R&D to continuously upgrade its diagnostic equipment to accommodate the latest vehicle technologies and is exploring opportunities in the rapidly emerging global market for EV and aerospace electrification testing.

The competitive landscape is intense, featuring large and medium-sized players like Dorman Products (DORM), Standard Motor Products (SMP), and BorgWarner (BWA), alongside numerous smaller and overseas competitors, including OEMs selling through dealerships. While competitors like DORM boast a significantly broader product catalog and SMP has strong distribution networks, MPAA positions itself by emphasizing quality, reliability, customer service, and its unique operational model. The remanufacturing process offers an inherent cost advantage and environmental benefit, which MPAA leverages. Its patented power emulators provide a technological edge in the diagnostic space. Furthermore, MPAA's strategic focus on specific high-growth areas like brake-related products and the emerging Mexican market allows it to target share gains effectively. While some competitors may have greater financial resources or faster innovation cycles in certain areas (like BWA in advanced EV components), MPAA's cost efficiency, specialized technology in testing, and focused growth initiatives represent its core competitive moats. The company believes its efforts to diversify its supply chain away from heavy reliance on China also provide a strategic competitive advantage, particularly in the face of evolving tariff policies.

Business Segments and Operational Momentum

MPAA operates through three segments: Hard Parts, Test Solutions and Diagnostic Equipment, and Heavy Duty. The Hard Parts segment, encompassing rotating electrical, wheel hubs, brake-related products, and turbochargers, is the company's only reportable segment, reflecting its significant contribution to overall revenue and profitability. In fiscal 2025, Hard Parts generated $707.21 million in external net sales, representing the vast majority of the company's total sales.

Within Hard Parts, rotating electrical products remain the flagship category, contributing 67% of total net sales in fiscal 2025. Brake-related products have rapidly grown to become the second-largest category, accounting for 21% of sales in fiscal 2025, up from 18% in fiscal 2023. This growth is a key focus area, driven by the company's capacity, quality, and customer service. Management is particularly encouraged by the market share gains of its Quality-Built brand in the professional installer market for brake calipers, pads, and rotors, noting "extraordinarily good" acceptance and renewal rates among installers. The increasing volume in brake products is expected to drive production efficiencies and contribute to overall gross margin accretion.

The Test Solutions and Heavy Duty segments, while not material enough to be reported separately, are strategic growth areas. Combined, these "Other" segments contributed $50.14 million in external net sales in fiscal 2025. The diagnostic business is gaining traction, with the JBT-1 Bench Top tester being embraced by major retail chains. The company aims to achieve $100 million in diagnostic equipment sales within the next three years, anticipating additional high-margin service revenue as the installed base matures. The Heavy Duty segment continues to see momentum across various platforms like agriculture and Class 8 trucks, leveraging the Dixie brand and the company's reputation.

Operational efficiency is a continuous focus. The strategic relocation of operations, including the Torrance facility, is a prime example of leveraging the global footprint to reduce costs. The company's manufacturing and distribution network, particularly the large distribution center in Tijuana, Mexico, and new facilities like the one in Malaysia, are critical for supporting growth and improving supply chain reliability and fill rates. The remanufacturing process itself, with its emphasis on recycling and lean manufacturing, is a core operational strength contributing to cost efficiency.

Financial Performance and Health

Fiscal year 2025 marked a period of record performance for MPAA, demonstrating resilience and growth momentum. Net sales reached a record $757.4 million, a 5.5% increase over fiscal 2024, driven by strong demand across rotating electrical and brake-related product lines. Gross profit also hit a record $153.8 million, a significant 16.1% increase year-over-year. This led to a notable improvement in gross margin, which expanded by 1.8 percentage points to 20.3% in fiscal 2025. This margin expansion reflects the benefits of the company's strategy to enhance operating efficiencies through its global footprint and cost-saving initiatives. However, gross margin was partially offset by certain tariff costs, one-time expenses for onboarding new business, and transition expenses related to operational realignments. Non-cash items like the amortization of core/finished goods premiums and core revaluation also impacted reported gross profit.

Operating expenses increased in fiscal 2025, primarily due to unfavorable non-cash foreign exchange impacts related to Mexican lease liabilities and forward contracts ($15.89 million loss vs $3.81 million gain in FY2024), and increased severance costs ($2.54 million) from headcount reductions associated with efficiency strategies. Despite the higher gross profit, the significant non-cash foreign exchange loss resulted in a decrease in reported operating income to $39.92 million in fiscal 2025 from $46.12 million in fiscal 2024.

The company reported a net loss of $19.47 million ($0.99 per share) in fiscal 2025, compared to a net loss of $49.24 million ($2.51 per share) in fiscal 2024. The fiscal 2025 net loss was significantly impacted by non-cash items, particularly the foreign exchange loss and changes in the fair value of the compound net derivative liability related to the convertible notes, as well as one-time cash expenses. Management often highlights performance metrics before the impact of these non-cash and one-time items to provide a clearer view of underlying operational performance.

Interest expense decreased by 7.5% to $55.55 million in fiscal 2025, benefiting from lower average outstanding balances under the credit facility ($90.79 million at March 31, 2025, vs $128.00 million at March 31, 2024) and slightly lower interest rates on both the credit facility and accounts receivable discount programs. However, interest costs remain a significant expense, particularly those associated with the accounts receivable discount programs ($38.02 million in FY2025).

Financially, MPAA demonstrated solid cash flow generation from operating activities, providing $45.5 million in fiscal 2025, up from $39.17 million in fiscal 2024. This positive cash flow, driven by improved operating results and working capital management, enabled a substantial reduction in net bank debt by $32.7 million, bringing the balance down to $81.4 million at March 31, 2025. The company maintains strong liquidity, with $135.15 million available under its revolving credit facility at year-end. Initiatives to neutralize working capital, including enhanced inventory management and the successful ramp-up of the supplier finance program (with outstanding obligations increasing to $33.66 million), are expected to further support cash flow generation.

Outlook and Growth Trajectory

Management remains optimistic about the future, anticipating continued organic growth and profitability improvements. For fiscal year ending March 31, 2026, the company provides concrete guidance:

• Net Sales: Expected to be between $780 million and $800 million, representing year-over-year growth of 3% to 5.6%.
• Operating Income: Expected to be between $86 million and $91 million, representing year-over-year growth of 4.3% to 10.4% (This guidance excludes certain non-cash items, one-time expenses, and the impact of tariffs, which are subject to uncertainty).
• Depreciation and Amortization: Estimated at approximately $11 million.

This outlook is underpinned by several key assumptions and growth drivers. The aging U.S. vehicle fleet (average age 12.8 years) and increasing vehicle registrations provide a fundamental tailwind for aftermarket parts demand. The non-discretionary nature of MPAA's core products ensures consistent replacement needs.

Specific growth initiatives are expected to contribute significantly. The accelerating momentum in brake-related products, driven by market share gains and new business wins, is a major factor. The expanding presence and increasing demand in the Mexican market are seen as a substantial opportunity, potentially growing to a "north of a $100 million opportunity" for the company. The diagnostic business, with the ongoing rollout of the JBT-1 tester and expected service revenue, is another area of anticipated growth. Furthermore, the company continues its aggressive new part number introduction program, targeting at least 800 new SKUs per year, which expands product coverage and adds organic growth. Meaningful new business commitments secured across all product lines are also expected to contribute to top-line expansion.

Profitability is expected to benefit from increasing sales volumes, leading to better overhead absorption, and the full realization of cost savings from operational efficiency initiatives, such as the Torrance relocation. While tariffs remain a variable factor, management is confident in its ability to mitigate their impact through price adjustments and supply chain strategies, leveraging its diversified manufacturing footprint. Expected moderation or reduction in interest rates could also provide a tailwind by lowering financing costs.

The company's focus on neutralizing working capital through improved inventory management and extended vendor payment terms is expected to continue generating positive cash flow, which management intends to use for further debt reduction and opportunistic share repurchases, aiming to enhance shareholder value.

Risks and Challenges

Despite the positive outlook and strategic momentum, MPAA faces several pertinent risks and challenges that could impact its performance and the investment thesis.

A significant risk is customer concentration, with the top three customers accounting for 86% of net sales in fiscal 2025 and the largest customer representing 39%. Any meaningful reduction in sales to, or deterioration in the financial condition of, these key customers could have a material adverse impact. The highly competitive nature of the industry puts ongoing pressure on pricing and terms, potentially impacting margins. Competitors with greater resources or different operational structures could pose challenges.

Economic conditions, including inflation, interest rates, and potential recessionary pressures, can affect consumer spending on vehicle maintenance and impact customer payment ability. High interest rates, in particular, increase the cost of borrowing and utilizing accounts receivable discount programs. Foreign currency fluctuations, especially between the U.S. dollar and the Mexican peso, can result in significant non-cash gains or losses that affect reported earnings.

Supply chain disruptions, including work stoppages, production shutdowns, and difficulties in obtaining Used Cores or component parts from limited suppliers, remain a risk. The imposition or changes in tariffs on imported goods, particularly from China, Mexico, and Canada, can increase costs, and while the company is working to mitigate these, the timing and effectiveness of these efforts are subject to uncertainty.

The evolution of the automotive industry, particularly the pace of adoption of electric vehicles and advanced technologies, could reduce demand for traditional combustion engine parts, although management currently sees momentum shifting back towards hybrid and ICE vehicles. The company's EV testing business is noted as being slower than anticipated.

Operational risks, such as natural disasters impacting facilities in key regions (California, Mexico, Asia) or failures in technology and telecommunications systems, could disrupt operations. Cybersecurity threats are also a growing concern, potentially leading to data breaches, operational disruptions, and reputational damage.

Finally, the company's reliance on complex accounting related to core exchange programs and various customer allowances introduces complexity and potential for estimates to differ from actual outcomes.

Conclusion

Motorcar Parts of America is strategically positioned to capitalize on the enduring demand within the automotive aftermarket, driven by the fundamental tailwind of an aging vehicle population. The company's core strength lies in its efficient remanufacturing process, complemented by a strategically expanded global manufacturing and distribution footprint designed to enhance operational efficiency and reduce costs. While facing external pressures from economic volatility, tariffs, and foreign exchange fluctuations, MPAA has demonstrated the ability to grow its top line and improve underlying profitability metrics, as evidenced by record sales and gross profit in fiscal 2025.

The investment thesis is further supported by targeted growth initiatives in key areas such as the rapidly expanding brake-related product category, the promising Mexican market, and the growing diagnostic equipment business. The company's commitment to technological innovation, particularly in testing solutions and process efficiency, provides a competitive edge. With a focus on disciplined working capital management, MPAA is generating solid cash flow, enabling debt reduction and providing flexibility for future value creation opportunities. While risks like customer concentration and supply chain volatility persist, management's proactive strategies to mitigate these challenges, coupled with a favorable industry backdrop and clear growth drivers, suggest a positive trajectory for the company's financial performance and market position in the coming years.