Motorcar Parts of America Q3 Earnings Call Highlights

Key Points

• Q3 missed expectations after a large customer's sharp purchasing slowdown and store closures (about a 15% footprint reduction), with management saying the disruption could reduce fiscal 2026 sales by up to ~$50 million and revising guidance to $750–760M in sales and $72–79M in operating income.
• Gross margin was pressured, falling to 19.6% from 24.1% a year earlier, but showed sequential improvement (Q1 18.0% → Q2 19.3% → Q3 19.6%) and management expects further gains from efficiency initiatives, tariff mitigation, facility relocations (including Mexico) and greater brake-capacity utilization.
• Liquidity and leverage remain healthy: the company generated $23.7M cash in the first nine months, reduced net bank debt to $70.5M, holds ~$146M of cash/availability, repurchased 669,472 shares for $8.4M, and reports a net bank debt-to-EBITDA of about 0.84.

Motorcar Parts of America NASDAQ: MPAA executives told investors their fiscal 2026 third-quarter performance fell short of expectations due largely to a sharp, temporary sales disruption at one of the company’s largest customers, but said demand is beginning to recover and broader strategic momentum remains positive.

Quarter impacted by large customer purchasing slowdown

Chairman, President and CEO Selwyn Joffe described the period as “a day of contradictions,” noting that quarterly results were “less than expected,” even as the company’s outlook is improving amid changing competitive dynamics and an aging vehicle fleet.

Joffe said the company had been optimistic in early November after a large customer reduced purchases, expecting orders would resume more quickly. “In fact, it did not,” he said, which contributed to the company missing its third-quarter targets. Management said ordering activity from that customer is now showing signs of recovery, but not enough to offset the third-quarter shortfall or produce a full rebound in the fourth quarter.

Guidance reduced; customer store closures cited

CFO David Lee said the company now expects fiscal 2026 sales to be affected by up to approximately $50 million from the customer due to store closures and distribution center consolidation. As a result, Motorcar Parts of America revised fiscal 2026 guidance to:

• Sales: $750 million to $760 million
• Operating income: $72 million to $79 million
• Depreciation and amortization: approximately $10 million

Lee noted the operating income outlook does not include certain non-cash and one-time expenses.

In the Q&A, management characterized the disruption as largely a “one-time” reset, while acknowledging the customer’s store closures will reduce its footprint. Joffe said the store count reduction is about 15%, and the company’s outlook assumes a similar 15% reduction in its expectations related to that customer. He added that management remains optimistic the customer’s changes will be positive over time and said the company expects opportunities to capture share as demand shifts to other locations and retailers.

Margins pressured, but sequential improvement and initiatives highlighted

Lee said the sales decline from the large customer negatively affected gross margin and overall results in the quarter. Gross margin was 19.6%, compared with 24.1% a year earlier. He also emphasized sequential improvement in gross margin during fiscal 2026, citing 18.0% in the first quarter, 19.3% in the second quarter, and 19.6% in the third quarter.

Lee attributed the third-quarter margin pressure to several factors, including reduced capacity absorption and product mix impacts associated with lower volume. He also said returns were at historical levels, but became higher as a percentage of sales due to the temporary decline in sales.

Management expects gross margin to continue improving sequentially in the fiscal fourth quarter, supported by recovering ordering activity from the affected customer. Lee said the company is focused on gross margin expansion through a range of efforts, including operating efficiency initiatives, tariff mitigation, relocation of certain operations to lower-cost facilities (including Mexico), and cost reductions. He also pointed to “greater utilization of brake-related capacity,” referencing the company’s expectation that gains in braking will support overall margin improvement through operating efficiencies and facility utilization.

Asked about fourth-quarter operating income implied by the updated guidance, Lee said the company expects sequentially higher gross margins and “reductions in total operating expenses” to support the guidance range. He also noted that a strengthening Mexican peso could affect a non-cash foreign exchange impact related to lease liabilities, which the company breaks out separately.

Cash flow, liquidity, leverage, and share repurchases

Lee said the company generated $23.7 million of cash over the first nine months of fiscal 2026 and reduced net bank debt by $10.9 million, to $70.5 million from $81.4 million, even after $8.4 million of share repurchases.

For the trailing 12 months ended December 31, 2025, Lee reported cash from operating activities of approximately $32.8 million. He added that, over the past two years through December 31, 2025, the company generated approximately $60 million in operating cash flow and reduced net bank debt by approximately $32.3 million.

Motorcar Parts of America’s liquidity remained “strong,” according to management, with total cash and availability of approximately $146 million as of December 31, 2025. Lee said the company remains focused on increasing operating profit and generating positive cash flow, with additional opportunities to “neutralize working capital” through demand planning, inventory management, and extending vendor payment terms, including growth in its supply chain finance program.

On leverage, Lee cited trailing 12-month EBITDA of $68.1 million ended December 31, 2025, and EBITDA of $84 million before the impact of non-cash and one-time cash expenses. Using the $84 million figure, he said net bank debt of $70.5 million implies a net bank debt-to-EBITDA ratio of 0.84.

Lee also detailed share repurchases during the nine-month period: the company bought back 669,472 shares for $8.4 million, at an average price of $12.47.

Strategic focus on aftermarket; EV Emulator alternatives under review

Joffe reiterated the company’s focus on being a leading supplier of “nondiscretionary automotive aftermarket parts,” and he pointed to industry tailwinds such as an aging vehicle fleet. He cited industry data indicating average age of U.S. light vehicles increased to 12.8 years from 12.5 years in 2024, and vehicles in operation increased to 295.9 million from 291.1 million a year earlier.

He also referenced growth initiatives across the company’s brands and markets, including the Quality-Built offering in the professional installer channel, momentum in the Heavy Duty business, and demand growth in Mexico. As a reference point, he said Mexico has approximately 36 million vehicles, up 2.8% year over year, with an average age of 16.2 years.

Management also discussed the company’s diagnostics business, highlighting its JBT-1 bench top tester and recurring revenue from software and database updates.

Separately, the company said it is exploring strategic alternatives for its EV Emulator business, which executives described as a non-core asset. Joffe said the technology is “state-of-the-art,” but the distribution channel is primarily on the original equipment side, which does not fit the company’s aftermarket focus. Lee added that the company has invested in research and development for a next-generation emulator during the nine months ended December 31, 2025, which it believes could be significant for the EV market.

Looking ahead, Lee said the company plans to provide fiscal 2027 guidance during its fiscal year-end call in June. Joffe concluded the company remains “very bullish” on its outlook despite what he called a temporary headwind, pointing to efficiency initiatives, tariff mitigation efforts, working capital focus, and a global operational platform that management said supports future growth and shareholder value initiatives.

About Motorcar Parts of America NASDAQ: MPAA

Motorcar Parts of America, Inc is a leading North American designer, manufacturer and distributor of aftermarket automotive replacement parts. The company's product portfolio spans collision and mechanical components, providing solutions for steering and suspension, brake systems, engine cooling, electrical and drivelines. Through a combination of proprietary brands and exclusive licensing agreements, Motorcar Parts of America offers an extensive selection of both new and remanufactured parts to meet the needs of automotive service professionals and retailers.

In addition to its core collision and under-hood product lines, the company markets specialty items such as performance accessories, tools and equipment.

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