How does the company view the automotive aftermarket business in light of COVID-19?

The vast majority of consumers in our target market are unable to work from home and reluctant to utilize mass transportation or rideshare in the current environment. As a result, these workers are more dependent than ever on personal vehicles.

Equally important, internal combustion engine vehicles in operation in the United States are expected to increase by 36 million over the next 10 years from approximately 282 million vehicles in operation today, according to Lang Marketing Research. These vehicles will continue to age, fueling significant growth in the aftermarket parts replacement industry well beyond 2030.

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Please explain the non-cash, non-economic impact of currency fluctuations on your business, specifically as it relates to lease liabilities for the company’s operations in Mexico.

The company’s facilities in Mexico comprise approximately 1.0 million square feet of space. The leases for these buildings are denominated in the U.S. dollar which are recorded on the balance sheet of the Mexican foreign subsidiary in Mexican pesos. At each reporting date, the liability for these leases is remeasured using the exchange rate at that date. This results in either a remeasurement gain or a loss due to fluctuations in the foreign currency exchange rates. This remeasurement gain or loss has no economic impact on the company, as the U.S. dollar amounts due under the lease are not impacted by fluctuations in exchange rates and the required lease payments are made in U.S. dollars. When consolidating the subsidiaries’ financial statements with the financial statements of Motorcar Parts of America, Inc., this liability is then translated back into U.S. dollars and equals the stated U.S. dollar lease amount.

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Please provide a brief explanation of the following terms:

Update orders and stock adjustments

Extreme weather conditions impact the durability and life cycle of automotive parts, such as alternators and starters, wheel hubs and related component applications. This may have a seasonal industry impact on demand. During the summer months, for example, when temperatures typically increase over a sustained period of time, alternators are more likely to fail. Similarly, during winter months, starters are more likely to fail. In certain circumstances, a customer may order more units to have additional inventory in stock to meet anticipated sales to their end-user customers. In order to increase space in their warehouses and store locations for the additional inventory, customers may adjust their stock levels and return certain products back to the company.

Customers are allowed to return goods that their end-user customers have returned to them, whether or not the returned item is defective (warranty returns). In addition, under the terms of certain agreements and industry practice, customers from time to time are allowed stock adjustments when their inventory of certain product lines exceeds the anticipated sales to end-user customers (stock adjustment returns).

The allowance for stock adjustment returns is based on specific customer inventory levels, inventory movements, and information on the estimated timing of stock adjustment returns provided by customers. The return rate for stock adjustments is calculated based on expected returns within the normal operating cycle, which is generally one year.

As is standard in the industry, we only accept returns from on-going customers. If a customer ceases doing business with us, we have no further obligation to accept additional product returns from that customer.


When a customer sells a unit, they will generally reorder the unit from the supplier.


This term reflects the timing of shipment of products during the month and the company’s ability to recognize the revenue. Carryover is impacted by the freight payment arrangement with the customer. If the customer handles the freight costs, then the customer assumes ownership upon pickup of the product at the supplier’s dock, and revenues for the supplier are recognized at the time of pickup. If the supplier handles the freight cost, then revenues are recognized when the customer receives the product order at its warehouse location.

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How does scrap pricing impact the company’s business?

Recycling scrap from production contributes to a reduction in cost of goods sold, with higher scrap prices having a more immediate impact versus the benefits of lower commodity prices on core purchases, finished goods and raw material costs.

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With regard to the company’s D&V Electronics subsidiary, please explain its product applications for internal combustion engines and the emerging electric vehicle market. In addition, please provide an explanation of simulation and emulation in non-technical terms.

Motorcar Parts of America acquired D&V Electronics in 2017 initially for its highly regarded and innovative test equipment for alternator and starter applications. A primary market for this technology, sold as a bench-top tester, is leading automotive retail stores. The testers incorporate the latest protocols and support the retailers’ in-store focus on providing trust-worthy advice to consumers.

The company’s emulation and simulation technology is becoming increasingly important to the emergence of electrification and applications for the design and manufacture of hybrid and electric vehicle powertrain components and subassemblies -- such as motors, inverters, belt-driven starter generators, batteries, and aerospace and aviation power systems. For example, the company’s high-power emulator enables automotive manufacturers to “emulate” a motor without actually building a powertrain, and the customer can validate inverter designs and bring products to market faster. The primary function of an inverter is to convert the direct current electricity from the battery to create an alternating current output which powers the electric motor. D&V’s emulators can also be paired with high-speed, real-time simulators for industry leading power hardware-in-the-loop test solutions demanded by the electric vehicle industry. This allows customers to take their advanced computer models (simulation) of an electric vehicle and, using the emulator, test the operation of the actual part in a laboratory.

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* Investors should read about the company’s accounting policies in its Form 10-K and Forms 10-Q filed with the Securities and Exchange Commission.