Motorcar Parts of America (MPA) has reported record sales for its fiscal 2018 fourth quarter and year ended March 31, 2018.

Net sales for the fiscal 2018 fourth quarter increased 5.9 percent to a record high $121.1 million, up from $114.4 million for the same period a year earlier.

Adjusted net sales for the fiscal 2018 fourth quarter increased 7.8 percent to a record high $123.8 million from $114.9 million a year earlier.

Net income for the fiscal 2018 fourth quarter was $9.2 million, or 47 cents per diluted share, compared with $9.8 million, or 50 cents per diluted share, a year ago. The current quarter net income was impacted by higher customer allowances related to new business, an excess customer freight surcharge allowance, transition expenses in connection with expansion of operations and less proceeds from scrap sales due to lower prices compared with the prior year.

Adjusted net income for the fiscal 2018 fourth quarter was $10.9 million, or 56 cents per diluted share, compared with $11.3 million, or 58 cents per diluted share, a year earlier. Adjusted net income for the quarter includes the negative impact of a one-time excess customer freight surcharge allowance and less proceeds from scrap sales due to lower prices compared with the prior year.  These items were partially offset by a one-time gain related to customer allowances. The three items resulted in a combined net negative impact of 3 cents per diluted share.

Gross profit for the fiscal 2018 fourth quarter was $30.3 million compared with $31.6 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2018 fourth quarter was 25 percent compared with 27.6 percent a year earlier. The current quarter gross profit as a percentage of net sales was impacted by the unusual items noted above.

Adjusted gross profit for the fiscal 2018 fourth quarter was $36.6 million compared with $35.8 million a year ago. Adjusted gross profit as a percentage of adjusted net sales for the three months was 29.6 percent compared with 31.1 percent a year earlier. Adjusted gross profit as a percentage of adjusted net sales for the quarter was negatively impacted by a one-time excess customer freight surcharge allowance and less proceeds from scrap sales due to lower prices compared with the prior year. These items were partially offset by a one-time gain related to customer allowances. These three items resulted in a combined net negative impact of 0.8 percent to the adjusted gross profit margin.

Net sales for fiscal 2018 increased to a record high $428.1 million from $421.3 million a year earlier.  The company’s sales and profit performance for the prior-year period reflects the benefits of recognizing a $9.3 million revenue pick-up due to a change in estimate for stock adjustment returns.

Adjusted net sales for fiscal 2018 increased to a record high $436.5 million from $434 million last year. As noted above, the company’s sales and profit performance for the prior-year period reflects the benefits of recognizing a $9.3 million revenue pick-up due to a change in estimate for stock adjustment returns.

Net income for fiscal 2018 was $16.3 million, or 84 cents per diluted share, compared with $37.6 million, or $1.93 per diluted share, in fiscal 2017. Net income for fiscal 2018 includes a $4.9 million, or 25 cents per diluted share, non-cash book tax charge and a separate transition tax charge of approximately $530,000, or 3 cents per diluted share, both of which relate to the recently enacted Tax Reform Act, which is further discussed below.

Adjusted net income for fiscal 2018 was $35.6 million, or $1.82 per diluted share, compared with $45.5 million, or $2.35 per diluted share, in fiscal 2017.

Gross profit for fiscal 2018 was $105.9 million compared with $115 million a year earlier. Gross profit as a percentage of net sales for fiscal 2018 was 24.7 percent compared with 27.3 percent a year earlier – reflecting the impact of customer allowances and return accruals related to new business, higher returns as a percentage of sales and lower overhead absorption.

Adjusted gross profit for fiscal 2018 was $124.9 million compared with $134.5 million a year ago. Adjusted gross profit as a percentage of adjusted net sales for the 12 months was 28.6 percent compared with 31 percent a year earlier. Adjusted gross profit as a percentage of adjusted net sales for the 12-month period was impacted by higher returns as a percentage of adjusted sales and lower overhead absorption.

“We achieved record sales for the fiscal year, despite the impact of widely reported negative industry dynamics,” said Selwyn Joffe, chairman, president and CEO.

He noted that the fiscal year was disproportionately affected by inventory reduction initiatives in the customer base, which appears to be over. “While consumer demand was weaker than in prior years, the company believes aftermarket car parc fundamentals are trending positively, which should result in improving demand,” added Joffe.

SG&A expenses for fiscal 2018 increased as a result of the consolidation of the company’s newly acquired diagnostics company, and an increase in customer service and sales-related costs to support the company’s growing business.

Joffe emphasized the outlook for its newly acquired diagnostics company is positive, and that the company is ramping up for growth in both its standard and electric vehicle diagnostic product lines.

“Despite soft replenishment revenue, which had a negative impact on fiscal year 2018, we improved our overall market share during this period and are pleased with the significant new business commitments we have already received for fiscal year 2019.  This bodes well for the company’s future,” said Joffe.

“We have expanded our operating capacity with a new state-of-the-art distribution facility to support the company’s growth and enhance operational efficiencies. In addition, as announced last week, we completed a new credit facility with expanded liquidity and flexibility to support our growth.

We believe our company has reached its next inflection point, and we are excited by the opportunities and our leadership position within the $125 billion automotive aftermarket – including the unique opportunities for both our diagnostics and hard parts product lines,” Joffe emphasized.

Separately, the company repurchased $4.8 million, or approximately 208,000 of its shares, during the fiscal 2018 fourth quarter. The company has approximately $8.4 million remaining available to repurchase shares under its $20,000,000 authorized share repurchase program.

Fiscal 2019 Guidance

Motorcar Parts of America expects adjusted net sales for its fiscal year 2019 ending March 31 to be between $465 million and $474 million, representing between 6.5 and 8.5 percent growth year over year. The company has received at least $40 million in new business commitments in existing product lines on an annualized basis. This business will commence on a staggered basis, predominantly in the fiscal third and fourth quarters. Adjusted gross margins on an annualized basis are expected to be between 27 and 30 percent – primarily reflecting product mix and higher freight costs, although quarters may fluctuate above and below these numbers.

Impact of the Tax Reform Act

The company has evaluated its net income tax expense as a result of the December 2017 Tax Reform Act which reduces its federal corporate income tax rate to 21 percent from 35 percent, among other factors. The company estimates its effective tax rate commencing in fiscal 2019 will be reduced to approximately 25 percent.

The company’s deferred tax assets were reduced by a non-cash charge of approximately $4.9 million, as explained below. In addition, transition taxes of $530,000 were recorded as of March 31, 2018, as explained below.

Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in future years.  Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws are enacted.

Transition taxes are one-time expenses for deemed repatriation of accumulated foreign income.

The company’s fiscal 2018 results were negatively impacted by 28 cents per diluted share as a result of the Tax Reform Act. A pro-rated federal corporate income tax rate of 31.5 percent applies for the company’s full 2018 fiscal year. The full impact of the Tax Reform Act will be effective in the fiscal year commencing April 1, 2018.

These tax changes represent provisional amounts based on the company’s interpretation of the Tax Reform Act and may change as the company receives additional clarification and implementation guidance. The company will continue to analyze the effects of the Tax Reform Act on the company’s financial statements and operations. Any additional impacts from the enactment of the Tax Reform Act will be recorded as they are identified during the measurement period as provided for in accordance with Staff Accounting Bulletin No. 118.

Revenue Recognition

In May 2014, the Financial Accounting Standard Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, codified in Accounting Standards Codification (ASC) 606, “Revenue Recognition – Revenue from Contracts with Customers,” which amends the guidance in the former ASC 605, “Revenue Recognition.”

The company will adopt the new standard on April 1, and has elected to utilize the full retrospective transition method, which is not expected to have a material impact on the company’s consolidated statements of income. Additional information will be available in the company’s form 10-K filing later today.