Motorcar Parts & Accessories, Inc.

views updated

Motorcar Parts & Accessories, Inc.

2929 California Street
Torrance, California 90503
U.S.A.
Telephone: (310) 212-7920
Fax: (310) 212-7581

Public Company
Incorporated: 1968
Employees: 834
Sales: $160.7 million (2001)
Stock Exchanges: Over the Counter
Ticker Symbol: MPAA
NAIC: 335911 Storage Battery Manufacturing

Motorcar Parts & Accessories, Inc. (MPA), based in Torrance, California, is a remanufacturer of replacement alternators, starters, and spark plug wire sets for vehicles imported from England, Germany, Italy, Japan, Korea, and Sweden. To a lesser extent the company is involved in remanufacturing parts for domestic cars and lights trucks. With alternators and starters accounting for approximately 98 percent of annual sales, MPA is a leading remanufacturer of starters and alternators in both the United States and Canada. Geared toward the do-it-yourself market, almost all of the company’s products are sold under private labels, with only 1 percent marketed under the MPA trademark. Customers selling MPA parts under their private labels include such major retailers as AutoZone, CSK Automotive, The Pep Boys, O’ Reilly Automotive, and Canadian Tire. In addition, General Motors sells MPA remanufactured products under its AC Delco label. By far, Autozone is MPA’s largest customer, accounting for about half of all annual sales, followed by CSK Automotive in the 10 percent range. The company offers an extensive line of its primary products, more than 1,100 types of alternators and nearly 750 different starters. In addition to its California facility, MPA remanufactures auto parts in two company-owned plants located in Singapore and Malaysia.

Formative Years: 1940;s-80s

MPA’s founder, Mel Marks, became involved in the auto parts industry just after serving in the navy during World War II. Nineteen years old and looking for work, he answered an ad in the newspapers and was hired on as a shipping clerk with Beck/Arnley-Worldparts, a division of Echlin, Inc. The owner of the business took Marks under his wing and sent him to school to learn auto mechanics and gain a deeper understanding of the auto parts business, in particular parts for imports. Marks stayed with the company for 21 years, ultimately became a vice-president, traveled extensively to Europe, and established a number of contacts that would prove crucial when he decided to strike out on his own in order to take advantage of the increasing number of foreign cars in the United States. Britain pioneered the trend by shipping MG’s and Austins into the U.S. market, followed by a brief influx of French and a far more sizeable invasion of Volkswagens from Germany. In the late 1960s, Marks started his import parts business, originally called Motorcar Parts and Associates, out of his home in Jerrico, New York. Without partners or financial backing, he relied heavily on his relationship with his U.S. and European contacts in order to function as an import car parts broker. Although he could have made a comfortable living as a broker, Marks was intent on building a company. In 1968, he incorporated Motorcar Parts & Accessories, Inc. in the state of New York and initially started doing business in Plainview, New York. His timing proved to be prescient, as the import trend only heightened in the 1970s when the Japanese began to sell large quantities of Toyotas, Nissans, and Hondas in the United States. In 1979, Marks was joined by his son, Richard Marks, who gained experience in the business by owning and operating his own import automotive parts store.

For almost 20 years, MPA acted as a distributor of imported auto parts. It was not until 1986 that the company became involved in remanufacturing starters and alternators for foreign cars, aimed at the do-it-yourself customer. A spike in foreign auto sales during the 1980s made such a move an attractive idea. As those vehicles began to age they would need replacement alternators and starters, anywhere from four to eight years after purchase. Moreover, the sale of imports continued to pick up in pace. In 1985, according to the research firm R.L. Polk & Co., there were 14.5 million import car registrations in the United States, but by 1992 that number grew to more than 22.3 million, meaning that MPA could look forward to an increasing need for replacement parts as these vehicles entered their so-called “prime repair age.” Americans were also holding onto their cars longer, a fact that also boded well for MPA’s entry into the remanufactured replacement parts business.

Domestic Remanufacturing Beginning in 1987

Initially the company conducted its remanufacturing efforts overseas at two plants run by foreign affiliates located in Singapore and Malaysia, but only separated by an hour’s drive. Both businesses, MVR Products Pte Limited and Unijoh Sdn, Bhd, were 70 percent-owned by Mel and Richard Marks and 30 percent-owned by Vincent Quek, a Singapore resident. MPA provided the raw materials to the affiliates which remanufactured parts on an independent contract basis. Although the company’s Asian affiliates enjoyed much lower labor costs, MPA also began remanufacturing in the United States in 1987, establishing a plant in Torrance, California.

The remanufacturing process involved a number of steps, starting with the procurement of used alternators and starters, known in the business as “cores.” Most of the cores were obtained as trade-ins from direct customers in exchange for a credit against future purchases. General consumers were in turn encouraged by credits to trade in their used starters and alternators when they purchased new or remanufactured parts. As a supplemental source, MPA also purchased cores from brokers who specialized in the buying and selling of cores in the open market. Once received, the cores were assessed and stored, sorted by make and model for inventory purposes. Only when they were needed for the remanufacturing process would the cores be completely disassembled into component parts. Parts that could not be reused, either because they were damaged or were simply subjected to too much wear, were discarded and replaced with new components. Discarded parts were subsequently sold off as scrap. Reusable components were cleaned by specialized equipment and materials, in keeping with the specifications of that particular unit. This step was followed by thorough inspection and testing through MPA’s quality control program, which was QS 9000 approved (the internationally recognized automotive quality system certification designation). Component parts that make the grade were then ready to be placed on an automatic conveyor for use in the assembly of a final starter or alternator. Further quality control testing was conducted throughout the assembly process by separate quality control personnel. Finished products were also subjected to testing to make sure they performed up to expectations. Using an electroplating process, MPA applied a chrome-style finish to each item to present a like-new appearance. MPA’s re-manufactured products were then either warehoused or packaged for delivery. The complete process, from receipt of the core to final assembly and testing, lasted about four days. The company’s spark plug wire set business, launched in 1992, was a much less intricate process, involving components manufactured to MPA specifications by third parties. In short, terminals were attached to wire cut to required lengths. After testing, the final product was packaged under customers’ private labels.

With the advent of CAD/CAM technology, MPA was able to move beyond the simple remanufacturing of starters and alternators. Company personnel now sought to re-engineer the items. Original equipment products were thoroughly analyzed and MPA isolated ways to improve performance. Computer-aided design technology was then used to design better component parts. Moreover, MAP sought to better serve its customers through its private label programs by tailoring products to specific geographical conditions or other special needs. The company also published a comprehensive catalog of import and world car starters and alternators that featured a product identification system to allow counter personnel to quickly locate part numbers. The catalog also provided a glossary of technical terms and an explanation guide to clarify instructions and note additional parts that might be required for the installation process. Helpful photographs to assist the novice were included as well.

As the flood of foreign vehicles that Americans purchased in the 1980s began to enter prime repair age in the 1990s, MPA saw its revenues and profits steadily climb. For fiscal 1992, the company generated $13.7 million in sales and $500,000 in earnings. There was clearly considerable room for growth, since the foreign vehicle aftermarket for alternators alone was $231 million in 1992 and was expected to increase to more than $325 million within four years. Even during periods of weak economic conditions, such as the early 1990s, MPA was well suited for growth, with consumers opting to keep their vehicles longer and save money by purchasing remanufactured parts. As a result, the company also chose to concentrate on recruiting retail automotive chains as customers, believing that these chains represented the fastest growing segment of the automotive aftermarket industry. In anticipation of increased business, MPA moved much of its New York operations to California, where manufacturing and warehouse space were consolidated in a new 125,000-square-foot facility. Administration and sales continued to operate in offices located in Woodbury, New York.

Key Dates:

1968:: Mel Marks starts Motorcar Parts & Accessories, Inc. (MPA) to distribute imported auto parts.
1986:: MPA enters remanufacturing business.
1993:: The company ’s main offices moved from New York to California.
1994:: The company goes public.
1999:: Marks steps down as CEO.
2001:: Marks relinquishes chairmanship.

Going Public: 1994

In fiscal 1993, MPA reported $17.5 million in sales, a significant improvement over the previous year, as well as a $600,000 profit. To fuel the company’s continued growth, Marks took MPA public in 1994, netting nearly $5.7 million in an initial offering of stock. He also secured a $5 million credit line from Wells Fargo bank. For fiscal 1994, MPA saw its sales improve to $20.6 million and net earnings top $1 million for the first time. Prospects appeared even brighter in fiscal 1995: MPA’s plan to concentrate its sales efforts on major autopart retailers paid off when the AutoZone and Pep Boys chains signed on. To better serve its East Coast and southern markets, in May 1995 the company also established a 31,000-square-foot warehouse and distribution facility in Nashville, Tennessee. MPA then added the Canadian Tire chain as a customer in fiscal 1996, as well as Delphi, which chose MPA to supply remanufactured alternators and starters for imported vehicles under General Motors’ AC Delco private label. Sales to these new customers helped to continue MPA’s upward trend in sales and profits, resulting in revenues of $28.3 million in fiscal 1995 and $44.9 million in fiscal 1996. Net earnings grew to $1.6 million in fiscal 1995 and $3.6 million in fiscal 1996. The company’s success in appealing to major retailers was reflected in the fact that more than 70 percent of MPA sales in fiscal 1996 were to the automotive chains, with the rest mostly attributed to the large warehouse distributors such as Parts, Inc. and Hahn Automotive.

Although remanufactured alternators and starters for imported cars was now an $800 million-a-year business, the domestic segment totaled $2.4 billion and offered MPA attractive growth possibilities. Leveraging its reputation as a market leader for imports, the company successfully launched a domestic program for remanufactured alternators and starters in fiscal 1997. To fund necessary factory upgrades, MPA made a secondary offering of stock in 1997. It also brought the Asian affiliates into the fold in a stock-for-stock merger that made MVR and Unijoh wholly owned subsidiaries. In 1998, the company opened a second Torrance manufacturing plant, as well as signed a lease on a larger facility in Nashville, which not only provided distribution and warehousing functions but also the manufacture of spark plug wire sets.

MPA continued to post impressive sales and earnings. In fiscal 1997, the company generated revenues of $86.9 million and a reported net profit of $5.5 million, followed by revenues of $113 million in 1998 and a net profit of $6.6 million. That trend would continue through much of fiscal 1999, but by the time the company prepared to report year-end results, questions by senior management and the board were raised about accounting procedures. The audit committee initiated an investigation, bringing in outside auditors, and by early August the company announced that because it discovered “certain accounting irregularities” it would have to restate its financial results for fiscal 1997, fiscal 1998, and the first three quarters of fiscal 1999. Net income was overstated by $2.68 million in fiscal 1997, nearly $600,000 in fiscal 1998, and $2.35 million for the first nine months of 1998. In the same company press release, it was also announced that Mel Marks would step down as MPA’s chief executive officer, although he would remain as chairman. Investor reaction to this news was swift. Because MPA was unable to file an annual 10K financial report, the NASDAQ halted trading of the company’s stock. Moreover, MPA was now in violation of debt covenants in its revolving credit facility, requiring it to enter into some negotiations with the lender.

Soon MPA also faced a class-action lawsuit, which alleged that for “11 quarters in a row the company inflated its earnings by eliminating from its publicly issued financial statements the expenses for the used parts that were received during each quarter.” Seeking to recover damages, the suit contended that the company took advantage of its rising stock price to make a secondary offering of stock in 1997, with Mel Marks and Richard Marks selling 100,000 and 150,000 shares, respectively, at a price of $16.63 per share. Following the announcement of a restatement of earnings and subsequent delisting by the NASDAQ, MPA shares were traded on the pink sheets at $1.50 per share.

In addition, MPA became the subject of an SEC investigation in early 2000. While that lingered, the class-action suit was settled in September 2001, with the plaintiffs receiving $7.5 million. Of that amount, $6 million was to be paid by the company’s directors and officers and its insurance carrier. The balance would be raised by the company by selling 1.5 million shares of common stock to Mel Marks at $1 per share. Also in 2001, the founder of the company relinquished his position as chairman, although he stayed on as a director. He was replaced by Selwyn Joffe, who had been a director of the company since 1994 and had considerable executive experience at Wolfgang Puck Food Company as well as NetLock Technologies and Palace Entertainment. He and CEO Anthony Souza took over a company that suffered losses in both 2000 and 2001, yet MPA remained a company involved in a viable niche of the automotive aftermarket parts industry and continued to hold promise for a return to future profitability and growth.