Motorcar Parts of America Inc (MPAA) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Motorcar Parts of America's fiscal 2011 year-end results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Gary Maier. Please go ahead.

Thank you, Allie, and thank you, everyone, for joining us today for Motorcar Parts of America's fiscal 2011 fourth quarter conference call. Before we begin and I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer, and David Lee, the Company's Chief Financial Officer, I would like to remind everyone of the Safe Harbor Statement included in today's press release. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements including statements made during the course of today's conference call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in the forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and are subject to change based upon various factors. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the ongoing risks and uncertainties of the Company's business, I refer you to the Company's various filings with the Securities and Exchange Commission. I would now like to begin the call and turn the call over to Selwyn Joffe.

Okay thank you, Gary. Thank you everybody for joining us. I appreciate you joining us for our fiscal 2011 year-end conference call. As highlighted in today's earning release, we continued to post solid growth and profitability for the year with net income climbing 26.7% on a 9.6% increase in sales. As David will explain in more detail in a few minutes, net income for the quarter and the full year was impacted by the expenses of approximately $1 million directly related to the recent Fenco acquisition and a non-cash expense relating to a reduction in our effective tax rate which makes our deferred tax asset less valuable. Excluding these items, net income per diluted share for the fourth quarter would have been $0.28 per share.

Our base business which is starters and alternators was strong and we continue to benefit from strong market dynamics such as an aging vehicle population and the increased miles driven. Used car prices have been increasing which would seem to validate that people are holding onto their cars longer. Just as severe cold weather this past winter throughout the country contributed to parts failures, and hence increased demand for non-discretionary components, such as alternators and starters, now we have had some severe hot weather on the East Coast which should be a nice catalysts for sales as we begin the new fiscal year. Most importantly, we believe that with continued weakness in the economy, people will continue to look for a low cost way to repair their vehicles. As a result, we should continue to see the tailwinds in our market. While there may be quarterly variances, we remain excited about our overall growth opportunities for fiscal 2012 and beyond. All of these factors bode well for rotating electrical parts and other non-discretionary parts like the product lines acquired in the Fenco transaction.

What is most relevant for today in the cycle of our Company's progress is that we now have come through the complete cycle of moving our production offshore, and it has worked. We've been able to support our customers with excellent service levels and top quality product, while reducing our operating expenses. We believe we have gained great credibility in the marketplace and that our customers will try and support us as we move through the next wave of growth and relocate the Fenco operations.

Our Fenco Automotive acquisition, which we completed subsequent to fiscal year end, greatly expands our sales and earnings opportunities through product line expansion. And this allows Motorcar Parts to participate in product categories with high replacement rates such as brakes and steering-related components to mention a few.

Exposure to the elements, road conditions and everyday wear and tear are obvious factors that will lead to replacement, not to mention that under-the-car products are simply more exposed than under-the-hood components. While we have our work cut out for us in terms of integrating the acquisition, realigning certain logistical operations and enhancing the capital structure to support customer demand for Fenco's products, we are confident in our capabilities to get the job done in a timely manner. We have a successful template to follow and expect the rewards to add incremental shareholder value.

Our financial strength, manufacturing excellence and value added customer services remain the corner stone of our success. And we expect to leverage these qualities and our organization systems to produce solid growth in all our product segments. In short, our base business is strong and we will continue to capitalize on our competitive strength for both the benefit of rotating electrical products and Fenco's under-the-car products. As I've highlighted on other calls, there are numerous qualities that distinguish Motorcar Parts of America, qualities that will serve us well moving forward as we integrate and grow our Fenco operation.

Our low cost production model and reputation for quality, our ability to produce and ship product efficiently with fill rates unsurpassed in the industry, available capacity to increase production with very little incremental cost in our various product line, our ability to leverage our overall production and overhead absorption, and the international footprint that allows us to take advantage of many international opportunities, the ability to attract new business and maintain long-term customer relationships, the support and encouragement of our leading customers, particularly with regard to the acquisition of Fenco, a strong financial position to support our growth expectations, and as I mentioned during last quarter's call, both Motorcar Parts and Fenco serve many of the same customers and there are numerous synergies which we can capitalize on which will be beneficial to both us as well as our customers. Areas such as offshore production and management systems, product delivery, streamlined ordering, product education programs, sales training, and the like are important value-added considerations that we can add. We are committed to rational pricing and continuously evaluating the Company's cost structure and our entire operating metric. We continue to focus on annual and long-term growth and profitability and we expect that discipline will greatly enhance the Fenco business moving forward. David will now discuss our financials and I will then make some additional comments and then we will open the line for Q&A.

Thank you, Selwyn. Net sales for the fiscal 2011 fourth quarter ended March 31, 2011 were $42.8 million compared with $38.6 million for the same period last year, an increase of $4.2 million or 10.8%. Gross profit for the fiscal 2011 fourth quarter was $14 million, or 32.7% gross margin, compared with $12.5 million, or 32.3% gross margin for the same period a year ago. General and administrative expenses decreased $560,000, or 10%, to $5.1 million for the fourth quarter from $5.6 million a year ago. This decrease was primarily due to a decrease in bad debt expenses. Sales and marketing expenses increased $134,000 to $1.8 million for the fourth quarter, compared with $1.7 million for the same quarter of fiscal 2010. This increase was due primarily to increased travel-related and advertising expenses. Research and development expenses remained flat.

Acquisition costs were $1 million, or $0.05 per diluted share for the fourth quarter, consisting of legal fees, due diligence costs, banking and other professional fees in connection with the Fenco acquisition. Included in this number is $152,000 of travel and related acquisition costs in the fourth quarter recorded in general and administrative expenses. Operating income for the fiscal 2011 fourth quarter increased 43.8% to $6.9 million before $1 million of acquisition costs, compared with $4.8 million a year ago. EBITDA was approximately $7.6 million, adjusted for various non-cash items. These items include standard inventory revaluation write-downs of $235,000, due to lower manufacturing costs. Note that these reduced costs bode well for future profitability. FAS 123(R) stock compensation expense of $13,000, and a gain of $139,000 recorded due to the changes in the fair value of forward foreign currency exchange contracts as well as Fenco acquisition costs of $1 million and Fenco consignment inventory profit of $378,000.

In addition, depreciation and amortization for the quarter was approximately $986,000. Net of interest income, interest expense was $1.055 million for the fourth quarter compared with $964,000 for the prior quarter. In fiscal 2011, we recorded income tax expense of $7.8 million, compared with income tax expense of $5.3 million in fiscal 2010. An effective rate of 39% and 35.4% for fiscal 2010 -- fiscal 2011 and fiscal 2010 respectively. The primary reason for the increase in the effective tax rate was because the benefit of lower statutory tax rates in foreign taxing jurisdictions which was not as significant in fiscal 2011 when compared to fiscal 2010 the prior year. Offsetting the increase in the effective rate was an increase in the income apportioned to states with lower tax rates, which decreased our domestic effective rate.

As a result of the decrease in the domestic effective tax rate, we revalued our deferred tax assets to reflect the lower value of deductions taken for book purposes but not yet allowed for tax purposes. The change in deferred tax rate resulted in a reduction of the net deferred tax assets of $558,000, or $0.04 per diluted share. This amount was charged to income tax expense in fiscal 2011. As a result of the change in the deferred tax rate for fiscal 2011, the fourth quarter tax rate includes an adjustment for the full fiscal 2011, resulting in a 49.2% effective tax rate for the fourth quarter.

The Company reported net income for its fiscal 2011 fourth quarter of $2.4 million, or $0.19 per diluted share, compared with $2.9 million, or $0.24 per diluted share for the comparable period a year earlier. Excluding acquisition costs of $1 million and the higher income tax expenses previously -- explained previously, net income for the fiscal 2011 fourth quarter is $0.28 per diluted share.

Moving on for the full fiscal year comparisons, net sales for the fiscal 2011 ended March 31, 2011, were $161.3 million compared with $147.2 million for the prior year, an increase of $14.1 million or 9.6%. Gross profit for fiscal 2011 was $51.4 million, or 31.9% gross margin, compared with $41.3 million, or 28.1% gross margin for the prior year. General and administrative expenses increased $1.6 million, or 10.7%, to $17 million for fiscal 2011 from $15.4 million a year ago. The increase in general and administrative expenses was primarily due to a loss of $162,000 recorded due to the changes in the fair value of foreign exchange contracts compared to a gain of $1.56 million during fiscal 2010. Excluding the effect of foreign currency hedging, G&A expenses were flat.

Sales and marketing expenses increased $518,000 to $6.5 million for fiscal 2011, compared with $6 million for the prior year. The increase was due primarily to increased travel expenses, the full year impact of the compensation for employees we added as a result of our August 2009 acquisition, increased trade show expenses and increased advertising expenses during fiscal 2011. Research and development expenses increased $128,000 to $1.5 million for fiscal 2011 from $1.4 million for fiscal 2010. Acquisition costs were $1 million, or $0.05 per diluted share for fiscal 2011, consisting of legal fees, due diligence costs, banking, travel and other professional fees in connection with the Fenco acquisition, compared to $191,000 acquisition costs for fiscal 2010 incurred in connection with the Reliance acquisition in August 2009.

Operating income for fiscal 2011 was $26.4 million before $1 million of acquisition costs, compared with $18.5 million before acquisition costs of $191,000 a year ago, or a 42.8% increase. EBITDA was approximately $31 million, adjusted for various non-cash items. These items include standard inventory revaluation write-downs of $1.1 million due to lower remanufacturing costs, FASB 123(R) stock compensation expense of $58,000, and a loss of $163,000 recorded due to the change in the fair value of foreign-- forward foreign currency exchange contracts as well as Fenco acquisition costs of $1 million and Fenco consignment inventory profit of $378,000. In addition, depreciation and amortization for fiscal 2011 was approximately $3.6 million.

Net of interest income, interest expense was $5.36 million for fiscal 2011, compared with $4.7 million for the prior year. The increase was primarily attributable to a higher balances of receivables being discounted under the receivable discount programs during fiscal 2011 compared to fiscal 2010. This increase in net interest expense was partly offset by a decrease in interest expense incurred on the lower average outstanding balances on our revolving loan and capital use obligations during fiscal 2011. Income tax expense was $7.8 million, or 39% effective rate for fiscal 2011, compared with $5.3 million, or 35.4% effective rate for the prior year. The Company reported net income for its fiscal 2-11 of $12.2 million, or $0.99 per share, compared with $9.6 million, or $0.80 per share for the prior year. Excluding acquisition costs of $1 million, net income for fiscal 2011 is $1.04 per diluted share.

At March 31, 2011, our balance sheet had $2.5 million in cash, $191.9 million in total assets, and $7.5 million in term loan borrowings related to our prior acquisitions and a zero balance in revolver loan borrowings, leaving $45.3 million available after reflecting outstanding letters of credit. During fiscal 2011, cash generated in operations was $10.7 million, which includes an increase in accounts receivable of $5.9 million, an increase in inventory of $12.8 million which decreased cash, offset by an increase in accounts payable and accrued liabilities of $8.9 million, net income of $12.2 million, and non-cash expenses such as depreciation and amortization of $3.6 million, and a write-down of our deferred tax asset to account-- to reflect lower tax lower tax state-- lower state taxes going forward. During fiscal 2011, $4.9 million was loaned to Fenco prior to the acquisition closing in May 2011. I will now turn the call back to Selwyn who will make a few additional comments before we open the call to questions.

Thanks, David. As everyone can see, our financial position remains strong. We've increased our core inventory for new business which continues to gain momentum. We've continued to experience steady customer growth in our rotating electrical business. We are very excited about the future opportunities from MPA, both in terms of the continued strength our base business, and the tremendous opportunities we expect to realize through the Fenco acquisition by leveraging our strong customer relationships with their solid revenue base and a great selection of non-discretionary under-car parts.

In our core business, our quality built brand name, serving the professional installer segment, continues to expand and we remain focused on further leveraging key production advantages to expand our business even further. Had solid performance for the fiscal year, the closing of the Fenco acquisition and other potential complementary future transactions underscore Management's commitment to growth and enhancing shareholder value. We will more than double our sales for this year, and we'll be working on a plan to significantly grow earnings when we complete the Fenco transition. In summary, the long-term market statistics for our industry remain favorable and we are excited about the opportunities. I appreciate your interest in MPA and I'm happy to answer any questions you may have.

(Operator Instructions) Rick Hoss of ROTH Capital Partners. Please go ahead.

Hi, good morning.

Hi, Rick.

David, just on the granular basis here, start out with, the G&A ramped sequentially, I know you talked about the difference between fourth quarter 2010 and fourth quarter 2011 being debt -- bad debt expense last year, what about on a third quarter versus fourth quarter in 2011?

Right. So some of the costs would be as we head towards fiscal year end, there will be additional professional costs related to our audit and just overall additional professional fees in the fourth quarter. Also, we have a SOX compliance that we start working on more closely in the fourth quarter.

Okay. And then thinking about next year and I guess with the acquisitions, it's all going to kind of be NA eventually, but tax rate 38%, is that kind of what you're thinking?

Yes, I think the tax rate, I'll butt in a little bit, on the base business is 38%. I mean that tax rate could fluctuate based on the consolidation of the Fenco numbers. So for the base business, the 38% is good. We recently reapportioned our income allocation to low -- on the state tax basis, which basically should have reduced our rate, that's why we had the write-down of the deferred tax asset. And we're comfortable that we should have a better pick-up on the foreign income allocation this year. But we're also -- there are variables relating to the consolidation with the Canadian entity which we're not ready to really quantify on the tax side.

Fair. Okay then so on the 340,000 shares that were issued, are those going to be reflected in the share count in the next quarter?

They should be, yes.

Okay.

They'll be reflected in the first quarter.

Sure. Okay. And then what is your plan as far as utilizing your Tijuana facility for any additional Fenco work? Do you think that there an opportunity to push that utilization from 50 or so up to closer to 100, or how are you looking at the facility right now?

Okay. So basically Tijuana is a focus factory for alternators and starters. So that portion of the manufacturing we won't be able to leverage capacity, but what we will be doing is bringing imports in that come from Southeast Asia, basically will come into the Tijuana facility and we'll be able to leverage some of the overhead there and freight costs, relative to the new unit business that we're doing. The Fenco business is about 45% to 50% of their business are new units and so that will leverage the Tijuana operating costs fairly significantly. The remaining portion of the business will be moved down to Monterrey, Mexico, and where we'll be able to leverage the existing overhead in a facility that Fenco already has. And that'll result in significant savings.

Okay. So in Tijuana you'd be utilizing the overhead in order for, say, inventory storage, et cetera? Is that kind of how you're looking at it?

Correct. Correct. And we'll also -- it won't be a complete absorption because we'll have to -- the sheer volume of imports, we'll have to add some warehouse space in Tijuana.

Okay. And then Selwyn, any thoughts on fuel prices and at, where are we today, $4 here in California for regular unleaded, any impact on miles driven? Have you seen anything just say over the last month or two to imply any demand destruction at this level?

No, we have -- I have not. I mean, we have access to POS records for our customers. We have not seen a decline. We continue to see growth in our base business on an organic basis. There'll be levels of inventory that fluctuate between when customers order and take in, but fundamentally, registered sales are strong. The heat in the southeast and the northeast over the last couple weeks is good for register sales. I think we're in a little bit of a different mode than we were in the last time we had fuel price increases. The economy is so weak now that I think we -- the miles driven quotient is a little offset by the tremendous need for the consumer to have a low cost repair for its vehicle. So now while it is a concern, we'll continue to watch it. I mean, short term or near term, I hear conflicting reports but we've not seen an effect yet.

Okay. Thank you.

Jimmy Baker of B. Riley & Company. Please go ahead.

Good morning. Great quarter and thanks for the clear breakouts of one-time costs here. Selwyn, can you maybe talk a little about your sales to customer B which dipped a bit. I believe they're working through some excess inventories. I'm just wondering if you have a sense of how far along they are in that process? And have your register sales remained strong there, or do you feel like you might have lost some share? And maybe how should we think about your sales for that customer going forward?

Well let me start, we have not host any share there. We are an exclusive supplier for the parts that we supply to them. Their sales to the register are strong. They are increase -- they have increased their same-store sales over the prior year, and I can't comment on levels because that's their information. We're hoping that they'll get through the excess inventory as soon as possible. We still think that's probably a couple months out before we see the vibrancy in their sales translating to our sales. So I think despite having very good financial results, we think that once that customer starts to order a more regular basis, with more normalized inventory levels, that should help us a lot. So we're anxious to see them get through it, we do think it's at least another 60 days before they get through the inventory.

Okay. And then just a few questions on Fenco. As we model our June quarter and FY 2012, should we be assuming Fenco will be earnings for at least a quarter or two as you work through some of the inefficiencies? I mean how should we think about the ramp from $5 million incremental annual EBITDA to over $25 million in a couple years?

Yes, I think it's-- it's tough for me to comment on the now, Jimmy, I would say within the 2-year period, the guidance that we've given, we expect to have a minimum of $25 million of incremental EBITDA within the next 2 years on a run rate. We expect to double our revenue immediately this year. We are changing all of their accounting from Canadian GAAP to US GAAP and many of the policies that we have, they don't use, so it's very, very difficult for us to comment short term on the effect on the quarters right now, we know what the long term or medium term effect will be. And we plan to issue an 8-K early -- July 22 I guess, yes. So on July 22, at that point we'll be able to entertain a lot more definitive questions on it.

Okay and you're talking about doubling revenues this fiscal year, even including the fact that it's only partial contribution to the year?

Correct.

Okay. And how would you characterize demand for Fenco's products thus far? I mean, I know you're only a month or so into the acquisition but I assume fairly familiar with some of their sales trends there, can you talk about demand for those products?

Demand for their products is incredible. I mean, it's just -- they're in a number of categories. They've gone through significant growth and our biggest challenge right now is to stabilize getting enough inventory in to fill the demand. And so we're working with suppliers to open new channels and faster increase in inventory levels, and we feel that Fenco has some fabulous categories that are very high growth for us over the next number of years.

Okay. Last question from me, could you just talk about the impact to your business, if any, should we see some further consolidation in the rotating electrical after market?

Well, I think overall consolidation on the supply side is not a bad thing. There's been a tremendous consolidation on the demand side. We're-- there's 3 major competitors. If it went to 2, that wouldn't be bad. So we're not concerned about consolidation, we think it's ultimately a good thing for everybody.

Okay. Thanks very much.

Thank you.

Tony Cristello of BB&T Capital Markets. Please go ahead.

Thank you. Good morning.

Hello, Tony.

First question I have is I want to just understand sort of some of the dynamics of the seasonality that might be driving your business. I-- we look at sort of the macro factors in place and the aging of the fleet and failure rates of critical parts and that all makes sense. I'm just wondering, you had such a strong top line on what was a really good top line number in the fourth quarter of last year and I'm wondering how you can tell what is sort of pre-buy, what is sort of visibility into purchasing patterns and what do you believe is sort of the true sustainable run rate for top line growth from an organic versus an acquired standpoint?

Lot of questions in one there. First of all, I mean, again, people -- the failure rate for our base business products, alternators and starters, is affected by extreme weather and that means extreme cold, extreme heat, and that's number one. Number 2 is buying patterns for repairs where it's not critical but in our case it's mostly critical repairs, the summer is when people work on their vehicles, it's more comfortable to work on their vehicles. I think if we looked at retailers' buying habits, they like to be ready for heat in the summer. There used to be where there are updates done once a year. Certainly, most of the major customers are splitting that up into more frequent updates to make sure that they have the most current inventory levels. So seasonality is becoming less and less predictable. I mean it's more buying patterns of the customer carrying their -- for inventory carrying purposes.

Having said that, the fourth quarter was very strong. The first month in the first quarter gets a little weaker after you come off a strong quarter like that. But we expect, again, when we look at not necessarily our order patterns but when we look at the volumes to the register, they've been consistently strong year over year with some nice, significant increases. So whether we get the order this quarter or next quarter, we're getting it. We think summer's going to be very strong. This quarter we think is -- looks okay. I mean, not as vibrant as perhaps the fourth quarter but still strong. And we think the summer quarter's going to be excellent. So we certainly believe that the tailwinds, because of the weakness in the economy, are very strong. We don't believe that that's changed. There is some fear about rising gas prices but I think we're in a little bit of a different environment than we used to be in terms of how that affects sales.

But I would say where we're positioned in the marketplace and with the lineup of products that we have, that we expect a very strong summer, certainly the preliminary indications are all positive to that effect. And so I think the toughest months for us generally is sort of January and April. If you had to say, if they were tough months out there, those generally are very, very tough months. But coming off Christmas, after that it goes into a lull and then coming off this big March buy-in, then you see a drop-off in April. But that's been on a consistent basis. So I don't know if that answered your question. But I-- there's no sort of definitive seasonality that's really left in the business. Some of the Fenco parts, are you want to replace before they fail and so we see a lot of that happening in summer and customers ramping up to be ready for the summer. So that would really be a first quarter sort of update.

Okay. No, that's helpful. When I look at sort of what you're going to accomplish or I should say maybe opportunity from a cross-selling standpoint between Fenco and MPA, can you maybe talk about where you stand today in terms of your customer mix, what customers you've been able to retain? And not necessarily naming your specific customers, I'm just wondering to make sure that the customers that Fenco had and your customers are still on-board. And then second, can you talk about your marketing strategy, your sales force, how that may change in order to sort of drive and make sure not only revenue's not lost but also you're able to capture greater account penetration with the cross-sell?

Yes, okay. First of all, we've lost no major customer, which is great news. We sell every major -- on a combined basis, we sell every major customer in North America. We don't sell any one customer a full array of all of the parts that we'll now be offering. So from an opportunity on the revenue side, we certainly hope to take our complete offering to all customers and see what we can do. The preliminary indications are that new business growth will be very strong. Our sales force on a combined basis is outstanding. I think that we've embellished with excellent, excellent people. We had a good sales force to start with but I think combined it's truly outstanding in every single area. Our production capabilities that we've brought on board with best practices of MPA and Fenco, we're already starting to see increases in fill rates, that's our sole focus right now. The demand for the Fenco product is through the roof. And we're working aggressively to take advantage of that.

So I think the sales synergy opportunity, which is not what I'm referring to when I talk about at least $25 million in EBITDA, is enormous. And we hope we can capitalize on it. We certainly don't intend to go in and destroy margins. If anything, we want to enhance margins and be more rational in terms of how we price the product and -- but we still believe that -- I don't know how to even begin to quantify it but my preliminary estimates on sales increases on new business are outstanding.

Okay. And maybe just one quick follow up, if you look at customer concentration, I know on your core business you had 1 customer, particularly, that was a heavy sized percentage of your business. Can you talk a little bit about your customer concentration or mix at Fenco, and is that a much broader, more disbursed type of revenue sell-through?

Yes, I don't have the actual numbers at my fingertips, but just intuitively our large customer will still probably remain the largest customer. We'll enhance other customers that we don't have, we'll grow significantly based on the Fenco business. They're very strong on the professional installer side, so we'll have significant enhancements in the amount of revenue for the professional installer major customers. I think our second largest customer will go down in terms of what the -- as a percentage of concentration. But other customers will come in. So I think overall our customer concentration will not be any worse than what it is now and maybe a little better in terms of any one customer having significant chunk of our market. I think it certainly enhances us. The significant revenues at customers that we don't do business with right now.

Very good. Thank you.

Gary Durham of Gary Durham Consulting. Please go ahead.

Hello, guys. I actually just have a couple quick balance sheet questions for you. I was looking at the customer core returns accruals account and noticed that that dropped pretty sharply during fiscal year 2011 from about $16 million down to $10.4 million. Can you talk a little bit about what assumption changed or what drove that decline during the year?

There's several contributing factors. One being if we were to engage in an arrangement with our customer to buy back cores, that would reduce the amount of liability we have to that customer, reducing the customer core accrual account.

Okay, and--

Does that answer your question?

I guess so. So what's the journal entry then, so to speak, that would cause that account -- what's the other side of that journal entry?

Okay. So when the account is originally established, you credit the customer a core return account and then you debit accounts receivable gross.

Okay.

So that it's all in the same account, present it as a net balance on the balance sheet.

I see, so when the customer core return accruals account is reduced, the accounts receivable -- the credit is to accounts receivable gross, right?

Correct.

Okay. Okay. I see. And then on remanufactured cores held at customers' locations, that went up about $9 million or so during the year as well. Is that -- are those -- I know on the cash flow statement it shows up as a use of cash, but is the Company using cash to go out and acquire those cores or what's driving that significant increase in that account?

So let me first explain to you the nature of that account. It reflects cores on our customers' shelves, so naturally as our sales grow and we gain new customers, we have to account for those cores that are on our new customers' shelf. With new business, that account will continuously increase.

Okay. And I guess I'm just sort of trying to, again, think through the journal entries there and the P&L impact, does that centrally flow through the P&L as a reduction to COGS?

No, it's a balance sheet. All core transactions remain on the balance sheet.

Okay. Is-- when your customers grow, then, is that -- for example, if you make an a acquisition, is that the growth -- what is the growth that's driving the $9 million of remanufactured cores held at customer locations? In other words, there weren't any significant acquisitions that drove that growth; right?

There were no significant acquisitions, but as you can see, our top line net sales grew significantly so with organic growth, with new customers, there's more customers that have cores. As well as when we repurchase cores, as I mentioned, which caused the reduction in the customer core return account, so when we buy more cores, it also adds to that account as well.

Because you sort of hit the nail on the head as to what -- I've noticed that that account balance grows substantially faster than your net sales and I guess that's what was giving rise to my question, is why that account balance is growing so much faster than your net sales?

So it's a combination of the sales growth as well as buying back cores, also increases the remanufactured cores held at customers' locations.

Okay. Appreciate it. Thanks.

[Dimitri Cornasofskia] of First Wilshire. Please go ahead.

Hi, good morning, gentlemen. Congratulations on a great quarter.

Thank you.

Just strategic question on Fenwick, how strongly are they positioned in the markets in which they're in, like what's the market share and the competitive advantages there?

Yes, so I mean, they're in a number of categories so it's hard to go through each category but in general in the major categories they're sort of in the mid-20s, 25% to 27% market share. They're very well respected. They've been in business 60 years. They're a well respected supplier. They generally are the second largest supplier in the categories that they're in and the customers need a choice and they're definitely key to having the customers having a choice of supplier. So I think their position is excellent.

And are they lowest cost supplier?

I don't know if they're the low cost supplier at this point. I mean we certainly intend to re-engineer their cost structure, so they operate -- they have a number of US operations which increases their costs, and so we think there's tremendous opportunity in the cost structure, in particular in conjunction with the MPA footprint that we have.

Okay, great. And then could you talk a little about the organic growth opportunities this year and your existing business and what new customers do you have in the pipeline and just talk about that?

Yes, I think, again, we look forward to very solid growth year in our base business. We continue to accumulate growth in our QB brand, quality built brand, which is in the professional installers segment. Our existing customers for the most part are growing, so we expect that to continue on. We're always in the market with new opportunities. Our OES business continues to grow. There's not a sector of our business right now that is not growing. Our new unit business is growing. So we're confident of good growth in our base business and we think that there's going to be good growth in the Fenco business as well.

Great.

We also -- obviously, we had mentioned that one of our customers is consolidating or working through some excess inventory, we think that growth will help us as well once they get through it.

And would you report Fenco in a different segment or how would that work?

Yes, we're going to have to report GAAP, non-GAAP and we certainly will report segments so people can see exactly how the base business is doing relative to the acquisition and I think there's still going to be a lot-- there will be a lot of transparency as is required by GAAP in the way we report. We do have purchase accounting rules as well that we need to comply with, so margins in the beginning will probably be a little bit hurt from the purchase accounting rules. But again, having said all of that, again, I go back to within a 2-year period, we're looking at almost a double in EBITDA on the down side. So it's very difficult to quantify the quarters because of the amount of moving parts in the accounting. But again, we will be reporting transparently and we will try and reconcile and show GAAP, non-GAAP numbers as well as we go through this.

All right. Great. Thanks very much. Congratulations, again.

Thank you.

Thank you.

(Operator Instructions) [George Berman] of J.P. Turner. Please go ahead.

Good afternoon, gentlemen. Let me congratulate you too, through a very good quarter and very good year.

Thank you very much. Appreciate it.

Most of the questions have been answered. One quick one, maybe. You acquired Fenwick essentially by issuing 340,000 shares, and injecting about, what was it, $10 million or $12 million of cash into the company?

Yes well we acquired the company by paying 360,000 shares, actually, to be exact.

Okay.

And we are then -- obviously, we own 100% and now we're enhancing their working capital base by investing money into their working capital.

Okay.

So far, we have $17 million invested into Fenco.

Did you acquire any credit lines, any other--

Yes.

Debt obligations?

There is. Yes, there's a total facility in place of $60 million. And at this point we haven't announced how much is outstanding.

Plugging in your strong credit rating into their financials would probably lead to some lower costs there as well, correct?

Correct. I mean, we're very underleveraged. MPA at the time as of year end did you see had zero balance on their revolving credit facility?

Yes.

And we're reporting about $31 million in EBITDA, so there's a lot of flexibility in terms of our availability in the debt markets right now.

Okay, brilliant. Now I remember maybe a year ago a lot was said about you possibly buying back some stock. The way the Company's positioned right now, according to your comments here, do you have any anti-takeover provisions in place?

No.

Okay. So you're essentially going to become an open book, yes?

Yes, yes. I mean, we're a free market enterprise.

Okay. Okay. Well, I look forward to sharing your progress with you in the future. Thank you.

All right thanks, George. Appreciate the questions.

Jimmy Baker, B. Riley & Company. Please go ahead.

Yes, thank you. I was just curious to hear about your commodity exposure going forward, will that change at all with the inclusion of Fenco? I know they sell a higher mix of new goods, do you still anticipate scrap sales being able to effectively offset any rising commodity costs?

Yes, I think the Fenco scrap new unit is a little different than the base rotating electrical. We're still trying to get our arms around the value of their scrap. But the metal content in the products that they sell as new units are a lot different. I mean, it's mostly forged steel. We on the reman side, I think there may be a little more exposure to commodities with their product than ours, but we're still actually right in the heart of a study on that right now and so we need to watch metal prices.

Okay. So now we need to think about steel as well, though, and maybe what-- do you have a sense of maybe what percent of their cost mix that is?

I don't know the percent. But I will tell you that for the parts that they're selling as new units, there is no remanufactured market for them and so everybody -- I mean, the whole pricing commodity changes with that, because everybody -- all the competitive base is subject to the exact same exposure. So to the extent metal prices go up, it'll be across the board for everybody and certainly there's going to need to be price adjustments if that in fact happens.

Okay. And have you seen an ability to pass those price increases on to the customers pretty effectively?

I think in the new unit parts where there's no alternative, yes, the customers are just -- there's no choice. There is no choice. I mean, the customer needs viable suppliers and the consumer has to pay for what the market has. I mean, if there's -- there's just no alternatives.

Okay. Thanks very much.

I'm showing no further questions at this time and would like to turn the call back over to Management for any closing remarks.

Well, I thank you for joining us. We look forward to speaking to you when we get through our next fiscal year and our next first quarter and as we announce more information about Fenco. Again, I'd reiterate how excited we are at our opportunities and thank you, everybody, for your support and the time.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.