# Motorcar Parts of America Inc: Form 10-Q for the period ended Jun 30, 2011

- Company: [Motorcar Parts of America Inc](/companies/mpaa.md) (CIK 918251)
- Form: 10-Q
- Filed: 2011-08-15
- Accepted by EDGAR: Aug 15, 2011, 16:12 ET
- Period: 2011-06-30
- Accession: 0001140361-11-041985
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/918251/000114036111041985/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/918251/000114036111041985/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-04-01 to 2011-06-30 | $71.3m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2011-04-01 to 2011-06-30 | $58.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2011-04-01 to 2011-06-30 | $13.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2011-04-01 to 2011-06-30 | $416.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2011-04-01 to 2011-06-30 | $1.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-04-01 to 2011-06-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-04-01 to 2011-06-30 | −$2.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-04-01 to 2011-06-30 | −$0.19 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-04-01 to 2011-06-30 | −$0.19 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-04-01 to 2011-06-30 | 12,281,530 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2011-04-01 to 2011-06-30 | −$26.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-04-01 to 2011-06-30 | $357.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-06-30 | $1.3m | us-gaap:Cash |
| Current assets | at 2011-06-30 | $168.2m | us-gaap:AssetsCurrent |
| Total assets | at 2011-06-30 | $449.1m | us-gaap:Assets |
| Current liabilities | at 2011-06-30 | $256.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-06-30 | $330.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-06-30 | $118.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,235 characters.

The following discussion and analysis presents factors that Motorcar Parts of America, Inc. and its subsidiaries (“our”, “we”, or “us”) believe are relevant to an assessment and understanding of our consolidated financial position and results of operations. This financial and business analysis should be read in conjunction with our March 31, 2011 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 13, 2011.

### Disclosure Regarding Private Securities Litigation Reform Act of 1995

This report contains certain forward-looking statements with respect to our future performance that involve risks and uncertainties. Various factors could cause actual results to differ materially from those projected in such statements. These factors include, but are not limited to: concentration of sales to certain customers, changes in our relationship with any of our major customers, the increasing customer pressure for lower prices and more favorable payment and other terms, the increasing demands on our working capital, the significant strain on working capital associated with large Remanufactured Core inventory purchases from customers, our ability to obtain any additional financing we may seek or require, our ability to maintain positive cash flows from operations, potential future changes in our previously reported results as a result of the identification and correction of errors in our accounting policies or procedures or potential material weaknesses in our internal controls over financial reporting, lower revenues than anticipated from new and existing contracts, our failure to meet the financial covenants or the other obligations set forth in our credit agreements and our lenders’ refusal to waive any such defaults, any meaningful difference between projected production needs and ultimate sales to our customers, increases in interest rates, changes in the financial condition of any of our major customers, the impact of high gasoline prices, the potential for changes in consumer spending, consumer preferences and general economic conditions, increased competition in the automotive parts industry, including increased competition from Chinese and other offshore manufacturers, difficulty in obtaining Used Cores and component parts or increases in the costs of those parts, political, criminal or economic instability in any of the foreign countries where we conduct operations, currency exchange fluctuations, unforeseen increases in operating costs, our ability to integrate our Fenco operations, and other factors discussed herein and in our other filings with the SEC.

### Management Overview

The after-market for automobile parts is divided into two markets. The first market is the do-it-yourself (“DIY”) market, which is generally serviced by the large retail chain outlets. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a cheaper alternative than having the repair performed by a professional installer. The second market is the professional installer market, commonly known as the do-it-for-me (“DIFM”) market. This market is serviced by the retail chains, traditional warehouse distributors and the dealer networks. Generally, the consumer in this channel is a professional parts installer.

We historically have remanufactured alternators and starters for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. As a result of our acquisition on May 6, 2011, we now also manufacture, remanufacture and distribute new and remanufactured steering components, brake calipers, master cylinders, hub assembly and bearings, clutches and clutch hydraulics, constant velocity drive shafts, water pumps, control arms and loaded struts for the full range of passenger and truck vehicles. The remanufactured products are sold under the Fenco™ brand name and new products are sold under the Dynapak® brand name.

Our products are distributed to both the DIY and DIFM markets. Our products are distributed predominantly throughout the North America. Our products are sold to the largest auto parts retail chains in the United States and Canada. In addition, our products are sold to various traditional warehouses for the professional installers, and to major automobile manufacturers for both their after-market programs and their warranty replacement programs (“OES”). Demand and replacement rates for after-market remanufactured automobile parts generally increase with increases in miles driven and the age of vehicles.

Historically, our business has focused on the DIY market. In times of recession, we believe consumers are more apt to purchase replacement parts in the DIY market because of lower prices compared to the DIFM market. We believe we have recently increased our market share in the DIY market.

The DIFM market is an attractive opportunity for growth. We are positioned to benefit from this market opportunity in two ways: (1) our auto parts retail customers are expanding their efforts to target the DIFM market and (2) we sell our products under private label and our Quality-Built®, Talon®, Xtreme®, Reliance™ and other brand names directly to suppliers that focus on professional installers. In addition, we sell our products to original equipment manufacturers for distribution to the professional installer both for warranty replacement and their general after-market channels. We have been successful in growing sales to this market.

In May 2011, pursuant to a purchase agreement with FAPL Holdings Inc. (“Holdings”), the parent company of Fenwick Automotive Products Limited (“FAPL”), a privately-owned Toronto-based manufacturer, remanufacturer and distributor of new and remanufactured aftermarket auto parts, and certain other individuals, we acquired all of the outstanding equity of Holdings subsidiaries. This transaction provides us opportunities to expand beyond our existing product lines of alternators and starters and further enhances our market presence in North America.

As a result of this acquisition, we revised our segment reporting to reflect two reportable segments, rotating electrical and under-the-car product line, based on the way we manage, evaluate and internally report our business activities. Prior to this acquisition, we operated in one reportable segment pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

### Results of Operations for the Three Months Ended June 30, 2011 and 2010

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein. The acquisition of Fenco on May 6, 2011 has had a significant impact on the comparability of results as discussed below.

The following table summarizes certain key operating data by segment for the periods indicated:

| Three months ended June 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Consolidated |
| --- | ---: | ---: | ---: |
| Gross profit percentage | 32.1% | 1.8% | 18.4% |
| Cash flow (used in) provided by operations | $4,838,000 | $(31,242,000) | $(26,404,000) |
| Finished goods turnover (annualized) (1) | 5.1 | 2.9 | 4.2 |
| Annualized return on equity (2) | - | - | (8.1 ) % |
| **2010** |  |  |  |
| Gross profit percentage | 31.9% | - | 31.9% |
| Cash flow provided by operations | $67,000 | $- | $67,000 |
| Finished goods turnover (annualized) (1) | 4.4 | - | 4.4 |
| Annualized return on equity (2) | - | - | 9.7% |

(1) Annualized finished goods turnover for the rotating electrical segment for the fiscal quarter is calculated by multiplying segment cost of sales for the quarter by 4 and dividing the result by the average between beginning and ending segment non-core finished goods inventory values for the fiscal quarter. Annualized finished goods turnover for the under-the-car product line segment for the period subsequent to the acquisition of Fenco is calculated by multiplying segment cost of sales for the period by 6 and dividing the result by the average between beginning and ending segment non-core finished goods inventory values for the period. We believe this provides a useful measure of our ability to turn production into revenues.

(2) Annualized return on equity is computed as net income for the fiscal quarter multiplied by 4 and dividing the result by beginning shareholders’ equity. Annualized return on equity measures our ability to invest shareholders’ funds profitably.

### Net Sales and Gross Profit

The following table summarizes net sales and gross profit by segment for the three months ended June 30, 2011 and 2010:

| Three months ended June 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $39,792,000 | $32,246,000 | $(776,000) | $71,262,000 |
| Cost of goods sold | 27,036,000 | 31,650,000 | (550,000) | 58,136,000 |
| Gross profit | 12,756,000 | 596,000 | (226,000) | 13,126,000 |
| Cost of goods sold as a percentage of net sales | 67.9% | 98.2% | - | 81.6% |
| Gross profit percentage | 32.1% | 1.8% | - | 18.4% |
| **2010** |  |  |  |  |
| Net sales | $36,234,000 | $- | $- | $36,234,000 |
| Cost of goods sold | 24,689,000 | - | - | 24,689,000 |
| Gross profit | 11,545,000 | - | - | 11,545,000 |
| Cost of goods sold as a percentage of net sales | 68.1% | - | - | 68.1% |
| Gross profit percentage | 31.9% | - | - | 31.9% |

*Net Sales*. Our consolidated net sales for the three months ended June 30, 2011 increased by $35,028,000, or 96.7%, to $71,262,000 compared to net sales for the three months ended June 30, 2010 of $36,234,000. The increase in net sales was due primarily to (i) our May 6, 2011 acquisition of Fenco which resulted in additional net sales of $32,246,000 or 89.0%, and (ii) increase in sales of $3,558,000 or 9.8%, to our existing customers and several new customers added subsequent to the three months ended June 30, 2010 in our rotating electrical segment.

*Cost of Goods Sold/Gross Profit.* Our consolidated cost of goods sold as a percentage of net sales increased during the three months ended June 30, 2010 to 81.6% from 68.1% for the three months ended June 30, 2010, resulting in a corresponding decrease in our gross profit percentage of 13.5% to 18.4% for the three months ended June 30, 2010 from 31.9% for the three months ended June 30, 2010. The gross profit percentage in our rotating electrical segment increased to 32.1% from 31.9% during the three months ended June 30, 2010 due primarily to lower per unit manufacturing costs.

The gross profit percentage in our under-the-car product line segment was impacted by recording of $2,702,000 of cost of goods sold related to the fair value step-up of inventory acquired as of May 6, 2011. As this inventory was sold during the quarter, the step-up in value impacted cost of sales. As of June 30, 2011, there was $1,519,000 of inventory fair value step-up value remaining in inventory to be expensed as the inventory turns.

### Operating Expenses

The following table summarizes operating expenses by segment for the three months ended June 30, 2011 and 2010:

| Three months ended June 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $5,310,000 | $3,200,000 | $- | $8,510,000 |
| Sales and marketing | 1,834,000 | 564,000 | - | 2,398,000 |
| Research and development | 416,000 | - | - | 416,000 |
| Acquisition costs | 404,000 | - | - | 404,000 |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 13.3% | 9.9% | - | 11.9% |
| Sales and marketing | 4.6% | 1.7% | - | 3.4% |
| Research and development | 1.0% | - | - | 0.6% |
| Acquisition costs | 1.0% | - | - | 0.6% |
| **2010** |  |  |  |  |
| General and administrative | $4,024,000 | $- | $- | $4,024,000 |
| Sales and marketing | 1,740,000 | - | - | 1,740,000 |
| Research and development | 366,000 | - | - | 366,000 |
| Acquisition costs | - | - | - | - |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 11.1% | - | - | 11.1% |
| Sales and marketing | 4.8% | - | - | 4.8% |
| Research and development | 1.0% | - | - | 1.0% |
| Acquisition costs | - | - | - | - |

*General and Administrative.* Our consolidated general and administrative expenses for the three months ended June 30, 2011 were $8,510,000, which represents an increase of $4,486,000, or 111.5%, from general and administrative expenses for the three months ended June 30, 2010 of $4,024,000. The increase in general and administrative expenses for our rotating electrical business during the three months ended June 30, 2011 was primarily due to (i) $780,000 of incentive payments made to certain employees in connection with our Fenco acquisition, (ii) $308,000 of professional services and travel incurred in connection with our Fenco acquisition, and (ii) $231,000 of increased employee-related expenses, professional and travel expenses at our offshore manufacturing facilities. These increases were partly offset by a loss of $88,000 recorded due to the changes in the fair value of forward foreign currency exchange contracts, compared to a loss of $471,000 during the three months ended June 30, 2010.

General and administrative expenses for the under-the-car product line segment during the three months ended June 30, 2011 were $3,200,000, and were primarily attributable to (i) employee-related expenses, (ii) amortization of intangible assets, (iii) professional services fees and other consulting fees, (iv) $260,000 of bank financing charges, and (v) $51,000 for legal and professional fees incurred in connection with the Fenco Credit Agreement.

*Sales and Marketing*. Our consolidated sales and marketing expenses for the three months ended June 30, 2011 increased $658,000, or 37.8%, to $2,398,000 from $1,740,000 for the three months ended June 30, 2010. The increase of $94,000 from our rotating electrical business was due primarily to increased employee-related expenses and increased travel expenses associated with this segment.

Sales and marketing expenses for the under-the-car product line were $564,000 and primarily include (i) employee-related expenses, (ii) travel expenses, and (iii) sales commissions and agent fees.

*Research and Development*. Our consolidated research and development expenses increased by $50,000, or 13.7%, to $416,000 for the three months ended June 30, 2011 from $366,000 for the three months ended June 30, 2010. The increase in research and development expenses was due primarily to an increase in travel, supplies, and employee-related expenses at our rotating electrical segment as compared to the three months ended June 30, 2010.

*Acquisition Costs*. During the three months ended June 30, 2011, we incurred $404,000 of legal and professional fees in connection with the Fenco acquisition.

### Interest Expense

*Interest Expense.* Interest expense incurred by our rotating electrical segment for the three months ended June 30, 2011 was $1,098,000. This represents a decrease of $504,000 compared to interest expense of $1,602,000 during the three months ended June 30, 2010. This decrease is primarily attributable to a lower balance of receivables being discounted under the receivable discount programs.

Interest expense incurred by our under-the-car product line segment was $834,000 during the three months ended June 30, 2011. This interest expense primarily represents the cost of receivables being discounted under the receivable discount programs and interest expense incurred on the average outstanding balances on our Fenco Revolving Facility and Fenco Term Loan.

### Provision for Income Taxes

The following table summarizes our effective tax rate by segment for the three months ended June 30, 2011 and 2010:

| Three months ended June 30, | Percent of Pre-Tax Income Rotating Electrical | Under-the-Car Product Line |
| --- | ---: | ---: |
| 2011 | 44.7% | -1.1% |
| 2010 | 33.9% | - |

*Income Tax*. Income tax expenses for our rotating electrical segment for the three months ended June 30, 2011 reflect income tax rates higher than the federal statutory tax rates primarily due to state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions. In addition, our income tax rates for the three months ended June 30, 2011 were impacted by certain non-deductible transaction costs incurred in connection with our acquisition of Fenco.

In addition, any potential future income tax benefits associated with the net loss we incurred from our acquisition of Fenco for the three months ended June 30, 2011, was not recognized due primarily to our assessment of the recoverability of these tax benefits. We have provided a valuation allowance against these net operating loss carryforwards as we determined that it is not more likely than not that the deferred asset will be realized. For the three months ended June 30, 2011, we recorded $47,000 of income tax expense for our under-the-car product line segment specifically related to the Fenco subsidiaries located in Mexico, a separate tax jurisdiction.

### Liquidity and Capital Resources

### Overview

At June 30, 2011, we had negative working capital of $88,511,000, a ratio of current assets to current liabilities of 0.6:1, and cash of $1,275,000, compared to working capital of $1,395,000, a ratio of current assets to current liabilities of 1:1, and cash of $2,477,000 at March 31, 2011. The significant change in our working capital was primarily related to our acquisition of Fenco on May 6, 2011. The negative working capital attributable to the under-the-car product line was $77,558,000 due primarily to an increase in our customer core return accrual to $86,794,000 and customer returns for which an RGA has been issued to $14,597,000. This decrease in working capital was partly offset by an increase in our non-core inventory balance during the three months ended June 30, 2011. In accordance with our core accounting policy, we classify all of our core inventories as long-term assets. This has a significant impact on our resulting working capital being negative.

The negative working capital from our rotating electrical segment was $10,953,000 due primarily to increases in the amounts outstanding under our Parent Company Revolving Loan balance and accounts payable partly offset by an increase in our accounts receivable balance during the three months ended June 30, 2011.

During the three months ended June 30, 2011, we used cash generated by our rotating electrical segment, from our use of receivable discount programs with certain of our major customers, and our revolving loans as our primary sources of liquidity. These sources were primarily used to make the quarterly principal payment on the Parent Company Term Loan.

We believe our cash generated by operations, use of receivable discount programs with certain of our major customers, amounts available under our revolving loans, and our cash and short term investments on hand are sufficient to satisfy our expected future working capital needs, capital lease commitments, repayment of the current portion of our term loans, and capital expenditure obligations over the next twelve months.

### Cash Flows

Net cash used in operating activities was $26,404,000 for the three months ended June 30, 2011 compared to net cash provided by operating activities of $67,000 for the three months ended June 30, 2010. The most significant change in operating activities for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 was the $31,242,000 that was used in our under-the-car product line segment due primarily to an increase in Fenco non-core and core inventory and a decrease in accounts payable and accrued liabilities from the date of our acquisition of Fenco.

Our rotating electrical segment generated cash from operations of $4,838,000. Our accounts payable and accrued liabilities in this segment increased during the three months ended June 30, 2011. This increase was partly offset by an increase in our non-core inventory in this segment.

Net cash used in investing activities was $365,000 and $453,000 during the three months ended June 30, 2011 and 2010, respectively. Capital expenditures for the three months ended June 30 2011 primarily related to the purchase of equipment for our manufacturing facilities, software and computers, and improvements to our California facility compared to purchases in the same period of the prior year primarily for equipment for our manufacturing facilities. In addition, net cash used in investing activities during the three months ended June 30, 2010 included the payment of the purchase price holdback in connection with our May 2008 acquisition, which was partly offset by the redemption of short-term investments.

Net cash provided by financing activities was $25,604,000 and $942,000 during the three months ended June 30, 2011 and 2010, respectively. This change was primarily due to increased borrowings under our Parent Company Credit Facility associated with our rotating electrical segment. In addition, our financing activities from our under-the-car product line included the proceeds of $10,000,000 from the Fenco Term Loan.

### Capital Resources

#### Debt

We have two outstanding credit agreements as described below.

#### Parent Company Credit Agreement

Our revolving credit and term loan agreement, as amended, (the “Parent Company Credit Agreement”), with Union Bank, N.A. and Branch Banking & Trust Company (the “Lenders”), permits us to borrow up to a total of $60,000,000 (the “Parent Company Credit Facility”). The Parent Company Credit Facility is comprised of (i) a revolving facility with a $7,000,000 letter of credit sub-facility and (ii) a term loan. We may borrow on a revolving basis up to an amount equal to $50,000,000 minus all outstanding letter of credit obligations minus a borrowing reserve of $10,000,000 (the “Parent Company Revolving Loan”). The borrowing reserve remains in effect only if we are party to a receivable discount program pursuant to which our accounts receivable owed to us by our largest customer are being discounted. The term loan is in the principal amount of $10,000,000 (the “Parent Company Term Loan”). The Lenders hold a security interest in substantially all of the assets of the rotating electrical segment.

The Parent Company Credit Agreement, among other things, requires us to maintain certain financial covenants, including tangible net worth, fixed charge coverage ratio and leverage ratio covenants. We were in compliance with all financial covenants under the Parent Company Credit Agreement as of June 30, 2011.

The Parent Company Term Loan matures in October 2014 and requires principal payments of $500,000 on a quarterly basis. The Parent Company Revolving Loan expires in October 2012 and provides us the option to request up to two one-year extensions.

The balance of the Parent Company Revolving Loan was $18,500,000 at June 30, 2011. There was no outstanding balance on the Parent Company Revolving Loan at March 31, 2011. We had reserved $1,126,000 of the Parent Company Revolving Loan for standby letters of credit for workers’ compensation insurance and $4,319,000 for commercial letters of credit as of June 30, 2011. As of June 30, 2011, $26,055,000 was available under the Parent Company Revolving Loan, and of this, $10,000,000 was reserved for use in the event our largest customer discontinued its current practice of having our receivables discounted.

In July 2011, we entered into a fifth amendment to the Parent Company Credit Agreement with our Lenders. This amendment, among other things, (i) eliminated the $10,000,000 borrowing reserve against our Parent Company Revolving Loan commitment amount and (ii) permits us to forego including Fenco as subsidiaries for purposes of determining compliance with our financial covenants under the Parent Company Credit Agreement for the fiscal quarters ending June 30, 2011 and September 30, 2011.

The Parent Company Revolving Loan and the Parent Company Term Loan bear interest at either our bank’s reference rate plus an applicable margin or a LIBOR rate plus an applicable margin, as selected by us in accordance with the Parent Company Credit Agreement. The reference rate is, as further described in the Parent Company Credit Agreement, the higher of our bank’s announced base rate and the Federal funds rate plus 1/2 percent. The applicable margins are determined quarterly on a prospective basis as set forth below:

| Leverage Ratio | Applicable LIBOR Margin | Applicable Reference Rate Margin |
| --- | --- | --- |
| Less than 1.0:1.0 | 250 basis points | 125 basis points |
| Greater than or equal to 1.0:1.0, but less than 1.5:1.0 | 275 basis points | 150 basis points |
| Greater than or equal to 1.5:1.0 | 300 basis points | 175 basis points |

#### Fenco Credit Agreement

In connection with the acquisition of Fenco, our now wholly-owned subsidiaries, FAPL and Introcan, as borrowers (the “Fenco Borrowers”), entered into an amended and restated credit agreement, dated May 6, 2011 (the “Fenco Credit Agreement”) with Manufacturers and Traders Trust Company as lead arranger, M&T Bank as lender and administrative agent and the other lenders from time to time party thereto (the “Fenco Lenders”). Pursuant to the Fenco Credit Agreement, the Fenco Lenders have made available to the Fenco Borrowers a revolving credit facility in the maximum principal amount of $50,000,000 (the “Fenco Revolving Facility”) and a term loan in the principal amount of $10,000,000 (the “Fenco Term Loan”). The availability of the Fenco Revolving Facility is subject to a borrowing base calculation consisting of eligible accounts receivable and eligible inventory. At June 30, 2011, $4,250,000 was available under the Fenco Revolving Facility.

As of June 30, 2011, $47,630,000 of the Fenco Revolving Facility was outstanding, $712,000 was reserved for standby commercial letters of credit and $372,000 was reserved for certain expenses. In addition, $1,000,000 of this Fenco Revolving Facility was reserved for Canadian operations use. The Fenco Lenders hold a security interest in substantially all of the assets of the under-the-car product line segment. We have classified the Fenco Revolving Facility as long term as of June 30, 2011 as we intend that this amount will remain outstanding for an uninterrupted period extending beyond one year from the balance sheet date.

The Fenco Borrowers may receive advances under the Fenco Revolving Facility by any one or more of the following options: (i) swingline advances in Canadian or US dollars; (ii) Canadian dollar prime-based loans; (iii) US dollar base rate loans; (iv) LIBOR loans; or (v) letters of credits.

The Fenco Term Loan bears interest at the LIBO rate plus an applicable margin. Outstanding advances under the Revolving Facility bear interest as follows:

(i) in respect of swingline advances in Canadian dollars and Canadian dollar prime-based loans, at the reference rate announced by the Royal Bank of Canada plus an applicable margin;

(ii) in respect of swingline advances in US dollars and US dollar base rate loans, at a base rate (which shall be equal to the highest of (x) M&T Bank’s prime rate, (y) the Federal Funds Rate plus ½ of 1%, or (z) the one month LIBO rate) plus an applicable margin;

(iii) in respect of LIBOR loans, at the LIBO rate plus an applicable margin.

The Fenco Credit Agreement, among other things, requires the Fenco Borrowers to maintain certain financial covenants. The Fenco Borrowers were either in compliance or obtained a waiver for financial covenants under the Fenco Credit Agreement as of June 30, 2011. In particular, the original due date to submit the audited financial statements of Fenco for the year ended March 31, 2011 was extended from July 31, 2011 to August 31, 2011.

The Fenco Revolving Facility and the Fenco Term Loan mature on October 6, 2012, but may be accelerated upon the occurrence of an insolvency event or event of default under the Fenco Credit Agreement.

Our ability to comply in future periods with the financial covenants in the Parent Company Credit Agreement and Fenco Credit Agreement, will depend on our ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, business and other factors, many of which are beyond our control and will be substantially dependent on the selling prices and demand for our products, customer demands for marketing allowances and other concessions, raw material costs, and our ability to successfully implement our overall business strategy, including the integration of our Fenco acquisition. If a violation of any of the covenants occurs in the future, we would attempt to obtain a waiver or an amendment from our Lenders or the Fenco Lenders, as applicable. No assurance can be given that we would be successful in this regard.

#### Receivable Discount Programs

We have established receivable discount programs with certain customers and their respective banks. Under these programs, we have options to sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allows us to accelerate collection of customers’ receivables. While these arrangements have reduced our working capital needs, there can be no assurance that these programs will continue in the future. Interest expense resulting from these programs would increase if interest rates rise, if utilization of these discounting arrangements expands or if the discount period is extended to reflect more favorable payment terms to customers.

The following is a summary of our receivable discount programs:

|  | Three Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: |
| Receivables discounted | $47,387,000 | $31,801,000 |
| Weighted average days | 309 | 318 |
| Annualized weighted average discount rate | 3.1% | 4.8% |
| Amount of discount as interest expense | $1,269,000 | $1,337,000 |

#### Off-Balance Sheet Arrangements

At June 30, 2011, we had no off-balance sheet financing or other arrangements with unconsolidated entities or financial partnerships (such as entities often referred to as structured finance or special purpose entities) established for purposes of facilitating off-balance sheet financing or other debt arrangements or for other contractually narrow or limited purposes.

### Capital Expenditures and Commitments

### Capital Expenditures

Our capital expenditures were $357,000 for the three months ended June 30, 2011 and primarily related to the purchase of equipment for our manufacturing facilities, software and computers, and improvements to our office facilities. We expect our fiscal year 2012 capital expenditures to be approximately $4.8 million combined for both segments. We expect to use our working capital and incur additional capital lease obligations to finance these capital expenditures.

### Related Party Transactions

Our related party transactions primarily consist of employment and director agreements and stock option agreements. Our related party transactions have not changed since March 31, 2011.

### Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates that are presented in our Annual Report on Form 10-K for the year ended March 31, 2011, which was filed on June 13, 2011, except as discussed below.

### New Accounting Pronouncements

#### Fair Value Measurements and Disclosures

In January 2010, the FASB issued an update which requires new disclosures for transfers in and out of Level 1 and Level 2 of the fair value hierarchy and expanded disclosures for activity in Level 3 of the fair value hierarchy. The update also clarifies existing disclosures regarding the level of disaggregation for disclosure and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this update on January 1, 2010 did not have any impact on our consolidated financial position and results of operations. The disclosures regarding certain Level 3 activity are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance on April 1, 2011 did not have any impact on our consolidated financial position and results of operations.

#### When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts

In December 2010, the FASB issued guidance which modifies step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units with a carrying amount equal to or less than zero for which qualitative factors indicate that it is more likely than not that a goodwill impairment exists, step 2 of the goodwill impairment test will need to be performed. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption of this update is prohibited. The adoption of this guidance on April 1, 2011 did not have any impact on our consolidated financial position and the results of operations.

#### Disclosure of Supplementary Pro Forma Information for Business Combinations

In December 2010, the FASB issued guidance which specifies that if comparative financial statements are presented, disclosure of revenue and earnings of a combined entity should be made as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This guidance is effective for business combinations consummated in fiscal years beginning on or after December 15, 2010. The adoption of this guidance on April 1, 2011 did not have any impact on our consolidated financial position and the results of operations.

#### Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

In May 2011, the FASB issued an update which clarifies some existing concepts, eliminates wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. The update results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS, and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2011. Early application of this update by public entities is prohibited. We are currently evaluating the impact the adoption of this guidance on January 1, 2012 will have on our consolidated financial position and the results of operations.

#### Comprehensive Income

In June 2011, the FASB issued guidance which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. This guidance eliminates the option to present components of other comprehensive income as a part of the statement of equity. This guidance should be applied, retrospectively, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Other than the change in presentation, we have determined the changes from the adoption of this guidance on April 1, 2012 will not have an impact on our consolidated financial position and the results of operations.

## Market risk

As filed, 243 characters.

There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K as of March 31, 2011, which was filed on June 13, 2011.

## Controls and procedures

As filed, 1,962 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, we have conducted an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-5(e). Based on this evaluation, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2011.

### Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On May 6, 2011, the Company acquired Fenco, a privately-owned Toronto-based manufacturer, remanufacturer and distributor of new and remanufactured aftermarket auto parts. For additional information regarding the acquisition, refer to Note 2 of the Condensed Notes to Consolidated Financial Statements and, Management's Discussion and Analysis of Financial Condition and Results of Operations, included in Item 2 of this Quarterly Report. As permitted by SEC guidance, which allows for a one-year integration period, management has excluded the operations related to Fenco from its assessment of internal control over financial reporting as of June 30, 2011.

Integration activities, including documenting and assessing Fenco internal controls over financial reporting, are currently in process. Additionally, the Company has ongoing initiatives to standardize the Fenco financial, information technology, and operating systems. The initial annual assessment of internal controls over financial reporting for the acquired business will be conducted over the course of the fiscal year 2012.

## Risk factors

As filed, 2,745 characters.

Other than the additional risk factor set forth below, there have been no material changes to the risk factors set forth in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed on June 13, 2011.

***Our reliance on foreign suppliers for our under-the-car segment poses various risks.***

A significant portion of our products in our under-the-car segment are imported from suppliers located outside the U.S., including various countries in Asia. As a result, we are subject to various risks of doing business in foreign markets and importing products from abroad, such as:

- significant delays in the delivery of cargo due to port security considerations;
- imposition of duties, taxes, tariffs or other charges on imports;
- imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our product that may be imported into the United States from countries or regions where we do business;
- financial or political instability in any of the countries in which our product is manufactured;
- potential recalls or cancellations of orders for any product that does not meet our quality standards;
- disruption of imports by labor disputes and local business practices;
- political or military conflict involving the United States, which could cause a delay in the transportation of the Company’s products and an increase in transportation costs;
- heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods;
- natural disasters, disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw materials and scrutiny or embargoing of goods produced in infected areas;
- inability of our non-U.S. suppliers to obtain adequate credit or access liquidity to finance their operations; and
- our ability to enforce any agreements with our foreign suppliers.

Any of the foregoing factors, or a combination of them, could increase the cost or reduce the supply of products available to us and adversely affect our business, financial condition, results of operations or liquidity.

In addition, because we depend on independent third parties to manufacture a significant portion of our products in our under-the-car segment, we cannot be certain that we will not experience operational difficulties with such manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality controls and failure to meet production deadlines or increases in manufacturing costs.

Filed Aug 15, 2011.
Source: SEC EDGAR, the filing index for accession 0001140361-11-041985. Last ingested by Listed: Nov 9, 2026, 17:46 ET. No prices; not investment advice.