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

- Company: [Motorcar Parts of America Inc](/companies/mpaa.md) (CIK 918251)
- Form: 10-Q
- Filed: 2012-03-07
- Accepted by EDGAR: Mar 7, 2012, 16:00 ET
- Period: 2011-09-30
- Accession: 0001140361-12-013847
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/918251/000114036112013847/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/918251/000114036112013847/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-07-01 to 2011-09-30 | $107.6m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2011-04-01 to 2011-09-30 | $178.1m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2011-07-01 to 2011-09-30 | $92.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2011-04-01 to 2011-09-30 | $153.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2011-07-01 to 2011-09-30 | $15.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2011-04-01 to 2011-09-30 | $24.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2011-07-01 to 2011-09-30 | $401.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2011-04-01 to 2011-09-30 | $817.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2011-07-01 to 2011-09-30 | −$406.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2011-04-01 to 2011-09-30 | −$3.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2011-07-01 to 2011-09-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2011-04-01 to 2011-09-30 | $3.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-01 to 2011-09-30 | −$5.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2011-04-01 to 2011-09-30 | −$11.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-07-01 to 2011-09-30 | −$0.45 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2011-04-01 to 2011-09-30 | −$0.96 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-07-01 to 2011-09-30 | −$0.45 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2011-04-01 to 2011-09-30 | −$0.96 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-07-01 to 2011-09-30 | 12,451,600 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2011-04-01 to 2011-09-30 | 12,367,030 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2011-04-01 to 2011-09-30 | −$45.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2011-04-01 to 2011-09-30 | $678.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2011-04-01 to 2011-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2011-09-30 | $1.2m | us-gaap:Cash |
| Current assets | at 2011-09-30 | $177.1m | us-gaap:AssetsCurrent |
| Total assets | at 2011-09-30 | $492.8m | us-gaap:Assets |
| Current liabilities | at 2011-09-30 | $202.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-09-30 | $382.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-09-30 | $110.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 54,805 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 traditional warehouse distributors, the dealer networks, and the commercial divisions of retail chains. 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 and are distributed predominantly throughout North America. We sell our products to the largest auto parts retail and traditional warehouse chains 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 the age of vehicles and increases in miles driven.

Historically, the largest share of our business was in the DIY market. While that is still the case, our DIFM business is now a major part of our business. 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 the key driver for replacement parts sales is vehicle age.

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 reassessed and 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”).

In July 2011, we established indirect wholly owned Chinese subsidiary to, among other things, provide certain purchasing and logistics services to us in China.

### Results of Operations for the Three Months Ended September 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 September 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Consolidated |
| --- | ---: | ---: | ---: |
| Gross profit percentage | 32.4% | (0.1)% | 14.2% |
| Cash flow used in operations | $(762,000) | $(17,635,000) | $(18,397,000) |
| Finished goods turnover (annualized) (1) | 5.7 | 3.8 | 4.2 |
| Annualized return on equity (2) | - | - | (19.1)% |
| **2010** |  |  |  |
| Gross profit percentage | 30.9% | -% | 30.9% |
| Cash flow provided by operations | $9,013,000 | $- | $9,013,000 |
| Finished goods turnover (annualized) (1) | 5.6 | - | 5.6 |
| Annualized return on equity (2) | - | - | 13.5% |

(1) Annualized finished goods turnover for the fiscal quarter is calculated by multiplying cost of sales for the quarter by 4 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the fiscal quarter. 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 September 30, 2011 and 2010:

| Three months ended September 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales to external customers | $45,737,000 | $61,879,000 | $- | $107,616,000 |
| Intersegment revenue, net of cost | 836,000 | - | (836,000) | - |
| Cost of goods sold | 31,482,000 | 61,924,000 | (1,062,000) | 92,344,000 |
| Gross profit (loss) | 15,091,000 | (45,000) | 226,000 | 15,272,000 |
| Cost of goods sold as a percentage of net sales | 67.6% | 100.1% | - | 85.8% |
| Gross profit percentage | 32.4% | -0.1% | - | 14.2% |
| **2010** |  |  |  |  |
| Net sales | $40,977,000 | $- | $- | $40,977,000 |
| Cost of goods sold | 28,295,000 | - | - | 28,295,000 |
| Gross profit | 12,682,000 | - | - | 12,682,000 |
| Cost of goods sold as a percentage of net sales | 69.1% | - | - | 69.1% |
| Gross profit percentage | 30.9% | - | - | 30.9% |

*Net Sales*. Our consolidated net sales for the three months ended September 30, 2011 increased by $66,639,000, or 162.6%, to $107,616,000 compared to net sales for the three months ended September 30, 2010 of $40,977,000. The increase in net sales was due primarily to (i) our May 6, 2011 acquisition of Fenco which resulted in additional net sales of $61,879,000 or 151.0%, and (ii) increase in net sales to customers of $4,760,000 or 11.6%, primarily to the existing customers 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 September 30, 2011 to 85.8% from 69.1% for the three months ended September 30, 2010, resulting in a corresponding decrease in our gross profit percentage of 16.7% to 14.2% for the three months ended September 30, 2011 from 30.9% for the three months ended September 30, 2010. The gross profit percentage in our rotating electrical segment increased to 32.4% from 30.9% during the three months ended September 30, 2010 due primarily to lower per unit manufacturing costs.

The gross profit percentage in our under-the-car product line segment was (0.1%) for the three months ended September 30, 2011. In addition to the negative impact of lost sales due to our lower than expected customer service levels, we also incurred related contractual customer penalties of $896,000 resulting in an increase in cost of goods sold. Our gross profit was further impacted as follows:

- In order to improve our quality and productivity levels, we replaced and trained a large number of personnel at Fenco’s facilities at Monterrey, Mexico. In conjunction with this, we increased production to meet product demand and to improve Fenco customer service levels at an approximate cost of $1,092,000
- To expedite enhancing customer service levels, we made certain inventory purchases above our normal cost for $1,142,000 for inventory that was sold during the three months ended September 30, 2011, and we incurred increased inbound freight expenses of $285,000.

In addition, our gross profit in the three months ended September 30, 2011, was further impacted by (i) the negative contribution of $455,000 related to certain product lines we stopped selling and supporting in December 2011 and (ii) additional costs of approximately $500,000 that were incurred in connection with the modification of a product for a new customer program. In connection with the May 6, 2011 Fenco acquisition, $705,000 was charged to cost of goods sold related to the fair value step up of inventory acquired which was sold during the three months ended September 30, 2011. As of September 30, 2011, there was $840,000 of inventory fair value step-up value remaining to be expensed as the inventory is sold.

### Operating Expenses

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

| Three months ended September 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $7,004,000 | $4,767,000 | $- | $11,771,000 |
| Sales and marketing | 1,897,000 | 1,300,000 | - | 3,197,000 |
| Research and development | 401,000 | - | - | 401,000 |
| Acquisition costs | 309,000 | - | - | 309,000 |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 15.3% | 7.7% | - | 10.9% |
| Sales and marketing | 4.1% | 2.1% | - | 3.0% |
| Research and development | 0.9% | - | - | 0.4% |
| Acquisition costs | 0.7% | - | - | 0.3% |
| **2010** |  |  |  |  |
| General and administrative | $3,571,000 | $- | $- | $3,571,000 |
| Sales and marketing | 1,201,000 | - | - | 1,201,000 |
| Research and development | 396,000 | - | - | 396,000 |
| Acquisition costs | - | - | - | - |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 8.7% | - | - | 8.7% |
| Sales and marketing | 2.9% | - | - | 2.9% |
| Research and development. | 1.0% | - | - | 1.0% |
| Acquisition costs | 0.0% | - | - | 0.0% |

*General and Administrative.* Our consolidated general and administrative expenses for the three months ended September 30, 2011 were $11,771,000, which represents an increase of $8,200,000, or 229.6%, from general and administrative expenses for the three months ended September 30, 2010 of $3,571,000. The increase in general and administrative expenses for our rotating electrical business during the three months ended September 30, 2011 was primarily due to (i) a loss of $1,799,000 recorded due to the changes in the fair value of forward foreign currency exchange contracts, compared to a gain of $139,000 during the three months ended September 30, 2010, (ii) $848,000 of professional services and travel incurred in connection with our Fenco operations, and (iii) $415,000 of increased professional services and consulting fees.

General and administrative expenses for the under-the-car product line segment during the three months ended September 30, 2011 were $4,767,000, and were primarily attributable to (i) employee-related expenses, (ii) amortization of intangible assets, and (iii) professional services fees and other consulting fees, which were partly offset by foreign exchange gains recorded.

*Sales and Marketing*. Our consolidated sales and marketing expenses for the three months ended September 30, 2011 increased $1,996,000, or 166.2%, to $3,197,000 from $1,201,000 for the three months ended September 30, 2010. The increase of $696,000 for our rotating electrical business was due primarily to (i) the reversal of commission expenses during the prior year in connection with our acquisition of Reliance Automotive, Inc. as certain sales thresholds were not met, (ii) increased employee-related expenses, and (iii) increased travel incurred in connection with our Fenco operations.

Sales and marketing expenses for the under-the-car product line were $1,300,000 and primarily include (i) advertising expenses, (ii) employee-related expenses, (iii) sales commissions and agent fees, and (iv) travel expenses.

*Research and Development*. Our consolidated research and development expenses increased by $5,000, or 1.3%, to $401,000 for the three months ended September 30, 2011 from $396,000 for the three months ended September 30, 2010. The increase in research and development expenses was due primarily to an increase in travel at our rotating electrical segment as compared to the three months ended September 30, 2010.

*Acquisition Costs*. During the three months ended September 30, 2011, we incurred $309,000 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 September 30, 2011 was $1,410,000. This represents a decrease of $291,000 compared to interest expense of $1,701,000 during the three months ended September 30, 2010. This decrease is primarily attributable to a lower balance of receivables being discounted under the receivable discount programs and lower discount rates on these balances, partly offset by an increase in interest expense on the Old Parent Company Revolving Loan due to higher average outstanding balances.

Interest expense incurred by our under-the-car product line segment was $1,979,000 during the three months ended September 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

*Income Tax*. Income tax expenses for the three months ended September 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, any potential future income tax benefits associated with the net loss we incurred from Fenco operations for the three months ended September 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 September 30, 2011, we recorded $76,000 of income tax expense specifically related to the Fenco subsidiaries located in Mexico, a separate tax jurisdiction.

### Results of Operations for the Six Months Ended September 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:

| Six months ended September 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Consolidated |
| --- | ---: | ---: | ---: |
| Gross profit percentage | 32.2% | (3.5)% | 13.8% |
| Cash flow provided by (used in) operations | $4,076,000 | $(49,310,000) | $(45,234,000) |
| Finished goods turnover (annualized) (1) | 5.8 | 4.0 | 6.0 |
| Annualized return on equity (2) | - | - | (20.3)% |
| **2010** |  |  |  |
| Gross profit percentage | 31.4% | -% | 31.4% |
| Cash flow provided by operations | $9,080,000 | $- | $9,080,000 |
| Finished goods turnover (annualized) (1) | 5.1 | - | 5.1 |
| Annualized return on equity (2) | - | - | 11.6% |

(1) Annualized finished goods turnover for the rotating electrical segment for the six months ended September 30, 2011 and 2010 is calculated by multiplying segment cost of sales for each six month period by 2 and dividing the result by the average between beginning and ending segment non-core finished goods inventory values for each six month period. 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 2.4 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 period multiplied by 2 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 six months ended September 30, 2011 and 2010:

| Six months ended September 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales to external customers | $84,753,000 | $93,373,000 | $- | $178,126,000 |
| Intersegment revenue, net of cost | 1,612,000 | - | (1,612,000) | - |
| Cost of goods sold | 58,518,000 | 96,620,000 | (1,612,000) | 153,526,000 |
| Gross profit | 27,847,000 | (3,247,000) | - | 24,600,000 |
| Cost of goods sold as a percentage of net sales… | 67.8% | 103.5% | - | 86.2% |
| Gross profit percentage | 32.2% | -3.5% | - | 13.8% |
| **2010** |  |  |  |  |
| Net sales. | $77,211,000 | $- | $- | $77,211,000 |
| Cost of goods sold | 52,984,000 | - | - | 52,984,000 |
| Gross profit | 24,227,000 | - | - | 24,227,000 |
| Cost of goods sold as a percentage of net sales | 68.6% | - | - | 68.6% |
| Gross profit percentage | 31.4% | - | - | 31.4% |

*Net Sales*. Our consolidated net sales for the six months ended September 30, 2011 increased by $100,915,000, or 130.7%, to $178,126,000 compared to net sales for the six months ended September 30, 2010 of $77,211,000. The increase in net sales was due primarily to (i) our May 6, 2011 acquisition of Fenco which resulted in additional net sales of $93,373,000 or 120.9%, and (ii) an increase in sales to customers of $7,542,000 or 9.8%, primarily to the existing customers 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 six months ended September 30, 2011 to 86.2% from 68.6% for the six months ended September 30, 2010, resulting in a corresponding decrease in our gross profit percentage of 17.6% to 13.8% for the six months ended September 30, 2011 from 31.4% for the six months ended September 30, 2010. The gross profit percentage in our rotating electrical segment increased to 32.2% from 31.4% during the six months ended September 30, 2011 due primarily to lower per unit manufacturing costs.

The gross profit percentage in our under-the-car product line segment was (3.5%) for the six months ended September 30, 2011. In addition to the negative impact of lost sales due to our lower than expected customer service levels, we also incurred related contractual customer penalties of $1,032,000 resulting in an increase in cost of goods sold. Our gross profit was further impacted as follows:

- In order to improve our quality and productivity levels, we replaced and trained a large number of personnel at Fenco’s facilities at Monterrey, Mexico. In conjunction with this, we increased production to meet product demand and to improve Fenco customer service levels at an approximate cost of $1,911,000
- To expedite enhancing customer service levels, we made certain inventory purchases above our normal cost for $1,249,000 for inventory that was sold during the six months ended September 30, 2011, and we incurred increased inbound freight expenses of $366,000

In addition, our gross profit in the six months ended September 30, 2011, was further impacted by (i) losses of approximately $1,816,000 resulting from the negative contribution from the CV axle product line which we do not plan to continue to sell or support in the future, (ii) negative margin of $874,000 related to certain product lines we stopped selling and supporting in December 2011, and (iii) additional costs of approximately $559,000 that were incurred in connection with the modification of a product for a new customer program. In connection with the May 6, 2011 Fenco acquisition, $3,407,000 was charged to cost of goods sold related to the fair value step up of inventory acquired which was sold during the six months ended September 30, 2011. As of September 30, 2011, there was $840,000 of inventory fair value step-up value remaining to be expensed as the inventory is sold.

Excluding the impact of the above items related to the under-the-car product line segment, the gross profit margin in the six months ended September 30, 2011, would have been approximately 10.0%. We anticipate that the gross profit margin will be further improved after implementing the cost savings initiatives for production, warehousing, and distribution.

### Operating Expenses

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

| Six months ended September 30, 2011 | Rotating Electrical | Under-the-Car Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $12,314,000 | $8,063,000 | $- | $20,377,000 |
| Sales and marketing | 3,731,000 | 1,919,000 | - | 5,650,000 |
| Research and development | 817,000 | - | - | 817,000 |
| Acquisition costs | 713,000 | - | - | 713,000 |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 14.5% | 8.6% | - | 11.4% |
| Sales and marketing | 4.4% | 2.1% | - | 3.2% |
| Research and development | 1.0% | - | - | 0.5% |
| Acquisition costs | 0.8% | - | - | 0.4% |
| **2010** |  |  |  |  |
| General and administrative | $7,595,000 | $- | $- | $7,595,000 |
| Sales and marketing | 2,941,000 | - | - | 2,941,000 |
| Research and development | 762,000 | - | - | 762,000 |
| Acquisition costs | - | - | - | - |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 9.8% | - | - | 9.8% |
| Sales and marketing | 3.8% | - | - | 3.8% |
| Research and development | 1.0% | - | - | 1.0% |
| Acquisition costs | 0.0% | - | - | 0.0% |

*General and Administrative.* Our consolidated general and administrative expenses for the six months ended September 30, 2011 were $20,377,000, which represents an increase of $12,782,000, or 168.3%, from general and administrative expenses for the six months ended September 30, 2010 of $7,595,000. The increase in general and administrative expenses for our rotating electrical business during the six months ended September 30, 2011 was primarily due to (i) a loss of $1,887,000 recorded due to the changes in the fair value of forward foreign currency exchange contracts, compared to a loss of $332,000 recorded during the six months ended September 30, 2010, (ii) $1,156,000 of professional services and travel incurred in connection with our Fenco operations, (iii) $780,000 of incentive payments made to certain employees in connection with our Fenco acquisition, (iv) $575,000 of increased professional services, and (v) $262,000 of decreased amortization of deferred gain on sale-leaseback.

General and administrative expenses for the under-the-car product line segment during the six months ended September 30, 2011 were $8,063,000, and were primarily attributable to (i) employee-related expenses, (ii) amortization of intangible assets, (iii) professional services fees and other consulting fees, (iv) $325,000 of bank financing charges, and (v) $97,000 for legal and professional fees incurred in connection with the Fenco Credit Agreement, which were partly offset by foreign exchange gains recorded.

*Sales and Marketing*. Our consolidated sales and marketing expenses for the six months ended September 30, 2011 increased $2,709,000, or 92.1%, to $5,650,000 from $2,941,000 for the six months ended September 30, 2010. The increase of $790,000 from our rotating electrical business was due primarily to (i) the reversal of commission expenses during the prior year in connection with our August 2009 acquisition, (ii) increased employee-related expenses, (iii) increased travel incurred in connection with our Fenco operations, (iv) increased advertising expenses, and (v) increased trade show expense associated with this segment.

Sales and marketing expenses for the under-the-car product line were $1,919,000 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 $55,000, or 7.2%, to $817,000 for the six months ended September 30, 2011 from $762,000 for the six months ended September 30, 2010. The increase in research and development expenses was due primarily to an increase in travel and employee-related expenses at our rotating electrical segment as compared to the six months ended September 30, 2010.

*Acquisition Costs*. During the six months ended September 30, 2011, we incurred $713,000 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 six months ended September 30, 2011 was $2,508,000. This represents a decrease of $795,000 compared to interest expense of $3,303,000 during the six months ended September 30, 2010. This decrease is primarily attributable to a lower balance of receivables being discounted under the receivable discount programs and lower discount rates on these balances, partly offset by an increase in interest expense on the Old Parent Company Revolving Loan due to higher average outstanding balances.

Interest expense incurred by our under-the-car product line segment was $2,795,000 during the six months ended September 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

*Income Tax*. Income tax expenses for the six months ended September 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 six months ended September 30, 2011 were impacted by an additional 1.4% in the period due to 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 Fenco operations for the six months ended September 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 six months ended September 30, 2011, we recorded $123,000 of income tax expense specifically related to the Fenco subsidiaries located in Mexico, a separate tax jurisdiction.

### Liquidity and Capital Resources

Motorcar Parts of America, Inc. and its subsidiaries (the “Company” or “MPA”) remanufacture, produce, and distribute automobile parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. These replacement parts are sold for use on vehicles after initial vehicle purchase. These automotive parts are sold to automotive retail chain stores and warehouse distributors throughout the United States and Canada and to major automobile manufacturers.

### Overview

At September 30, 2011, we had negative working capital of $25,045,000, a ratio of current assets to current liabilities of 0.9:1, and cash of $1,197,000, 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.

In accordance with our core accounting policies, we classify all of our core inventories as long-term assets and the portion of core liability related to the core inventory purchased and on the shelves of our customers, are recorded as long-term liabilities. These accounts are therefore excluded from the working capital and current ratio calculations. We do not recognize revenue or the related cost of sales from the sale of remanufactured cores, however, we do invoice and collect for the core value. These accounts receivable amounts are classified as short-term assets. In addition, upon the sale of a remanufactured core a core liability is created to record the obligation to provide our customer with a credit upon the return of a like core by the customer. Since the return of a core is based on the sale of a remanufactured automobile part to an end user of our customer, the offset to this core liability generated by its return to us by our customer is usually followed by the sale of a replacement remanufactured auto part, and thus a portion of the core liability is continually outstanding and is recorded as long-term. The long term core inventory as of September 30, 2011 was $188,151,000 compared to $80,558,000 at March 31, 2011. The long-term core liability as of September 30, 2011 was $107,399,000. There was no long-term core liability balance at March 31, 2011.

During the six months ended September 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 Old Parent Company Term Loan.

In January 2012, we replaced the Old Parent Company Credit Agreement by entering into a new parent company financing agreement with a syndicate of lenders. The new parent company financing consists of: (i) term loans aggregating $75,000,000 and (ii) revolving loans up to $20,000,000, subject to borrowing base restrictions and a $10,000,000 sublimit for letters of credit. A portion of the proceeds from the New Parent Company Term Loans was used to repay all amounts outstanding under the Old Parent Company Credit Facility and the Old Parent Company Credit Agreement was terminated.

We believe our use of receivable discount programs with certain of our major customers, amounts available under our New Parent Company Loans, the Fenco Revolving Facility, 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 New Parent Company Term Loans, and capital expenditure obligations over the next twelve months.

### Cash Flows

Net cash used in operating activities was $45,234,000 for the six months ended September 30, 2011 compared to net cash provided by operating activities of $9,080,000 for the six months ended September 30, 2010. The rotating electrical segment provided cash from operations of $4,076,000 and $9,080,000 for the six months ended September 30, 2011 and 2010, respectively. The changes in operating activities for the rotating electrical segment was due primarily to an increase in accounts payable and accrued liabilities in connection with the inventory consigned to Fenco, which was partly offset by an increase in non-core inventory and accounts receivable. The most significant changes in our under-the-car product line segment subsequent to our acquisition of Fenco on May 6, 2011, was the $49,310,000 that was used in our under-the-car product line segment due primarily to (i) an increase of $19,399,000 in inventory in order to improve customer service levels and (ii) the net loss incurred by this segment of $17,150,000 adjusted for non-cash charges subsequent to the acquisition date, (iii) a decrease in accounts payable and accrued liabilities of $17,177,000, and (iv) an increase of $4,861,000 in the customer core returns accrual.

Net cash used in investing activities was $699,000 and $2,712,000 during the six months ended September 30, 2011 and 2010, respectively. Our capital expenditures for our rotating electrical segment for the six months ended September 30, 2011 and 2010 was $678,000 and $540,000, respectively, primarily related to the purchase of equipment for our manufacturing facilities. In addition, net cash used in investing activities during the six months ended September 30, 2010 included the secured loan made to Fenco of $1,894,000 prior to the acquisition in May 2011, and the payment of the purchase price holdback of $464,000 in connection with our acquisition of Automotive Importing Manufacturing, Inc.

Net cash provided by financing activities was $44,807,000 for the six months ended September 30, 2011 compared to net cash used in financing activities of $1,780,000 during the six months ended September 30, 2010. The rotating electrical segment provided cash from financing activities of $36,708,000 during the six months ended September 30, 2011, compared to the net cash used in financing activities of $1,780,000 during the six months ended September 30, 2010. The cash provided from financing activities was used primarily to finance Fenco. In addition, Fenco increased their credit facility by $10,000,000 which was used for working capital.

### 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 “ Old Parent Company Credit Agreement”), with Union Bank, N.A. and Branch Banking & Trust Company, allowed us to borrow up to a total of $60,000,000 (the “Old Parent Company Credit Facility”). The Old Parent Company Credit Facility was comprised of (i) a revolving facility with a $7,000,000 letter of credit sub-facility and (ii) a term loan. We were able to borrow on a revolving basis up to an amount equal to $50,000,000 minus all outstanding letter of credit obligations (the “Old Parent Company Revolving Loan”). The term loan was in the principal amount of $10,000,000 (the “Old Parent Company Term Loan”).

The Old Parent Company Term Loan was scheduled to mature in October 2014 and required principal payments of $500,000 on a quarterly basis. The Old Parent Company Revolving Loan was scheduled to expire in October 2012 and provided us the option to request up to two one-year extensions.

The balance outstanding under the Old Parent Company Revolving Loan was $37,500,000 at September 30, 2011. There was no outstanding balance on the Old Parent Company Revolving Loan at March 31, 2011. We had reserved $1,126,000 of the Old Parent Company Revolving Loan for standby letters of credit for workers’ compensation insurance and $4,731,000 for commercial letters of credit as of September 30, 2011. As of September 30, 2011, $6,643,000 was available under the Old Parent Company Revolving Loan.

In January 2012, we replaced the Old Parent Company Credit Agreement by entering into a new parent company financing agreement with a syndicate of lenders, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent (the “New Parent Company Loans”). The New Parent Company Loans consists of: (i) term loans aggregating $75,000,000 (the “New Parent Company Term Loans”) and (ii) revolving loans of up to $20,000,000, subject to borrowing base restrictions and a $10,000,000 sublimit for letters of credit (the “New Parent Company Revolving Loans,”). The lenders hold a security interest in substantially all of the assets of our rotating electrical segment.

A portion of the proceeds from the New Parent Company Term Loans was used to repay all amounts outstanding under the Old Parent Company Credit Facility and the Old Parent Company Credit Agreement was terminated.

#### 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 September 30, 2011, approximately $2,581,000 was available under the Fenco Revolving Facility.

As of September 30, 2011, $47,748,000 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.

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.

We have classified the Fenco Revolving Facility as long term as of September 30, 2011 as we have the ability and intent to hold the balance outstanding for an uninterrupted period extending beyond one year from the balance sheet date. The Fenco Credit Agreement, among other things, requires the Fenco Borrowers to maintain certain financial covenants. As of September 30, 2011, the Fenco Borrowers were not in compliance with the minimum EBITDA covenant and the requirement to submit the most recent interim financial statements within time frames specified by the Fenco Credit Agreement. On March 5, 2012, the Fenco Borrowers obtained a waiver for non-compliance with these covenants which also extended the delivery date to submit the December 31, 2011 financial statements to March 31, 2012.

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 New Parent Company Loans 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

Both our segments use 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 the receivable discount programs:

|  | Six Months Ended September 30, 2011 | 2010 |
| --- | ---: | ---: |
| Receivables discounted | $133,222,000 | $70,950,000 |
| Weighted average days | 312 | 325 |
| Annualized weighted average discount rate | 2.9% | 4.5% |
| Amount of discount as interest expense | $3,363,000 | $2,855,000 |

#### Off-Balance Sheet Arrangements

At September 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 $678,000 for the six months ended September 30, 2011 and primarily related to the purchase of equipment for our manufacturing 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.

### Subsequent Events

#### New Parent Company Financing Agreement

In January 2012, we replaced the Old Parent Company Credit Agreement by entering into a new parent company financing agreement with a syndicate of lenders, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent (the “New Parent Company Loans”). The New Parent Company Loans consists of: (i) term loans aggregating $75,000,000 (the “New Parent Company Term Loans”) and (ii) revolving loans of up to $20,000,000, subject to borrowing base restrictions and a $10,000,000 sublimit for letters of credit (the “New Parent Company Revolving Loans,”). The lenders hold a security interest in substantially all of the assets of our rotating electrical segment.

The New Parent Company Term Loans require quarterly principal payments of $250,000 beginning on October 1, 2012 through July 1, 2013, and quarterly principal payments of $1,000,000 beginning on October 1, 2013. The New Parent Company Loans mature on January 17, 2017.

The New Parent Company Loans bear interest, at the reference rate, plus an applicable margin, or at the Eurodollar rate, plus an applicable per annum margin, as selected by us. The applicable per annum margins for the New Revolving Loans are 2.5% for reference rate loans and 3.0% for Eurodollar rate loans. The applicable per annum margins for the New Term Loans are 7.0% for reference rate loans and 8.0% for Eurodollar rate loans. Additionally, we are subject to a 0.5% per annum fee on the unused portions of the New Revolving Loans.

The New Parent Company Loans, among other things, require us to maintain certain financial covenants including a maximum senior leverage ratio, a minimum fixed charge coverage ratio, and a minimum consolidated earnings before interest, income tax, depreciation and amortization (“EBITDA”).

A portion of the proceeds from the New Parent Company Term Loans was used to repay all amounts outstanding under the Old Parent Company Credit Facility, and the Old Parent Company Credit Agreement was terminated.

#### Discontinued Product Line

In December 2011, we announced the discontinuation of the constant velocity (“CV”) axle product line and the shut-down of our related facility located in Bedford, New Hampshire. We recorded net sales and gross profit (loss) of $3,327,000 and ($1,816,000), respectively, in the six months ended September 30, 2011 in connection with this product line.

### 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.

#### Testing Goodwill for Impairment

In September 2011, the FASB issued an amendment which gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is required to perform the first step of the two-step goodwill impairment test. If the carrying value of the reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance on April 1, 2012 is not expected to have any 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, 3,305 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 September 30, 2011.

### Changes in Internal Control over Financial Reporting

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

On May 6, 2011, MPA 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 September 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.

Since the acquisition of Fenco we have been unable to timely file our Quarterly Reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the second and third quarters of our fiscal 2012. As a result, management has concluded that our disclosure controls and procedures were not effective because of the existence of a material weakness in our internal control over financial reporting at Fenco. Specifically, systems required to segregate and account for core and other transactions accurately were inadequate. As a result, Fenco was unable to complete the financial closing process on a timely and accurate basis. In addition, the policies and procedures existing at Fenco did not provide for effective oversight and review of the reconciliation of accounts at month or quarter ends.

As a result of the material weakness, we have commenced a review of the internal controls over financial reporting at Fenco and began putting in place appropriate oversight and controls. In preparing our fiscal 2012 second quarter filing, we integrated the core receiving and return transactions into our financial reporting process and implemented additional core tracking procedures. We have also added additional personnel to review core and other transactions. We continue to focus on establishing effective internal controls.

## 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 Mar 7, 2012.
Source: SEC EDGAR, the filing index for accession 0001140361-12-013847. Last ingested by Listed: Nov 10, 2026, 01:42 ET. No prices; not investment advice.