# Motorcar Parts of America Inc: Form 10-Q for the period ended Sep 30, 2012

- Company: [Motorcar Parts of America Inc](/companies/mpaa.md) (CIK 918251)
- Form: 10-Q
- Filed: 2012-12-18
- Accepted by EDGAR: Dec 18, 2012, 16:02 ET
- Period: 2012-09-30
- Accession: 0001140361-12-051668
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/918251/000114036112051668/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/918251/000114036112051668/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $111.6m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2012-04-01 to 2012-09-30 | $200.7m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-07-01 to 2012-09-30 | $94.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2012-04-01 to 2012-09-30 | $171.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2012-07-01 to 2012-09-30 | $16.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2012-04-01 to 2012-09-30 | $28.8m | us-gaap:GrossProfit |
| Research and development | 3 months, 2012-07-01 to 2012-09-30 | $461.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2012-04-01 to 2012-09-30 | $897.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | $1.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-04-01 to 2012-09-30 | −$2.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $3.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2012-04-01 to 2012-09-30 | $5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | −$8.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-04-01 to 2012-09-30 | −$18.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | −$0.62 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-04-01 to 2012-09-30 | −$1.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-01 to 2012-09-30 | −$0.62 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-04-01 to 2012-09-30 | −$1.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 14,456,921 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-04-01 to 2012-09-30 | 14,192,235 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2012-04-01 to 2012-09-30 | −$14.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-04-01 to 2012-09-30 | $1.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-09-30 | $32.3m | us-gaap:Cash |
| Current assets | at 2012-09-30 | $155.8m | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $488.9m | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $170.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-09-30 | $420.5m | us-gaap:Liabilities |
| Long-term debt | at 2012-09-30 | $92.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-09-30 | $1.7m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2012-09-30 | $68.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,188 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, 2012 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on September 28, 2012.

### 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

We are a leading manufacturer, remanufacturer, and distributor of aftermarket automobile parts.

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 May 2011 acquisition of the business formerly operated by FAPL, we also manufacture, remanufacture and distribute new and remanufactured steering components, brake calipers, master cylinders, hub assembly and bearings, and clutches and clutch hydraulics for virtually all passenger and truck vehicles. We intend to focus our efforts in the near term on four major categories: rotating electrical, brakes, steering, and wheel hubs and bearings. All of these parts are non-discretionary.

We have two reportable segments, our existing product lines were included under the rotating electrical and the product lines from our FAPL acquisition were included under the undercar product line, based on the way we manage, evaluate and internally report our business activities.

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.

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 aftermarket programs and their warranty replacement programs (“OES”). Demand and replacement rates for aftermarket 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 significant part of our business. In difficult economic times, we believe consumers are more likely to purchase lower cost replacement parts in both the DIY and DIFM markets. We focus on supplying both these channels with the most cost efficient replacement parts for the consumer to purchase.

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™, Fenco™, Dynapak®, and other brand names directly to suppliers that focus on professional installers. In addition, we sell our products to OE manufacturers for distribution to the professional installer both for warranty replacement and their general aftermarket channels. We have been successful in growing sales to this market.

### Undercar Product Line Turnaround Plan

Our top turnaround priority continues to be improvement of the financial performance of our undercar product line business to position it for sustained profitability and growth in the long-term. At the same time we are focused on maintaining strong liquidity and bringing the level of customer service in our undercar business to the excellent level of customer service we had achieved and strive to maintain in our rotating electrical business. We have been systematically and aggressively implementing our undercar product line turnaround plan since acquisition with our initial goal to enhance customer service followed by our plan to streamline the operations, with a goal of achieving profitability and positive cash flow for the undercar business. This turnaround plan is built on the following elements: upgrading customer service levels; focusing on product excellence; discontinuing certain product offerings; improving manufacturing and logistics productivity; and implementing cost savings throughout the operating model.

*Customer Service Levels*. We have made certain inventory purchases above our normal cost in order to expedite improving customer service levels. This initiative has resulted in significant improvements in our customers’ order fill rates. As a result, we had to increase our inventory levels by approximately $27 million in the aggregate from May 2011 through the quarter ended December 31, 2011. These inventory levels declined in the quarter ended September 30, 2012 to below the May 2011 levels. We expect these inventory levels to decrease as we continue to normalize our operations.

*Product Excellence.* We continue to place significant attention on improving product excellence in our undercar product line business. We have implemented a personnel training program at Fenco’s facilities in Monterrey, Mexico and have also implemented new quality control systems including new end of line testing at all of our production facilities. Throughout our system we have engaged third party labs to test purchased products.

*Review of Product Offerings*. With our Fenco acquisition we have added several new product lines which are vehicle operation critical. We have reviewed and continue to review the market opportunities for our products and potential products. In the third quarter of fiscal 2012, we discontinued the CV axle product line and shut-down the related facility. We have successfully supported our customers through this transition and continue to sell down the remaining CV axle inventory. Additionally, we exited the clutch product line during the second quarter of fiscal 2013.

*Manufacturing Productivity*. We have implemented a process of continuing improvements at Fenco facilities and expect to see enhancement to productivity as we introduce lean operating disciplines.

During the second quarter of fiscal 2013, we discontinued supplying our products to a major non-profitable customer of this segment. The net sales to this customer represented approximately 31.0% for six months ended September 30, 2012 and 20.8% for the year ended March 31, 2012 from the date of acquisition on May 6, 2011, of net sales for this segment. We have no further obligation to accept additional product returns from this customer. As our ongoing commitment to excellence in customer service, we have continued to support this customer through this transition during the third quarter of fiscal 2013. In accordance with our net-of-core revenue recognition policy, we expect to record revenue from the sale of these Remanufactured Cores which were previously recorded as a customer core returns accrual and the related long-term core inventory in the consolidated balance sheet.

In addition, during fiscal 2013, we reached an agreement with one of our third-party logistics service providers located in Pennsylvania to terminate its services provided to the undercar product line segment effective November 5, 2012. Among other things, this agreement requires us to (i) pay all invoice amounts and other invoices for services rendered up to and the date of actual vacating of the premises and (ii) pay a termination fee of approximately $1,402,000. In addition, we agreed to pay $95,000 per month all-inclusive rental fee to use the property for period not to exceed eight months from the termination date.

To improve Fenco’s liquidity, in August 2012, Fenco entered into a second amendment to the Fenco Credit Agreement which, among other things, amended the maximum amount of the revolving facility to (i) $55,000,000 for the period up to and including December 31, 2012 and (ii) $50,000,000 for the period on or after January 1, 2013 through October 6, 2014. In August 2012, we entered into a revolving credit agreement with the Supplier and Fenco pursuant to which the Supplier agreed to provide a revolving credit line for purchases of automotive parts and components by Fenco in an aggregate principal amount not to exceed $22,000,000, of which $2,000,000 will only be available for accrued interest and other amounts payable. We have negotiated payment plans for our accounts payable with the majority of Fenco’s suppliers and vendors, of which approximately $39,000,000 was past due at November 28, 2012.

Our implementation of our plan for Fenco has taken longer and cost more than initially anticipated. We anticipate continuing to refine this turnaround plan as the various elements are implemented. We expect these and related initiatives will be substantially completed in the first quarter of fiscal 2014. Our ability to successfully implement this plan and the timing of our implementation of this plan will depend on, among other things, our customer and vendor support and the financial resources that are or will become available for implementation of this plan.

### Results of Operations for the Three Months Ended September 30, 2012 and 2011

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein.

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

| Three months ended September 30, 2012 | Rotating Electrical | Undercar Product Line | Consolidated |
| --- | ---: | ---: | ---: |
| Gross profit (loss) percentage | 34.9% | (6.3)% | 15.0% |
| Cash flow provided by (used in) operations | $10,946,000 | $(8,730,000) | $2,216,000 |
| Finished goods turnover (annualized) (1) | 7.4 | 5.4 | 6.0 |
| Annualized return on equity (2) | - | - | (48.5)% |
| **2011** |  |  |  |
| Gross profit (loss) percentage | 32.4% | (0.5)% | 13.9% |
| Cash flow used in operations | $(762,000) | $(17,635,000) | $(18,397,000) |
| Finished goods turnover (annualized) (1) | 5.7 | 4.2 | 4.6 |
| Annualized return on equity (2) | - | - | (18.6)% |

(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 consolidated net income for the fiscal quarter multiplied by 4 and dividing the result by beginning consolidated 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, 2012 and 2011:

| Three months ended September 30, 2012 | Rotating Electrical | Undercar Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales to external customers | $57,652,000 | $53,980,000 | $- | $111,632,000 |
| Cost of goods sold | 37,556,000 | 57,355,000 | - | 94,911,000 |
| Gross profit (loss) | 20,096,000 | (3,375,000) | - | (16,721,000) |
| Cost of goods sold as a percentage of net sales | 65.1% | 106.3% | - | 85.0% |
| Gross profit (loss) percentage | 34.9% | (6.3)% | - | 15.0% |
| **2011** |  |  |  |  |
| Net sales | $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 | 62,217,000 | (1,062,000) | 92,637,000 |
| Gross profit (loss) | 15,091,000 | (338,000) | 226,000 | 14,979,000 |
| Cost of goods sold as a percentage of net sales | 67.6% | 100.5% | - | 86.1% |
| Gross profit (loss) percentage | 32.4% | (0.5)% | - | 13.9% |

*Net Sales*. Our consolidated net sales for the three months ended September 30, 2012 increased by $4,016,000, or 3.7%, to $111,632,000 compared to consolidated net sales for the three months ended September 30, 2011 of $107,616,000.

- *Rotating electrical product line*

The net sales in our rotating electrical product line segment increased by $11,915,000 or 26.1%, to $57,652,000 for the three months ended September 30, 2012 compared to net sales of $45,737,000 for the three months ended September 30, 2011. The increase in net sales in our rotating electrical product line segment was due primarily to increased sales to our existing customers and to a lesser extent increased sales to new customers.

- *Undercar product line*

The net sales in our undercar product line segment decreased by $7,899,000 or 12.8%, to $53,980,000 for the three months ended September 30, 2012 compared to net sales of $61,879,000 for the three months ended September 30, 2011. This decrease in net sales in our undercar product line segment was due primarily to the discontinuation of certain unprofitable product lines and customers subsequent to September 30, 2011 as part of our undercar product line turnaround plan.

*Cost of Goods Sold/Gross Profit.* Our consolidated cost of goods sold as a percentage of consolidated net sales decreased during the three months ended September 30, 2012 to 85.0% from 86.1% for the three months ended September 30, 2011, resulting in a corresponding increase in our consolidated gross profit percentage of 1.1% to 15.0% for the three months ended September 30, 2012 from 13.9% for the three months ended September 30, 2011.

- *Rotating electrical product line*

The gross profit percentage in our rotating electrical product line increased to 34.9% from 32.4% during the three months ended September 30, 2011, which reflects lower per unit manufacturing costs.

- *Undercar product line*

The gross profit percentage in our undercar product line was negative 6.3% and 0.5% for the three months ended September 30, 2012 and 2011, respectively, representing a gross loss of $3,375,000 and $338,000 for the same periods. Our gross loss in our undercar product line for the three months ended September 30, 2012 was primarily impacted by higher production, warehousing and distribution costs. Higher production, warehousing and distribution costs were due to the increase in under-absorption of manufacturing overhead resulting from lower production levels.

In addition, our gross loss in our undercar product line during the three months ended September 30, 2012 was further impacted by (i) termination fees of $1,402,000 related to an agreement to terminate services with one of our third-party logistics service providers, (ii) severance costs included in cost of sales related to the production workforce of $1,272,000, (iii) contractual customer penalties of $817,000, (iv) losses of $795,000 related to certain unprofitable product lines we stopped selling and supporting in December 2011, (v) vendor support allowance for a certain product line of $500,000, and (vi) premium freight cost of $80,000 in order to improve our fill rates and ability to service our customers.

### Operating Expenses

The following table summarizes operating expenses by segment for the three months ended September 30, 2012 and 2011:

| Three months ended September 30, 2012 | Rotating Electrical | Undercar Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $4,392,000 | $6,801,000 | $- | $11,193,000 |
| Sales and marketing | 1,724,000 | 2,180,000 | - | 3,904,000 |
| Research and development | 461,000 | - | - | 461,000 |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 7.6% | 12.6% | - | 10.0% |
| Sales and marketing | 3.0% | 4.0% | - | 3.5% |
| Research and development | 0.8% | - | - | 0.4% |
| **2011** |  |  |  |  |
| General and administrative | $7,004,000 | $4,305,000 | $- | $11,309,000 |
| 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% | 7.0% | - | 10.5% |
| Sales and marketing | 4.1% | 2.1% | - | 3.0% |
| Research and development | 0.9% | - | - | 0.4% |
| Acquisition costs | 0.7% | - | - | 0.3% |

*General and Administrative.* Our consolidated general and administrative expenses for the three months ended September 30, 2012 were $11,193,000, which represents a decrease of $116,000, or 1.0%, from general and administrative expenses for the three months ended September 30, 2011 of $11,309,000. The decrease of $2,612,000 in general and administrative expenses for our rotating electrical business during the three months ended September 30, 2012 was primarily due to (i) a gain of $431,000 recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts compared to a loss of $1,799,000 recorded during the three months ended September 30, 2011 and (ii) $848,000 of decreased professional services and travel incurred in connection with our Fenco operations. These decreases were partly offset by $481,000 of increased general and administrative expenses at our offshore locations. The increase of $2,496,000 in general and administrative expenses for our undercar product line during the three months ended September 30, 2012 was primarily attributable to (i) $1,429,000 of severance, (ii) $1,292,000 of increased professional services fees and other consulting fees, (iii) $497,000 of increased audit fees, and (iv) $286,000 of increased bank charges. These increases in general and administrative expenses were partly offset by lower employee related expenses due to the reduction in workforce.

*Sales and Marketing*. Our consolidated sales and marketing expenses for the three months ended September 30, 2012 increased $707,000, or 22.1%, to $3,904,000 from $3,197,000 for the three months ended September 30, 2011. The decrease of $173,000 for our rotating electrical business was due primarily to (i) $96,000 of decreased travel incurred in connection with our Fenco operations and (ii) $45,000 of decreased trade shows expense. The increase of $880,000 in sales and marketing expenses for our undercar product line during the three months ended September 30, 2012 was primarily due to (i) $747,000 of severance and (ii) $283,000 of increased travel expenses. These increases were partly offset by a decrease of $140,000 in sales commissions and agent fees.

*Research and Development*. Our consolidated research and development expenses increased by $60,000, or 15.0%, to $461,000 for the three months ended September 30, 2012 from $401,000 for the three months ended September 30, 2011. The increase in research and development expenses was due primarily to an increase of $31,000 of employee-related expenses and $27,000 of increased supplies for our rotating electrical business during the three months ended September 30, 2012.

*Acquisition Costs*. We incurred $309,000 of legal and professional fees in connection with the Fenco acquisition during the three months ended September 30, 2011.

### Interest Expense

*Interest Expense.* Reflecting our increased leverage as a result of the acquisition of Fenco and the increase in the size of our business, net consolidated interest expense for the three months ended September 30, 2012 increased $2,773,000, or 81.8%, to $6,162,000 from $3,389,000 for the three months ended September 30, 2011. This increase in net interest expense was attributable to increased outstanding loan balances and higher interest rates incurred primarily by the rotating electrical product line segment during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.

### Provision for Income Taxes

*Income Tax*. Our income tax expense was $3,934,000 and $1,813,000 during the three months ended September 30, 2012 and 2011, respectively. This was primarily due to the federal and state income tax provision on pretax income in the U.S. and not recognizing income tax benefits related to the net losses of Fenco’s Canadian operations during the period due to the recoverability of these tax benefits not being deemed by us to be more likely than not to be realized. The income tax expenses, excluding the net losses of Fenco’s Canadian operations, reflect income tax rates of 37.6% and 36.2% for the three months ended September 30, 2012 and 2011, respectively. The income tax rates were 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 other foreign taxing jurisdictions.

In addition, any potential future income tax benefits associated with the net loss we incurred from Fenco’s Canadian operations during fiscal 2013 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.

### Results of Operations for the Six Months Ended September 30, 2012 and 2011

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, 2012 | Rotating Electrical | Undercar Product Line | Consolidated |
| --- | ---: | ---: | ---: |
| Gross profit (loss) percentage | 33.4% | (6.3)% | 14.4% |
| Cash flow provided by (used in) operations | $340,000 | $(14,883,000) | $(14,543,000) |
| Finished goods turnover (annualized) (1) | 7.2 | 4.4 | 5.2 |
| Annualized return on equity (2) | - | - | (51.1)% |
| **2011** |  |  |  |
| Gross profit (loss) percentage | 32.2% | (6.2)% | 12.4% |
| Cash flow provided by (used in) operations | $4,076,000 | $(49,310,000) | $(45,234,000) |
| Finished goods turnover (annualized) (1) | 5.8 | 4.4 | 4.8 |
| Annualized return on equity (2) | - | - | (29.9)% |

(1) Annualized finished goods turnover for the rotating electrical segment for the six months ended September 30, 2012 and 2011 and for the undercar product line for the six months ended September 30, 2012 is calculated by multiplying segment cost of sales for each six month period by 2 and dividing the result by the average between each respective segment’s beginning and ending non-core finished goods inventory values for the six month period. Annualized finished goods turnover for the undercar product line for the six months ended September 30, 2011 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 rotating electrical segment for the six month period multiplied by 2 plus net loss for the undercar product line segment for the period since acquisition multiplied by 2.4 and dividing the result by beginning consolidated 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, 2012 and 2011:

| Six months ended September 30, 2012 | Rotating Electrical | Undercar Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales to external customers | $104,451,000 | $96,204,000 | $- | $200,655,000 |
| Cost of goods sold | 69,536,000 | 102,284,000 | - | 171,820,000 |
| Gross profit (loss) | 34,915,000 | (6,080,000) | - | 28,835,000 |
| Cost of goods sold as a percentage of net sales | 66.6% | 106.3% | - | 85.6% |
| Gross profit (loss) percentage | 33.4% | (6.3)% | - | 14.4% |
| **2011** |  |  |  |  |
| Net sales | $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 | 99,208,000 | (1,612,000) | 156,114,000 |
| Gross profit (loss) | 27,847,000 | (5,835,000) | - | 22,012,000 |
| Cost of goods sold as a percentage of net sales | 67.8% | 106.2% | - | 87.6% |
| Gross profit (loss) percentage | 32.2% | (6.2)% | - | 12.4% |

*Net Sales*. Our consolidated net sales for the six months ended September 30, 2012 increased by $22,529,000, or 12.6%, to $200,655,000 compared to consolidated net sales for the six months ended September 30, 2011 of $178,126,000.

- *Rotating electrical product line*

The net sales in our rotating electrical product line segment increased by $19,698,000 or 23.2%, to $104,451,000 for the six months ended September 30, 2012 compared to net sales of $84,753,000 for the six months ended September 30, 2011. The increase in net sales in our rotating electrical product line segment was due primarily to increased sales to our existing customers and to a lesser extent increased sales to new customers.

- *Undercar product line*

The net sales in our undercar product line segment increased by $2,831,000 or 3.0%, to $96,204,000 for the six months ended September 30, 2012 compared to net sales of $93,373,000 for the six months ended September 30, 2011. This increase in net sales in our undercar product line segment was due primarily to the full period impact of our May 6, 2011 acquisition of Fenco, partly offset by the discontinuation of certain unprofitable product lines and customers subsequent to September 30, 2011 as part of our undercar product line turnaround plan.

*Cost of Goods Sold/Gross Profit.* Our consolidated cost of goods sold as a percentage of consolidated net sales decreased during the six months ended September 30, 2012 to 85.6% from 87.6% for the six months ended September 30, 2011, resulting in a corresponding increase in our consolidated gross profit percentage of 2.0% to 14.4% for the six months ended September 30, 2012 from 12.4% for the six months ended September 30, 2011.

- *Rotating electrical product line*

The gross profit percentage in our rotating electrical product line increased to 33.4% from 32.2% during the six months ended September 30, 2011. Our increased gross profit percentage in our rotating electrical product line for the six months ended September 30, 2012 is a result of lower per unit manufacturing costs, partially offset by $1,665,000 of marketing and certain other allowances made in connection with the purchase of inventory from a new customer we acquired in the first quarter of fiscal 2013.

- *Undercar product line*

The gross profit percentage in our undercar product line was negative 6.3% and 6.2% for the six months ended September 30, 2012 and 2011, respectively, representing a negative gross profit of $6,080,000 and $5,835,000 for the same periods. Our gross profit in our undercar product line for the six months ended September 30, 2012 was primarily impacted by higher production, warehousing and distribution costs. Higher production, warehousing and distribution costs were due to the increase in under-absorption of manufacturing overhead resulting from lower production levels.

In addition, our gross profit in our undercar product line during the six months ended September 30, 2012 was further impacted by (i) contractual customer penalties of $1,882,000, (ii) losses of $1,506,000 related to certain unprofitable product lines we stopped selling and supporting in December 2011, (iii) termination fees of $1,402,000 related to an agreement to terminate services with one of our third-party logistics service providers, (iv) severance costs related to our production workforce of $1,272,000, (v) vendor support allowance of $1,145,000, (vi) allowance to a customer of $355,000 in connection with a return of certain products, and (vii) premium freight cost of $125,000 in order to improve our fill rates and ability to service our customers.

### Operating Expenses

The following table summarizes operating expenses by segment for the six months ended September 30, 2012 and 2011:

| Six months ended September 30, 2012 | Rotating Electrical | Undercar Product Line | Eliminations | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $10,306,000 | $12,451,000 | $- | $22,757,000 |
| Sales and marketing | 3,496,000 | 3,947,000 | - | 7,443,000 |
| Research and development | 897,000 | - | - | 897,000 |
| **Percent of net sales** |  |  |  |  |
| General and administrative | 9.9% | 12.9% | - | 11.3% |
| Sales and marketing | 3.3% | 4.1% | - | 3.7% |
| Research and development | 0.9% | - | - | 0.4% |
| **2011** |  |  |  |  |
| General and administrative | $12,314,000 | $7,304,000 | $- | $19,618,000 |
| 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% | 7.8% | - | 11.0% |
| Sales and marketing | 4.4% | 2.1% | - | 3.2% |
| Research and development | 1.0% | - | - | 0.5% |
| Acquisition costs | 0.8% | - | - | 0.4% |

*General and Administrative.* Our consolidated general and administrative expenses for the six months ended September 30, 2012 were $22,757,000, which represents an increase of $3,139,000, or 16.0%, from general and administrative expenses for the six months ended September 30, 2011 of $19,618,000. The decrease of $2,008,000 in general and administrative expenses for our rotating electrical business during the six months ended September 30, 2012 was primarily due to (i) a gain of $340,000 recorded due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts compared to a loss of $1,887,000 recorded during the six months ended September 30, 2011 and (ii) $1,156,000 of decreased professional services and travel incurred in connection with our Fenco operations. These decreases were partly offset by (i) $535,000 of increased audit fees, (ii) $393,000 of increased general and administrative expenses at our offshore locations, and (iii) $360,000 of increased legal expense. The increase of $5,147,000 in general and administrative expenses for our undercar product line during the six months ended September 30, 2012 was primarily attributable to (i) $3,182,000 of increased professional services fees and other consulting fees, (ii) $1,429,000 of severance, and (iii) $1,003,000 of increased audit fees. These increases in general and administrative expenses were partly offset by lower employee related expenses due to reduction in workforce.

*Sales and Marketing*. Our consolidated sales and marketing expenses for the six months ended September 30, 2012 increased $1,793,000, or 31.7%, to $7,443,000 from $5,650,000 for the six months ended September 30, 2011. The decrease of $235,000 for our rotating electrical business was due primarily to (i) $127,000 of decreased travel incurred in connection with our Fenco operations, (ii) $44,000 of decreased trade shows expense, (iii) $38,000 of decreased advertising expense, and (iv) $28,000 of decreased employee-related expenses. The increase of $2,028,000 in sales and marketing expenses for our undercar product line during the six months ended September 30, 2012 was primarily due to (i) $747,000 of severance, (ii) $655,000 of increased travel expenses, and (iii) $578,000 of increased advertising expense.

*Research and Development*. Our consolidated research and development expenses increased by $80,000, or 9.8%, to $897,000 for the six months ended September 30, 2012 from $817,000 for the six months ended September 30, 2011. The increase in research and development expenses for our rotating electrical business was due primarily to an increase of $60,000 of employee-related expenses and $35,000 of increased supplies expense during the six months ended September 30, 2012, partly offset by $25,000 of decreased travel.

*Acquisition Costs*. We incurred $713,000 of legal and professional fees in connection with the Fenco acquisition during the six months ended September 30, 2011.

### Interest Expense

*Interest Expense.* Reflecting our increased leverage as a result of the acquisition of Fenco and the increase in the size of our business, net consolidated interest expense for the six months ended September 30, 2012 increased $5,943,000, or 112.1%, to $11,246,000 from $5,303,000 for the six months ended September 30, 2011. This increase in net interest expense was attributable to (i) increased outstanding loan balances and higher interest rates incurred primarily by the rotating electrical product line segment during the six months ended September 30, 2012 as compared to the six months ended September 30, 2011, (ii) the full period impact of interest expense incurred on the outstanding loan balances by the undercar product line business since our acquisition on May 6, 2011, and (iii) increased discount on factored receivables due to a higher balance of receivables were discounted during the six months ended September 30, 2012.

### Provision for Income Taxes

*Income Tax*. Our income tax expense was $5,287,000 and $3,655,000 during the six months ended September 30, 2012 and 2011, respectively. This was primarily due to the federal and state income tax provision on pretax income in the U.S. and not recognizing income tax benefits related to the net losses of Fenco’s Canadian operations during the period due to the recoverability of these tax benefits not being deemed by us to be more likely than not to be realized. The income tax expenses, excluding the net losses of Fenco’s Canadian operations, reflect income tax rates of 37.7% and 40.1% for the six months ended September 30, 2012 and 2011, respectively. The income tax rates were 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 other foreign taxing jurisdictions.

In addition, any potential future income tax benefits associated with the net loss we incurred from Fenco’s Canadian operations during fiscal 2013 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.

### Liquidity and Capital Resources

The Company remanufactures, manufactures, and distributes 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 North America and to major automobile manufacturers.

### Overview

At September 30, 2012, we had negative working capital of $14,255,000, a ratio of current assets to current liabilities of 0.9:1, and cash of $32,328,000, compared to negative working capital of $2,188,000, a ratio of current assets to current liabilities of 1:1, and cash of $32,617,000 at March 31, 2012.

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, 2012 was $192,902,000 compared to $194,406,000 at March 31, 2012. The long-term core liability as of September 30, 2012 was $102,445,000 compared to $113,702,000 at March 31, 2012.

During the six months ended September 30, 2012, we used cash generated from the use of our receivable discount programs with certain of our major customers, from the private placement of our common stock, and our loans as our primary sources of liquidity. These sources were primarily used to pay down our accounts payable balances, enhance the integration of our Fenco acquisition, and pay for the capital expenditure obligations.

In April 2012, we entered into a Subscription Agreement and a Registration Rights Agreement to raise $15,004,000 in gross proceeds and net proceeds of $13,970,000 after expenses, through a private placement of our common stock. Pursuant to the terms of the Subscription Agreement, certain accredited investors purchased an aggregate of 1,936,000 shares of common stock in a private placement exempt from registration under the Securities Act in reliance upon Rule 506 of Regulation D, for a purchase price of $7.75 per share. We used the proceeds to enhance the integration of our Fenco acquisition and for general corporate purposes.

Pursuant to the Registration Rights Agreement, we have agreed to file a registration statement with the SEC to register for resale the common stock sold in the private placement not later than 45 days after the closing of the private placement and to use commercially reasonable efforts to cause such registration statement to be declared effective, subject to certain exceptions, within 60 days of closing (or 120 days in the event of an SEC review). Failure to meet these deadlines and certain other events may result in our payment to the Purchasers of liquidated damages in the amount of 1.0% of the purchase price per 30-day period pending filing of the registration statement, effectiveness of the registration statement or other events, as applicable. On June 12, 2012, we initially filed a registration statement under the Securities Act of 1933 to register the shares of common stock; however, the registration statement has yet to be declared effective and we began accruing liquidated damages starting on August 25, 2012. Liquidated damages may be settled either in cash or, at the option of the purchaser, in shares of our common stock. As of September 30, 2012, we had accrued $150,000 for the settlement of these liquidated damages.

In May 2012, we entered into the Second Amendment to the Parent Company Financing Agreement and borrowed an additional $10,000,000, for an aggregate of $85,000,000 under the Amended Parent Company Term Loans. The Second Amendment, among other things, modified the interest rates per annum applicable to the Amended Parent Company Term Loans. The Amended Parent Company Term Loans will bear interest at rates equal to, at our option, either LIBOR plus 8.5% or a base rate plus 7.5%. The Amended Parent Company Term Loans require quarterly principal payments of $250,000 beginning on October 1, 2012 and increase to $600,000 per quarter on April 1, 2013 and to $1,350,000 on October 1, 2013 until the final maturity date. Among other things, the Second Amendment provides for certain amended financial covenants, and requires that we maintain cash and cash equivalents of up to $10,000,000 in the aggregate until our obligations with respect to a significant supplier have ceased.

In connection with the Second Amendment, we issued the Cerberus Warrant to Cerberus Business Finance, LLC. Pursuant to the Cerberus Warrant, Cerberus Business Finance, LLC, may purchase up to 100,000 shares of our common stock for an initial exercise price of $17.00 per share for a period of five years. The exercise price is subject to adjustments, among other things, for sales of common stock by us at a price below the exercise price. As a result of the issuance of the Supplier Warrant in August 2012 at an initial exercise price of $7.75 per share, the exercise price of the Cerberus Warrant was reduced to $7.75 per share. As the exercise price of the Cerberus Warrant was reduced, the number of shares of our common stock that may be purchased upon the exercise of the Cerberus Warrant was increased to 219,355 so that the aggregate exercise price of the Cerberus Warrant after the adjustment is the same as the aggregate exercise price prior to the adjustment. The fair value of the Cerberus Warrant using the Monte Carlo simulation model was $607,000 at May 24, 2012 and $357,000 at September 30, 2012. This amount was recorded as a warrant liability which is included in other liabilities in the consolidated balance sheet at September 30, 2012. During the three and six months ended September 30, 2012, a gain of $260,000 and $250,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of the warrant liability.

In August 2012, we entered into the Third Amendment to the Parent Company Financing Agreement which, among other things, (i) permitted us to enter into the Fenco Credit Line, (ii) to make additional investments in Fenco in an aggregate amount outstanding not to exceed $20,000,000 at any time, (iii) added additional reporting requirements regarding financial reports and material notices under the Fenco Credit Line, and (iv) removed the Second Amendment requirement that we maintain cash and cash equivalents of up to $10,000,000.

In August 2012, Fenco entered into the Fenco Second Amendment with the Fenco lenders which, among other things, (i) extended the maturity date to October 6, 2014, (ii) amended the maximum amount of the revolving facility to (y) $55,000,000 for the period up to and including December 31, 2012 and (z) $50,000,000 for the period on or after January 1, 2013 through October 6, 2014, (iii) replaced the repayment schedule and the amounts for the term loan to require quarterly principal payments of $500,000 beginning on June 30, 2013 and increasing to $1,000,000 per quarter beginning December 31, 2013 through September 30, 2014, with the remaining unpaid principal amount being due on the final maturity date, (iv) provided for certain mandatory prepayments of the term loan, and (v) revised certain financial covenants regarding minimum EBITDA, minimum fixed charge coverage, unused borrowing availability under the Fenco revolving credit facility, and maximum capital expenditures.

Neither the Parent Company Financing Agreement nor the Fenco Credit Agreement contain any cross default provisions with respect to the other agreement.

In August 2012, we entered into the Agreement with the Supplier and Fenco. Under the terms of the Agreement, the Supplier agreed to provide a revolving credit line for purchases of automotive parts and components by Fenco in an aggregate principal amount not to exceed $22,000,000 under the Fenco Credit Line, of which $2,000,000 will only be available for accrued interest and other amounts payable under the Obligations. Payment for all purchases will be due and payable 120 days after the date of the bill of lading. Any amounts remaining unpaid following the due date will bear interest at a rate of 1% per month. The Fenco Credit Line will mature on July 31, 2017. Among other things, the Agreement requires that Fenco on an annual basis, purchase at least approximately $33,000,000 of new automotive parts and components from the Supplier. After July 1, 2014, the Supplier has the right to settle up to $8,000,000 under the Receivable Sale Option of our outstanding Obligations in exchange, at our option, for (i) shares of our common stock valued at $7.75 per share, subject to certain adjustments, or (ii) cash in an amount equal to 135% of the amount of the outstanding Obligations sold to us. The Obligations under the Agreement are guaranteed by us and certain of our subsidiaries. As of September 30, 2012, we had approximately $17,000,000 outstanding under the Fenco Credit Line.

In connection with this Agreement, we also issued the Supplier Warrant to the Supplier to purchase up to 516,129 shares of our common stock for an initial exercise price of $7.75 per share exercisable at any time after two years from August 22, 2012 and on or prior to September 30, 2017. The exercise price is subject to adjustments, among other things, for sales of common stock by us at a price below the exercise price. Any outstanding Obligations settled by the Supplier will reduce the Fenco Credit Line. We are obligated to issue no more than an aggregate of 1,032,258 shares of our common stock in connection with the Receivable Sale Option and Supplier Warrant. The Obligations under this Agreement are subordinated to our obligations under the Parent Company Financing Agreement. The fair value of the Supplier Warrant using the Monte Carlo simulation model was $1,018,000 at August 22, 2012, and $1,211,000 at September 30, 2012. This amount was recorded as a warrant liability which is included in other liabilities in the consolidated balance sheet at September 30, 2012. During the three and six months ended September 30, 2012, a loss of $193,000 was recorded in general and administrative expenses due to the change in the fair value of the warrant liability.

We believe our cash on hand, short-term investments, use of receivable discount programs with certain of our major customers, amounts available under our credit agreements, and amounts available under the Fenco Credit Line are sufficient to satisfy our expected future working capital needs, repayment of the current portion of our term loans, capital lease commitments, and capital expenditure obligations over the next twelve months. However, our ability to continue to meet such liquidity needs is subject to and will be affected by cash utilized in operations, including our undercar product line turnaround plan, continued general economic conditions, uncertain industry conditions, and the financial condition of our customers and suppliers.

### Cash Flows

Net cash used in operating activities was $14,543,000 and $45,234,000 for the six months ended September 30, 2012 and 2011, respectively. The rotating electrical segment provided cash from operations of $340,000 during the six months ended September 30, 2012 compared to $4,076,000 during the six months ended September 30, 2011. The changes in operating activities for the rotating electrical segment were due primarily to the pay-down of accounts payable balances incurred in connection with the inventory provided to Fenco in fiscal 2012 and a decrease in accounts receivable balances. The undercar product line segment used cash from operations of $14,883,000 and $49,310,000 during the six months ended September 30, 2012 and 2011, respectively. The most significant changes in our undercar product line segment were due primarily to decreases in non-core inventory, core inventory, and customer core return accrual during the six months ended September 30, 2012 compared to increases in the same period of the prior year.

Net cash used in investing activities was $1,882,000 and $699,000 during the six months ended September 30, 2012 and 2011, respectively. Our capital expenditures for our rotating electrical segment for the six months ended September 30, 2012 and 2011 was $1,415,000 and $604,000, respectively, primarily related to the purchase of equipment for our manufacturing facilities. Our capital expenditures for our undercar product line segment for the six months ended September 30, 2012 and 2011 was $445,000 and $74,000, respectively, primarily related to the conversion of Fenco’s financial and operating systems to the applications used at our corporate headquarters in Torrance, California, and purchase of equipment for Fenco manufacturing facilities.

Net cash provided by financing activities was $16,151,000 and $44,807,000 for the six months ended September 30, 2012 and 2011, respectively. The rotating electrical segment provided net cash from financing activities of $23,022,000 and $36,708,000 during the six months ended September 30, 2012 and 2011, respectively. This decrease was due to decreased borrowings compared to the prior year partly offset by the net proceeds received from our private placement during the six months ended September 30, 2012. The net cash provided by financing activities was used primarily to finance Fenco. The undercar product line segment used net cash from financing activities of $6,871,000 due primarily to the repayment of amounts outstanding under the Fenco Revolving Facility during the six months ended September 30, 2012 compared to borrowing $10,000,000 under the Fenco Term Loan during the six months ended September 30, 2011.

### Capital Resources

#### Debt

We have the following outstanding credit agreements.

#### Parent Company Credit Agreement

We are party to the Parent Company Financing Agreement involving the Parent Company Loans. The Parent Company Loans consist of the Parent Company Term Loans and the Parent Company Revolving Loans. The Parent Company Loans mature on January 17, 2017. The lenders hold a security interest in substantially all of the assets of our rotating electrical segment. The Parent Company Financing Agreement permits us to invest up to $20,000,000 in Fenco.

In May 2012, we entered into the Second Amendment and borrowed an additional $10,000,000, for an aggregate of $85,000,000 in term loans. The Second Amendment, among other things, modified the interest rates per annum applicable to the Amended Parent Company Term Loans. The Amended Parent Company Term Loans will bear interest at rates equal to, at our option, either LIBOR plus 8.5% or a base rate plus 7.5%.

The Amended Parent Company Term Loans require quarterly principal payments of $250,000 beginning on October 1, 2012 and increase to $600,000 per quarter on April 1, 2013 and to $1,350,000 on October 1, 2013 until the final maturity date. Among other things, the Second Amendment provides for certain amended financial covenants, and requires that we maintain cash and cash equivalents of up to $10,000,000 in the aggregate until our obligations with respect to a significant supplier have ceased.

In August 2012, we entered into a Third Amendment and waiver to the Parent Company Financing Agreement which, among other things, (i) permitted us to enter into the Fenco Credit Line, (ii) to make additional investments in Fenco in an aggregate amount not to exceed $20,000,000 at any time outstanding, (iii) added additional reporting requirements regarding financial reports and material notices under the Fenco Credit Line, and (iv) removed the Second Amendment requirement that we maintain cash and cash equivalents of up to $10,000,000.

The Parent Company Financing Agreement, as amended, among other things, requires us to maintain certain financial covenants including a maximum senior leverage ratio, a minimum fixed charge coverage ratio, and minimum consolidated EBITDA. We were in compliance with all financial covenants and reporting requirements under the Parent Company Financing Agreement, as amended, as of September 30, 2012.

The following table summarizes the financial covenants required under the Parent Company Financing Agreement as of September 30, 2012:

|  | Calculation as of September 30, 2012 | Financial covenants required per the Parent Company Financing Agreement |
| --- | ---: | ---: |
| Maximum senior leverage ratio | 2.19 | 3.40 |
| Minimum fixed charge coverage ratio | 1.53 | 1.10 |
| Minimum consolidated EBITDA | $38,883,000 | $26,500,000 |

There was no outstanding balance on the Parent Company Revolving Loans at September 30, 2012 and March 31, 2012. As of September 30, 2012, $16,955,000 was available under the Parent Company Revolving Loans. We had reserved $626,000 of the Parent Company Revolving Loans for standby letters of credit for workers’ compensation insurance and $2,200,000 for commercial letters of credit as of September 30, 2012.

#### Fenco Credit Agreement

The Fenco Borrowers entered into the Fenco Credit Agreement with the Fenco Lenders. Pursuant to the Fenco Credit Agreement, the Fenco Lenders have made available to the Fenco Borrowers the Fenco Revolving Facility and 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.

In August 2012, Fenco entered into a Second Amendment to the Fenco Credit Agreement with the Fenco Lenders which, among other things, (i) extended the maturity date to October 6, 2014, (ii) amended the maximum amount of the Fenco Revolving Facility to (y) $55,000,000 for the period up to and including December 31, 2012 and (z) $50,000,000 for the period on or after January 1, 2013 through October 6, 2014, (iii) replaced the repayment schedule and the amounts for the Fenco Term Loan to require quarterly principal payments of $500,000 beginning on June 30, 2013 and increasing to $1,000,000 per quarter beginning December 31, 2013 through September 30, 2014, with the remaining unpaid principal amount being due on the final maturity date, (iv) provided for certain mandatory prepayments of the Fenco Term Loan, and (v) revised certain financial covenants regarding minimum EBITDA, minimum fixed charge coverage, unused borrowing availability under the Fenco Revolving Credit Facility, and maximum capital expenditures. The maturity dates may be accelerated upon the occurrence of an insolvency event or event of default under the Fenco Credit Agreement.

The outstanding balance on the Fenco Revolving Facility was $42,089,000 and $48,884,000 at September 30, 2012 and March 31, 2012, respectively. As of September 30, 2012, approximately $712,000 was reserved for standby commercial letters of credit and $264,000 was reserved for certain expenses. As of September 30, 2012, approximately $8,969,000 was available under the Fenco Revolving Facility. The Fenco Lenders hold a security interest in substantially all of the assets of the undercar 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 Fenco 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 a minimum EBITDA of not less than $600,000 for the period from September 1, 2012 to September 30, 2012. As of September 30, 2012, the Fenco Borrowers were in compliance with all financial covenants and reporting requirements under the Fenco Credit Agreement.

Neither the Parent Company Financing Agreement nor the Fenco Credit Agreement contain any cross default provisions with respect to the other agreement.

#### Strategic Cooperation Agreement

In August 2012, we entered into the Agreement with the Supplier and Fenco. Under the terms of the Agreement, the Supplier agreed to provide the Fenco Credit Line in an aggregate amount not to exceed $22,000,000 of which $2,000,000 will only be available for accrued interest and other amounts payable. Payment for all purchases will be due and payable 120 days after the date of the bill of lading. Any amounts remaining unpaid following the due date will bear interest at a rate of 1% per month. The Fenco Credit Line will mature on July 31, 2017. Among other things, the Agreement requires that Fenco on an annual basis, purchase at least approximately $33,000,000 of new automotive parts and components. After July 1, 2014, the Supplier has the right to exercise the Receivable Sale Option under which the Supplier may settle up to $8,000,000 of our outstanding Obligations in exchange, at our option, for (i) shares of our common stock valued at $7.75 per share, subject to certain adjustments, or (ii) cash in an amount equal to 135% of the amount of the outstanding Obligations sold to us. Any outstanding Obligations settled by the Supplier will reduce the Fenco Credit Line. The Obligations under the Agreement are guaranteed by us and certain of our subsidiaries. As of September 30, 2012, we had approximately $17,000,000 outstanding under the Fenco Credit Line.

Our ability to comply in future periods with the financial covenants in the Parent Financing 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

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, 2012 | 2011 |
| --- | ---: | ---: |
| Receivables discounted | $157,335,000 | $133,222,000 |
| Weighted average days | 316 | 312 |
| Annualized weighted average discount rate | 2.8% | 2.9% |
| Amount of discount as interest expense | $3,824,000 | $3,363,000 |

#### Off-Balance Sheet Arrangements

At September 30, 2012, 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 $1,860,000 for the six months ended September 30, 2012, which primarily related to the purchase of equipment for our manufacturing facilities and the conversion of Fenco’s financial and operating systems to the applications used at our corporate headquarters in Torrance, California. We expect our fiscal year 2013 capital expenditures to be in the range of $3,000,000 to $4,000,000. 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, 2012.

### Subsequent Events

### Equity Transaction

In December, 2012, we entered into the Stock Repurchase Agreement with Mel Marks, our founder, a member of our board of directors and consultant, and Melmarks Enterprises LLLP, a limited liability limited partnership controlled by Mr. Marks, which, among other things, provides the Shareholders with the option to sell up to $300,000 of our common stock held by the Shareholders, on or prior to February 28, 2013, at a purchase price that is 10% below the average daily closing price per share of our common stock for the five consecutive trading days immediately preceding the date of the notice of sale.

In connection with the Stock Repurchase Agreement, we entered into the Fourth Amendment to the Parent Company Financing Agreement, which, among other things, permitted us to repurchase the Shares pursuant to the Stock Repurchase Agreement.

### 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, 2012, which was filed on September 28, 2012, except as discussed below.

### New Accounting Pronouncements

#### 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 did 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 did not have any impact on our consolidated financial position and the results of operations.

## Market risk

As filed, 248 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, 2012, which was filed on September 28, 2012.

## Controls and procedures

As filed, 5,057 characters.

### Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

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-15(e). Based on this evaluation, our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer concluded that MPA’s disclosure controls and procedures were not effective as of September 30, 2012, as the Company has not filed this report in a timely manner and has not remediated the material weakness in internal control over financial reporting described below under Changes in Internal Control Over Financial Reporting.

### Inherent Limitations Over Internal Controls

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control may not prevent misstatements. Further, an evaluation of the effectiveness of internal control may not detect misstatements.

### Changes in Internal Control Over Financial Reporting

There were no changes in MPA’s internal control over financial reporting during the second quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, MPA’s 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 3 in the Notes to Consolidated Financial Statements included in our March 31, 2012 audited consolidated financial statements in our Annual Report on Form 10-K as of March 31, 2012 filed with the SEC on September 28, 2012 and, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 2 of this Quarterly Report.

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, third and fourth quarters of our fiscal year 2012, and first and second quarters of our fiscal year 2013. As a result, we concluded that our internal control over financial reporting was not effective because of the existence of a material weakness in our financial statement close process at Fenco. Specifically, systems required to segregate and account for transactions accurately were inadequate. Also, the financial policies and procedures at Fenco did not provide for effective oversight and review of the reconciliation of accounts at month or quarter ends. Moreover, there is a lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP and lack of sufficient analysis, reconciliations and documentation of the application of U.S. GAAP to transactions. As a result, Fenco was unable to complete the financial close process on a timely and accurate basis.

As a result of the material weakness, we commenced a review of the internal control over financial reporting at Fenco and began putting in place appropriate oversight and controls. In fiscal year 2012, direct oversight by MPA management of Fenco accounting personnel was substantially increased. Experienced accounting personnel were added to review core and other transactions, which improved the overall accounting skill set. The core receiving and return transactions were integrated into our financial reporting process and additional core tracking procedures were implemented. Controls over sales and purchasing transactions were improved to ensure their inclusion in the proper reporting period. At the start of the third quarter of fiscal 2013, the Fenco financial and operating systems were converted to the applications used at MPA. In conjunction with this system conversion, Fenco accounting was also centralized at MPA headquarters in Torrance, California. These changes are expected to permit more timely reporting of consolidated financial results going forward.

The initial assessment of internal control over financial reporting for the acquired business will be conducted over the course of fiscal year 2013 and reported as of March 31, 2013.

## Risk factors

As filed, 191 characters.

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, 2012, filed on September 28, 2012.

Filed Dec 18, 2012.
Source: SEC EDGAR, the filing index for accession 0001140361-12-051668. Last ingested by Listed: Nov 10, 2026, 01:42 ET. No prices; not investment advice.