# Motorcar Parts of America Inc: Form 10-Q for the period ended Dec 31, 2015

- Company: [Motorcar Parts of America Inc](/companies/mpaa.md) (CIK 918251)
- Form: 10-Q
- Filed: 2016-02-09
- Accepted by EDGAR: Feb 9, 2016, 16:01 ET
- Period: 2015-12-31
- Accession: 0001140361-16-050989
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/918251/000114036116050989/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/918251/000114036116050989/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-10-01 to 2015-12-31 | $94.0m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2015-04-01 to 2015-12-31 | $271.5m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-10-01 to 2015-12-31 | $65.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2015-04-01 to 2015-12-31 | $194.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2015-10-01 to 2015-12-31 | $28.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2015-04-01 to 2015-12-31 | $76.7m | us-gaap:GrossProfit |
| Research and development | 3 months, 2015-10-01 to 2015-12-31 | $711.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2015-04-01 to 2015-12-31 | $2.1m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2015-10-01 to 2015-12-31 | $16.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-04-01 to 2015-12-31 | $28.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-10-01 to 2015-12-31 | $6.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2015-04-01 to 2015-12-31 | $6.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-10-01 to 2015-12-31 | $7.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-04-01 to 2015-12-31 | $8.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-10-01 to 2015-12-31 | $0.41 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-04-01 to 2015-12-31 | $0.44 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-10-01 to 2015-12-31 | $0.42 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-04-01 to 2015-12-31 | $0.45 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-10-01 to 2015-12-31 | 19,095,704 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-04-01 to 2015-12-31 | 18,981,421 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-04-01 to 2015-12-31 | $10.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2015-04-01 to 2015-12-31 | $3.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2015-12-31 | $13.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-12-31 | $115.6m | us-gaap:AssetsCurrent |
| Total assets | at 2015-12-31 | $383.1m | us-gaap:Assets |
| Current liabilities | at 2015-12-31 | $116.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-12-31 | $179.8m | us-gaap:Liabilities |
| Long-term debt | at 2015-12-31 | $20.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-12-31 | $3.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-12-31 | $203.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,540 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, 2015 audited consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on June 15, 2015, as amended by the Form 10-K/A filed with the SEC on July 29, 2015.

### 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 a small number of customers, changes in the financial condition of or our relationship with any of our major customers, the increasing customer pressure for lower prices and more favorable payment and other terms, lower revenues than anticipated from new and existing contracts, the increasing demands on our working capital, the significant strain on working capital associated with large inventory purchases from customers, any meaningful difference between expected production needs and ultimate sales to our customers, our ability to obtain any additional financing we may seek or require, our ability to achieve 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 the potential material weaknesses in our internal controls over financial reporting, our failure to meet the financial covenants or the other obligations set forth in our credit agreement and the lenders’ refusal to waive any such defaults, increases in interest rates, the impact of high gasoline prices, 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, 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 automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. We sell our products predominantly in North America to the largest auto parts retail and traditional warehouse chains and to major automobile manufacturers for both their aftermarket programs and their OES programs. Our products include (i) rotating electrical products such as alternators and starters, (ii) wheel hub assemblies and bearings, and (iii) new brake master cylinders. In July 2015, we also began selling remanufactured brake master cylinder products.

The aftermarket for automobile parts is divided into two markets. The first is the 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 less expensive alternative than having the repair performed by a professional installer. The second is the professional installer market, commonly known as the DIFM market. This market is generally 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.

Pursuant to the guidance provided under the FASB ASC for segment reporting, we have determined that our operating segments meet the criteria for aggregation and accordingly we have one reportable segment for purposes of recording and reporting our financial results.

### Results of Operations for the Three Months Ended December 31, 2015 and 2014

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

The following summarizes certain key operating data:

|  | Three Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| Gross profit percentage | 30.7% | 29.1% |
| Cash flow used in operations | $(9,214,000) | $(9,667,000) |
| Finished goods turnover (annualized) (1) | 6.6 | 6.2 |

(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 our inventory into revenues.

### Net Sales and Gross Profit

The following summarizes net sales and gross profit:

|  | Three Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| Net sales | $94,022,000 | $83,992,000 |
| Cost of goods sold | 65,123,000 | 59,564,000 |
| Gross profit | 28,899,000 | 24,428,000 |
| Cost of goods sold as a percentage of net sales | 69.3% | 70.9% |
| Gross profit percentage | 30.7% | 29.1% |

*Net Sales*. Our net sales for the three months ended December 31, 2015 increased by $10,030,000, or 11.9%, to $94,022,000 compared to net sales for the three months ended December 31, 2014 of $83,992,000. The increase in our net sales was across all the product lines and reflects the impact of the new business awarded to us by a significant customer for our rotating electrical products, which began shipping in January 2015. We began selling remanufactured brake master cylinder products in July 2015. In addition, our prior year net sales included the favorable impact of the recognition of previously deferred revenue related to the Remanufactured Cores of $16,331,000 partially offset by an accrued sales allowance of $3,706,000 for the future buy-backs of Remanufactured Cores.

*Cost of Goods Sold/Gross Profit.* Our cost of goods sold as a percentage of net sales decreased during the three months ended December 31, 2015 to 69.3% from 70.9% for the three months ended December 31, 2014, resulting in a corresponding increase in our gross profit to 30.7% for the three months ended December 31, 2015 from 29.1% for the three months ended December 31, 2014. Our increase in gross profit was due primarily to overall lower per unit costs from an increased volume of purchases and production resulting in better absorption of overhead. In addition, our prior year gross profit included net expense of $537,000 in connection with the returns of products associated with the new business awarded to us.

### Operating Expenses

The following summarizes operating expenses:

|  | Three Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| General and administrative | $8,802,000 | $12,628,000 |
| Sales and marketing | 2,671,000 | 2,281,000 |
| Research and development | 711,000 | 601,000 |
| **Percent of net sales** |  |  |
| General and administrative | 9.4% | 15.0% |
| Sales and marketing | 2.8% | 2.7% |
| Research and development | 0.8% | 0.7% |

*General and Administrative.* Our general and administrative expenses for the three months ended December 31, 2015 were $8,802,000, which represents a decrease of $3,826,000, or 30.3%, from general and administrative expenses for the three months ended December 31, 2014 of $12,628,000. The decrease in general and administrative expenses was primarily due to (i) a $5,800,000 gain in connection with the settlement of litigation with FAPL and various of its subsidiaries, (ii) $2,157,000 of decreased legal fees, (iii) $1,183,000 of decreased loss recorded due to the change in the fair value of the forward foreign currency exchange contracts, and (iv) $649,000 of decreased loss recorded due to the change in the fair value of the warrant liability. These decreases in general and administrative expenses were partially offset by (i) $4,434,000 of increased bad debt expense resulting from the bankruptcy filing by one of our customers, (ii) $577,000 due to increased personnel to support our growth initiatives, (iii) $480,000 of increased general and administrative expenses at our offshore locations, (iv) $268,000 of increased incentive compensation, and (v) $154,000 of increased share-based compensation.

*Sales and Marketing*. Our sales and marketing expenses for the three months ended December 31, 2015 increased $390,000, or 17.1%, to $2,671,000 from $2,281,000 for the three months ended December 31, 2014. The increase was due primarily to (i) $326,000 due to increased personnel to support our growth initiatives and (ii) $78,000 of increased advertising expenses.

*Research and Development*. Our research and development expenses increased by $110,000, or 18.3%, to $711,000 for the three months ended December 31, 2015 from $601,000 for the three months ended December 31, 2014, due primarily to $65,000 due to increased personnel to support our growth initiatives and $79,000 of increased supplies expense, partially offset by $28,000 of decreased travel.

### Interest Expense

*Interest Expense, net.* Our interest expense, net for the three months ended December 31, 2015 decreased $649,000, or 20.5%, to $2,516,000 from $3,165,000 for the three months ended December 31, 2014. We entered into a new credit facility on June 3, 2015 which resulted in a decrease in interest expense due to lower interest rates and lower average outstanding balances on our loans. This was partially offset by a higher balance of receivables discounted during the three months ended December 31, 2015 compared to the three months ended December 31, 2014 and the amortization of interest on accrued core payments.

### Provision for Income Taxes

*Income Tax*. Our income tax expense was $6,451,000, or an effective tax rate of 45.4%, and $2,826,000, or an effective tax rate of 49.1% during the three months ended December 31, 2015 and 2014, respectively. The income tax rates for each period were higher than the federal statutory rate primarily due to (i) state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdiction, (ii) the non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) the non-deductible expense in connection with the fair value adjustment on the warrants. In addition, the income tax rate for the three months ended December 31, 2015 was impacted by certain adjustments related to the return to provision reconciliation, while the income tax rate for the three months ended December 31, 2014 includes the required adjustments to reflect the appropriate nine-month rate for fiscal 2015.

### Results of Operations for the Nine Months Ended December 31, 2015 and 2014

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

The following summarizes certain key operating data:

|  | Nine Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| Gross profit percentage | 28.3% | 27.9% |
| Cash flow provided by continuing operations | $9,963,000 | $2,926,000 |
| Finished goods turnover (annualized) (1) | 6.5 | 5.9 |

(1) Annualized finished goods turnover for the period is calculated by multiplying cost of sales for the period by 1.33 and dividing the result by the average between beginning and ending non-core finished goods inventory values for the period. We believe this provides a useful measure of our ability to turn our inventory into revenues.

### Net Sales and Gross Profit

The following summarizes net sales and gross profit:

|  | Nine Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| Net sales | $271,527,000 | $217,807,000 |
| Cost of goods sold | 194,817,000 | 157,143,000 |
| Gross profit | 76,710,000 | 60,664,000 |
| Cost of goods sold as a percentage of net sales | 71.7% | 72.1% |
| Gross profit percentage | 28.3% | 27.9% |

*Net Sales*. Our net sales for the nine months ended December 31, 2015 increased by $53,720,000, or 24.7%, to $271,527,000 compared to net sales for the nine months ended December 31, 2014 of $217,807,000. The increase in our net sales was across all the product lines and reflects the impact of the new business awarded to us by a significant customer for our rotating electrical products, which began shipping in January 2015. We began selling remanufactured brake master cylinder products in July 2015. In addition, our prior year net sales included the favorable impact of the recognition of previously deferred revenue related to the Remanufactured Cores of $16,331,000 partially offset by an accrued sales allowance of $3,706,000 for the future buy-backs of Remanufactured Cores. Our net sales for the nine months ended December 31, 2015 were negatively impacted by returns and allowances as discussed in the Cost of Goods/Gross Profit paragraph below.

*Cost of Goods Sold/Gross Profit.* Our cost of goods sold as a percentage of net sales decreased during the nine months ended December 31, 2015 to 71.7 % from 72.1% for the nine months ended December 31, 2014, resulting in a corresponding increase in our gross profit to 28.3% for the nine months ended December 31, 2015 from 27.9% for the nine months ended December 31, 2014. Our increase in gross profit was due primarily to overall lower per unit costs from an increased volume of purchases and production resulting in better absorption of overhead. In addition, our gross profit for the nine months ended December 31, 2015 was further impacted by the following returns and allowances associated with new business: (i) $3,352,000 of returns associated with remanufactured brake master cylinder products, (ii) $3,396,000 of allowances in connection with core inventory purchases for remanufactured brake master cylinder products, and (iii) $2,350,000 of returns and allowances for rotating electrical products. Our gross profit for the nine months ended December 31, 2014 was impacted by (i) $6,641,000 recorded in connection with the returns of certain wheel hub and new brake master cylinder products, (ii) $2,879,000 of allowances recorded in connection with certain core inventory purchases, (iii) $560,000 of initial warranty accrual set up for new brake master cylinder products, (iv) $537,000 was net expense recorded in connection with the returns of products associated with the new business awarded to us, (v) special upfront allowances incurred of $442,000, and (vi) $189,000 of start-up costs incurred related to the introduction of our new brake master cylinder products.

### Operating Expenses

The following summarizes operating expenses:

|  | Nine Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| General and administrative | $38,381,000 | $27,832,000 |
| Sales and marketing | 7,583,000 | 5,944,000 |
| Research and development | 2,093,000 | 1,662,000 |
| **Percent of net sales** |  |  |
| General and administrative | 14.1% | 12.8% |
| Sales and marketing | 2.8% | 2.7% |
| Research and development | 0.8% | 0.8% |

*General and Administrative.* Our general and administrative expenses for the nine months ended December 31, 2015 were $38,381,000, which represents an increase of $10,549,000, or 37.9%, from general and administrative expenses for the nine months ended December 31, 2014 of $27,832,000. The increase in general and administrative expenses was primarily due to (i) $9,250,000, net of insurance recoveries, for the litigation settlement with M&T Bank and the trustee in the bankruptcy cases relating to the discontinued subsidiaries, (ii) $4,374,000 of increased bad debt expense resulting from the bankruptcy filing by one of our customers, (iii) $1,405,000 due to increased personnel to support our growth initiatives, (iv) $818,000 of increased loss recorded due to the change in the fair value of the warrant liability, (v) $615,000 of increased professional services, (vi) $265,000 of increased general and administrative expenses at our offshore locations, (vii) $195,000 of increased travel, and (viii) $143,000 of increased directors expense. These increases in general and administrative expenses were partially offset by (i) a $5,800,000 gain in connection with the settlement of litigation with FAPL and various of its subsidiaries, (ii) $962,000 of decreased loss recorded due to the change in the fair value of the forward foreign currency exchange contracts, and (iii) $398,000 of decreased legal fees.

*Sales and Marketing*. Our sales and marketing expenses for the nine months ended December 31, 2015 increased $1,639,000, or 27.6%, to $7,583,000 from $5,944,000 for the nine months ended December 31, 2014. The increase was due primarily to (i) $906,000 due to increased personnel to support our growth initiatives, (ii) $395,000 of increased commissions, (iii) $174,000 of increased advertising expenses, and (iv) $100,000 of increased other marketing expenses in connection with the new rotating electrical business.

*Research and Development*. Our research and development expenses increased by $431,000, or 25.9%, to $2,093,000 for the nine months ended December 31, 2015 from $1,662,000 for the nine months ended December 31, 2014, due primarily to $259,000 in increased personnel to support our growth initiatives and $214,000 of increased supplies expense, partially offset by $51,000 of decreased travel.

### Interest Expense

*Interest Expense, net.* Our interest expense, net for the nine months ended December 31, 2015 increased $3,649,000, or 36.8%, to $13,566,000 from $9,917,000 for the nine months ended December 31, 2014. The increase in interest expense was due primarily to the write-off of previous debt issuance costs of $5,108,000 in connection with the Financing Agreement which was terminated when we entered into a new credit facility on June 3, 2015. In addition, interest expense increased due to a higher balance of receivables discounted during the nine months ended December 31, 2015 compared to the nine months ended December 31, 2014 and the amortization of interest on accrued core payments. These increases were partially offset by lower interest rates and lower average outstanding balances on our loans.

### Provision for Income Taxes

*Income Tax*. Our income tax expense was $6,821,000, or an effective tax rate of 45.2%, and $6,958,000, or an effective tax rate of 45.5% during the nine months ended December 31, 2015 and 2014, respectively. The income tax rates were higher than the federal statutory rate primarily due to (i) state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdiction, (ii) the impact of non-deductible executive compensation under Internal Revenue Code Section 162(m), and (iii) the non-deductible expenses in connection with the fair value adjustment on the warrants. In addition, the income tax rate for the nine months ended December 31, 2015 was impacted by certain adjustments related to the return to provision reconciliation, while the income tax rate for the nine months ended December 31, 2014 was impacted by the payments made under voluntary disclosure agreements with certain states.

### Liquidity and Capital Resources

### Overview

At December 31, 2015, we had negative working capital of $1,164,000, a ratio of current assets to current liabilities of 0.99:1, and cash of $13,701,000, compared to working capital of $66,734,000, a ratio of current assets to current liabilities of 1.6:1, and cash of $61,230,000 at March 31, 2015. We generated cash during the nine months ended December 31, 2015 from operations, the use of receivable discount programs with certain of our major customers, and from our credit facility. The cash generated from these activities was used to: (i) repay our previous financing agreement which was terminated when we entered into a new credit facility on June 3, 2015, (ii) build up our long-term core inventory to support higher sales, and (iii) make accrued core payments.

We believe our cash and cash equivalents, short-term investments, use of receivable discount programs, amounts available under our credit facility, and other sources 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.

### Cash Flows

The following summarizes cash flows as reflected in the consolidated statement of cash flows:

| Cash provided by (used in): | Nine Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| Operating activities | $9,963,000 | $2,926,000 |
| Investing activities | (6,707,000) | (2,628,000) |
| Financing activities | (50,642,000) | 51,896,000 |
| Effect of exchange rates on cash and cash equivalents | (143,000) | (75,000) |
| Net (decrease) increase in cash and cash equivalents | $(47,529,000) | $52,119,000 |
| **Additional selected cash flow data:** |  |  |
| Depreciation and amortization | $2,213,000 | $1,865,000 |
| Capital expenditures | 3,168,000 | 2,551,000 |

Net cash provided by operating activities was $9,963,000 and $2,926,000 during the nine months ended December 31, 2015 and 2014, respectively. The significant changes in our operating activities for the nine months ended December 31, 2015, were due primarily to (i) increased operating results (net income plus net add-back for non-cash transactions in earnings), (ii) reduction in our non-core finished good inventory as a result of higher sales, (iii) accrued core payments made during the current fiscal year, and (iv) increased long-term core inventory to support higher sales.

Net cash used in investing activities was $6,707,000 and $2,628,000 during the nine months ended December 31, 2015 and 2014, respectively. The increase in investing activities during the nine months ended December 31, 2015, were due mainly to (i) the acquisition of OE Plus, (ii) the purchase of equipment for our office, manufacturing and warehousing facilities, and (iii) additions to our short-term investments.

Net cash used in financing activities during the nine months ended December 31, 2015 was $50,642,000 compared to net cash provided by financing activities during the nine months ended December 31, 2014 of $51,896,000. The change in financing activities during the nine months ended December 31, 2015 was due mainly to the increased net repayment of our long term debt compared to net proceeds received from our public offering in September 2014.

### Capital Resources

#### Debt

We are party to the following credit agreements.

#### Credit Facility

We were party to a financing agreement (as amended, modified, amended and restated or supplemented, the “Financing Agreement”) with a syndicate of lenders party thereto, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent. The Financing Agreement was comprised of (i) a $95,000,000 term facility (the “Term Loans” and (ii) an up to $40,000,000 revolving facility subject to borrowing base restrictions and a $10,000,000 sublimit for letters of credit (the “Revolving Facility”). The interest rate on our Term Loans was 6.75% at March 31, 2015. The obligations under the Financing Agreement were repaid on June 3, 2015.

On June 3, 2015, we entered into a new $125,000,000 senior secured financing (the “Credit Facility”) with the lenders party thereto, and PNC Bank, National Association, as administrative agent, consisting of (i) a $100,000,000 revolving loan facility, subject to borrowing base restrictions and a $15,000,000 sublimit for letters of credit (the “New Revolving Facility”) and (ii) a $25,000,000 term loan facility (the “New Term Loans”). The loans under the Credit Facility mature on June 3, 2020. In connection with the Credit Facility, the lenders were granted a security interest in substantially all of our assets.

In November 2015, we entered into a consent and first amendment to the Credit Facility (the “First Amendment”) which (i) provided consent for us to enter into the litigation settlement agreement with M&T Bank and the trustee in the bankruptcy cases relating to the discontinued subsidiaries and (ii) amended certain terms and provisions of the Credit Facility.

The New Term Loans require quarterly principal payments of $781,250 beginning October 1, 2015. The New Revolving Facility and New Term Loans made under the Credit Facility bear interest at rates equal to either LIBOR plus a margin of 2.50%, 2.75% or 3.00% or a reference rate plus a margin of 1.50%, 1.75% or 2.00%, in each case depending on the total leverage ratio as of the applicable measurement date. There is also a facility fee of 0.25% to 0.375%, depending on the total leverage ratio as of the applicable measurement date. The interest rate on our New Term Loans and New Revolving Facility was 3.0% and 3.64%, respectively, at December 31, 2015.

The Credit Facility, among other things, requires us to maintain certain financial covenants including a maximum total leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all financial covenants as of December 31, 2015.

The following summarizes the financial covenants required under the Credit Facility:

|  | Calculation as of December 31, 2015 | Financial covenants required per the Credit Facility |
| --- | ---: | ---: |
| Maximum senior leverage ratio | 0.42 | 2.50 |
| Minimum fixed charge coverage ratio | 1.67 | 1.10 |

In addition to other covenants, the Credit Facility places limits on our ability to incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, engage in asset sales, declare dividends or redeem or repurchase capital stock, alter the business conducted by us and our subsidiaries, transact with affiliates, prepay, redeem or purchase subordinated debt, and amend or otherwise alter debt agreements.

At December 31, 2015, we had $7,000,000 outstanding under the New Revolving Facility. In addition, $430,000 was reserved for standby letters of credit for workers’ compensation insurance and $1,057,000 for commercial letters of credit at December 31, 2015. We had no outstanding balance under the Revolving Facility at March 31, 2015. At December 31, 2015, $91,513,000, subject to certain adjustments, was available under the New Revolving Facility.

#### WX Agreement

In August 2012, we entered into a Revolving Credit/Strategic Cooperation Agreement (the “WX Agreement”) with Wanxiang America Corporation (the “Supplier”) and the discontinued subsidiaries. In connection with the WX Agreement, we also issued a warrant (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 August 22, 2014 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.

The fair value of the Supplier Warrant using level 3 inputs and the Monte Carlo simulation model was $13,523,000 and $10,506,000 at December 31, 2015 and March 31, 2015, respectively. This amount is recorded as a warrant liability which is included in other liabilities in the consolidated balance sheets at December 31, 2015 and March 31, 2015. During the three months ended December 31, 2015 and 2014, losses of $1,275,000 and $1,924,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability. During the nine months ended December 31, 2015 and 2014, losses of $3,017,000 and $2,199,000, respectively, were recorded in general and administrative expenses due to the change in the fair value of this warrant liability

#### Receivable Discount Programs

We 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:

|  | Nine Months Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| Receivables discounted | $248,443,000 | $198,073,000 |
| Weighted average days | 342 | 337 |
| Annualized weighted average discount rate | 2.2% | 2.0% |
| Amount of discount as interest expense | $5,241,000 | $3,691,000 |

#### Off-Balance Sheet Arrangements

At December 31, 2015, 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 $3,168,000 and $2,551,000 for the nine months ended December 31, 2015 and 2014, respectively. Our capital expenditures were primarily related to the purchase of equipment for our office, manufacturing and warehousing facilities. We expect our fiscal year 2016 capital expenditures to be approximately $4,000,000 for purchases of equipment, information technology, and leasehold improvements to our current facilities. We expect to use cash from our operations and incur additional capital lease obligations to finance these capital expenditures.

### Related Party Transactions

There have been no material changes to our related party transactions that are presented in our Annual Report on Form 10-K for the year ended March 31, 2015, which was filed on June 15, 2015, and as amended by the Form 10-K/A filed with the SEC on July 29, 2015.

### Litigation

There have been no material changes to our litigation matters that are presented in our Annual Report on Form 10-K for the year ended March 31, 2015, which was filed on June 15, 2015, and as amended by the Form 10-K/A filed with the SEC on July 29, 2015, except as discussed below.

On October 26, 2015, we entered into a settlement and general and specific release agreement with M&T Bank and the trustee in the bankruptcy cases relating to the discontinued subsidiaries, which resolved the litigation and released the claims made or threatened by those parties against us and our executives in exchange for a payment by us of $18,500,000, of which approximately half was paid by our insurers under applicable insurance policies. As a result, we recorded an accrual of $9,250,000 in general and administrative expense in the consolidated statements of income, net of insurance recoveries, during the three months ended September 30, 2015 and this amount was paid in full during the three months ended December 31, 2015. None of the parties admitted the allegations made by any other party, and the settlement was entered into for the purpose of avoiding the time, expense, inconvenience and delay incident to protracted litigation. The settlement agreement was subject to approval by the applicable courts and other customary conditions, which have now been obtained and satisfied.

On December 8, 2015, we entered into a settlement agreement that resolved the federal court litigation brought in California by us involving the purchase of FAPL and various of its subsidiaries, styled Motorcar Parts of America, Inc. v. FAPL Holdings Inc., et al., Case No. 2:14-cv-01153-GW-JEM (“MPA Action”). The agreement also resolved the pending Ontario, Canada, litigation by individual defendants in the MPA Action against us relating to their employment. We received a net payment of $5,800,000, which is included in general and administrative expenses in the consolidated statements of income for the three and nine months ended December 31, 2015. None of the parties admitted the allegations made by any other party. On December 16, 2015, the Ontario actions filed by the individual defendants against us were dismissed.

### 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, 2015, which was filed on June 15, 2015, except as discussed below.

### Recently Adopted Accounting Standards

#### Debt Issuance Costs

In April 2015, the FASB issued guidance that requires debt issuance costs related to a recognized liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB issued guidance to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this guidance is permitted for financial statements that have not been previously issued. We adopted this guidance effective June 30, 2015 which resulted in the reclassification of debt issuance cost of $879,000 from other assets and is now presented as a direct deduction of $110,000 to the current portion of the term loan and $769,000 to the noncurrent portion of the term loan in the previously reported consolidated balance sheet at March 31, 2015. We elected to continue presenting debt issuance costs related to our revolving credit facilities as an asset. The adoption of this guidance did not have any other impact on our consolidated financial statements.

#### Discontinued Operations

In April 2014, the FASB issued guidance on reporting discontinued operations. The new guidance changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. The adoption of this guidance did not have any impact on our financial position, results of operations or cash flows.

#### Business Combinations

In September 2015, the FASB issued guidance simplifying the accounting for measurement-period adjustments. The guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and earlier adoption is permitted for financial statements that have not been issued. We adopted this guidance effective September 30, 2015, which resulted in no material effect on our financial position, results of operations, or cash flows.

### New Accounting Pronouncements

#### Revenue Recognition

In May 2014, the FASB issued guidance codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers”, which amends the guidance in the former ASC 605, “Revenue Recognition”. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods within that reporting period for a public company. A full or modified retrospective transition method is required. In August 2015, the FASB delayed the effective date by one year to annual periods beginning after December 15, 2017, and interim periods within that reporting period for a public company. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact of the provisions of this guidance to our consolidated financial statements.

#### Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

In August 2014, the FASB issued guidance which requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that are intended to mitigate those conditions. The new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We do not expect any impact on our financial position, results of operations or cash flows from the adoption of this guidance.

#### Extraordinary Items

In January 2015, the FASB issued guidance that simplifies income statement presentation by eliminating the concept of extraordinary items. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not expect any impact on its consolidated financial statements from the adoption of this guidance.

#### Inventory

In July 2015, the FASB issued guidance that requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments in this update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of the provisions of this guidance to our consolidated financial statements.

#### Income Taxes

In November 2015, the FASB issued guidance that requires deferred tax liabilities and assets to be classified as noncurrent in the consolidated balance sheet. This new guidance becomes effective for interim and annual reporting periods beginning after December 15, 2016 with early adoption permitted. A reporting entity should apply the amendment prospectively or retrospectively. We are currently evaluating the impact of the provisions of this guidance to our consolidated financial statements.

#### Financial Instruments

In January 2016, the FASB issued guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. A reporting entity should apply the new guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact of the provisions of this guidance to our consolidated financial statements.

## Market risk

As filed, 256 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, 2015, which was filed with the SEC on June 15, 2015.

## Controls and procedures

As filed, 3,199 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 effective as of December 31, 2015.

### Inherent Limitations Over Internal Controls

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, applying certain estimates

and judgments as required.

Internal control over financial reporting includes those policies and procedures that:

1\. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

2\. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

3\. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

### Changes in Internal Control Over Financial Reporting

There were no changes in MPA’s internal control over financial reporting during the third quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, MPA’s internal control over financial reporting.

## Risk factors

As filed, 256 characters.

There have been no material changes in 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, 2015, filed on June 15, 2015 and as amended by the Form 10-K/A filed with the SEC on July 29, 2015.

Filed Feb 9, 2016.
Source: SEC EDGAR, the filing index for accession 0001140361-16-050989. Last ingested by Listed: Nov 9, 2026, 17:46 ET. No prices; not investment advice.