form10q.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM       TO

Commission File No. 001-33861

MOTORCAR PARTS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)

New York
 
11-2153962
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
2929 California Street, Torrance, California
 
90503
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (310) 212-7910

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes £ No R

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No R

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £
Accelerated filer R
Non-accelerated filer £
Smaller reporting company £
 
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No R

There were 14,471,321 shares of Common Stock outstanding at December 10, 2012.



 
 

 

MOTORCAR PARTS OF AMERICA, INC.

TABLE OF CONTENTS

 
Page 
PART I — FINANCIAL INFORMATION
 
4
4
5
6
7
8
23
39
39
PART II — OTHER INFORMATION
 
41
41
41
42
44

 
2

 
MOTORCAR PARTS OF AMERICA, INC.

GLOSSARY

The following terms are frequently used in the text of this report and have the meanings indicated below.

“Used Core” — An automobile part which has been used in the operation of a vehicle. Generally, the Used Core is an original equipment (“OE”) automobile part installed by the vehicle manufacturer and subsequently removed for replacement. Used Cores contain salvageable parts which are an important raw material in the remanufacturing process. We obtain most Used Cores by providing credits to our customers for Used Cores returned to us under our core exchange program. Our customers receive these Used Cores from consumers who deliver a Used Core to obtain credit from our customers upon the purchase of a newly remanufactured automobile part. When sufficient Used Cores cannot be obtained from our customers, we will purchase Used Cores from core brokers, who are in the business of buying and selling Used Cores. The Used Cores purchased from core brokers or returned to us by our customers under the core exchange program, and which have been physically received by us, are part of our raw material or work in process inventory included in long-term core inventory.

“Remanufactured Core” — The Used Core underlying an automobile part that has gone through the remanufacturing process and through that process has become part of a newly remanufactured automobile part. The remanufacturing process takes a Used Core, breaks it down into its component parts, replaces those components that cannot be reused and reassembles the salvageable components of the Used Core and additional new components into a remanufactured automobile part. Remanufactured Cores are included in our on-hand finished goods inventory and in the remanufactured finished good product held for sale at customer locations. Used Cores returned by consumers to our customers but not yet returned to us continue to be classified as Remanufactured Cores until we physically receive these Used Cores. All Remanufactured Cores are included in our long-term core inventory or in our long-term core inventory deposit.
 
 
3


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
   
September 30, 2012
   
March 31, 2012
 
ASSETS
 
(Unaudited)
       
Current assets:
           
Cash
  $ 32,328,000     $ 32,617,000  
Short-term investments
    368,000       342,000  
Accounts receivable — net
    21,829,000       20,036,000  
Inventory— net
    82,731,000       95,071,000  
Inventory unreturned
    9,318,000       9,819,000  
Deferred income taxes
    3,638,000       3,793,000  
Prepaid expenses and other current assets
    5,596,000       6,553,000  
Total current assets
    155,808,000       168,231,000  
Plant and equipment — net
    12,892,000       12,738,000  
Long-term core inventory — net
    192,902,000       194,406,000  
Long-term core inventory deposit
    27,226,000       26,939,000  
Long-term deferred income taxes
    2,147,000       1,857,000  
Goodwill
    68,356,000       68,356,000  
Intangible assets — net
    21,399,000       22,484,000  
Other assets
    8,217,000       6,887,000  
TOTAL ASSETS
  $ 488,947,000     $ 501,898,000  
LIABILITIES AND SHAREHOLDERS'  EQUITY
               
Current liabilities:
               
Accounts payable
  $ 116,830,000     $ 126,100,000  
Accrued liabilities
    23,749,000       19,379,000  
Customer finished goods returns accrual
    22,647,000       21,695,000  
Other current liabilities
    4,831,000       2,331,000  
Current portion of term loan
    1,700,000       500,000  
Current portion of capital lease obligations
    306,000       414,000  
Total current liabilities
    170,063,000       170,419,000  
Term loan, less current portion
    92,746,000       84,500,000  
Revolving loan
    42,089,000       48,884,000  
Deferred core revenue
    10,226,000       9,775,000  
Customer core returns accrual
    102,445,000       113,702,000  
Other liabilities
    2,779,000       751,000  
Capital lease obligations, less current portion
    124,000       248,000  
Total liabilities
    420,472,000       428,279,000  
Commitments and contingencies
               
Shareholders' equity:
               
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued
    -       -  
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued
    -       -  
Common stock; par value $.01 per share, 20,000,000 shares authorized; 14,471,321 and 12,533,821 shares issued; 14,456,921 and 12,519,421 outstanding at September 30, 2012 and March 31, 2012, respectively
    145,000       125,000  
Treasury stock, at cost, 14,400 shares of common stock at September 30, 2012 and March 31, 2012, respectively
    (89,000 )     (89,000 )
Additional paid-in capital
    114,489,000       98,627,000  
Additional paid-in capital-warrant
    -       1,879,000  
Accumulated other comprehensive loss
    (1,236,000 )     (884,000 )
Accumulated deficit
    (44,834,000 )     (26,039,000 )
Total shareholders' equity
    68,475,000       73,619,000  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 488,947,000     $ 501,898,000  
 
The accompanying condensed notes to consolidated financial statements are an integral part hereof.
 
 
4

 
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net sales
  $ 111,632,000     $ 107,616,000     $ 200,655,000     $ 178,126,000  
Cost of goods sold
    94,911,000       92,637,000       171,820,000       156,114,000  
Gross profit
    16,721,000       14,979,000       28,835,000       22,012,000  
Operating expenses:
                               
General and administrative
    11,193,000       11,309,000       22,757,000       19,618,000  
Sales and marketing
    3,904,000       3,197,000       7,443,000       5,650,000  
Research and development
    461,000       401,000       897,000       817,000  
Acquisition costs
    -       309,000       -       713,000  
Total operating expenses
    15,558,000       15,216,000       31,097,000       26,798,000  
Operating income (loss)
    1,163,000       (237,000 )     (2,262,000 )     (4,786,000 )
Interest expense, net
    6,162,000       3,389,000       11,246,000       5,303,000  
Loss before income tax expense
    (4,999,000 )     (3,626,000 )     (13,508,000 )     (10,089,000 )
Income tax expense
    3,934,000       1,813,000       5,287,000       3,655,000  
Net loss
  $ (8,933,000 )   $ (5,439,000 )   $ (18,795,000 )   $ (13,744,000 )
Basic net loss per share
  $ (0.62 )   $ (0.44 )   $ (1.32 )   $ (1.11 )
Diluted net loss per share
  $ (0.62 )   $ (0.44 )   $ (1.32 )   $ (1.11 )
Weighted average number of shares outstanding:
                               
Basic
    14,456,921       12,451,600       14,192,235       12,367,030  
Diluted
    14,456,921       12,451,600       14,192,235       12,367,030  

The accompanying condensed notes to consolidated financial statements are an integral part hereof.
 
 
5

 
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net loss
  $ (8,933,000 )   $ (5,439,000 )   $ (18,795,000 )   $ (13,744,000 )
Other Comprehensive income (loss), net of tax:
                               
Unrealized gain (loss) on short-term investments
    9,000       (26,000 )     2,000       (26,000 )
Foreign currency translation
    193,000       (731,000 )     (354,000 )     (446,000 )
Total other comprehensive income (loss), net of tax
    202,000       (757,000 )     (352,000 )     (472,000 )
Comprehensive loss
  $ (8,731,000 )   $ (6,196,000 )   $ (19,147,000 )   $ (14,216,000 )

The accompanying condensed notes to consolidated financial statements are an integral part hereof.

 
6


MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

   
Six Months Ended
 
   
September 30,
 
Cash flows from operating activities:
 
2012
   
2011
 
Net loss
  $ (18,795,000 )   $ (13,744,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
    1,643,000       2,685,000  
Amortization of intangible assets
    1,085,000       969,000  
Amortization of deferred financing costs
    796,000       43,000  
Amortization of finished goods inventory step-up valuation
    -       6,001,000  
Gain due to change in fair value of warrant liability
    (57,000 )     -  
Net (recovery of) provision for inventory reserves
    (744,000 )     294,000  
Provision for customer payment discrepancies
    521,000       59,000  
Provision for doubtful accounts
    151,000       46,000  
Deferred income taxes
    219,000       (316,000 )
Share-based compensation expense
    24,000       27,000  
Impact of tax benefit on APIC pool from stock options exercised
    1,000       67,000  
Loss on disposal of assets
    37,000       -  
Changes in current assets and liabilities:
               
Accounts receivable
    (2,465,000 )     (5,833,000 )
Inventory
    14,724,000       (24,009,000 )
Inventory unreturned
    501,000       173,000  
Prepaid expenses and other current assets
    812,000       3,774,000  
Other assets
    (114,000 )     (124,000 )
Accounts payable and accrued liabilities
    (5,204,000 )     (3,543,000 )
Customer finished goods returns accrual
    952,000       (2,511,000 )
Deferred core revenue
    451,000       431,000  
Long-term core inventory
    (136,000 )     (14,357,000 )
Long-term core inventory deposits
    (287,000 )     (489,000 )
Customer core returns accrual
    (11,257,000 )     4,860,000  
Other liabilities
    2,599,000       263,000  
Net cash used in operating activities
    (14,543,000 )     (45,234,000 )
Cash flows from investing activities:
               
Purchase of plant and equipment
    (1,860,000 )     (678,000 )
Change in short term investments
    (22,000 )     (21,000 )
Net cash used in investing activities
    (1,882,000 )     (699,000 )
Cash flows from financing activities:
               
Borrowings under revolving loan
    46,734,000       106,694,000  
Repayments under revolving loan
    (53,529,000 )     (70,990,000 )
Proceeds from term loan
    10,000,000       10,000,000  
Repayments of term loan
    -       (1,000,000 )
Deferred financing costs
    (799,000 )     -  
Payments on capital lease obligations
    (232,000 )     (300,000 )
Exercise of stock options
    5,000       257,000  
Excess tax benefit from employee stock options exercised
    3,000       213,000  
Impact of tax benefit on APIC pool from stock options exercised
    (1,000 )     (67,000 )
Proceeds from issuance of common stock
    15,004,000       -  
Stock issuance costs
    (1,034,000 )     -  
Net cash provided by financing activities
    16,151,000       44,807,000  
Effect of exchange rate changes on cash
    (15,000 )     (154,000 )
Net increase (decrease) in cash
    (289,000 )     (1,280,000 )
Cash — Beginning of period
    32,617,000       2,477,000  
Cash — End of period
  $ 32,328,000     $ 1,197,000  
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 11,879,000     $ 3,307,000  
Income taxes
    1,664,000       1,544,000  
Non-cash investing and financing activities:
               
Common stock issued in business acquisition
  $ -     $ 4,946,000  
Warrants issued in connection with debt
    1,625,000       -  

The accompanying condensed notes to consolidated financial statements are an integral part hereof.
 
 
7

 
MOTORCAR PARTS OF AMERICA, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
September 30, 2012
(Unaudited)

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013. This report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2012, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 28, 2012.

The accompanying consolidated financial statements have been prepared on a consistent basis with, and there have been no material changes to, the accounting policies described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

1. Company Background and Organization

Motorcar Parts of America, Inc. and its subsidiaries (the “Company” or “MPA”) is a leading manufacturer, remanufacturer, and distributor of aftermarket automobile parts. 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.

The Company obtains used automobile parts, commonly known as Used Cores, primarily from its customers under the Company’s core exchange program. It also purchases Used Cores from vendors (core brokers). The customers grant credit to the consumer when the used part is returned to them, and the Company in turn provides a credit to the customers upon return to the Company. These Used Cores are an essential material needed for the remanufacturing operations.

The Company has remanufacturing, warehousing and shipping/receiving operations for automobile parts in North America and Asia. In addition, the Company utilizes various third party warehouse distribution centers in North America.

Pursuant to the guidance provided under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company has two reportable segments, rotating electrical and undercar product line, based on the way the Company manages, evaluates and internally reports its business activities.

2. Acquisition

On May 6, 2011, the Company entered into and consummated transactions pursuant to the Purchase Agreement. Pursuant to the Purchase Agreement, the Company purchased (i) all of the outstanding equity of FAPL, (ii) all of the outstanding equity of Introcan, Inc., a Delaware corporation (“Introcan”), and (iii) 1% of the outstanding equity of Fapco S.A. de C.V., a Mexican variable capital company (“Fapco”) (collectively, “Fenco”). Since FAPL owned 99% of Fapco prior to these acquisitions, the Company now owns 100% of Fapco.
 
 
The unaudited pro forma information presented is for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results. The following historical financial information has been adjusted to give effect to pro forma events that are (i) directly attributable to the acquisition, (ii) factually supportable, and (iii) with respect to statements of operations, expected to have a continuing impact on the combined results, including the amortization of the fair value of the identifiable intangible assets and the cost of goods sold impact related to the fair value step-up of inventory acquired. The unaudited pro forma information does not reflect any operating efficiencies, associated cost savings or additional costs that the Company may achieve with respect to the combined companies.

 
8


The unaudited pro forma financial information presented below for the six months ended September 30, 2011 assumes the acquisition had occurred on April 1, 2011. Financial information presented below for the six months ended September 30, 2012 represents actual results of operations for the period.

   
Six Months Ended
 
   
September 30,
 
   
2012
   
2011
 
             
Net sales
  $ 200,655,000     $ 204,660,000  
Operating income (loss)
    (2,262,000 )     (6,430,000 )
Loss before income tax expense
    (13,508,000 )     (12,526,000 )
Net loss
    (18,795,000 )     (16,388,000 )
Basic net loss per share
  $ (1.32 )   $ (1.33 )
Diluted net loss per share
  $ (1.32 )   $ (1.33 )

3. Goodwill

At September 30, 2012 and March 31, 2012, the Company had $68,356,000 of goodwill recorded in the Company’s undercar product line segment in connection with its May 2011 acquisition.

During the second quarter of fiscal 2013, the Company discontinued supplying its undercar products to a major non-profitable customer of the undercar product line segment. The net sales to this customer represented approximately 31.0% for the 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 the undercar product line segment. As a result, the Company performed an interim impairment test of the related goodwill and intangible assets as of the end of the second quarter of fiscal 2013.

The Company evaluates whether goodwill has been impaired at the reporting unit level by first determining whether the estimated fair value of the reporting unit is less than its carrying value and, if so, by determining whether the implied fair value of goodwill within the reporting unit is less than the carrying value. The Company determined the fair value of the reporting unit based on an equal weighting of: (1) a discounted cash flow method, (2) guideline company method, and (3) guideline transaction method.  The discounted cash flow analysis establishes fair value by estimating the present value of the projected future cash flows of a reporting unit and applying a 3% terminal growth rate. The present value of estimated discounted future cash flow is determined using significant estimates of revenue and costs for the reporting unit, driven by assumed growth rates, as well as appropriate discount rates. The discount rate of 14% was determined using a weighted average cost of capital that incorporates long term government bonds, effective cost of debt, and the cost of equity of similar guideline companies. The market approach is calculated using market multiples and comparable transaction data for guideline companies. The guideline information was based on publicly available information. A valuation multiple was selected based on a financial benchmarking analysis that compared the reporting unit’s benchmark results with the guideline information. In addition to these financial considerations, qualitative factors such as business descriptions, markets served, and profitability were considered in the ultimate selection of the multiple used to estimate a value on a minority basis. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. Management has performed sensitivity analysis on its significant assumptions and has determined that a change in its assumptions within selected sensitivity testing levels would not impact its conclusion. Based on the results of the Company’s interim analysis of goodwill as of the end of second quarter of fiscal 2013, the reporting unit’s fair value exceeded its carrying value, indicating that there was no goodwill impairment.

 
9

 
4. Intangible Assets

Rotating Electrical Product Line

The following is a summary of the intangible assets attributable to the Company’s rotating electrical product line segment subject to amortization at September 30, 2012 and March 31, 2012.

     
September 30, 2012
   
March 31, 2012
 
 
Weighted
Average
Amortization
Period
 
Gross Carrying
Value
   
Accumulated
Amortization
   
Gross Carrying
Value
   
Accumulated
Amortization
 
Intangible assets subject to amortization
                         
Trademarks
9 years
  $ 553,000     $ 299,000     $ 553,000     $ 262,000  
Customer relationships
12 years
    6,464,000       2,420,000       6,464,000       2,096,000  
Non-compete agreements
4 years
    257,000       185,000       257,000       160,000  
Total
11 years
  $ 7,274,000     $ 2,904,000     $ 7,274,000     $ 2,518,000  

Undercar Product Line

As noted in Note 3 above, the Company discontinued supplying its undercar products to a major unprofitable customer. As a result, the Company performed an interim impairment test of its intangible assets attributable to the Company’s undercar product line segment and concluded that there was no impairment.

The following is a summary of the undercar product line segment’s intangible assets subject to amortization at September 30, 2012 and March 31, 2012.

     
September 30, 2012
   
March 31, 2012
 
 
Weighted
Average
Amortization
Period
 
Gross Carrying
Value
   
Accumulated
Amortization
   
Gross Carrying
Value
   
Accumulated
Amortization
 
Intangible assets subject to amortization
                         
Trademarks
20 years
  $ 11,159,000     $ 779,000     $ 11,159,000     $ 500,000  
Customer relationships
10 years
    7,680,000       1,075,000       7,680,000       691,000  
Non-compete agreements
2 years
    144,000       100,000       144,000       64,000  
Total
16 years
  $ 18,983,000     $ 1,954,000     $ 18,983,000     $ 1,255,000  

Consolidated amortization expense for acquired intangible assets for the three and six months ended September 30, 2012 and 2011 is as follows:

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Amortization expense
  $ 542,000     $ 542,000     $ 1,085,000     $ 969,000  
 
 
10

 
The consolidated aggregate estimated future amortization expense for intangible assets subject to amortization is as follows:

Year Ending March 31,
 
 
 
2013 - remaining 6 months
  $ 1,087,000  
2014
    2,070,000  
2015
    1,996,000  
2016
    1,675,000  
2017
    1,592,000  
Thereafter
    12,979,000  
Total
  $ 21,399,000  

5. Accounts Receivable — Net

Included in accounts receivable — net are significant offset accounts related to customer allowances earned, customer payment discrepancies, returned goods authorizations (“RGA”) issued for in-transit unit returns, estimated future credits to be provided for Used Cores returned by the customers and potential bad debts. Due to the forward looking nature and the different aging periods of certain estimated offset accounts, they may not, at any point in time, directly relate to the balances in the open trade accounts receivable.

Accounts receivable — net is comprised of the following:

   
September 30, 2012
   
March 31, 2012
 
Accounts receivable — trade
  $ 71,554,000     $ 67,038,000  
Allowance for bad debts
    (934,000 )     (968,000 )
Customer allowances earned
    (18,329,000 )     (16,250,000 )
Customer payment discrepancies
    (624,000 )     (280,000 )
Customer returns RGA issued
    (4,849,000 )     (5,875,000 )
Customer core returns accruals
    (24,989,000 )     (23,629,000 )
Less: total accounts receivable offset accounts
    (49,725,000 )     (47,002,000 )
Total accounts receivable — net
  $ 21,829,000     $ 20,036,000  

Warranty Returns

The Company allows its customers to return goods to the Company that their end-user customers have returned to them, whether the returned item is or is not defective (warranty returns). The Company accrues an estimate of its exposure to warranty returns based on a historical analysis of the level of this type of return as a percentage of total unit sales. Amounts charged to expense for these warranty returns are considered in arriving at the Company’s net sales. At September 30, 2012, the warranty return accrual of $2,336,000 was included under the customer returns RGA issued in the above table and in accounts receivable – net in the consolidated balance sheets and the warranty estimate of $7,922,000 was included in customer finished goods returns accrual in the consolidated balance sheets.

 
11

 
Change in the Company’s warranty return accrual is as follows:

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Balance at beginning of period
  $ 10,284,000     $ 7,120,000     $ 9,023,000     $ 8,969,000  
Charged to expense (1)
    18,977,000       17,783,000       35,578,000       30,626,000  
Amounts processed (1)
    (19,003,000 )     (17,579,000 )     (34,343,000 )     (32,271,000 )
Balance at end of period
  $ 10,258,000     $ 7,324,000     $ 10,258,000     $ 7,324,000  

(1)           Amounts shown above as warranty claims processed and charged to expense for the three and six months ended September 30, 2011 have been reclassified to conform to the current year presentation.

6. Inventory

Inventory is comprised of the following:

   
September 30, 2012
   
March 31, 2012
 
Non-core inventory
           
Raw materials
  $ 29,220,000     $ 31,560,000  
Work-in-process
    190,000       153,000  
Finished goods
    59,705,000       72,171,000  
      89,115,000       103,884,000  
Less allowance for excess and obsolete inventory
    (6,384,000 )     (8,813,000 )
Total
  $ 82,731,000     $ 95,071,000  
                 
Inventory unreturned
  $ 9,318,000     $ 9,819,000  
Long-term core inventory
               
Used cores held at the Company's facilities
  $ 48,410,000     $ 47,206,000  
Used cores expected to be returned by customers
    5,295,000       5,542,000  
Remanufactured cores held in finished goods
    22,553,000       25,751,000  
Remanufactured cores held at customers' locations
    120,446,000       118,402,000  
      196,704,000       196,901,000  
Less allowance for excess and obsolete inventory
    (3,802,000 )     (2,495,000 )
Total
  $ 192,902,000     $ 194,406,000  
                 
Long-term core inventory deposit
  $ 27,226,000     $ 26,939,000  

 
12

 
7. Major Customers

The Company’s largest customers accounted for the following total percentage of net sales and accounts receivable — trade:

   
Three Months Ended
 
Six Months Ended
   
September 30,
 
September 30,
Sales
 
2012
 
2011
 
2012
 
2011
Customer A
    38 %     43 %     37 %     40 %
Customer B
    16 %     7 %     16 %     8 %
Customer C (1)
    21 %     15 %     20 %     13 %

Accounts receivable - trade
 
September 30, 2012
   
March 31, 2012
 
Customer A
    29 %     31 %
Customer B
    9 %     8 %
Customer C (1)
    22 %     21 %

(1)           As noted in Note 3, the Company discontinued supplying its undercar products to customer C but has retained the rotating electrical product line sales to this customer.

The Company’s largest suppliers accounted for the following total percentage of raw materials purchases:

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
Significant supplier purchases
 
2012
   
2011
   
2012
   
2011
 
Supplier A
    19 %     11 %     18 %     13 %

8. Debt

The Company has the following outstanding credit agreements.

Parent Company Credit Agreement

The Company has a financing agreement (the “Parent Company Financing Agreement”) with a syndicate of lenders, Cerberus Business Finance, LLC, as collateral agent, and PNC Bank, National Association, as administrative agent (the “Parent Company Loans”). The Parent Company Loans consist of: (i) term loans aggregating $75,000,000 (the “Parent Company Term Loans”) and (ii) revolving loans of up to $20,000,000, subject to borrowing base restrictions and a $10,000,000 sublimit for letters of credit (the “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 the Company’s rotating electrical segment. The Parent Company Financing Agreement permits the Company to invest up to $20,000,000 in Fenco.

In May 2012, the Company entered into a second amendment to the Parent Company Financing Agreement (the “Second Amendment”) and borrowed an additional $10,000,000, for an aggregate of $85,000,000 (the “Amended Parent Company Term Loans”) 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 the Company’s 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 the Company maintain cash and cash equivalents of up to $10,000,000 in the aggregate until its obligations with respect to a significant supplier have ceased.

 
13

 
In August 2012, the Company entered into a third amendment and waiver to the Parent Company Financing Agreement (the “Third Amendment”) which, among other things, (i) permitted the Company to enter into the Fenco Credit Line described below, (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 described below, and (iv) removed the Second Amendment requirement that the Company maintain cash and cash equivalents of up to $10,000,000.

The Parent Company Financing Agreement, as amended, among other things, requires the Company to maintain certain financial covenants including a maximum senior leverage ratio, a minimum fixed charge coverage ratio, and minimum consolidated earnings before interest, income tax, depreciation and amortization expenses (“EBITDA”). The Company was in compliance with all financial covenants and reporting requirements under the Parent Company Financing Agreement, as amended, as of September 30, 2012.

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. The Company 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.

In connection with the Second Amendment, the Company issued a warrant (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 the Company’s 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 the Company at a price below the exercise price. As a result of the issuance of the Supplier Warrant in August 2012 (as described below) 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 the Company’s 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.

Fenco Credit Agreement

The Company’s wholly-owned subsidiaries, FAPL and Introcan, as borrowers (the “Fenco Borrowers”), entered into an amended and restated credit agreement, dated May 6, 2011 (the “Fenco Credit Agreement”) with Manufacturers and Traders Trust Company as lead arranger, M&T Bank as lender and administrative agent and the other lenders from time to time party thereto (the “Fenco Lenders”). Pursuant to the Fenco Credit Agreement, the Fenco Lenders have made available to the Fenco Borrowers a revolving credit facility in the maximum principal amount of $50,000,000 (the “Fenco Revolving Facility”) and a term loan in the principal amount of $10,000,000 (the “Fenco Term Loan”). The availability of the Fenco Revolving Facility is subject to a borrowing base calculation consisting of eligible accounts receivable and eligible inventory.

In August 2012, Fenco entered into a second amendment to the Fenco Credit Agreement (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.  The maturity date may be accelerated upon the occurrence of an insolvency event or event of default under the Fenco Credit Agreement.

 
14

 
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 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, as amended, among other things, requires the Fenco Borrowers to maintain certain financial covenants. 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, the Company entered into a revolving credit agreement (the “Agreement”) with Wanxiang America Corporation (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 (the “Fenco Credit Line”), of which $2,000,000 will only be available for accrued interest and other amounts payable (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. After July 1, 2014, the Supplier has the right to settle up to $8,000,000 (the “Receivable Sale Option”) of the Company’s outstanding Obligations in exchange, at the Company’s option, for (i) shares of the Company’s 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 the Company. Any outstanding Obligations settled by the Supplier will reduce the Fenco Credit Line. The Obligations under the Agreement are guaranteed by the Company and certain of its subsidiaries.

In connection with this Agreement, the Company also issued a warrant (the “Supplier Warrant”) to the Supplier to purchase up to 516,129 shares of the Company’s 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 the Company at a price below the exercise price. Any outstanding Obligations settled by the Supplier will reduce the Fenco Credit Line. The Company is obligated to issue no more than an aggregate of 1,032,258 shares of its common stock in connection with the Receivable Sale Option and Supplier Warrant. The Obligations under this Agreement are subordinated to the Company’s 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. A loss of $193,000 was recorded in general and administrative expenses due to the change in the fair value of the warrant liability from the date of grant in August 2012.

 
15

 
9. Accounts Receivable Discount Programs

Both of the Company’s segments use receivable discount programs with certain customers and their respective banks. Under these programs, the Company may sell those customers’ receivables to those banks at a discount to be agreed upon at the time the receivables are sold. These discount arrangements allow the Company to accelerate collection of customers’ receivables.

The following is a summary of the Company’s accounts 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  

10. Net Loss Per Share

Basic net loss per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock.

The following presents a reconciliation of basic and diluted net loss per share.

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net loss
  $ (8,933,000 )   $ (5,439,000 )   $ (18,795,000 )   $ (13,744,000 )
Basic shares
    14,456,921       12,451,600       14,192,235       12,367,030  
Effect of dilutive stock options and warrants
    -       -       -       -  
Diluted shares
    14,456,921       12,451,600       14,192,235       12,367,030  
Net loss per share:
                               
Basic
  $ (0.62 )   $ (0.44 )   $ (1.32 )   $ (1.11 )
Diluted
  $ (0.62 )   $ (0.44 )   $ (1.32 )   $ (1.11 )

The effect of dilutive options and warrants excludes 1,451,784 shares subject to options and 735,484 shares subject to warrants with exercise prices ranging from $1.80 to $15.06 per share for the three and six months ended September 30, 2012 and 1,506,354 shares subject to options and 546,283 shares subject to warrants with exercise prices ranging from $1.80 to $15.06 per share for the three and six months ended September 30, 2011 — all of which were anti-dilutive.

11. Income Taxes

The Company recorded income tax expenses for the three and six months ended September 30, 2012 and 2011. This is 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 for the three and six months ended September 30, 2012 and 2011 due to the recoverability of these tax benefits not being deemed by the Company to be more likely than not to be realized. In addition, for the three and six months ended September 30, 2012, the Company recorded $50,000 and $98,000, respectively, of income tax expense specifically related to the Fenco subsidiaries located in Mexico, a separate tax jurisdiction. For the three and six months ended September 30, 2011, the Company recorded $93,000 and $140,000, respectively, of income tax expense specifically related to the Fenco subsidiaries located in Mexico, a separate tax jurisdiction.

 
16

 
The income tax expenses, excluding the net losses of Fenco’s Canadian operations, reflect effective income tax rates of 37.6% and 37.7% for the three and six months ended September 30, 2012, respectively. The income tax expenses, excluding the net losses of Fenco’s Canadian operations, reflect income tax rates of 36.2% and 40.1% for the three and six months ended September 30, 2011, respectively. The income tax rates for all periods were higher than the federal statutory rates primarily due to state income taxes, which were partially offset by the benefit of lower statutory tax rates in foreign taxing jurisdictions.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions with varying statutes of limitations.

12. Financial Risk Management and Derivatives

Purchases and expenses denominated in currencies other than the U.S. dollar, which are primarily related to the Company’s facilities overseas, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currency. The Company’s primary risk exposure is from changes in the rate between the U.S. dollar and the Mexican peso related to the operation of the Company’s facilities in Mexico. The Company enters into forward foreign currency exchange contracts to exchange U.S. dollars for Mexican pesos in order to mitigate this risk. The extent to which forward foreign currency exchange contracts are used is modified periodically in response to management’s estimate of market conditions and the terms and length of specific purchase requirements to fund those overseas facilities and purchases.

The Company enters into forward foreign currency exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual cash outflow resulting from funding the expenses of the foreign operations and purchases will be materially affected by changes in exchange rates. The Company does not hold or issue financial instruments for trading purposes. The forward foreign currency exchange contracts are designated for forecasted expenditure requirements to fund foreign operations and purchases.

The Company had forward foreign currency exchange contracts with a U.S. dollar equivalent notional value of $15,039,000 and $13,494,000 at September 30, 2012 and March 31, 2012, respectively. These contracts generally expire in a year or less, at rates agreed at the inception of the contracts. The counterparty to this derivative transaction is a major financial institution with investment grade or better credit rating; however, the Company is exposed to credit risk with this institution. The credit risk is limited to the potential unrealized gains (which offset currency fluctuations adverse to the Company) in any such contract should this counterparty fail to perform as contracted. Any changes in the fair values of forward foreign currency exchange contracts are reflected in current period earnings and accounted for as an increase or offset to general and administrative expenses.

The following table shows the effect of the Company’s derivative instruments on its consolidated statements of operations:

   
Gain (Loss) Recognized within General and Administrative Expenses
 
   
Three Months Ended
   
Six Months Ended
 
Derivatives Not Designated as
 
September 30,
   
September 30,
 
Hedging Instruments
 
2012
   
2011
   
2012
   
2011
 
                         
Forward foreign currency exchange contracts
  $ 431,000     $ (1,799,000 )   $ 340,000     $ (1,887,000 )

The fair value of the forward foreign currency exchange contracts of $219,000 is included in prepaid expenses and other current assets in the consolidated balance sheet at September 30, 2012. The fair value of the forward foreign currency exchange contracts of $121,000 is included in other current liabilities in the consolidated balance sheet at March 31, 2012.

 
17

 
13. Fair Value Measurements

The following table summarizes the Company’s financial assets and liabilities measured at fair value, by level within the fair value hierarchy as of September 30, 2012 and March 31, 2012:

   
September 30, 2012
   
March 31, 2012
 
         
Fair Value Measurements
         
Fair Value Measurements
 
         
Using Inputs Considered as
         
Using Inputs Considered as
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Assets
                                               
Short-term investments
 
                                           
Mutual funds
  $ 368,000     $ 368,000       -       -     $ 342,000     $ 342,000       -       -  
Prepaid expenses and other current assets
                                                               
Forward foreign currency exchange contracts
    219,000       -     $ 219,000       -       -       -       -       -  
                                                                 
Liabilities
                                                               
Other current liabilities
                                                               
Deferred compensation
    368,000       368,000       -       -       342,000       342,000       -       -  
Forward foreign currency exchange contracts
    -       -       -       -       121,000       -     $ 121,000       -  
Other liabilities
                                                               
Warrant liability
    1,568,000       -       -     $ 1,568,000       -       -       -       -  

The Company’s short-term investments, which fund its deferred compensation liabilities, consist of investments in mutual funds. These investments are classified as Level 1 as the shares of these mutual funds trade with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.

The forward foreign currency exchange contracts are primarily measured based on the foreign currency spot and forward rates quoted by the banks or foreign currency dealers. During the three months ended September 30, 2012 and 2011, a gain of $431,000 and a loss of $1,799,000, respectively, was recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts. During the six months ended September 30, 2012 and 2011, a gain of $340,000 and a loss of $1,887,000, respectively, was recorded in general and administrative expenses due to the change in the value of the forward foreign currency exchange contracts subsequent to entering into the contracts.

The Company estimates the fair value of the warrant liability using level 3 inputs and the Monte Carlo simulation model at each balance sheet date. This amount is recorded as a warrant liability which is included in other liabilities in the consolidated balance sheet at September 30, 2012. Any subsequent changes in the fair value of the warrant liability will be recorded in current period earnings as a general and administrative expense. During the three and six months ended September 30, 2012, a gain of $67,000 and $57,000, respectively, was recorded in general and administrative expenses due to the change in the fair value of the warrant liability.

The assumptions used to determine the fair value of the Cerberus Warrant and the Supplier Warrant recorded as warrant liability were:

   
September 30, 2012
 
   
Cerberus Warrant
   
Supplier Warrant
 
             
Risk free interest rate
    0.54 %     0.62 %
Expected life in years
    4.65       5.00  
Expected volatility
    55.93 %     56.59 %
Dividend yield
    -       -  
Probability of future financing
    0 %     0 %

 
18

 
The risk free interest rate used was based on U.S. treasury-note yields with terms commensurate with the remaining term of the warrants. The expected life is based on the remaining contractual term of the warrants and the expected volatility is based on the Company’s daily historical volatility over a period commensurate with the remaining term of the warrants.

A summary of the change to the Company’s warrant liability, as measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is presented below:

   
Three Months Ended
   
Six Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Beginning balance
  $ 617,000     $ -     $ -     $ -  
Newly issued
    1,018,000       -       1,625,000       -  
Total (gain) loss included in net loss
    (67,000 )     -       (57,000 )     -  
Warrants exercised
    -       -       -       -  
Net transfers in (out) of Level 3
    -       -       -       -  
Ending balance
  $ 1,568,000     $ -     $ 1,568,000     $ -  

During the three and six months ended September 30, 2012, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition.

The carrying amounts of cash, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the revolving loans, term loans and other long-term liabilities approximate their fair value based on current rates for instruments with similar characteristics.

14. Segment Information

The Company has two reportable segments, the rotating electrical segment and the undercar product line segment, based on the way the Company manages, evaluates and internally reports its business activities.

The rotating electrical segment is comprised of the Company’s alternator and starter business. This segment remanufactures, produces, and distributes alternators and starters 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.

The undercar product line segment manufactures, remanufactures and distributes new and remanufactured aftermarket auto parts, including steering components, brake calipers, master cylinders, hub assembly and bearings, clutches and clutch hydraulics for virtually all passenger and truck vehicles.

The Company’s products are sold to automotive retail chain stores, warehouse distributors, and to major automobile manufacturers throughout North America.

 
19

 
The results of operations of Fenco have been included from the date of acquisition on May 6, 2011. Financial information relating to the Company’s reportable segments is as follows:

   
Three months ended September 30, 2012
 
   
Rotating
   
Undercar
             
Selected income statement data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Net sales to external customers
  $ 57,652,000     $ 53,980,000     $ -     $ 111,632,000  
Gross profit (loss)
    20,096,000       (3,375,000 )     -       16,721,000  
Operating income (loss)
    13,519,000       (12,356,000 )     -       1,163,000  
Net income (loss)
    6,503,000       (15,436,000 )     -       (8,933,000 )

   
Three months ended September 30, 2011
 
   
Rotating
   
Undercar
             
Selected income statement data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Net sales to external customers
  $ 45,737,000     $ 61,879,000     $ -     $ 107,616,000  
Intersegment revenue, net of cost
    836,000       -       (836,000 )     -  
Gross profit (loss)
    15,091,000       (338,000 )     226,000       14,979,000  
Operating income (loss)
    5,480,000       (5,943,000 )     226,000       (237,000 )
Net income (loss)
    3,026,000       (8,691,000 )     226,000       (5,439,000 )

   
Six months ended September 30, 2012
 
   
Rotating
   
Undercar
             
Selected income statement data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Net sales to external customers
  $ 104,451,000     $ 96,204,000     $ -     $ 200,655,000  
Gross profit (loss)
    34,915,000       (6,080,000 )     -       28,835,000  
Operating income (loss)
    20,216,000       (22,478,000 )     -       (2,262,000 )
Net income (loss)
    8,870,000       (27,665,000 )     -       (18,795,000 )

   
Six months ended September 30, 2011
 
   
Rotating
   
Undercar
             
Selected income statement data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Net sales to external customers
  $ 84,753,000     $ 93,373,000     $ -     $ 178,126,000  
Intersegment revenue, net of cost
    1,612,000       -       (1,612,000 )     -  
Gross profit (loss)
    27,847,000       (5,835,000 )     -       22,012,000  
Operating income (loss)
    10,272,000       (15,058,000 )     -       (4,786,000 )
Net income (loss)
    5,252,000       (18,996,000 )     -       (13,744,000 )

   
September 30, 2012
 
   
Rotating
   
Undercar
             
Selected balance sheet data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Current assets
  $ 109,690,000     $ 75,441,000     $ (29,323,000 )   $ 155,808,000  
Non-current assets
    213,781,000       173,922,000       (54,564,000 )     333,139,000  
Total assets
  $ 323,471,000     $ 249,363,000     $ (83,887,000 )   $ 488,947,000  
Current liabilities
  $ 68,704,000     $ 130,682,000     $ (29,323,000 )   $ 170,063,000  
Non-current liabilities
    95,813,000       204,214,000       (49,618,000 )     250,409,000  
Total liabilities
    164,517,000       334,896,000       (78,941,000 )     420,472,000  
Equity (deficit)
    158,954,000       (85,533,000 )     (4,946,000 )     68,475,000  
Total liabilities and equity
  $ 323,471,000     $ 249,363,000     $ (83,887,000 )   $ 488,947,000  
 
 
20

 
   
March 31, 2012
 
   
Rotating
   
Undercar
             
Selected balance sheet data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Current assets
  $ 115,451,000     $ 81,778,000     $ (28,998,000 )   $ 168,231,000  
Non-current assets
    179,167,000       186,896,000       (32,396,000 )     333,667,000  
Total assets
  $ 294,618,000     $ 268,674,000     $ (61,394,000 )   $ 501,898,000  
Current liabilities
  $ 72,987,000     $ 126,430,000     $ (28,998,000 )   $ 170,419,000  
Non-current liabilities
    85,201,000       200,112,000       (27,453,000 )     257,860,000  
Total liabilities
    158,188,000       326,542,000       (56,451,000 )     428,279,000  
Equity (deficit)
    136,430,000       (57,868,000 )     (4,943,000 )     73,619,000  
Total liabilities and equity
  $ 294,618,000     $ 268,674,000     $ (61,394,000 )   $ 501,898,000  

   
Six months ended September 30, 2012
 
   
Rotating
   
Undercar
             
Selected cash flow data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Net cash provided by (used in) operating activities
  $ 340,000     $ (14,883,000 )   $ -     $ (14,543,000 )
Net cash used in investing activities
    (1,437,000 )     (445,000 )     -       (1,882,000 )
Net cash provided by (used in) financing activities
    23,022,000       (6,871,000 )             16,151,000  
Effect of exchange rate changes on cash
    (15,000 )     -               (15,000 )
Cash — Beginning of period
    32,379,000       238,000               32,617,000  
Cash — End of period
    31,921,000       407,000       -       32,328,000  
Additional selected financial data
                               
Depreciation and amortization
  $ 1,438,000     $ 1,290,000     $ -     $ 2,728,000  
Capital expenditures
    1,415,000       445,000       -       1,860,000  

   
Six months ended September 30, 2011
 
   
Rotating
   
Undercar
             
Selected cash flow data
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
Net cash provided by (used in) operating activities
  $ 4,076,000     $ (49,310,000 )   $ -     $ (45,234,000 )
Net cash used in investing activities
    (625,000 )     (74,000 )     -       (699,000 )
Net cash provided by financing activities
    36,708,000       8,099,000       -       44,807,000  
Effect of exchange rate changes on cash
    (154,000 )     -       -       (154,000 )
Cash — Beginning of period
    2,477,000       -       -       2,477,000  
Cash — End of period
    857,000       340,000       -       1,197,000  
Additional selected financial data
                               
Depreciation and amortization
  $ 1,777,000     $ 1,877,000     $ -     $ 3,654,000  
Capital expenditures
    604,000       74,000       -       678,000  

15. Equity Transaction

In April 2012, the Company entered into a Subscription Agreement and a Registration Rights Agreement to raise approximately $15,004,000 in gross proceeds and net proceeds of $13,970,000 after expenses through a private placement of its 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. The Company used the proceeds to enhance the integration of its Fenco acquisition and for general corporate purposes.

 
21

 
Pursuant to the Registration Rights Agreement, the Company has 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 the Company’s 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, the Company 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 the Company 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 the Company’s common stock. As of September 30, 2012, the Company had accrued $150,000 for the settlement of these liquidated damages.

16. Subsequent Events

Equity Transaction

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

In connection with the Stock Repurchase Agreement, the Company entered into a fourth amendment to the Parent Company Financing Agreement (the “Fourth Amendment”), which, among other things, permitted the Company to repurchase the Shares pursuant to the Stock Repurchase Agreement.

17. 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, the Company has determined the changes from the adoption of this guidance on April 1, 2012 did not have an impact on its 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 the Company’s consolidated financial position and the results of operations.

 
22

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

 
23

 
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.

 
24

 
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:

   
Rotating
   
Undercar
       
Three months ended September 30,
 
Electrical
   
Product Line
   
Consolidated
 
2012
                 
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.

 
25

 
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:

   
Rotating
   
Undercar
             
Three months ended September 30,
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
2012
                       
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.

 
26

 
 
·
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:

   
Rotating
   
Undercar
             
Three months ended September 30,
 
Electrical
   
Product Line
   
Eliminations
   
Consolidated
 
                         
2012
                       
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