Summary of MOTORCAR PARTS AMERICA INC

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 including rack and pinion, pumps and gears, brake calipers, master cylinders, and hub assembly and bearings 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.

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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 reestablishing strong liquidity and bringing the level of customer service in our undercar business to the excellent level of customer service we have achieved and maintained in our rotating electrical business. We have been systematically and aggressively implementing our undercar product line turnaround plan since acquisition and at December 31, 2012, we are 20 months into a 24 month plan. This turnaround plan is built on the following elements:
upgrading customer service levels; reviewing profitability of product offerings; improving manufacturing and logistics productivity; and implementing cost savings throughout the operating model including the implementation of an ERP system to support the undercar product line segment.

During the current quarter ended December 31, 2012, the following are some of the key steps taken toward our goal of sustained profitability and growth for the long-term. In performing these steps operating inefficiencies and transition costs were incurred, which we believe are non-recurring and that was especially true this quarter as we tackled some of the larger and more complex challenges. We will refer back to the impacts of these key steps noted below throughout our comparative analysis of the quarterly results of operations.

Customer Service Levels. During this quarter we continued to focus on improving or maintaining our customer service levels. The implementation of the new ERP system has provided better information to allow us to improve the fill rates in support of the customer requirements, but we still have not obtained our target levels and are aggressively working on this issue. To enhance customer service levels we have also voluntarily incurred additional premium freight charges and purchased material at prices in excess of normal cost.

During the third quarter of fiscal 2013, we agreed with several customers to evaluate their inventory offerings and developed a new mix of product to be offered by these customers, which we expect will result in better performance in future quarters for these customers and the undercar product line segment. In the current quarter ended December 31, 2012, however, this will require that we record an accrual to reserve for the inventory that will be returned to be replaced with the new product offerings.

Profitability of Product Offerings. In the quarter ended December 31, 2012, we continued the process of transitioning out of the CV axle, clutch and other smaller product lines. We are focused on our main product lines which include brakes, steering, and wheel hubs. The process of transitioning out of the discontinued product lines included sales of discontinued products to customers or others at reduced margins, the sale of components and packaging related to these product lines as scrap material, and the establishment of additional reserves to reduce the cost of the remaining inventory to market value.

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In addition, we transitioned out of an unprofitable major customer relationship representing approximately 31% of our net sales of the undercar product line segment in the first six months of fiscal 2013. This step allowed us to recognize revenue from the reduction in our obligation to provide a credit for the customer's Remanufactured Cores offset by the recognition of the cost of the Remanufactured Cores held at the customer's location. By exiting a customer relationship for certain undercar product lines, we incurred some direct one-time transition costs, which impacted our manufacturing productivity by reducing our production requirements at the undercar product line segment's facility in Mexico. The lower sales and production rates also impacted other accounting estimates, such as our excess and obsolescence reserve levels and our warranty reserve rates. The impacts on these accounting estimates will be reduced in future quarters as we adjust to our expected future production and sales environment.

Manufacturing and Logistics Productivity. Our transition plan for logistics is to consolidate multiple facilities into one facility in Pennsylvania. We will also utilize additional space in our Torrance facility for the distribution of the purchased finished goods products in our undercar product line segment. These facilities will be managed by our in-house personnel using the newly implemented ERP system. The transition plan for manufacturing includes implementing and maintaining lean manufacturing at our undercar product line facility located in Monterrey, Mexico.

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 pay a termination fee of approximately $1,402,000, which was recorded in the second quarter of fiscal 2013. In addition, we agreed to pay a $95,000 per month all-inclusive rental fee to use the property for a period not to exceed eight months from the termination date. The transition of the purchased finished goods to the new facility in Torrance began in December 2012, and we expect that there will be additional expenses incurred until the transition is completed. Once completed, we expect that this will result in additional savings in logistics expenses.

Cost Savings In addition to the cost savings discussed above, part of our turnaround plan included centralizing the accounting functions previously performed in our office located in Toronto into our existing accounting function in Torrance. This was made possible by the extension of the current rotating electric ERP system to incorporate the undercar product line segment. The ERP system became operational at the beginning of the current quarter ending December 31, 2012. For a period of time during the quarter we incurred both costs to finalize the first and second quarter accounting functions in Toronto as well as incurring the ongoing accounting function costs related to the third quarter activity in Torrance. We believe that this transition has been substantially completed and will result in cost savings in future quarters.

Our implementation of our plan for Fenco has taken longer and cost more than initially anticipated. We anticipate continuing to adjust 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, but the impact of those initiatives may take longer to be reflected in our financial results. 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, including capital or other support (if any) that we may provide to Fenco. Fenco continues to face capital and liquidity concerns, and we have only agreed to (and under the Parent Company Financing Agreement are only permitted to) support those in specific limited circumstances and cannot assure that we will do so in any other circumstances in the future or that Fenco will have or be able to obtain significant capital to implement its plan.

Results of Operations for the Three Months Ended December 31, 2012 and 2011

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

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