EDITOR'S NOTE: This story has been changed from the print version to correct the spelling of Fenco in several places.

The ride has been a little shaky lately for investors in Motorcar Parts of America Inc. The Torrance auto parts manufacturer and distributor faces surprise challenges in digesting its acquisition of another auto parts maker.

Last year, Motorcar Parts acquired Toronto-based Fenco in a stock deal worth more than $5 million. The move was expected to add product lines for Motorcar Parts, more than doubling revenue.

Motorcar Parts executives acknowledged at the time that it would take two years to integrate the large acquisition into operations.

They said that they’re on track with the timetable, but the process has proved more expensive and troublesome than anticipated.

Fenco’s books needed a lot of work to bring them up to accounting standards of U.S. public companies. As a result, Motorcar Parts missed filing deadlines for several quarters.

On top of that, Motorcar Parts has had to invest more money in streamlining to integrate Fenco, culminating earlier this month in a $15 million private-placement stock offering that diluted the value of existing shares.

A burst of investor enthusiasm after the merger announcement in May pushed the stock to nearly $15 a share. Since then, shares have fallen nearly 50 percent, closing last week at $7.79. Last week alone, after the placement announcement, the stock fell nearly 20 percent, making Motorcar Parts the biggest loser for the week on the Business Journal’s stock index. (See page 38.)

“In the eyes of many investors, Motorcar Parts of America has again become a show-me story, and the stock has been discounted accordingly,” said Jimmy Baker, senior analyst at B. Riley & Co. in West Los Angeles.

That’s not what was anticipated when Motorcar Parts announced its acquisition of Fenco last May. Investors saw the purchase as a major coup for Motorcar Parts that would allow it to broaden product offerings.

Until then, Motorcar Parts had focused on what analysts call “under the hood” products – primarily original and remanufactured alternators and starters – and selling them to automotive part wholesalers, retailers and professional repair shops. Fenco sold “under the car” parts – such as brake calipers, clutches and water pumps – to that same customer base.

Both companies were riding increased sales of aftermarket auto parts due to the aging automotive fleet in the United States, Canada and Mexico. Decades ago, the average age of autos on U.S. roads was seven years; now it’s 11 and climbing. Since most part warranties expire within seven years, vehicle owners or their auto mechanics are now much more likely to buy aftermarket auto parts.

Accounting problems

But trouble surfaced almost immediately after the purchase. As Motorcar Parts accounting executives began to comb through Fenco’s books, they discovered that as a private company in Canada, Fenco did not have to separate out what are called core revenues as required under U.S. accounting standards.

Fenco hadn’t been accounting for the value of old parts traded in for new ones. That calculation is required under U.S. accounting practices. So Motorcar Parts’ accounting team had to go back and recalculate.

“Separating out these values proved to be a much greater challenge than we expected,” said Selwyn Joffe, Motorcar Parts chief executive. “This was the major reason that led to our filing delays.”

Joffe also said Motorcar Parts accountants found that Fenco’s base business was about $5 million weaker than first thought.

In addition, under its main credit agreement, Motorcar Parts was only allowed to spend $5 million on expenses related to integrating acquisitions into operations. That amount wasn’t enough to consolidate Fenco’s manufacturing and distribution process, especially to deal with inefficiencies related to its plant in Monterrey, Mexico.

Joffe said the company had two options to raise more capital: take on more debt or issue more stock.

“We decided we didn’t want to take on more leverage at this time, so that left the stock offering,” he said.

The company sold unregistered securities to avoid the expense of full Securities and Exchange Commission disclosures. As a result, the shares were offered at $7.75 each, a discount of nearly 20 percent. The 2 million additional shares increased the total share count by about 16 percent; the combination of the share dilution and the discount hurt existing shareholders.

Joffe said Motorcar Parts is still on track to complete the integration of Fenco into operations within two years. Much of the remaining work will focus on streamlining operations in Mexico.

“Fenco spent an inordinate amount of money moving product around in Mexico,” he said.

The consolidation will result in bringing some operations to Torrance headquarters.

“We’re going to be creating a lot of jobs in California,” he said.

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