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| PRTS > SEC Filings for PRTS > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
Quarterly Report
Cautionary Statement
You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008 and subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail. The section entitled "Risk Factors" set forth below, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.
Overview
We are one of the largest online providers of aftermarket auto parts, including body parts, engine parts, performance parts and accessories. Our user-friendly websites provide customers with a broad selection of SKUs, with detailed product descriptions and photographs. Our proprietary product database maps our SKUs to product applications based on vehicle makes, models and years. We principally sell our products to individual consumers through our network of websites and online marketplaces. Our flagship websites are located at www.autopartswarehouse.com and www.partstrain.com. We believe our strategy of disintermediating the traditional auto parts supply chain and selling products directly to customers over the Internet allows us to more efficiently deliver products to our customers while generating higher margins.
Our History. We were formed in 1995 as a distributor of aftermarket auto parts and launched our first website in 2000. We rapidly expanded our online operations, increasing the number of SKUs sold through our e-commerce network, adding additional websites, acquiring the Partsbin business, improving our Internet marketing proficiency and commencing sales in online marketplaces. As a result, our business has grown since 2000, generating net sales of $153.4 million for the year ended December 31, 2008.
International Operations. In April 2007, we entered into a purchase agreement to bring in-house certain sales and customer service employees based in the Philippines who were providing support to us through our outsourced call center provider, Access Worldwide. As of the closing of this transaction, approximately 171 of the Access Worldwide employees had agreed to transition over to direct employment by our Philippines subsidiary. The purchase price for the right to acquire this assembled workforce was approximately $1.7 million. We had 650 employees in our Philippines operations as of April 4, 2009. In addition to our Philippines operations, we own a Canadian subsidiary to facilitate sales of our products in Canada which currently has no employees. We believe that the cost advantages of our offshore operations provide us with the ability to grow our business in a cost-effective manner, and we expect to continue to add headcount and infrastructure to our offshore operations.
Acquisitions. From time to time, we may acquire certain businesses, websites, domain names, or other assets. During 2008, we acquired several websites and domain name assets. In May 2006, we completed the acquisition of Partsbin, which expanded our product offering, and enhanced our ability to reach more customers. The Partsbin acquisition significantly increased our net sales and added a complementary, drop-ship order fulfillment method, and operations in Canada. We may pursue additional acquisition opportunities in the future to increase our share of the aftermarket auto parts market or expand our product offerings.
Change in Fiscal Year
We changed our fiscal year from a calendar year ending on December 31 to a 52/53 week fiscal year ending on the first Saturday following December 31st. The change in the fiscal year took effect on January 1, 2009; therefore there was no transition period in connection with this change of fiscal year-end. As a result, the first quarter of 2009 consists of the thirteen weeks ended April 4, 2009 and the first quarter of 2008 consists of the three months ended March 31, 2008.
Stock Option Exchange Program
Our Annual Meeting of the Stockholders was held on May 5, 2009. The stock option exchange program, pursuant to which up to 1,486,464 options would be exchanged for up to 743,232 new options was approved at the Annual Meeting. The option exchange has not yet commenced. Should the Board of Directors determine to proceed with and commence the program, we will have up to six months after stockholder approval to do so. US Auto Parts Network, Inc. will file a Tender Offer Statement on Schedule TO with the Securities and Exchange Commission, or SEC, upon the commencement of the option exchange.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, uncollectible receivables, intangible and other long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes to our critical accounting policies during the quarter ended April 4, 2009, as compared to those policies disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2008.
Results of Operations
The following table sets forth certain unaudited statements of operations data
as a percentage of total net sales for the periods indicated:
Thirteen Weeks
Ended % of Three Months Ended % of
April 4, 2009 Net Sales March 31, 2008 Net Sales
(in thousands) (in thousands)
Net sales $ 39,664 100.0 % $ 40,009 100.0 %
Cost of sales 25,024 63.1 26,259 65.6
Gross profit 14,640 36.9 13,750 34.4
Operating expenses:
Marketing 5,335 13.5 5,967 14.9
General and administrative 4,765 12.0 4,623 11.6
Fulfillment 2,652 6.7 2,088 5.2
Technology 928 2.3 684 1.7
Amortization of intangibles 367 0.9 2,099 5.2
Total operating expenses 14,047 35.4 15,461 38.6
Income (loss) from operations 593 1.5 (1,711 ) (4.2 )
Other income, net 91 0.2 272 0.7
Income (loss) before income taxes 684 1.7 (1,439 ) (3.5 )
Income tax provision (benefit) 1,363 3.4 (564 ) (1.4 )
Net loss $ (679 ) (1.7 )% $ (875 ) (2.1 )%
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Estimated Impact of the Change in Fiscal Year to a 52/53 Week in the First Quarter of 2009
• Net sales increased by $1.4 million for the first quarter of 2009
due to three additional business days. Excluding these additional
days, net sales would have been $38.3 million.
• Net loss would have been $0.8 million or $0.03 per diluted share.
• We do not anticipate that the change to the 52/53 week fiscal year
will have a material effect on future quarters.
Thirteen Weeks Ended April 4, 2009 Compared to Three Months Ended March 31, 2008
Net Sales and Gross Margin
Thirteen Three Months
Weeks Ended Ended
April 4, 2009 March 31, 2008 $ Change % Change
(in thousands)
Net sales $ 39,664 $ 40,009 $ (345 ) (0.9 )%
Cost of sales 25,024 26,259 (1,235 ) (4.7 )%
Gross profit $ 14,640 $ 13,750 $ 890 6.5 %
Gross margin 36.9 % 34.4 % 2.5 %
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Net sales decreased $0.3 million, or 0.9%, for the first quarter of 2009 compared to the first quarter of 2008. The decrease was primarily attributable to a 25.9% decrease in our offline channels, partially offset by a 2.1% increase in our online channels. The first quarter of 2009 was partially impacted by an additional three business days in the current period due to our change from a calendar year to a 52/53 week fiscal year. Excluding the three additional business days, net sales on a calendar basis would have been $38.3 million on a calendar basis or a 4.3% decrease over the prior year period.
Net sales in our online channels consist of our e-commerce and online marketplaces. Our e-commerce channel includes a network of e-commerce websites, supported by our call-center sales agents who generate cross-sell and up-sell opportunities. We also sell our products through our online marketplaces, which primarily consist of auction and other third party websites.
E-commerce sales on a calendar basis decreased 2.3% for the first quarter of 2009 compared to the first quarter of 2008. The decrease was primarily attributable to a decline in the average order value, a lower conversion rate, and an extra business day in 2008 (leap year), which was partially offset by improvements in our revenue capture. The total number of our e-commerce orders for the quarter remained relatively consistent year-over-year but our average order value was $126 and $120 for the first quarters of 2008 and 2009, respectively. The decline in our average order value was caused by a reduction in the number of higher dollar items ordered and a reflection of unfavorable economic conditions that have affected, and may continue to adversely affect retail sales in general. During 2009, we plan to continue to expand our product categories.
Online marketplace sales on a calendar basis increased 4.6% in the first quarter of 2009 compared to the first quarter of 2008. The increase was primarily due to a higher number of completed auctions in our eBay channel.
Net sales of our offline business, which consists of our Kool-Vue™ and wholesale operations, on a calendar basis decreased 27.5% for the first quarter of 2009 compared to the first quarter of 2008. The decline in offline sales was primarily due to the loss of sales from a significant customer in the third quarter of 2008.
We have historically experienced seasonality in our business. We expect seasonality to continue in future years as automobile collisions during inclement weather create increased demand for body parts in winter months, and consumers often undertake projects to maintain and enhance the performance of their automobiles in the summer months. We anticipate that seasonality will continue to have a material impact on our financial condition and results of operations during any given year.
Gross profit was $14.6 million, or 36.9% of net sales, for the first quarter of 2009, compared to $13.8 million or 34.4% of net sales in the first quarter of 2008. The 2.5% increase in gross margin was primarily due to initiatives to lower freight costs and a contract change with one of our suppliers regarding marketing co-op, which is now included as a reduction in product cost.
Marketing Expense
Thirteen
Weeks Ended Three Months Ended
April 4, 2009 March 31, 2008 $ Change % Change
(in thousands)
Marketing expense $ 5,335 $ 5,967 $ (632 ) (10.6 )%
Percent of net sales 13.5 % 14.9 % (1.4 )%
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Marketing expenses decreased $632,000, or 10.6%, for the first quarter of 2009 compared to the first quarter of 2008. As a percentage of net sales, marketing expense decreased 1.4% primarily due to lower personnel-related costs, lower depreciation expense, and a decrease in online advertising spending from continued improvements in our ROI-based spending model, fee reductions from eBay and the removal of marketing co-op related to a contract change with one of our suppliers which is now included in product cost.
General and Administrative Expense
Thirteen
Weeks Ended Three Months Ended
April 4, 2009 March 31, 2008 $ Change % Change
(in thousands)
General and administrative expense $ 4,765 $ 4,623 $ 142 3.1 %
Percent of net sales 12.0 % 11.6 % 0.4 %
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General and administrative expenses increased $142,000, or 3.1%, for the first quarter of 2009 compared to the first quarter of 2008. The increase was primarily due to a $600,000 reduction in professional fees; partially offset by $500,000 higher personnel-related expenses, which included a charge of $300,000 in share-based compensation expense related to the voluntary forfeiture of certain stock options by our CEO.
During the first quarter of 2008, we recognized share-based compensation expense of $1.0 million, net of capitalized internally developed software, determined in accordance with SFAS 123(R). Based on options outstanding as of April 4, 2009, we expect to recognize additional share-based compensation expense of $6.1 million over a weighted-average period of 3.01 years.
Fulfillment Expense
Thirteen
Weeks Ended Three Months Ended
April 4, 2009 March 31, 2008 $ Change % Change
(in thousands)
Fulfillment expense $ 2,652 $ 2,088 $ 564 27.0 %
Percent of net sales 6.7 % 5.2 % 1.5 %
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Fulfillment expense increased $564,000, or 27.0%, for the first quarter of 2009 compared to the first quarter of 2008, primarily due to an increase in personnel-related costs and facility expenses to support the opening of our new distribution center on the East Coast in the first quarter of 2009.
Technology Expense
Thirteen Weeks Ended Three Months Ended
April 4, 2009 March 31, 2008 $ Change % Change
(in thousands)
Technology expense $ 928 $ 684 $ 244 35.7 %
Percent of net sales 2.3 % 1.7 % 0.6 %
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Technology expense increased $244,000, or 35.7%, for the first quarter of 2009 compared to the first quarter of 2008, primarily due to higher personnel-related expenses to support our expanded infrastructure and investment in our overall technology platform.
Amortization of Intangibles
Thirteen Weeks Ended Three Months Ended
April 4, 2009 March 31, 2008 $ Change % Change
(in thousands)
Amortization of intangibles $ 367 $ 2,099 $ (1,732 ) (82.5 )%
Percent of net sales 0.9 % 5.2 % (4.3 )%
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Amortization of intangibles decreased $1.7 million, or 82.5%, for the first quarter of 2009 compared to the first quarter of 2008. This decrease was primarily due to the impairment write-off of certain intangible assets during 2008. We estimate aggregate amortization expense for the balance of the fiscal year ending January 2, 2010, and the fiscal years ending 2011, 2012, 2013 and thereafter to be approximately $252,000, $197,000, $197,000, $197,000 and $184,000, respectively.
Income Tax Provision (Benefit)
Thirteen Weeks Ended Three Months Ended
April 4, 2009 March 31, 2008 $ Change % Change
(in thousands)
Income tax provision (benefit) $ 1,363 $ (564 ) $ 1,927 342 %
Percent of net sales 3.4 % (1.4 )% 4.8 %
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The effective tax rate for the quarter ended April 4, 2009 and March 31, 2008 was 199.3% and 39.2%, respectively. The increase in income tax provision during the first quarter of 2009 was primarily due to a $1.0 million tax effect of stock option forfeitures and other non-deductible permanent differences.
Liquidity and Capital Resources
Sources of Liquidity
We have historically funded our operations from cash generated from operations, credit facilities, bank and stockholder loans, an equity financing and capital lease financings.
Cash Flows
We had cash and cash equivalents of $33.9 million as of April 4, 2009, representing a $1.5 million increase from $32.5 million of liquid assets as of December 31, 2008. The increase in our cash and cash equivalents as of April 4, 2009 was primarily due to cash generated from operations less our investment in property and equipment.
Operating Activities
We generated $3.0 million of net cash from operating activities for the first quarter of 2009. The significant components of cash flows from operating activities were a net loss of $679,000; a decrease of $1.3 million in deferred tax assets primarily related to the tax effect of stock option forfeitures and other non-deductible permanent differences; $1.4 million in non-cash depreciation and amortization expense; and $1.0 million of non-cash share-based compensation expense.
Investing Activities
Cash used in investing activities during the first quarter of 2009 totaled $1.6 million which was attributable to purchases of property and equipment related to technology investments to improve our websites, operating systems and back-end platforms, as well as the opening of our East Coast distribution center.
Financing Activities
Cash used in financing activities during the first quarter of 2009 totaled $19,000 and was primarily due to repayments made on short-term financing.
Funding Requirements
We had working capital of $37.3 million as of April 4, 2009, which was primarily due to the cash generated from our initial public offering. The historical seasonality in our business during the fourth and first calendar quarters of each year cause cash and cash equivalents, inventory and accounts payable to be generally higher in these quarters, resulting in fluctuations in our working capital. We anticipate that funds generated from operations and cash on hand will be sufficient to meet our working capital needs and expected capital expenditures for at least the next twelve months. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our operating plans, lower than anticipated net sales, increased expenses, continued or worsened economic conditions, or other events, including those described in "Risk Factors," may cause us to seek additional debt or equity financings in the future. Financings may not be available on acceptable terms, on a timely basis, or at all, and our failure to raise adequate capital when needed could negatively impact our growth plans and our financial condition and results of operations. In addition, our $6.4 million (fair value) of ARPS investments as of April 4, 2009 remain classified as long-term investments as a result of failed auctions and liquidity issues, and we may not have immediate access to those funds.
We opened a new distribution center on the East Coast in the first quarter of 2009. We are also accelerating our technology investments in an effort to improve our websites, operating systems and back-end platforms. We anticipate these decisions will increase our technology costs as a percentage of sales, as well as increase our capitalized software and website development costs over the next several quarters.
Seasonality
We believe our business is subject to seasonal fluctuations. We have historically experienced higher sales of body parts in winter months when inclement weather and hazardous road conditions typically result in more automobile collisions. Engine parts and performance parts and accessories have historically experienced higher sales in the summer months when consumers have more time to undertake elective projects to maintain and enhance the performance of their automobiles and the warmer weather during that time is conducive for such projects. We expect the historical seasonality trends to continue to have a material impact on our financial condition and results of operations in subsequent periods.
Inflation
Inflation has not had a material impact upon our operating results, and we do not expect it to have such an impact in the near future. We cannot assure you that our business will not be affected by inflation in the future.
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