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| PRTS > SEC Filings for PRTS > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-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 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 in the future. 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 626 employees in our Philippines operations as of July 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 in our fiscal year end. As a result, the first and second quarters of 2009 consisted of the thirteen weeks ended April 4, 2009 and July 4, 2009, respectively. The first and second quarters of 2008 consisted of the three months ended March 31, 2008 and June 30, 2008, respectively.
Stock Option Exchange Program
Our Annual Meeting of the Stockholders was held on May 5, 2009. At the meeting, the stockholders approved a stock option exchange program, pursuant to which up to 1,486,464 options would be exchanged for up to 743,232 new options. The option exchange has not yet commenced. The Compensation Committee of the Company's Board of Directors may elect to commence this program at any time within six months of the stockholder approval but has not yet elected to do so. Should the Compensation Committee determine to proceed with and commence the program, the Company will file a Tender Offer Statement on Schedule TO with SEC with further information regarding this program.
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. 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 July 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
for the periods indicated:
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 63.8 66.2 63.4 65.9
Gross profit 36.2 33.8 36.6 34.1
Operating expenses:
Marketing 13.0 15.4 13.2 15.2
General and administrative 11.0 10.6 11.5 11.0
Fulfillment 6.4 5.5 6.5 5.4
Technology 3.1 1.8 2.7 1.8
Amortization of intangibles and
impairment loss 0.3 47.7 0.6 27.2
Total operating expenses 33.8 81.0 34.5 60.6
Income (loss) from operations 2.4 (47.2 ) 2.1 (26.5 )
Other income (expense):
Other income (0.1 ) 0.0 0.0 0.0
Interest income (expense), net 0.1 0.5 0.0 0.6
Total other income (expense),
net 0.0 0.5 0.0 0.6
Income (loss) before income
taxes 2.4 (46.7 ) 2.1 (25.9 )
Income tax provision (benefit) 1.0 (18.7 ) 2.2 (10.3 )
Net income (loss) 1.4 % (28.0 )% (0.1 )% (15.6 )%
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Estimated Impact of the Change in Fiscal Year to a 52/53 Week During the First Six Months of 2009
• Net sales increased by $0.4 million for the twenty-six weeks ended July 4, 2009 due to three additional business days during the first quarter of 2009 and one less business day in the second quarter of 2009. Excluding these additional days, net sales would have been $82.3 million compared to $83.5 million as reported.
• Net loss would remain $0.1 million or $0.00 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 and Twenty-Six Weeks Ended July 4, 2009 Compared to Three and Six
Months Ended June 30, 2008
Net Sales and Gross Margin
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
Net sales $ 43,805 $ 43,105 $ 83,469 $ 83,114
Cost of sales 27,937 28,518 52,961 54,777
Gross profit $ 15,868 $ 14,587 $ 30,508 $ 28,337
Gross margin 36.2 % 33.8 % 36.6 % 34.1 %
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Net sales increased $700,000 or 1.6% to $43.8 million and increased 50 basis points to $83.5 million for the thirteen and twenty-six weeks ended July 4, 2009, respectively, compared to the three and six months ended June 30, 2008. The quarter over quarter increase was primarily due to a 3.1% increase in our Internet business, which consists of our e-commerce and online marketplaces channels. 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. The year over year increase was primarily due to a 2.4% increase in our Internet business and a 22.8% decrease in our offline business, which consists of our wholesale operations. Excluding the two additional business days, net sales on a calendar basis would have been $82.3 million for the current six month period or a 1.0% decrease over the prior year.
E-commerce sales increased $2.5 million or 8.0% from $32.7 million for the three months ended June 30, 2008 to $35.3 million for the thirteen weeks ended July 4, 2009. The total number of placed orders in our e-commerce channel increased from 334,000 orders in the second quarter of 2008 to 363,000 orders in the second quarter of 2009 primarily due to a higher number of unique visitors. For the six months ended June 30, 2008 and twenty-six weeks ended July 4, 2009, e-commerce sales were $63.3 million and $66.1 million, respectively. The 4.4% increase for the twenty-six weeks ended July 4, 2009 compared to the six months ended June 30, 2008 was primarily due to less traffic and better revenue capture associated with a lower return rate in the 2009 period. Excluding the two additional business days, net sales on a calendar basis would have been $65.1 million for the current six month period or a 2.8% increase over the prior year.
Online marketplaces net sales decreased $1.4 million or 22.6% from $6.2 million for the three months ended June 30, 2008 to $4.8 million for the thirteen weeks ended July 4, 2009. This decrease was primarily due to lower unique visitors in 2009. For the six months ended June 30, 2008 and twenty-six weeks ended July 4, 2009, online marketplaces sales were $10.9 million and $9.8 million, respectively. The 10.1% decrease for the twenty-six weeks ended July 4, 2009 compared to the six months ended June 30, 2008 was due in part, to more aggressive pricing on our e-commerce platform, which may have caused cannibalization of online marketplace sales and less traffic on our eBay auctions in 2009. Excluding the two additional business days, net sales on a calendar basis would have been $9.8 million for the current six month period or a 10.1% decrease over the prior year.
Net sales from our wholesale operations decreased 19.4% to $3.0 million and 22.8% to $6.1 million for the thirteen and twenty-six weeks ended July 4, 2009, respectively, which primarily reflected the loss of sales to a large customer in the third quarter of 2008. Excluding the two additional business days, net sales on a calendar basis would have been $6.1 million for the six month period or a 22.8% decrease over the prior year. We anticipate that sales from our wholesale operations will continue to decline as a percentage of net sales in the future primarily due to a focus on our online business.
We have historically experienced seasonality in our business which generally has resulted in higher sales in winter and summer months. 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 increased during the thirteen and twenty-six weeks ended July 4, 2009 primarily due to an increase in sales from our e-commerce channel that was largely related to higher unique visitors and better revenue capture associated with a lower return rate in 2009. In addition, lower outbound freight expense contributed significantly to higher gross profit. Gross margins increased 240 basis points to 36.2% and 250 basis points to 36.6% for the thirteen and twenty-six weeks ended July 4, 2009, respectively, compared to the three and six months ended June 30, 2008. The increase in gross margins for both periods was primarily due to lower outbound freight expense.
Marketing Expense
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
Marketing expense $ 5,680 $ 6,635 $ 11,015 $ 12,602
Percent of net sales 13.0 % 15.4 % 13.2 % 15.2 %
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Marketing expense decreased $955,000 or 14.4% and $1,587,000 or 12.6% for the thirteen and twenty-six weeks ended July 4, 2009, respectively, from the three and six months ended June 30, 2008. As a percentage of net sales, marketing expense decreased 2.4% and 2.0% for the thirteen and twenty-six weeks July 4, 2009, respectively from the three and six months ended June 30, 2008 primarily due to lower personnel-related costs, lower depreciation expense, and a decrease in eBay advertising spending and less vendor related marketing co-op in 2009. Excluding the three additional business days, online advertising spend, excluding marketing co-op on a calendar basis would have been $5.2 million compared to $5.3 million as reported or an 8.8% decrease over the prior year period.
General and Administrative Expense
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
General and administrative
expense $ 4,811 $ 4,588 $ 9,576 $ 9,211
Percent of net sales 11.0 % 10.6 % 11.5 % 11.0 %
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General and administrative expenses increased $223,000 or 4.9% and $365,000 or 4.0%, respectively, for the thirteen and twenty-six weeks ended July 4, 2009 from the three and six months ended June 30, 2008. The increase the in the current quarter was primarily due to a $300,000 increase in personnel-related expenses related to higher incentives due to better company performance, $200,000 increase in depreciation and amortization related to increased capital investment, partially offset by a $300,000 reduction in professional fees. The increase for the twenty-six weeks ended July 4, 2009 was primarily due to a $700,000 increase in 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, $300,000 increase in depreciation and amortization, partially offset by an $800,000 reduction in professional fees. We expect professional fees to increase in the second half of 2009, however, as we incur litigation expenses and external audit fees to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
During the thirteen and twenty-six weeks ended July 4, 2009, we recognized
$820,000 and $1.8 million, respectively, of share-based compensation, net of
capitalized internally developed software, determined in accordance with SFAS
123(R). Based on options outstanding as of July 4, 2009, we expect to recognize
$5.4 million in additional share based compensation expense over a weighted
average period of 2.9 years.
Fulfillment Expense
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
Fulfillment expense $ 2,809 $ 2,377 $ 5,461 $ 4,465
Percent of net sales 6.4 % 5.5 % 6.5 % 5.4 %
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Fulfillment expense increased $432,000 or 18.2% and $996,000 or 22.3%, for the thirteen and twenty-six weeks ended July 4, 2009, respectively, from the three and six months ended June 30, 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 Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
Technology expense $ 1,343 $ 787 $ 2,271 $ 1,471
Percent of net sales 3.1 % 1.8 % 2.7 % 1.8 %
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Technology expense increased $556,000 or 70.6% and $800,000 or 54.4% for the thirteen and twenty-six weeks ended July 4, 2009, respectively, from the three and six months ended June 30, 2008 primarily due to higher personnel-related expenses to support our expanded infrastructure and investment in our overall technology platform.
Amortization of Intangibles and Impairment Loss
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
Amortization of intangibles
and impairment loss $ 153 $ 20,541 $ 520 $ 22,640
Percent of net sales 0.3 % 47.7 % 0.6 % 27.2 %
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Amortization of intangibles and impairment loss decreased by $20.4 million to $0.2 million and $22.1 million to $0.5 million for the thirteen and twenty-six weeks ended July 4, 2009, respectively, due to a non-cash impairment charge recorded in the second quarter of 2008, totaling $18.4 million on intangible assets associated with the Partsbin business, which we acquired in May 2006. We estimate aggregate amortization expense for the remaining six months ending January 2, 2010, and the years ending the first Saturday after December 31, 2010, 2011, 2012 and thereafter to be approximately $99,000, $197,000, $197,000, $197,000 and $184,000, respectively.
Other Income, Net
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
Other income, net $ 26 $ 236 $ 117 $ 508
Percent of net sales 0.0 % 0.5 % 0.0 % 0.6 %
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The decrease in other income, net during the thirteen and twenty-six weeks ended July 4, 2009 was primarily due to less interest income received related to lower interest rates in the three and six months ended July 4, 2009, compared to the three and six months ended June 30, 2008.
Income Tax Provision (Benefit)
Thirteen Three Months Twenty-Six Six Months
Weeks Ended Ended Weeks Ended Ended
July 4, 2009 June 30, 2008 July 4, 2009 June 30, 2008
(in thousands)
Income tax provision (benefit) $ 469 $ (8,042 ) $ 1,832 $ (8,606 )
Percent of net sales 1.0 % (18.7 )% 2.2 % (10.3 )%
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The effective tax rate for the thirteen and twenty-six weeks ended July 4, 2009 was 42.7% and 102.8%, respectively, compared to 40.0% and 39.9% for the three and six months ended June 30, 2008, respectively. The increase in income tax provision during the thirteen and twenty-six weeks ended July 4, 2009 was primarily due to the tax effect of the $18.4 million impairment loss on our intangible assets recorded in the second quarter of 2008 and due to a $1.0 million tax effect of stock option forfeitures and other non-deductible permanent differences recorded in the first quarter of 2009.
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 $32.6 million as of July 4, 2009, representing a $0.1 million increase from $32.5 million of liquid assets as of December 31, 2008. The increase in our cash and cash equivalents as of July 4, 2009 was primarily due to cash generated from operations less our investment in property and equipment.
Operating Activities
We generated $7.6 million of net cash from operating activities for the first half of 2009. The significant components of cash flows from operating activities were a net loss of $50,000; $2.7 million in non-cash depreciation and amortization expense; $1.8 million of non-cash share-based compensation expense; and 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;.
Investing Activities
Cash used in investing activities during the first half of 2009 totaled $7.5 million, of which was $3.9 million related 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 and $4.1 million purchases of short-term investments, offset by $475,000 of redemptions of our ARPS.
Financing Activities
Cash used in financing activities during the first half of 2009 totaled $39,000 and was primarily due to repayments made on short-term financing.
Funding Requirements
We had working capital of $39.0 million as of July 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
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