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| PRTS > SEC Filings for PRTS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 Stock Keeping Units, or 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 735 employees in our Philippines operations as of October 3, 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. In the third quarter of 2009, we completed the acquisition of AutoPartsGiant.com which further expanded and enhanced our product offering and our ability to reach more customers. We believe the AutoPartsGiant.com acquisition will increase our net sales and internet traffic. 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, second, and third quarters of 2009 consisted of the thirteen weeks ended April 4, 2009, July 4, 2009 and October 3, 2009, respectively. The first, second and third quarters of 2008 consisted of the three months ended March 31, 2008, June 30, 2008 and September 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 outstanding options would be exchanged for up to 743,232 new options. The Compensation Committee of the Company's Board of Directors has elected not to commence this program at this time. In the event the Company elects to implement a stock exchange program in the future, it plans to seek stockholder approval of such program at that time.
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 October 3, 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 Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 64.1 67.0 63.7 66.2
Gross profit 35.9 33.0 36.3 33.8
Operating expenses:
Marketing 13.5 14.3 13.3 14.9
General and administrative 10.9 11.4 11.3 11.2
Fulfillment 6.2 6.4 6.4 5.7
Technology 2.3 2.8 2.6 2.1
Amortization of intangibles .1 1.0 0.4 19.2
Total operating expenses 33.1 35.9 34.0 53.1
Income (loss) from
operations 2.8 (2.9 ) 2.3 (19.3 )
Other income (expense):
Other (expense) - (0.1 ) - -
Interest income, net 0.1 0.7 0.1 0.6
Total other income
(expense), net 0.1 0.6 0.1 0.6
Income (loss) before income
taxes 2.9 (2.3 ) 2.4 (18.7 )
Income tax provision
(benefit) 1.3 (1.0 ) 1.9 (7.5 )
Net income (loss) 1.7 % (1.3 )% .6 % (11.2 )%
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Estimated Impact of the Change in Fiscal Year to a 52/53 Week on the First Nine Months of 2009
• Net sales increased by $1.4 million for the thirty-nine weeks ended October 3, 2009 due to three additional business days during the first quarter of 2009, (There was no impact of the one less business day in the second quarter of 2009 because it was offset by the one additional business day in the third quarter of 2009). Excluding these additional three business days, net sales would have been $129.1 million compared to $130.5 million as reported.
• Net income would have been $0.6 million or $0.02 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 Thirty-nine Weeks Ended October 3, 2009 Compared to Three and Nine
Months Ended September 30, 2008
Net Sales and Gross Margin
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
Net sales $ 47,043 $ 36,554 $ 130,512 $ 119,668
Cost of sales 30,144 24,485 83,105 79,262
Gross profit $ 16,899 $ 12,069 $ 47,407 $ 40,406
Gross margin 35.9 % 33.0 % 36.3 % 33.8 %
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Net sales increased 28.7% to $47.0 million and increased 9.1% to $130.5 million for the thirteen and thirty- nine weeks ended October 3, 2009, respectively, compared to the three and nine months ended September 30, 2008. The year over year increase for the quarter was primarily due to a 29.3% 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 thirty-nine week or nine month year over year increase was primarily due to a 10.8% increase in our internet business, partially offset by a 14.9% decline in our offline business, which consists of our Kool-Vue™ and wholesale operations. Excluding the three additional days, net sales on a calendar basis would have been $129.1 million for the current nine month period or a 7.9% increase over the prior year.
E-commerce net sales increased $9.9 million or 35.2% from $28.1 million for the three months ended September 30, 2008 to $38.0 million for the thirteen weeks ended October 3, 2009. The total number of placed orders in our e-commerce channel increased from 291,000 orders in the third quarter of 2008 to 386,000 orders in the third quarter of 2009 primarily due to an increase in unique visitors and a higher conversion rate. E-commerce sales increased $12.7 million or 13.9% from $91.4 million for the nine months ended September 30, 2008 to $104.1 million for the thirty-nine weeks ended October 3, 2009. The 13.9% growth was primarily due to increased unique visitors and a higher conversion rate, partially offset by a lower average order value. Excluding the three additional days, e-commerce sales on a calendar basis would have been $103.1 million for the current nine month period or a 12.8% increase over the prior year.
Online marketplace net sales decreased $0.1 million or 2.6% from $5.3 million for the three months ended September 30, 2008 to $5.2 million for the thirteen weeks ended October 3, 2009. This decrease was primarily due to lower unique visitors in 2009. Online marketplace net sales decreased 7.5% from $16.2 million for the nine months ended September 30, 2008 to $15.0 million for the thirty-nine weeks ended October 3, 2009. The 7.4% decrease was due to less traffic on our eBay auctions in 2009. Excluding the three additional days, online marketplace net sales on a calendar basis would have been $14.8 million for the current nine month period or an 8.6% decrease over the prior year.
Net sales from our offline business, which consist of sales from our Kool-VueTM and wholesale operations, increased $0.2 million or 8.2% to $2.9 million for the thirteen weeks ended October 3, 2009 due to an increase in our customer base. Offline sales decreased $1.6 million or 14.9% to $9.0 million for the thirty-nine weeks ended October 3, 2009 primarily due to the loss of sales to a large customer in the third quarter of 2008. We anticipate that sales from our offline operations will decline as a percentage of net sales in the future due to our continued focus in growing our online business. Excluding the three additional days, offline net sales on a calendar basis would have been $8.9 million for the current nine month period or a 15.6% decrease over the prior year.
We have historically experienced seasonality in our business which generally has resulted in higher sales in winter and summer months. While our revenues for the thirteen weeks ended October 3, 2009 were higher than our historically strongest second quarter; 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 thirty-nine weeks ended October 3, 2009 due to an increase in sales from our e-commerce channel related to increased unique visitors, higher conversion and better revenue capture, which is the amount of actual dollars retained after taking into consideration credit card declines, returns and product fulfillment. Gross margins increased by 290 basis points to 35.9% and 250 basis points to 36.3% for the thirteen and thirty-nine weeks ended October 3, 2009, respectively, compared to the three and nine months ended September 30, 2008. The increase in gross margins for both periods was primarily due to lower outbound freight expense.
Marketing Expense
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
Marketing expense $ 6,351 $ 5,240 $ 17,367 $ 17,842
Percent of net sales 13.5 % 14.3 % 13.3 % 14.9 %
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Marketing expense increased $1.1 million or 21.2% and decreased $0.5 million or 2.7% for the thirteen and thirty-nine weeks ended October 3, 2009, respectively from the three and nine months ended September 30, 2008. Marketing expense as a percentage of net sales decreased 0.8% for the thirteen weeks ended October 3, 2009 from the three months ended September 30, 2008 primarily due to fixed cost leverage on higher sales. Marketing expense as a percentage of net sales decreased 1.6% for the thirty-nine weeks ended October 3, 2009 from the nine months ended September 30, 2008 primarily due to lower personnel-related costs, lower depreciation expense and a lower online advertising spend rate. Excluding the three additional days, online advertising spend excluding marketing co-op on a calendar basis would have been $8.5 million for the current nine month period or a 1.3% increase over the prior year.
General and Administrative Expense
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
General and administrative
expense $ 5,131 $ 4,170 $ 14,707 $ 13,381
Percent of net sales 10.9 % 11.4 % 11.3 % 11.2 %
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General and administrative expenses increased $1.0 million or 23.1% and $1.3 million or 9.9%, respectively for the thirteen and thirty-nine weeks ended October 3, 2009, from the three and six months ended September 30, 2008. The increase in the current quarter was primarily due to a $0.4 million increase in depreciation and amortization associated with software investments, $0.3 million increase in personnel-related expenses related to incentive programs from improved company performance, and $0.2 million increase in legal services to protect our intellectual property. The increase for the thirty-nine weeks ended October 3, 2009 was primarily due to a $0.7 million increase in personnel-related expenses related to incentive programs from improved company performance, $0.8 million increase in depreciation and amortization related to software investments, partially offset by an $0.8 million reduction in professional fees. During the thirteen and thirty-nine weeks ended October 3, 2009, we recognized $0.9 million and $2.7 million, respectively, of share-based compensation, net of capitalized internally developed software. Based on options outstanding as of October 3, 2009, we expect to recognize approximately $5.0 million in additional share-based compensation expense over a weighted average period of 2.7 years.
Fulfillment Expense
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
Fulfillment expense $ 2,926 $ 2,322 $ 8,386 $ 6,787
Percent of net sales 6.2 % 6.4 % 6.4 % 5.7 %
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Fulfillment expense increased $0.6 million or 26.0% and $1.6 million or 23.6%, respectively, for the thirteen and thirty-nine weeks ended October 3, 2009 from the three and nine months ended September 30, 2008. This increase was 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 and an increase in shipment volume related to higher sales.
Technology Expense
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
Technology expense $ 1,103 $ 1,041 $ 3,374 $ 2,512
Percent of net sales 2.3 % 2.8 % 2.6 % 2.1 %
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Technology expense increased $0.1 million or 6.0% and $0.9 million or 34.3% for the thirteen and thirty-nine weeks ended October 3, 2009, respectively, from the three and nine months ended September 30, 2008 primarily due to increased communication bandwidth to support growth.
Amortization of Intangibles and Impairment Loss
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
Amortization of
intangibles and impairment
loss $ 60 $ 365 $ 580 $ 23,005
Percent of net sales 0.1 % 1.0 % 0.4 % 19.2 %
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Amortization of intangibles and impairment loss decreased by $0.3 million to $0.1 million and $22.4 million to $0.6 million for the thirteen and thirty-nine weeks ended October 3, 2009, respectively. The decrease in the current quarter is the result of full amortization of certain assets. The decrease for the thirty-nine weeks ended October 3, 2009 is primarily 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 thirteen weeks ending January 2, 2010 will be $81,000, and for the fiscal years ending 2011, 2012, 2013 and thereafter to be approximately $323,000, $323,000, $323,000 and $393,000, respectively.
Other Income, Net
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
Other income, net $ 57 $ 216 $ 174 $ 724
Percent of net sales 0.1 % 0.6 % 0.1 % 0.6 %
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The decrease in other income, net during the thirteen and thirty-nine weeks ended October 3, 2009 was primarily related to less interest income received due to lower interest rates compared to the three and nine months ended September 30, 2008.
Income Tax Provision (Benefit)
Thirteen Three Months Thirty-Nine Nine Months
Weeks Ended Ended Weeks Ended Ended
October 3, September 30, October 3, September 30,
2009 2008 2009 2008
(in thousands)
Income tax provision (benefit) $ 604 $ (362 ) $ 2,436 $ (8,968 )
Percent of net sales 1.3 % (1.0 )% 1.9 % (7.5 )%
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The effective tax rate for the thirteen and thirty-nine weeks ended October 3, 2009 was 43.6% and 76.9%, respectively. For the three and nine months ended September 30, 2008, the effective tax rate for the Company was 42.4% and 40.0% respectively. The Company's effective tax rate is higher than the U.S federal statutory rate primarily as a result of state income taxes and other non-deductible permanent differences. The increase in income tax provision for 2009 is primarily due to a $1.1 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 $33.6 million as of October 3, 2009, representing a $1.1 million increase from $32.5 million of liquid assets as of December 31, 2008. The increase in our cash and cash equivalents as of October 3, 2009 was primarily due to cash generated from operations less our investment in property and equipment.
Operating Activities
We generated $10.3 million of net cash from operating activities for the 39 weeks ended October 3, 2009. The significant components of cash flows from operating activities were net income of $0.7 million $4.0 million in non-cash depreciation and amortization expense; $2.7 million of non-cash share-based compensation expense; and a decrease of $2.7 million in deferred tax assets . . .
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