Business context and reporting period
This is U.S. Auto Parts Network, Inc.’s unaudited Form 10-Q for the 13 weeks ended April 4, 2015; the company operates online aftermarket auto-parts businesses, including CarParts.com, and AutoMD. The request metadata says “2014 Q1,” but the filing covers first-quarter fiscal 2015 and compares with the 13 weeks ended March 29, 2014. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Net sales | $76.388 | $68.028 |
| Gross profit / margin | $21.478 / 28.1% | $20.701 / 30.4% |
| Operating income (loss) | $(0.018) | $0.495 |
| Net income (loss), consolidated | $(0.316) | $0.201 |
| Net income (loss) attributable to U.S. Auto Parts | $(0.060) | $0.201 |
| Operating cash flow | $4.550 | $8.142 |
- Sales grew 12.3%, led by online sales, up 13.4%; online marketplaces grew 22.2% and the company’s e-commerce channel grew 10.0%. Total online orders rose 8.0%, and average order value increased 4.3% to $96.
- Gross margin declined 2.3 percentage points, primarily due to online sales mix, competitive pricing, and lower freight revenue relative to freight costs. Marketing costs rose in dollars but fell as a share of sales; general and administrative and fulfillment expenses also declined as a share of sales.
- Base USAP generated operating income of $0.695 million and net income of $0.187 million. AutoMD reported an operating loss of $0.713 million and net loss of $0.503 million. Consolidated results include a $0.256 million net loss attributable to noncontrolling interests in AutoMD.
- Adjusted EBITDA, a non-GAAP measure, was $2.564 million, versus $3.320 million. Management cautions that it is supplemental and may not be comparable across companies.
- Cash and cash equivalents were $7.917 million at April 4, 2015, with short-term investments of $0.066 million. Working capital was $14.450 million. Cash increased $0.264 million during the quarter.
- Investing used $2.248 million, including $2.151 million of capital expenditures, mainly for website and software development. Financing used $2.027 million, primarily net revolver repayments and share-based compensation tax withholding.
- Total debt, including capital leases, was $18.958 million: $9.485 million drawn on the revolving facility and $9.473 million in capital leases. The revolver is classified as current under accounting rules because of subjective acceleration provisions, although no principal payments were then due. Excess borrowing availability was $10.833 million; the company reported compliance with credit-facility covenants.
Changes, outlook, risks and notable items
- Compared with Q1 2014, revenue and gross profit increased, but gross margin, operating results, attributable net income and operating cash flow weakened. Interest expense increased to $0.373 million from $0.259 million, mainly due to a higher average revolver balance.
- Management expected fiscal 2015 revenue to increase and net loss to be lower than in fiscal 2014, while also disclosing an expectation that losses would continue for the remainder of fiscal 2015, at a lower level than in 2014. It expected modest improvement in visitors and orders and planned to invest in the customer experience, mobile shopping, private-label products, product selection and AutoMD.
- Management believed available cash, operating cash flows and debt financing would fund operating needs for at least 12 months. It warned that weaker-than-expected sales or margins, continued losses, or unavailable borrowing could require additional financing or asset sales, spending reductions, restructuring or curtailed operations.
- Key business risks include dependence on search engines and online traffic, intense price competition (including from suppliers selling directly to consumers), supplier and drop-ship relationships, delivery and fulfillment disruptions, and execution of mobile and website improvements. Gross margins are also exposed to shipping and product-cost pressures.
- AutoMD’s 2014 share sale reduced the company’s ownership to 64.1%; proceeds are restricted to AutoMD’s general operating purposes. Under specified conditions, the company may have to purchase 2,000 AutoMD shares for $2.0 million. A separate agreement restricts certain transfers and could require a purchase of non-consenting investors’ shares at $1 per share plus 10% annual compounded interest.
- Other commitments include $18.270 million of undiscounted capital-lease payments, $3.691 million of operating-lease obligations, and $1.479 million for warehouse equipment. Asbestos litigation was disclosed; the company did not expect material out-of-pocket costs. It stated ordinary-course legal matters were not expected to have a material adverse effect.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also noted that the new customer-revenue accounting standard was under evaluation.
Important facts for investors to verify
- Confirm the period: this filing is for Q1 2015, not Q1 2014, and verify the comparison and fiscal-year convention.
- Track whether revenue growth translates into margin recovery and improved profitability; Q1 gross margin fell to 28.1% and consolidated results were a net loss.
- Assess liquidity and borrowing-base availability, including the current classification of the revolver, covenant requirements and the facility’s April 2017 maturity.
- Monitor AutoMD’s losses, restricted funding, repair-shop growth and potential share-purchase obligations.
- Review the outlook against actual results, particularly management’s expectation of continuing fiscal 2015 losses and its stated 12-month liquidity assessment.