Business context and reporting period
This is U.S. Auto Parts Network, Inc.’s unaudited Form 10-Q for the 13 and 26 weeks ended July 2, 2011—not a filing under the name CarParts.com, Inc. The company distributes aftermarket auto parts and accessories, primarily through e-commerce. Results include WAG, acquired in August 2010; therefore, reported growth versus 2010 reflects acquisition effects.
Financial performance and liquidity
Amounts below are in millions except per-share data.
| Metric | 13 weeks ended July 2, 2011 | Prior-year period | 26 weeks ended July 2, 2011 | Prior-year period |
|---|---|---|---|---|
| Net sales | $84.3 | $53.2 | $171.2 | $109.5 |
| Gross profit / margin | $28.4 / 33.7% | $18.4 / 34.6% | $58.8 / 34.4% | $38.2 / 34.9% |
| Operating income (loss) | $(2.2) | $0.7 | $(2.2) | $3.1 |
| Net income (loss) | $(2.6) | $0.5 | $(2.8) | $2.0 |
| Diluted EPS | $(0.08) | $0.01 | $(0.09) | $0.06 |
| Adjusted EBITDA | $4.6 | $5.0 | $11.2 | $11.1 |
For the first half, operating cash flow was $7.4 million, versus $9.3 million a year earlier. Investing cash outflow was $6.1 million, including $7.2 million of property and equipment additions; financing cash outflow was $2.7 million, including $3.0 million of debt repayments. Cash declined $1.3 million to $16.2 million. Working capital was $18.5 million.
At July 2, 2011, long-term debt was $21.0 million, with no revolving-credit borrowings and up to $10 million available on the revolver. The company reported $17.362 million of covenant liquidity against a stated $11.4 million requirement, including the permitted integration-capex addback. It was compliant with facility covenants at period-end; the lender had waived a fixed-charge-coverage breach as of January 1, 2011. The secured facility matures June 30, 2014.
Material changes versus the prior comparable period
- Reported second-quarter sales rose 58.4% and first-half sales rose 56.4%, primarily reflecting WAG. Excluding WAG and the prior-year revenue-recognition adjustment, management reported sales growth of 7.8% for the quarter and 10.6% for the first half.
- Despite sales growth, the company moved from profit to loss. Second-quarter loss included a $4.1 million WAG-related net loss, including $1.5 million net of tax for restructuring and integration costs. The filing reports $5.9 million of acquisition and integration costs incurred to date.
- Gross margin fell 0.9 percentage points in the quarter and 0.5 points for the first half. Management attributed pressure to a sales mix shift from body to engine parts, partly offset by price increases.
- Marketing expense increased to 17.0% of quarterly sales from 13.5%, while amortization of intangibles rose materially following WAG. Excluding WAG, management cited higher advertising and technology-related costs, partly offset by general and administrative cost leverage.
- Adjusted EBITDA was lower year over year for the quarter but slightly higher for the first half. The measure excludes specified items and is not a GAAP substitute for operating income or cash flow.
- For the legacy business excluding WAG, management reported quarterly adjusted EBITDA of $5.2 million versus $5.0 million, and first-half adjusted EBITDA of $11.7 million versus $11.1 million.
Outlook, risks, contingencies and unusual items
- No numerical revenue or earnings guidance is provided. Management expected operating cash and cash on hand to cover working capital, planned capital expenditures and debt service for at least 12 months, while warning that lower sales, higher expenses, acquisitions or other changes could require additional financing.
- Seasonality is expected to remain material, with historically stronger body-parts demand in winter and engine/performance demand in summer. Management also planned continued technology investment.
- The $3.8 million fair value of auction-rate preferred securities remained classified as long-term investments because of failed auctions and limited liquidity. The securities had $59,000 of unrealized losses; management intended to hold them, but noted that access timing was uncertain and a future other-than-temporary impairment could affect earnings.
- In the Parts Geek litigation, the company’s appeal was fully briefed and oral argument scheduling was pending. Approximately $1.1 million plus interest in legal fees and costs could become payable depending on the outcome and subsequent proceedings; no accrual was recorded.
- A California Air Resources Board inquiry concerned alleged sales of non-compliant catalytic converters. Penalties were expected to be assessed, but the amount was not estimable; the matter could affect emissions-product sales and results.
- WAG was named in asbestos-related lawsuits concerning historical brake installations. The company said insurance coverage applied and it did not expect material out-of-pocket costs.
- Other cited risks include supplier concentration (top ten suppliers represented 55.1% of first-half purchases; one supplier represented 16.4%), online competition and marketing dependence, acquisition integration, shipping and fulfillment disruptions, foreign exchange exposure, and debt-covenant compliance. Management estimated a 10% peso/U.S. dollar movement would have affected first-half operating expenses by about $0.6 million.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported sales growth with WAG’s contribution and the prior-year $2.0 million noncash revenue-recognition adjustment; assess organic sales trends and conversion, order value and visitor metrics.
- Track whether WAG integration costs and operating losses decline, and whether underlying gross margin and adjusted EBITDA improve; review the company’s non-GAAP adjustments alongside GAAP results.
- Monitor operating cash generation, capital spending, scheduled debt amortization, liquidity headroom and compliance with tightening financial covenants.
- Follow the valuation and liquidity of the auction-rate securities and any change in impairment assessment.
- Check developments in the Parts Geek appeal and CARB inquiry, including any resulting payments, penalties or sales restrictions.