Business Context and Reporting Period
Company: U.S. Auto Parts Network, Inc. (d/b/a Carparts.Com, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Company is an online provider of aftermarket auto parts, operating through a network of websites including PartsTrain and AutoPartsWarehouse. It sells body parts, engine parts, and performance accessories to consumers via e-commerce and online marketplaces. The Company also maintains international operations in the Philippines and India and a Canadian subsidiary.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Net Sales | $43,105 | $42,112 | $83,114 | $85,855 |
| Gross Profit | $14,587 | $13,785 | $28,337 | $27,454 |
| Gross Margin | 33.8% | 32.7% | 34.1% | 32.0% |
| Operating Loss | $(20,341) | $740 | $(22,052) | $1,413 |
| Net Loss | $(12,063) | $773 | $(12,938) | $1,008 |
| Diluted EPS | $(0.40) | $0.03 | $(0.43) | $0.04 |
| Cash and Equivalents | $34,120 (as of June 30, 2008) | |||
| Working Capital | $35,921 (as of June 30, 2008) |
Liquidity and Debt: The Company had no outstanding balance on its bank line of credit as of June 30, 2008. Total liabilities were $18.6 million, consisting primarily of accounts payable and accrued expenses. The Company holds $6.7 million in Auction Rate Preferred Securities (ARPS), which are classified as non-current investments due to liquidity issues in the credit markets.
Material Changes vs. Prior Period
- Revenue: Net sales increased 2.4% for the three months ended June 30, 2008, driven by a 4.2% increase in online business. However, for the six-month period, sales decreased 3.2% due to declines in both online and wholesale channels.
- Profitability: The Company reported a significant operating loss of $20.3 million for the quarter and $22.1 million for the six months, compared to operating income in the prior year periods. This reversal was primarily caused by a non-cash impairment charge of $18.4 million related to intangible assets from the 2006 Partsbin acquisition.
- Expenses: Operating expenses increased significantly. General and administrative expenses rose 25.5% (quarterly) due to higher payroll and public company compliance costs. Marketing expenses increased 34.8% (quarterly) due to expanded offshore operations. Technology expenses rose 55.2% (quarterly) due to team expansion and severance costs.
- Impairment: A $18.4 million impairment charge was recorded on intangible assets (websites, software, vendor agreements, and domain names) associated with the Partsbin business, attributed to deteriorating economic conditions, lower sales, and software deficiencies.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance: Management anticipates that seasonality will continue to impact results, with higher sales expected in winter and summer months. The Company expects to focus on its online business, with wholesale operations likely to decline as a percentage of net sales. No specific financial guidance for the full year was provided in this filing.
Material Risks and Contingencies:
- Legal Proceedings (Ford): The Company is involved in ongoing litigation with Ford Global Technologies regarding design patents for the Ford F-150 and Mustang. A USITC exclusion order prohibits the importation of certain infringing parts. While current sales of these parts are minimal, future sales could be impacted if the patents are upheld on appeal. A new complaint regarding the 2005 Ford Mustang was filed in May 2008.
- Securities Litigation: A class action lawsuit regarding the Company's IPO was settled in principle for approximately $3.4 million (Company's share), which has been accrued. The settlement is pending final court approval.
- SEC Inquiry: The Company is cooperating with an informal SEC inquiry regarding its Q4 2006 financial results announcement.
- Investment Liquidity: $6.7 million of investments in ARPS are currently illiquid due to failed auctions in the credit market. While the Company believes these are temporary liquidity issues rather than credit issues, it may not be able to access these funds in the short term.
- Internal Controls: Management identified material weaknesses in internal controls over financial reporting, specifically regarding the financial statement close process and IT general controls. Remediation plans are underway.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used in the discounted cash flow analysis for the $18.4 million intangible asset impairment charge.
- ARPS Liquidity: Monitor the status of the $6.7 million in Auction Rate Preferred Securities and the potential for further write-downs if the market does not recover.
- Legal Exposure: Track the outcome of the Ford patent appeals and the final court approval of the $3.4 million securities litigation settlement.
- Internal Controls: Review progress on remediation of material weaknesses in internal controls to ensure compliance with Sarbanes-Oxley Section 404.
- Wholesale Decline: Assess the impact of the strategic shift away from wholesale operations on future revenue stability.