Business context and reporting period
The filing is for U.S. Auto Parts Network, Inc. and its subsidiaries, an online-focused aftermarket auto-parts distributor. It covers the 13 weeks ended March 31, 2012; comparisons are with the 13 weeks ended April 2, 2011. The filing’s registrant name is U.S. Auto Parts Network, Inc., not CarParts.com, Inc.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2012 | Prior period |
|---|---|---|
| Net sales | $87.436 | $86.978 |
| Gross profit / gross margin | $26.628 / 30.5% | $30.416 / 35.0% |
| Operating income (loss) | $(0.486) | $0.023 |
| Net loss / loss per share | $(0.788) / $(0.03) | $(0.245) / $(0.01) |
| Adjusted EBITDA | $4.206 | $6.652 |
| Cash from operating activities | $(0.220) | $6.785 |
Sales increased 0.5%; online sales were 93.4% of sales, versus 93.9% a year earlier. Gross margin fell 4.5 percentage points, which management attributed mainly to increased competition and higher freight expense, partly offset by a greater private-label sales mix. Adjusted EBITDA, a non-GAAP measure, declined 36.8%.
Liquidity, debt, and cash flow
At March 31, cash and cash equivalents were $8.834 million and short-term investments were $1.893 million. Current assets were $69.943 million and current liabilities $69.727 million, leaving working capital of approximately $0.2 million, down from $8.7 million at year-end. The filing says this decline largely reflects classifying the $17.875 million Silicon Valley Bank term-loan balance as current in connection with its subsequent refinancing.
Operating cash flow was negative $0.220 million, principally reflecting a $9.3 million reduction in accounts payable and accrued expenses and a $1.3 million increase in receivables, partly offset by a $6.1 million inventory reduction. Capital expenditures were $2.371 million. Cash declined $1.501 million during the quarter.
Total debt and capital-lease obligations were approximately $18.0 million at quarter-end. The prior secured facility had a $17.875 million term-loan balance and an unused $10 million revolver. On April 26, 2012, the company entered into a JPMorgan revolving credit facility of up to $40 million, subject to a borrowing base, and used borrowings to repay the prior facility. The new facility matures in 2017 and includes a minimum 1.0-to-1.0 fixed-charge coverage covenant and other restrictive covenants. The old lender had amended the fixed-charge covenant in March after the company identified a probable risk of noncompliance with its then-current requirement.
Changes, outlook, and risks
- Sales were nearly flat, but cost of sales rose 7.5%, driving the sharp gross-margin contraction. Fulfillment expense increased 18.2%, partly due to depreciation and amortization from software deployments.
- General and administrative expense fell 28.7%, including because the prior-year period included $1.2 million of WAG restructuring costs. Intangible amortization also fell substantially as certain acquired assets had become fully amortized.
- Management expected cash, investments, and operating cash generation to cover working capital, planned capital spending, technology investments, and debt service for at least the next 12 months. The filing provides no specific revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of the full year.
- Key risks include sustained online price competition, freight and supplier costs, reliance on major suppliers and drop-ship distributors, seasonality, execution of online marketing and fulfillment, and compliance with credit covenants. Management reported that a 10% change in the Philippine peso/U.S. dollar exchange rate would affect quarterly Philippine operating expenses by approximately $0.3 million.
- In the Parts Geek litigation, an appeal ruling was pending. Approximately $1.1 million of legal fees and costs could become payable under specified outcomes; the company had posted a bond and recorded no accrual, concluding a loss was not probable. The company said asbestos claims were covered by insurance and not expected to result in material out-of-pocket costs.
- Other notable items: the company paid a non-material penalty under a 2011 California Air Resources Board settlement concerning catalytic converters. It also revised estimated stock-option forfeiture rates upward in Q1 2012 and reversed $105,000 of previously recognized performance-option compensation after goals were not met.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the gross-margin decline and whether competitive pricing and freight costs continue to pressure profitability.
- Review borrowing-base availability, covenant compliance, and the terms and actual utilization of the April 2012 JPMorgan facility.
- Track operating cash flow and working-capital movements, especially accounts payable, inventory, and receivables.
- Monitor the Parts Geek appeal and any change in the estimated exposure or accrual assessment.
- Reconcile the registrant identity: this source filing is for U.S. Auto Parts Network, Inc., while the request names Carparts.com, Inc.