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: September 30, 2008
Business Overview: The Company is an online provider of aftermarket auto parts, operating through a network of websites (including PartsTrain and AutoPartsWarehouse) and online marketplaces. It sells body parts, engine parts, and performance accessories directly to consumers. The Company maintains international operations in the Philippines, India, and Canada.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Net Sales | $36,554 | $119,668 | $123,642 |
| Gross Profit | $12,069 | $40,406 | $41,145 |
| Gross Margin | 33.0% | 33.8% | 33.3% |
| Operating Income (Loss) | $(1,069) | $(23,121) | $2,548 |
| Net Income (Loss) | $(491) | $(13,429) | $1,901 |
| Diluted EPS | $(0.02) | $(0.45) | $0.07 |
| Cash and Cash Equivalents | $33,122 | Balance Sheet Item (Sep 30, 2008) | |
| Working Capital | $36,124 | Calculated (Current Assets $50.5M - Current Liab $14.4M) | |
| Long-Term Debt | $0 | Notes Payable and Capital Leases fully paid or current |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 3.3% in the quarter and 3.2% year-to-date compared to 2007. The decline was driven by a 26.6% drop in offline business (wholesale/Kool-Vue) and a 3.2% drop in e-commerce sales due to fewer orders and lower average order value.
- Significant Impairment Charge: The Company recorded a non-cash impairment charge of $18.4 million in the second quarter of 2008 related to intangible assets from the 2006 Partsbin acquisition. This charge was driven by deteriorating economic conditions, lower sales/profitability of specific websites, software deficiencies, and the termination of vendor volume discounts.
- Operating Expenses: Operating expenses increased significantly year-over-year. General and administrative expenses rose 31% (quarterly) due to higher payroll, professional fees, and share-based compensation. Technology expenses surged 137.7% due to increased investments in the technology platform.
- Liquidity Shift: While cash and cash equivalents increased to $33.1 million, the Company reclassified $6.4 million of Auction Rate Preferred Securities (ARPS) to long-term investments due to failed auctions and liquidity issues in the credit markets.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates that funds from operations and cash on hand will be sufficient for the next twelve months. However, the Company plans to open a new East Coast distribution center, expecting $2.0 million in start-up costs and up to $3.0 million in additional inventory.
- Unusual Items:
- Impairment: The $18.4 million impairment loss on intangibles was the primary driver of the net loss for the nine-month period.
- ARPS Liquidity: $6.4 million of investments in ARPS are currently illiquid due to failed auctions. The Company recorded an unrealized loss of $149,000 to other comprehensive income but does not expect to access these funds in the short term.
- Legal Settlement: The Company paid $3.4 million in July 2008 to settle a securities class action lawsuit related to its IPO.
- Risks and Contingencies:
- Intellectual Property Litigation: Ongoing USITC proceedings with Ford Global Technologies regarding design patents on F-150 and Mustang parts. An exclusion order is in place for certain parts, though the Company believes the impact is currently minimal.
- Internal Controls: The Company identified material weaknesses in internal controls over financial reporting (specifically regarding the financial statement close process and IT general controls) and is implementing remediation plans.
- Covenant Waiver: The Company was in violation of its minimum EBITDA requirement under its line of credit but has received a waiver from the lender.
Key Facts for Investor Verification
- Impairment Sustainability: Verify the assumptions used in the $18.4 million impairment charge and whether further write-downs of intangible assets are likely given the continued economic downturn.
- ARPS Recovery: Monitor the liquidity status of the $6.4 million in Auction Rate Preferred Securities and the potential for additional impairment charges if the market does not recover.
- Offline Business Trajectory: Assess the long-term viability of the offline/wholesale segment, which saw a 26.6% decline in the quarter due to reduced purchases from a significant customer.
- Internal Control Remediation: Track progress on remediation of material weaknesses in internal controls to ensure compliance with Sarbanes-Oxley Act Section 404.
- Capital Expenditures: Confirm the timeline and funding requirements for the planned East Coast distribution center expansion.