Liquidity Services, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also reports fourth-quarter results; this is an annual filing, not a standalone quarterly report. Amounts below are in U.S. dollars.
Business context
Liquidity Services operates online marketplaces and related services for corporate and government sellers of surplus, returned, scrap, and capital-asset inventory. Its reportable segments are Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and GovDeals. The company reported approximately 3.17 million registered buyers and $629.3 million of gross merchandise volume (GMV) in FY2017.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $270.0 million | $316.5 million |
| Gross profit / margin | $124.5 million / 46.1% | $162.1 million / 51.2% |
| Operating loss | $40.0 million | $34.1 million |
| Net loss | $39.2 million; $1.25 per diluted share | $59.9 million; $1.96 per diluted share |
| Adjusted EBITDA, non-GAAP | $(21.6) million | $3.7 million |
| Operating cash flow | $(31.7) million | $45.8 million |
| Capital expenditures | $7.8 million | $6.1 million |
| Cash and cash equivalents at year-end | $94.3 million | $134.5 million |
| Working capital at year-end | $68.2 million | $99.4 million |
| Total liabilities / stockholders’ equity | $82.6 million / $132.6 million | $97.5 million / $162.6 million |
The company had no debt at September 30, 2017, and no third-party credit facility. Management said existing cash should meet anticipated needs for at least 12 months. Approximately $14.9 million of cash was held overseas and unavailable for domestic use without potential tax costs. No shares were repurchased in FY2017, and the company reported no cash dividends.
Fourth quarter: Revenue was $61.4 million versus $78.5 million in Q4 FY2016; net loss was $13.9 million versus $53.8 million. Q4 diluted loss per share was $0.44 versus $1.75.
Material changes versus the prior comparable period
- Annual revenue fell 14.7%, while GMV declined 2.0% to $629.3 million. The sharper revenue drop reflects, among other factors, the company’s transaction mix and lower CAG activity.
- CAG revenue declined 24.3% to $145.1 million and gross margin fell to 49.6% from 57.0%, driven by reduced Surplus-contract volume, a shift to lower-value scrap, weaker industrial and energy activity, and higher DLA distributions under the new Scrap contract.
- GovDeals revenue rose 17.8% to $26.9 million, supported by higher sales volume and new sellers. RSCG revenue was nearly flat at $95.0 million, although segment GMV increased.
- Consolidated gross margin contracted to 46.1% from 51.2%. Operating loss widened to $40.0 million from $34.1 million, despite a smaller net loss. FY2016 included a $19.0 million goodwill impairment and a $27.0 million income-tax provision; FY2017 included a $10.1 million increase in the deferred-tax valuation allowance.
- Operating cash flow swung from $45.8 million provided to $31.7 million used, principally reflecting weaker cash generation and working-capital movements; FY2016 benefited from a tax refund recovery.
Outlook, risks, contingencies, and unusual items
- Major DoD contract exposure: The Surplus contract generated 27.6% of FY2017 revenue and the Scrap contract 11.1%. The Surplus contract was scheduled to run through December 14, 2017. On December 5, 2017, after year-end, DLA said Liquidity Services was not the apparent high bidder for either of two replacement Surplus contracts; final awards remained subject to a protest period and pre-award survey. Loss or unfavorable terms could materially reduce revenue, GMV, and profitability.
- Management reported Surplus-contract service-fee price reductions, including an approximately $2.0 million revenue impact in FY2017 versus earlier pricing, with further declines anticipated. The filing estimated that applying additional planned reductions would have lowered FY2017 revenue by approximately $5.0 million.
- The company is migrating marketplaces and back-office processes to its LiquidityOne platform and rolling out a new ERP system. Management expects efficiency and scale benefits, but implementation costs, delays, system disruption, and buyer or seller adoption are material risks. Planned platform launches and migration dates are management expectations, not guarantees.
- FY2017 included $4.2 million of business-realignment expenses, including restructuring and occupancy costs, and a $2.0 million headquarters cease-use charge. The company also recorded a $3.1 million IronDirect inventory valuation reserve and impairment charges on IronDirect assets.
- A shareholder class action concerning alleged past disclosures had been certified; the company said it could not estimate potential liability. A separate derivative case was dismissed on November 27, 2017. The filing reports an unqualified audit opinion and effective internal controls over financial reporting.
- Other principal risks include dependence on DoD and Amazon inventory sources, competitive pressure, inventory and commodity-price exposure, cybersecurity and cloud-service dependence, regulatory and export-control compliance, and the possibility of further losses or tax-asset valuation adjustments.
Most important facts for investors to verify
- Final DLA contract awards, protest outcomes, renewal decisions, and the resulting impact on CAG revenue and cash flow.
- Whether operating cash flow and adjusted EBITDA improve, and how much liquidity remains available after working-capital requirements and restructuring payments.
- Progress, spending, and realized benefits from LiquidityOne and the ERP rollout, including any disruptions or changes in expected timing.
- Further changes in CAG supply, scrap mix and commodity prices, and the company’s ability to grow GovDeals and RSCG sufficiently to offset weakness.
- Developments in the shareholder litigation and the realizability of deferred tax assets, given recurring losses and the substantial valuation allowance.