Liquidity Services, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016; the filing also reports the quarter ended September 30, 2016. The company operates e-commerce marketplaces and related services for business and government surplus and salvage assets.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $316.5 million | $397.1 million |
| GMV | $642.1 million | $799.0 million |
| Operating income (loss) | ($34.1 million) | ($144.2 million) |
| Net income (loss) | ($59.9 million) | ($104.8 million) |
| Adjusted EBITDA | $3.7 million | $33.1 million |
| Operating cash flow | $45.8 million | $43.5 million |
- FY2016 operating margin was approximately negative 10.8%; net margin was approximately negative 18.9%. Cost of goods sold rose to 45.2% of revenue from 41.8%.
- Fourth-quarter revenue was $78.5 million and net loss was $53.8 million, or $1.75 per diluted share.
- At year-end, cash and cash equivalents were $134.5 million, working capital was $99.4 million, and total liabilities were $97.5 million. The company reported no debt and terminated its $75 million credit facility in March 2016; it had no outstanding borrowings at termination.
- Operating cash flow included approximately $34.0 million of net cash benefit from recovery of prior-year income taxes. Capital expenditures were $6.1 million. Management said existing cash should meet anticipated needs for at least 12 months; there was no revolving credit facility.
Changes versus the prior comparable period
- Revenue declined 20.3% and GMV declined 19.6%. Management attributed the fall primarily to the Jacobs Trading divestiture, the NESA business wind-down, reduced retail product flows, weaker energy-sector activity, and lower DoD commodity prices and property values.
- DoD contract revenue fell 18.0%; commercial marketplace revenue fell 24.9%. State and local government marketplace revenue increased 10.8%, supported by new sellers and increased sales from existing clients.
- Registered buyers increased 5.0% to approximately 2.986 million, while auction participants declined to 2.417 million from 2.483 million.
- Net loss narrowed year over year, principally because FY2015 included substantially larger goodwill and long-lived asset impairment charges. FY2016 still included a $19.0 million goodwill impairment and a $35.8 million deferred-tax valuation allowance charge. Adjusted EBITDA fell sharply to $3.7 million.
Outlook, commentary, risks, and unusual items
- No numeric revenue or earnings guidance is provided. Management plans to continue implementing LiquidityOne, migrating the remaining marketplaces during FY2017, and investing in IronDirect, launched on the platform in the fourth quarter. Expected benefits include operating efficiencies and lower infrastructure costs, but realization and timing are uncertain.
- The DoD Surplus Contract’s initial term ended in December 2016, with four one-year extension options exercisable by the DLA. The current Scrap Contract began October 1, 2016, runs for a three-year base term with two one-year options, and provides the DLA 64.5% of gross resale proceeds. DoD contracts together represented approximately 41.2% of FY2016 revenue, making contract terms, renewal, supply, and government audits material risks.
- Unusual FY2016 items include the $19.0 million goodwill impairment and $35.8 million valuation allowance charge. The company also received $30.1 million of tax refunds related to the Jacobs Trading sale’s tax loss, plus $5.0 million for a prior-year tax overpayment.
- Principal risks include continued revenue and buyer-activity declines, dependence on DoD contracts, inventory and commodity-price exposure, competition, and disruption or cost overruns during the LiquidityOne/ERP transition. The company also cites cybersecurity, regulatory, foreign-exchange, and international operating risks.
- A securities class action and putative derivative actions remain pending. The company disputes the allegations and says it cannot estimate potential liability. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the Surplus Contract was extended or renewed and what effect its terms and property supply have on revenue and margins.
- Whether the new Scrap Contract’s revenue-sharing economics offset lower commodity prices and operating costs.
- Whether marketplace demand, GMV, active auction participation, and commercial supply stabilize after the divestiture and business wind-downs.
- Whether LiquidityOne migration proceeds on schedule and within budget, and whether expected efficiencies improve adjusted EBITDA and cash generation.
- How much of future operating cash flow is recurring versus tax-related; also monitor deferred-tax asset realizability, further impairment risk, litigation developments, and liquidity needs.