Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2015. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. The company operates online marketplaces for surplus and salvage assets.
Financial performance
| Metric | Three months ended June 30, 2015 | Prior-year quarter | Nine months ended June 30, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $89.7 | $127.0 | $317.8 | $377.2 |
| Fee revenue | $19.7 | $26.7 | $66.3 | $80.5 |
| Operating income (loss) | $(0.01) | $28.6 | $(81.2) | $49.9 |
| Net income (loss) | $1.6 | $18.4 | $(61.1) | $31.1 |
| Diluted earnings (loss) per share | $0.05 | $0.59 | $(2.04) | $0.98 |
| Adjusted EBITDA | $5.5 | $17.3 | $31.2 | $54.0 |
| Gross merchandise volume | $193.6 | $246.0 | $628.3 | $707.7 |
- Quarterly revenue fell 29.3%; nine-month revenue fell 15.7%. Management attributed the declines mainly to lower retail commercial activity after termination of the Wal-Mart Agreement and weaker DoD marketplace activity, including cessation of rolling-stock sales.
- Operating margin was approximately break-even for the quarter, versus 22.5% a year earlier; the nine-month operating margin was negative 25.5%, versus positive 13.2%.
- The nine-month results included $96.2 million of acquisition-related, fair-value and impairment charges, principally goodwill and long-lived asset impairment. The company recorded an $85.1 million goodwill impairment and wrote off the remaining $10.3 million Wal-Mart contract intangible. A $20.2 million income tax benefit partially offset the nine-month loss; the quarter also recorded a $1.6 million tax benefit.
Cash flow, balance sheet and debt
- Cash from operating activities was $39.5 million for the nine months, versus $5.1 million in the prior-year period. The cash-flow statement shows significant contributions from a $42.5 million inventory reduction and noncash impairment and tax adjustments; operating cash flow should not be read as equivalent to reported earnings.
- Investing activities used $5.4 million, primarily for equipment and leasehold improvements. Financing activities provided $0.1 million. Cash increased $33.6 million from September 30, 2014, to $96.2 million at June 30, 2015.
- Current assets were $173.3 million and current liabilities $74.2 million. Inventory declined to $40.7 million from $78.5 million; accounts receivable declined to $10.0 million from $21.7 million.
- The company had no borrowings under its $75.0 million credit facility; $65.9 million remained available after letters of credit. The facility was extended to May 31, 2018, and the company reported compliance with its covenants. Management said existing cash was expected to meet anticipated needs for at least 12 months.
- Approximately $18.4 million of cash was held overseas and was not available for domestic operations without incurring repatriation taxes.
Material changes, outlook and risks
- DoD contracts: The current Surplus Contract was extended through November 14, 2015. The replacement non-rolling-stock contract requires payment of 4.35% of DoD original acquisition value, up from 1.8%, which management expects to increase cost of goods sold in fiscal 2016 and beyond. The company withdrew from bidding on the new rolling-stock contract, and rolling-stock sales under the current contract had ceased.
- Scrap Contract: The DoD extended the contract by nine months from June 9, 2015, with additional option periods. Terms changed to a 65% profit-sharing distribution to the DoD, and the DoD may terminate portions by location or commodity subject to specified notice and effective-date restrictions.
- Wal-Mart: Wal-Mart terminated the long-term agreement effective December 8, 2014. A January 2015 settlement provided $7.5 million to the company, received in February, with both parties waiving claims. The loss of the agreement reduced retail marketplace activity.
- Management forecast fiscal 2015 capital expenditures of $8–$9 million; $5.4 million had been spent in the first nine months. It estimated a fiscal 2015 tax rate of approximately 24.8%, with future rates expected at 38%–40%. No specific earnings or revenue guidance is provided in the filing.
- Key operating risks include dependence on DoD contracts and their renewal or termination terms, increased costs under the replacement surplus contract, lower retail supply following the Wal-Mart termination, and the possibility of further goodwill impairment if forecasts or business plans weaken.
- A shareholder securities class action alleges misrepresentations concerning growth and financial and operating conditions. The company denies the allegations, had moved to dismiss, and said the motion was awaiting a court decision; it could not estimate potential liability.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track revenue, GMV and margins by marketplace, especially DoD and retail, to assess whether declines are stabilizing.
- Verify the timing and economics of the new DoD surplus contract, including the 4.35% purchase price, and any further changes or termination of Scrap Contract locations or categories.
- Assess cash generation excluding working-capital movements and noncash impairment adjustments; monitor the use and domestic availability of cash.
- Review assumptions supporting the $96.2 million impairment charge and the risk of additional impairment.
- Monitor the securities litigation and any material developments in the DoD or Wal-Mart-related matters.