Liquidity Services, Inc. — Q2 FY2014 Form 10-Q
Business context and reporting period. The company operates online marketplaces for surplus and salvage assets, providing auction, logistics, and transaction services. This unaudited report covers the quarter and six months ended March 31, 2014; the company has one reportable segment.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Total revenue | $128.3 | $130.3 | $250.3 | $252.5 |
| Operating income | $9.5 | $21.6 | $21.3 | $31.9 |
| Net income | $5.6 | $12.7 | $12.7 | $19.4 |
| Diluted EPS | $0.17 | $0.39 | $0.39 | $0.59 |
| Adjusted EBITDA | $16.7 | $29.2 | $36.7 | $53.3 |
| Operating cash flow | Not separately reported for the quarter | $9.1 | $10.4 |
- Q2 operating margin was 7.4% versus 16.6%; net margin was 4.4% versus 9.7%. For the six-month periods, operating margin was 8.5% versus 12.7%, and net margin was 5.1% versus 7.7%.
- Q2 gross merchandise volume (GMV) declined 12.3% to $227.2 million; six-month GMV declined 6.3% to $461.6 million. Management attributed the declines primarily to lower commercial capital-assets volume, with an immaterial revenue effect because that business uses consignment.
- Cash and cash equivalents were $101.8 million at March 31, 2014, up from $95.1 million at September 30, 2013. Inventory rose to $71.6 million from $29.3 million, largely reflecting increased DoD surplus property flow.
- Current assets were $225.6 million and current liabilities $123.0 million. The company had no outstanding borrowings under its $75 million credit facility; $65.1 million remained available, subject to letters of credit and a contractual reserve. The facility was extended to May 31, 2015, and the company reported compliance with its covenants.
- Six-month investing cash outflow was $5.0 million, primarily capital expenditures; financing cash inflow was $2.5 million. Cash increased by $6.7 million over the six months.
Material changes versus prior comparable periods
- Despite modestly lower revenue, Q2 operating income fell 56.2% and net income fell 55.7%. Cost of goods sold rose 8.8%, and technology and operations expense rose 29.7%, including marketplace integration work and added warehouse capacity.
- Six-month operating income decreased about one-third and net income declined 34.4%. Technology and operations expense increased 21.7%; lower general and administrative expense and acquisition costs partly offset increases elsewhere. Prior-year acquisition costs included a $5.1 million Jacobs Trading earn-out adjustment.
- Q2 cost of goods sold increased in part because DoD surplus property included more lower-value items. Over the six-month period, higher cost of goods sold also reflected expansion of the Canadian purchase-model business.
- Registered buyers reached approximately 2.524 million at March 31, up from 2.424 million at September 30, 2013. Six-month completed transactions declined to approximately 261,000 from 267,000.
Outlook, risks, and unusual items
- DoD surplus contract transition: After quarter-end, the company was the high bidder for the new non-rolling-stock contract at 4.35% of DoD original acquisition value, compared with 1.8% under the existing contract. Formal award remained pending, subject to protest and DoD review. The company withdrew from bidding on the new rolling-stock contract after determining the bid levels were economically unsustainable. Management expected higher cost of goods sold in FY2015 and beyond, cessation of rolling-stock sales under the new contract, and a material adverse impact on EBITDA. Rolling stock historically represented about 30–35% of revenue from the current DoD Surplus Contract. The existing contract was to continue through December 2014, with two one-month renewal options.
- The existing DoD Surplus Contract generated about 30.1% of total company revenue in Q2 and 27.4% for the six-month period. DoD property flow was higher than historical levels, and the shift to smaller-value items increased space, staffing, and operating needs.
- Management expected to spend an additional $7–9 million in FY2014 on marketplace integration and enhancement, with the initiative expected to finish in FY2015. FY2014 capital expenditures were forecast at $7–8 million; $5.0 million had been spent in the first six months.
- Management said existing cash and cash equivalents should cover anticipated needs for at least 12 months. It did not provide a revised financial forecast while the DoD contracting process remained incomplete.
- The company estimated an approximately 40% FY2014 tax rate. It reported no material pending legal matters, no material off-balance-sheet arrangements, and effective disclosure controls. Foreign-currency exposure was described as limited; the company reported no hedging.
Important facts for investors to verify
- Whether the DoD formally awarded the non-rolling-stock contract, whether the award faced protests, and the final contract terms and start date.
- The realized financial impact of the higher non-rolling-stock acquisition rate and the loss of rolling-stock sales on revenue, margins, and EBITDA.
- Whether the elevated inventory balance converts to sales and cash as expected, and whether warehouse and operating costs remain elevated.
- Progress, spending, and expected benefits from the marketplace integration initiative, alongside capital expenditure plans.
- Liquidity and covenant capacity after considering working-capital needs, contract obligations, share repurchases, and the May 2015 credit-facility maturity.