Liquidity Services, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2012. Unaudited results; dollar figures below are in millions unless noted. The company operates online marketplaces for surplus and salvage assets.
Financial performance
| Metric | Three months ended March 31, 2012 | Prior-year quarter | Six months ended March 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Total continuing-operations revenue | $125.7 | $89.4 | $231.8 | $164.9 |
| Income from continuing operations | $18.8 | $6.2 | $27.9 | $8.3 |
| Net income | $18.8 | $5.1 | $27.9 | $6.4 |
| Diluted EPS | $0.57 | $0.18 | $0.85 | $0.23 |
| Cash from continuing operating activities | Not provided for quarter | Not provided for quarter | $38.6 | $16.8 |
- Quarterly revenue grew 40.6%; management attributed growth mainly to Jacobs Trading and TruckCenter.com acquisitions, new commercial programs, higher DoD surplus property flow, and growth in state and local government sales. Six-month revenue also rose 40.6%.
- Quarterly gross merchandise volume (GMV) was $218.4 million, up 61.8%; six-month GMV was $397.6 million, up 53.7%. Registered buyers reached approximately 1.711 million, 13.5% higher year over year.
- Fee revenue was $13.6 million for the quarter, versus $6.3 million; $23.4 million for six months, versus $13.2 million. Purchase-model revenue remained the largest model, representing 73.9% of quarterly revenue; consignment represented 10.8%.
- Quarterly operating income before interest and taxes was $31.9 million, or 25.3% of revenue, versus $11.5 million, or 12.9%. Continuing-operations net margin was 14.9%, versus 6.9%. Six-month figures were $48.1 million (20.8% margin) and $15.3 million (9.2%) for operating income, and $27.9 million (12.0%) and $8.3 million (5.0%) for continuing income.
- Adjusted EBITDA, a company-defined non-GAAP measure, was $30.9 million for the quarter versus $15.2 million, and $53.6 million for six months versus $27.1 million. The current-period measure includes a $7.0 million earn-out reversal; see unusual items below.
Liquidity, cash flow and debt
- Cash and cash equivalents were $104.8 million at March 31, down from $129.0 million at September 30, 2011. Six-month operating cash flow was $38.6 million; investing cash outflow was $82.1 million, principally the $80.0 million Jacobs Trading cash acquisition payment; financing cash inflow was $19.3 million.
- Current assets were $155.1 million and current liabilities $81.0 million (current ratio approximately 1.9). Total assets were $353.5 million; total liabilities $115.2 million.
- Debt consisted of a $40.0 million unsecured seller note issued for Jacobs Trading, bearing 5% interest. Principal payments of $8 million, $12 million and $20 million are due October 2012, 2013 and 2014, respectively.
- The amended senior credit facility provides up to $75.0 million through May 31, 2014. There were no borrowings; reported availability was $70.5 million after letters of credit, with $1.0 million reserved for the DoD Scrap Contract. The company reported compliance with facility covenants.
Changes, outlook and risks
- The October 2011 Jacobs Trading acquisition materially expanded commercial operations. The preliminary purchase-price allocation included $110.2 million goodwill and $33.3 million of vendor-contract intangibles; total goodwill and intangible assets were $184.8 million at March 31. The allocation remained subject to additional information and analysis.
- Management reversed the $7.0 million TruckCenter.com earn-out liability after revising projections; the reversal was recorded as a credit to acquisition costs and increased reported income. Jacobs Trading’s estimated earn-out liability was $8.2 million at period-end, out of a possible $30.0 million.
- The UK subsidiary had ceased operations and was substantially liquidated; its prior-year losses were presented as discontinued operations. No discontinued-operations loss was reported in the current quarter or six-month period.
- The DoD exercised the first renewal option for the Surplus Contract. The Scrap Contract runs through August 2013, subject to renewal options; the company said it remained above the contract’s performance benchmarks. DoD contracts carry renewal, termination and property-availability risks.
- Management expected fiscal 2012 capital expenditures of $5–$6 million and believed cash and available resources would cover anticipated needs for at least 12 months. It estimated a fiscal 2012 tax rate of approximately 40%. No revenue or earnings guidance was provided.
- Management cited possible risks from economic and competitive conditions, buyer and seller relationships, acquisition integration and valuation estimates, and future financing needs. Goodwill and intangibles are subject to impairment judgments. The company reported no material off-balance-sheet arrangements and no pending or threatened legal matters expected to have a material adverse effect.
Investor verification priorities
- Assess underlying earnings and cash generation excluding the $7.0 million TruckCenter.com earn-out credit, and review the assumptions behind adjusted EBITDA.
- Track Jacobs Trading integration, acquired-business performance, purchase-price allocation and the $8.2 million estimated earn-out.
- Evaluate cash needs for the $8.0 million note principal payment due October 2012, ongoing inventory requirements and planned capital expenditures.
- Monitor DoD contract renewals, performance conditions and property volumes, as well as the company’s commercial customer and seller concentration.
- Review the carrying values and impairment assumptions for $150.8 million of goodwill and $34.1 million of net intangible assets.