Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015; fiscal second quarter. Unaudited consolidated results. Dollar amounts below are in millions unless stated otherwise.
Business context
Liquidity Services operates online marketplaces for surplus and salvage assets. It reports one operating segment. Revenue reflects both gross merchandise sales where the company acts as principal and commission or other fee revenue. The company reported approximately 2.688 million registered buyers at March 31, 2015, up 6.5% year over year.
Financial results and liquidity
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Six months ended Mar. 31, 2015 | Six months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Total revenue | $102.9 | $128.3 | $228.1 | $250.3 |
| Operating income (loss) | $3.8 | $9.5 | $(81.2) | $21.3 |
| Net income (loss) | $1.4 | $5.6 | $(62.7) | $12.7 |
| Diluted EPS | $0.05 | $0.17 | $(2.09) | $0.39 |
| Adjusted EBITDA | $8.6 | $16.7 | $25.7 | $36.7 |
- Quarterly operating margin was 3.7%, compared with 7.4% a year earlier; net margin was 1.3%, compared with 4.4%. For the six-month period, operating margin was negative 35.6%, versus positive 8.5%, and net margin was negative 27.5%, versus positive 5.1%.
- Quarterly revenue fell 19.8%; six-month revenue fell 8.9%. Gross merchandise volume was $189.4 million for the quarter, down 16.6%, and $434.7 million for six months, down 5.8%.
- At March 31, cash and cash equivalents were $86.2 million; current assets were $172.9 million and current liabilities $79.5 million. The resulting current ratio was approximately 2.2. Total liabilities were $86.5 million and stockholders’ equity was $256.7 million.
- There was no outstanding credit-facility borrowing. The $75 million facility had $66.9 million available, subject to letters of credit and a $1 million contractual reserve. The facility was extended on May 1, 2015 to May 31, 2018; the company reported compliance with its covenants at quarter-end.
- Six-month operating cash flow was $28.9 million, compared with $9.1 million in 2014; investing cash outflow was $5.1 million and financing cash inflow was $0.2 million. Cash increased $23.6 million from September 30, 2014. Operating cash flow benefited substantially from inventory reductions and noncash impairment add-backs.
- Capital expenditures were $5.1 million for six months. Management expected fiscal 2015 capital expenditures of $8–9 million and said existing cash should meet anticipated needs for at least 12 months.
Material changes and unusual items
- Impairment charges: The company recorded $85.1 million of goodwill impairment and $10.3 million for the remaining Wal-Mart-related contract intangible in the first quarter. Total six-month acquisition, fair-value adjustment and impairment expense was $96.2 million. Management cited the Wal-Mart contract termination, declining market capitalization and uncertainty in forecasts. Further impairment is possible if business plans or assumptions weaken.
- Wal-Mart: Wal-Mart terminated the long-term agreement effective December 8, 2014, alleging service-level and disposition issues; the company disputed the allegations. The parties settled in January 2015, waived claims against each other, and Wal-Mart paid $7.5 million in February. The lost agreement reduced retail marketplace activity and contributed to revenue and GMV declines.
- Department of Defense contracts: The company stopped selling DoD rolling stock after declining to bid at economically unsustainable levels. The current surplus contract was extended through August 2015, with renewal options. The next non-rolling-stock contract carries a purchase price of 4.35% of DoD original acquisition value, versus 1.8% under the current contract, which management expects to raise cost of goods sold in fiscal 2016 and later. Rolling stock had represented approximately 30–35% of revenue under the current surplus contract. The separate Scrap Contract was scheduled to expire in June 2015.
- Tax: Management estimated a 22.8% fiscal 2015 effective tax rate, below historical rates, largely due to tax effects of impairment; it expects future rates of 38–40%. A $22.1 million deferred tax asset was recognized in connection with impairment.
- Other commitments and contingencies: The company guaranteed certain U.K. pension-scheme obligations up to £10 million. A shareholder securities class action seeks unspecified damages; the company moved to dismiss and said it could not estimate potential liability. It also had $0.7 million remaining in accrued employee severance costs at March 31.
Outlook, risks and management commentary
Management described ongoing work to integrate marketplaces and processes through its Liquidity One transformation initiative and announced a commercial-market brand relaunch in April 2015. It cited growth opportunities in online adoption, returned merchandise, sustainability and outsourced asset disposition, while noting that lower consumer-electronics supply and lower prices can pressure retail volume and margins. The filing provides no specific revenue or earnings guidance. Key risks include dependence on major seller contracts, DoD contract economics and renewals, continued marketplace-volume pressure, execution of transformation plans, foreign exchange exposure, and estimates used in goodwill valuation. Approximately $15.7 million of cash was held overseas and not available for domestic operations without potential repatriation taxes.
Most important facts for investors to verify
- Whether the Wal-Mart termination and settlement have produced lasting changes in retail supply, revenue and inventory economics.
- Performance and renewal status of the DoD surplus and scrap contracts, including the impact of the higher non-rolling-stock purchase rate and lost rolling-stock sales.
- Whether current forecasts support goodwill carrying values and whether additional impairment charges are warranted.
- Quality and sustainability of operating cash flow, particularly the contribution from inventory liquidation and changes in payables and accrued liabilities.
- Potential developments in the shareholder litigation and the funded status or future payment exposure of the U.K. pension guarantee.