LIQUIDITY SERVICES INC quarterly report, Q1 FY2013

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Business Context and Reporting Period

Liquidity Services, Inc. operates online marketplaces for surplus and salvage assets, serving corporate and government sellers and professional buyers. This unaudited Form 10-Q covers the three months ended December 31, 2012, the company’s fiscal 2013 first quarter, compared with the three months ended December 31, 2011. Unless noted otherwise, amounts below are in U.S. dollars.

Financial and Operating Results

  • Revenue: Total revenue rose 15.3% to $122.2 million from $106.0 million. Gross merchandise volume (GMV) increased 30.2% to $233.4 million.
  • Profitability: Operating income declined to $10.3 million from $16.3 million; operating margin fell to 8.4% from 15.3%. Net income decreased 26.5% to $6.7 million; diluted EPS was $0.20 versus $0.28.
  • Non-GAAP measures: EBITDA was $14.5 million, down from $19.8 million. Adjusted EBITDA was $24.2 million, up from $22.7 million; the company adds back stock compensation and acquisition costs in this measure.
  • Cash flow: Operating cash flow was a $0.2 million use, compared with $12.2 million provided a year earlier. Investing used $16.6 million, including $14.7 million for acquisitions and $1.9 million in capital expenditures. Financing used $42.0 million, primarily for repayment of the Jacobs Trading note and earn-out payments. Cash declined $58.9 million to $45.9 million.
  • Liquidity and debt: Current assets were $111.5 million and current liabilities $86.0 million at December 31, 2012. No debt was outstanding. The $75.0 million senior credit facility had $70.5 million available, including $4.5 million of letters of credit; $1.0 million of availability was reserved under the DoD Scrap Contract. The company reported compliance with facility covenants.
  • Other metrics: Total assets were $380.0 million and stockholders’ equity was $266.0 million. The company reported approximately 2.24 million registered buyers, up 36.6% year over year.

Material Changes Versus Prior Period

  • Revenue growth reflected higher DoD surplus property flows and a richer mix of capital assets, commercial growth including GoIndustry and NESA, and growth in state and local government activity. These gains were partly offset by a 27.9% decline in scrap revenue amid lower DoD flows and commodity prices.
  • Operating expenses rose, including technology and operations, sales and marketing, and general and administrative costs, with acquired businesses and staffing contributing. Acquisition costs increased to $5.4 million, primarily from a $5.1 million increase in the Jacobs Trading earn-out estimate.
  • The company acquired NESA on November 1, 2012, for approximately $18.3 million upfront plus an earn-out. NESA provides returns management, refurbishment, and reverse-logistics services. The preliminary total consideration was $36.4 million, including estimated contingent consideration.
  • The $40.0 million Jacobs Trading seller note was repaid in November 2012; the company received a $1.0 million early-repayment discount. Cash use also included acquisition-related contingent payments.

Guidance, Risks, and Unusual Items

  • Management expected fiscal 2013 capital expenditures of $6 million to $7 million, primarily funded from operating cash flow, and estimated a fiscal 2013 tax rate of approximately 40%. It stated existing cash and expected resources should cover anticipated needs for at least 12 months; no earnings or revenue guidance was provided.
  • The DoD Surplus and Scrap contracts are important business drivers and were scheduled to expire in February 2014 and June 2014, respectively, after exercised renewal options. DoD discretion over property supplied, contract terms, and performance requirements may affect results.
  • Management cited risks including forward-looking uncertainties, acquisition integration and earn-out estimates, goodwill and intangible-asset valuation, and possible future financing needs. Goodwill and other intangible assets totaled approximately $249.7 million. The filing reported no pending or threatened legal matters expected to have a material adverse effect.
  • Unusual items included $5.4 million in acquisition costs, notably the Jacobs Trading earn-out remeasurement, and the $1.0 million gain on early debt extinguishment. Management cautioned that quarterly results are not necessarily indicative of full-year results.

Important Facts for Investors to Verify

  1. Whether the DoD contracts renew and whether surplus and scrap property flows, commodity prices, and contract performance remain favorable.
  2. How much acquired-business growth is organic, and whether NESA and GoIndustry contribute sustainably to revenue and profitability.
  3. The cash-flow and working-capital outlook after acquisition, debt repayment, earn-out settlements, and the decline in cash.
  4. Future earn-out payments and valuation assumptions, particularly the preliminary NESA purchase-price allocation and Jacobs Trading contingent consideration.
  5. Whether operating margins recover as acquisition-related and integration expenses evolve; assess adjusted EBITDA alongside GAAP income and cash flow.