Liquidity Services, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2013; fiscal third quarter. Unaudited consolidated results. The company operates online marketplaces for surplus and salvage assets.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Total revenue | $124.2 million | $121.3 million | $376.7 million | $353.0 million |
| Operating income | $18.9 million | $25.3 million | $50.7 million | $73.4 million |
| Net income | $11.3 million | $14.9 million | $30.7 million | $42.8 million |
| Diluted EPS | $0.35 | $0.45 | $0.94 | $1.30 |
| Operating margin | 15.2% | 20.8% | 13.5% | 20.8% |
| Net margin | 9.1% | 12.3% | 8.2% | 12.1% |
| Adjusted EBITDA (non-GAAP) | $26.4 million | $33.4 million | $79.8 million | $87.1 million |
Q3 revenue rose 2.4%, while operating income and net income fell 25.4% and 24.1%, respectively. For the nine-month period, revenue increased 6.7%, but operating income declined 30.9% and net income declined 28.2%. Management attributed revenue growth mainly to the GoIndustry and NESA acquisitions; Q3 growth also included GovDeals, partly offset by lower DoD contract activity. Gross merchandise volume was $230.3 million in Q3, up 2.1%, and $722.8 million for nine months, up 16.0%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $16.8 million, down from $39.3 million; investing cash outflow was $18.6 million versus $82.9 million; financing cash outflow was $39.7 million versus $0.8 million.
- Cash declined to $63.3 million at June 30, 2013, from $104.8 million at September 30, 2012. Current assets were $137.3 million and current liabilities $73.3 million, leaving working capital of approximately $64.0 million.
- No debt was outstanding. The $75 million senior facility had $70.5 million available, subject to $4.5 million of letters of credit; $1.0 million of availability was reserved for a DoD contractual obligation. The facility matures May 31, 2014, and the company reported covenant compliance.
- The company repaid the $40 million Jacobs Trading seller note in November 2012 and received a $1 million early repayment discount. NESA acquisition earn-out liability was $18.3 million at June 30.
- Capital expenditures were $3.9 million for nine months; management expected $6–7 million for FY2013 and said existing cash should meet anticipated needs for at least 12 months.
Material changes, outlook and risks
- Higher technology and operations, sales and marketing, and general and administrative expenses—partly reflecting acquired businesses and technology projects—pressured margins. Nine-month acquisition costs were $5.8 million, compared with $5.6 million of acquisition-cost income in the prior-year period, including earn-out valuation changes.
- Management said GoIndustry restructuring was expected to be completed over the following three months and anticipated profitable operations for that marketplace in FY2014. NESA integration was reported on schedule.
- The DoD Surplus and Scrap contracts were significant revenue sources and were due to expire in February 2014 and June 2014, respectively. The DoD issued a request for information on both contracts in April 2013. The filing does not provide a definitive renewal outcome. The DoD has discretion over property made available under the Surplus Contract.
- Management noted near-term pressure from lower consumer-electronics volume and prices, as well as lower DoD property flow. It also identified risks from competition, customer relationships, acquisition integration, and potential impairment of goodwill and intangible assets, which totaled $240.5 million.
- The company reported no material pending or threatened legal claims, no material off-balance-sheet arrangements, and effective disclosure controls. It had no outstanding capital expenditure commitments.
Important facts for investors to verify
- Developments and renewal terms for the DoD contracts approaching expiration, including the effect of changes in DoD property flows.
- Whether GoIndustry achieves the stated FY2014 profitability expectation and whether restructuring is completed as planned.
- Acquisition-related costs, NESA earn-out estimates, and the assumptions supporting goodwill and intangible-asset valuations.
- Whether operating cash generation improves after the substantial year-over-year decline and supports planned spending and liquidity needs.
- Continuation of margin pressure from operating expenses and weaker consumer-electronics supply and pricing.