Liquidity Services, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2013; unaudited. The company operates online marketplaces for surplus and salvage assets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Total revenue | $130.3 | $125.7 | $252.5 | $231.8 |
| Operating income | $21.6 | $31.9 | $31.9 | $48.1 |
| Operating margin | 16.6% | 25.3% | 12.7% | 20.8% |
| Net income | $12.7 | $18.8 | $19.4 | $27.9 |
| Diluted EPS | $0.39 | $0.57 | $0.59 | $0.85 |
| Adjusted EBITDA (non-GAAP) | $29.2 | $30.9 | $53.3 | $53.6 |
Quarterly revenue grew 3.7%, while gross merchandise volume (GMV) rose 18.7% to $259.1 million. For the six months, revenue increased 9.0% and GMV rose 23.9% to $492.5 million. Fee revenue was $24.1 million for the quarter versus $13.6 million a year earlier; reported merchandise revenue was $106.2 million versus $112.2 million.
Margins and earnings declined despite higher revenue. Management attributed revenue growth chiefly to DoD surplus activity and acquired businesses; lower cost of goods sold and profit-sharing distributions were outweighed by higher technology and operations, sales and marketing, and general and administrative costs. The acquisitions contributed substantially to these expense increases.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $57.2 million at March 31, 2013, down from $104.8 million at September 30, 2012. Current assets were $128.7 million and current liabilities $82.7 million.
- Six-month operating cash flow was $10.4 million, compared with $38.6 million a year earlier. Investing used $17.2 million, primarily for NESA and capital expenditures; financing used $41.3 million, mainly for debt and earn-out payments.
- The company had no outstanding debt at quarter-end. Its $75 million senior credit facility had $70.5 million available, including $4.5 million of letters of credit; $1.0 million of availability was reserved for a DoD contractual obligation. The company reported compliance with facility covenants.
- Total liabilities were $110.4 million and stockholders’ equity was $280.5 million. Goodwill was $210.2 million; net intangible assets were $34.1 million.
- Management said cash and cash equivalents were expected to meet anticipated cash needs for at least the next 12 months. Fiscal 2013 capital expenditures were expected to be $6–$7 million; $2.5 million had been spent in the first six months.
Material changes, outlook and risks
- On November 1, 2012, the company acquired NESA, a Canadian returns-management and reverse-logistics provider. The estimated acquisition earn-out liability was $18.2 million at March 31; the potential total payout was estimated at zero to $37.7 million.
- The company repaid the $40 million Jacobs Trading seller note in November 2012 and paid acquisition earn-outs. It recorded a $1.0 million gain from early debt extinguishment. Acquisition costs were $5.6 million for the six-month period, compared with $6.7 million of acquisition-related income in the prior-year period, including a prior-year $7.0 million reversal of a TruckCenter.com earn-out liability. These items affect period comparisons.
- Management reported progress on GoIndustry restructuring, including location closures and infrastructure rationalization. It expected to complete the plan within six months and believed the marketplace could achieve profitable operations in FY2014; this is an expectation, not a guarantee.
- The Surplus and Scrap DoD contracts accounted for about 42.5% of quarterly revenue, including buyer premiums. Their current terms expire in February and June 2014, respectively. The DoD issued a Request for Information on both contracts in April 2013. The Surplus Contract also allows the DoD discretion over property made available and certain retrieval or restriction rights.
- Other disclosed risks include uncertainty in earn-out fair-value estimates, potential impairment of goodwill and intangibles, and foreign currency exposure (management described exposure as limited and reported no hedging). The filing reported no pending or threatened legal matter expected to have a material adverse effect.
Important facts for investors to verify
- Whether DoD contract renewals, terms, and property flows support revenue continuity after the 2014 expirations.
- Whether GoIndustry restructuring delivers the stated FY2014 profitability expectation and whether acquired-business costs remain elevated.
- How NESA’s performance affects the $18.2 million estimated earn-out liability and potential payments.
- What drove the sharp decline in operating cash flow and whether working-capital needs normalize.
- How much of reported earnings and adjusted EBITDA depends on acquisition-related estimates and other adjustments; adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP results or cash flow.