Business context and reporting period
Liquidity Services, Inc. operates online marketplaces and related services for business and government sellers of surplus and scrap assets. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended June 30, 2016; amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $85.2m | $89.7m | $237.9m | $317.8m |
| Operating income (loss) | $0.1m | $(0.0)m | $(8.9)m | $(81.2)m |
| Net income (loss) | $(0.1)m | $1.6m | $(6.2)m | $(61.1)m |
| Adjusted EBITDA (non-GAAP) | $4.8m | $5.5m | $4.4m | $31.2m |
| Gross merchandise volume (GMV) | $178.5m | $193.6m | $482.9m | $628.3m |
Q3 total revenue comprised $62.0m of revenue and $23.2m of fee revenue. Q3 operating margin was approximately 0.1%, versus approximately break-even a year earlier; nine-month operating margin was -3.7%, versus -25.5%. Nine-month net margin was -2.6%, versus -19.2%.
For the nine months, operating cash flow was $38.6m (prior year $39.5m), investing cash outflow $4.6m, and financing cash outflow $0.1m. Cash increased $34.4m to $129.9m. Management said operating cash flow included about $34.0m from recovery of prior-year income taxes, net of estimated fiscal 2016 taxes; it should not be viewed as solely recurring operating performance.
At June 30, 2016, cash was $129.9m, current assets $185.3m, current liabilities $74.4m, total assets $296.0m, and stockholders’ equity $218.1m. The company had no debt. It terminated its $75m senior credit facility in March with no borrowings outstanding. About $21.5m of cash was held overseas and unavailable for domestic operations without tax on repatriation.
Material changes versus comparable periods
- Revenue declined 5.1% in Q3 and 25.1% for the nine months; GMV fell 7.8% and 23.1%, respectively.
- Management attributed declines to the Jacobs Trading sale, NESA business wind-down, lower retail product flows, and, for the nine months, weakness in the energy sector. DoD revenue and GMV were pressured by lower commodity prices and a shift to lower-value property. GovDeals growth partly offset these declines.
- Q3 net income shifted to a $0.1m loss from $1.6m income. Nine-month loss narrowed substantially from $61.1m, primarily because the prior-year period included $96.2m in acquisition-related charges and goodwill/long-lived asset impairment; the current period recorded $0.04m in that expense line.
- Cost of goods sold rose to 46.1% of revenue in Q3 from 39.9%, and to 44.6% for the nine months from 41.8%, reflecting higher purchase costs under the current Surplus Contract and a greater mix of principal transactions.
- Inventory reserves increased to approximately $2.8m from $0.8m at September 30, 2015.
Outlook, management commentary, risks and unusual items
- Management said existing cash should meet anticipated needs for at least 12 months. It expects continued spending on the LiquidityOne platform and related implementation and client education, and is investing in the IronDirect construction marketplace. No specific financial guidance was provided.
- The new DLA Scrap Contract was awarded in April 2016 and is expected to begin in fiscal Q1 2017. It has a 36-month base term plus two one-year options; the company will pay the DLA 64.5% of gross resale proceeds and bear sorting, merchandising and sale costs. The existing contract expires September 30, 2016.
- The current DLA Surplus Contract’s two-year base term ends in December 2016, with four one-year options exercisable by the DLA. The contract requires purchases at 4.35% of original acquisition value, and the DLA retains broad discretion over property availability and retrieval.
- The company reported no new goodwill impairment indicators during the nine months, but goodwill and other intangible assets totaled $67.1m; management noted that adverse business developments or lower expected cash flows could lead to future impairment.
- A securities class action remains pending; the court granted the company’s motion to dismiss in part and denied it in part. The company disputes the claims and said it cannot estimate potential liability. A derivative action was filed in June 2016. The filing also describes a guarantee of certain UK pension scheme obligations capped at £10m.
- Management estimated a 28.3% effective tax rate for the nine-month pre-tax loss and said future tax rates may range from 30% to 40%. The company reported approximately $22.1m in net deferred tax assets, which could require a valuation allowance if realization becomes less likely.
Important facts for investors to verify
- Whether revenue and GMV trends stabilize, particularly in retail, energy-related and DoD activity, and whether GovDeals growth continues.
- Whether the new DLA Scrap Contract’s gross-proceeds sharing terms and operating costs support returns comparable to the expiring contract.
- How much of operating cash flow reflects tax refunds and working-capital movements versus ongoing business generation.
- Whether inventory reserve levels, deferred tax asset realizability, and goodwill valuation assumptions change.
- Developments and potential exposure in the securities class action, derivative action, and UK pension guarantee.