Liquidity Services, Inc. — Form 10-Q Summary
Business context and reporting period. The company operates online marketplaces for surplus and salvage assets. This unaudited report covers the quarter and nine months ended June 30, 2014, the company’s fiscal third quarter and year to date, respectively. Unless otherwise noted, amounts are in U.S. dollars.
Financial results and position
| Metric | Quarter ended June 30, 2014 | Prior-year quarter | Nine months ended June 30, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $127.0 million | $124.2 million | $377.2 million | $376.7 million |
| Income from operations | $28.6 million | $18.9 million | $49.9 million | $50.7 million |
| Net income | $18.4 million | $11.3 million | $31.1 million | $30.7 million |
| Diluted EPS | $0.59 | $0.35 | $0.98 | $0.94 |
| Adjusted EBITDA (non-GAAP) | $17.3 million | $26.4 million | $54.0 million | $79.8 million |
| Operating cash flow | Not separately stated | Not separately stated | $5.1 million | $16.8 million |
- Quarterly revenue increased 2.2%; nine-month revenue was essentially flat. Fee revenue was $26.7 million for the quarter and $80.5 million year to date.
- Quarterly net income rose 62.8%, but included an $18.6 million non-cash credit from reversing the NESA acquisition earn-out liability. The reversal also drove reported operating income higher; adjusted EBITDA, which excludes acquisition-related fair-value adjustments, declined. Year-to-date adjusted EBITDA fell 32.4%.
- Quarterly GMV was $246.0 million, up 6.8%; nine-month GMV was $707.7 million, down 2.1%. Management attributed the year-to-date decline mainly to weaker commercial capital-asset activity, including softer energy pipe markets and a global slowdown in surplus manufacturing equipment.
- Cash and cash equivalents were $56.9 million at June 30, 2014, versus $95.1 million at September 30, 2013. Current assets were $170.0 million and current liabilities $101.6 million. Inventory rose to $69.4 million from $29.3 million, largely reflecting increased DoD property flows.
- The company had no debt outstanding. Its $75.0 million revolving credit facility had $64.9 million available, subject to letters of credit; $1.0 million of availability was set aside for a DoD contract obligation. The facility matures May 31, 2015, and the company reported covenant compliance.
- Operating cash flow was $5.1 million year to date; investing cash outflow was $6.5 million and financing cash outflow was $37.3 million, principally due to $44.9 million of share repurchases. Capital expenditures were $6.5 million year to date.
Material changes and management outlook
- DoD surplus contract changes are a major risk. Liquidity Services won the new non-rolling-stock contract at 4.35% of the Department of Defense’s original acquisition value, up from 1.8% under the existing contract. Management expects significantly higher cost of goods sold from fiscal 2015 onward. The company withdrew from bidding on the new rolling-stock contract because the price was deemed economically unsustainable; rolling stock had represented about 30–35% of revenue under the current DoD Surplus Contract.
- At the DLA’s request, sales of selected rolling stock and other assets under the existing contract ceased pending regulatory review. The company said cancellations affected the June quarter and would adversely affect fiscal 2014 results. The existing contract was scheduled to run through December 2014, with two one-month renewal options.
- Technology and operations expense increased 25.5% in the quarter and 22.9% year to date, driven by marketplace integration and enhancement work, staffing and consulting, and added warehouse space. Management said the integration initiative was on plan, expected $7–$9 million of additional spending during fiscal 2014, and expected completion during fiscal 2015.
- Management expected fiscal 2014 capital expenditures of $7–$8 million and estimated an effective tax rate of approximately 37.3%. It stated that cash on hand was expected to meet anticipated needs for at least the next 12 months.
- Registered buyers reached approximately 2.572 million at June 30, 2014, up 9.0% over 12 months. The filing also describes risks from changing supply and product mix, contract dependence, operating costs, and potential future financing needs.
Contingencies and unusual items
- The NESA earn-out liability was reduced to zero based on revised projections and unfavorable business developments; the $18.6 million reversal increased reported earnings but is not recurring operating revenue.
- A putative securities class action was filed July 14, 2014 against the company and three executives, alleging misstatements or omissions concerning growth initiatives and financial and operating conditions. The company disputed the allegations; damages were unspecified and no loss range could be estimated.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also stated that ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How the new DoD non-rolling-stock contract’s higher acquisition cost and the loss of rolling-stock sales affect fiscal 2015 revenue, margins, and EBITDA.
- Whether further DLA restrictions or regulatory review affect sales under the existing contract and fiscal 2014 results.
- The sustainability of earnings excluding the $18.6 million NESA earn-out reversal, and the drivers of the decline in adjusted EBITDA.
- Whether working-capital needs—particularly the elevated inventory balance—continue to constrain operating cash flow and liquidity.
- The outcome and potential financial exposure, if any, from the securities class action; the filing provides no clear estimate of potential liability.
- Execution, remaining cost, and expected benefits of the marketplace integration initiative.