Liquidity Services, Inc. — Q3 FY2012 Form 10-Q
Business and period: Liquidity Services operates online marketplaces for surplus and salvage assets. This unaudited report covers the quarter and nine months ended June 30, 2012; the comparable periods ended June 30, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Total continuing revenue | $121.3 | $83.3 | $353.0 | $248.2 |
| Income from continuing operations | $14.9 | $6.6 | $42.8 | $14.9 |
| Net income (loss) | $14.9 | ($1.1) | $42.8 | $5.4 |
| Diluted EPS | $0.45 | ($0.04) | $1.30 | $0.19 |
| Adjusted EBITDA from continuing operations | $33.4 | $16.4 | $87.1 | $43.6 |
- Q3 revenue rose 45.6%; continuing income rose 126.5%. Continuing-income margin was 12.3%, versus 7.9% a year earlier. Nine-month revenue increased 42.3%, and continuing-income margin rose to 12.1% from 6.0%.
- Q3 gross merchandise volume (GMV) was $225.6 million, up 55.2%; nine-month GMV was $623.2 million, up 54.2%. The company completed approximately 126,000 transactions in Q3 and had 1.764 million registered buyers, up 12.6% year over year.
- Q3 cost of goods sold was 40.6% of revenue, versus 38.1%; profit-sharing distributions were 8.5%, versus 14.8%. For the nine months, these ratios were 41.8% versus 40.7% and 9.7% versus 13.9%, respectively. Technology and operations, sales and marketing, and G&A were lower as a share of revenue, reflecting operating leverage.
Cash flow, balance sheet and debt
- Nine-month operating cash flow from continuing operations was $39.7 million, compared with $28.8 million; total operating cash flow was $39.3 million. Investing used $82.9 million, primarily for the Jacobs Trading acquisition ($80.1 million) and capital expenditures ($2.8 million). Financing used $0.8 million, including $30.0 million of share repurchases offset largely by option-related proceeds and tax benefits.
- Cash and cash equivalents were $84.6 million at June 30, down from $129.0 million at September 30, 2011. Current assets were $144.1 million and current liabilities $68.8 million. The filing reports total assets of $339.6 million and stockholders’ equity of $236.5 million.
- The balance sheet reports note payable of $41.5 million, including $9.5 million current; the acquisition seller note’s contractual principal is $40.0 million, bears 5% interest, and is payable in installments of $8 million in October 2012, $12 million in 2013 and $20 million in 2014. No borrowings were outstanding under the $75 million senior credit facility; $70.5 million was available after letters of credit. The company said it complied with facility covenants and expected cash to cover needs for at least 12 months.
- Fiscal 2012 capital expenditures were expected to total $5–$6 million; $2.8 million had been spent in the first nine months.
Changes, outlook and notable items
- Growth reflected the Jacobs Trading acquisition (October 2011), TruckCenter.com, new commercial programs and increased DoD surplus property flow. Commercial growth included a shift toward consignment, which contributed substantially to GMV. Scrap revenue declined in Q3 amid lower DoD property flow and commodity prices.
- The Jacobs acquisition added $71.6 million of revenue since closing. Its preliminary purchase-price allocation included $110.2 million of goodwill and a $33.3 million vendor-contract intangible. The company reported $150.8 million goodwill and $31.8 million net intangible assets at June 30.
- Q3 2012 acquisition costs were $1.1 million. Nine-month acquisition costs were a $5.6 million credit, principally reflecting reversal of the $7.0 million TruckCenter.com earn-out liability after revised projections; the Jacobs earn-out liability was $8.3 million at June 30. Fair-value estimates for earn-outs rely on management projections and could differ materially from eventual payments.
- The UK business had been substantially liquidated and is presented as discontinued operations. The prior-year periods included losses of $7.6 million for the quarter and $9.5 million for nine months, so reported net-income comparisons benefit from the absence of those losses.
- In July 2012, after quarter-end, the company completed its GoIndustry purchase for approximately $31 million, including assumed indebtedness. Integration had begun; purchase-price allocation and pro forma results were not yet available. Management described opportunities to expand capital-asset services but provided no quantified revenue or earnings guidance.
- DoD contracts are important to revenue. The Surplus Contract was described as expiring in February 2013 with a renewal option; the Scrap Contract’s base term expires in August 2013 with renewal options. The DoD has discretion over property availability, and contract terms include termination provisions. The company reported performance above Scrap Contract benchmarks through June 30.
- The board authorized an additional $30 million share-repurchase amount in May 2012. The company repurchased 505,067 shares for $30.0 million during Q3; $18.1 million remained authorized at June 30. Management cautioned that forward-looking statements are subject to risks, and that actual results may differ; it undertook no general obligation to update forecasts.
Important facts for investors to verify
- Whether commercial growth and margins persist after separating acquisition effects and purchase-model revenue from consignment fees.
- DoD property flow, contract renewal and termination terms, and the effect of scrap volumes and commodity prices.
- Jacobs and GoIndustry integration performance, goodwill and intangible-asset valuations, and earn-out assumptions and payments.
- Cash requirements for the seller-note installments, acquisitions, working capital, capital spending and further repurchases.
- The filing’s period-specific presentation: June 30, 2012 quarter-end, with GoIndustry completed in July; no quantified forward guidance was provided.