Liquidity Services, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011; this is an annual report, not a standalone Q4 filing. Financial amounts below are in U.S. dollars unless noted.
Business context
Liquidity Services operates online marketplaces and related services for remarketing surplus and salvage assets. It serves corporate and government sellers and professional buyers through consignment, profit-sharing and purchase models. Its Defense Logistics Agency (DLA) contracts are a significant source of business. The U.K. subsidiary ceased operations and was substantially liquidated; its results are reported as discontinued operations.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Revenue from continuing operations | $327.4m | $273.0m | Up 19.9% |
| GMV | $548.6m in selected data | $416.3m | Up 31.8%; MD&A elsewhere states FY2011 GMV of $558.5m, an inconsistency to verify |
| Income from continuing operations | $20.7m | $15.1m | Up 37.1% |
| Continuing-operations income margin | 6.3% | 5.5% | Calculated as continuing income divided by revenue |
| Adjusted EBITDA from continuing operations | $58.9m | $40.5m | Non-GAAP; includes adjustments for stock compensation and acquisition costs |
| Net income | $8.5m | $12.0m | Down 29.1%, primarily reflecting the U.K. discontinued-operations loss |
| Operating cash flow from continuing operations | $40.6m | $33.8m | Up $6.8m |
| Cash and short-term investments | $129.0m | $75.9m | FY2011 balance is cash; no short-term investments remained |
| Working capital | $111.7m | $60.1m | Increased year over year |
| Debt | No borrowings | — | $30m revolving facility due April 2013; availability is reported as $24.5m in one passage and $25.5m in another |
FY2011 investing cash flow was positive $19.6m and financing cash flow positive $26.7m. The company repurchased $3.5m of stock and spent $4.8m on capital expenditures. Total liabilities were $66.4m and total assets $227.8m at year-end.
Changes versus the prior year
- Revenue growth reflected higher scrap sales amid rising commodity prices and a richer mix of metals, increased U.S. commercial purchase-model programs, greater DoD property flows and acquisitions.
- GMV grew faster than revenue. Registered buyers increased 14.3% to 1.604m, while auction participants declined to 1.936m from 2.247m and completed transactions fell to 475,000 from 522,000.
- Cost of goods sold fell as a share of revenue to 38.6% from 40.1%; technology and operations, sales and marketing, and general and administrative expenses also declined as a share of revenue.
- Acquisition costs rose to $6.7m from $0.5m, including earn-out fair-value changes and costs related to Jacobs Trading.
- Continuing-operations income improved, but net income fell because discontinued operations recorded a $12.2m loss, including a $17.5m U.K. goodwill impairment and related currency translation effects. Tax benefits partly offset the charge.
Outlook, transactions and risks
- Management expected FY2012 capital expenditures of $5m–$6m, primarily funded from operating cash flow, and believed existing cash would cover anticipated needs for at least 12 months. No specific revenue or earnings guidance is provided.
- On October 1, 2011, the company completed the Jacobs Trading acquisition. Consideration included $80m cash, a $40m subordinated 5% note, $24.5m in stock and a potential earn-out; estimated earn-out fair value was $8.2m. Preliminary purchase-price allocation included $110.2m goodwill and a $33.3m vendor-contract intangible. The cash payment occurred after year-end.
- Following the acquisition, the company assumed rights and obligations under a Wal-Mart merchandise agreement, which management expected to contribute significantly to FY2012 revenue and GMV. The agreement runs to May 2016 before continuing month to month.
- Customer concentration is material: the DoD Surplus and Scrap contracts accounted for 30.3% and 25.5% of FY2011 revenue, respectively. A separate commercial seller represented approximately 11% of GMV in FY2011.
- The DoD contracts face renewal, performance, audit and termination risks. The Surplus contract’s base term expires in February 2012 and the Scrap contract’s base term in 2012, with renewal options; the filing also describes an exercised extension for Scrap. Verify current contract terms and dates.
- Other cited risks include dependence on buyer and seller supply, competition, purchase-model inventory and commodity-price exposure, acquisition integration, cybersecurity and service interruptions, shipping and regulatory compliance. Management and the auditor reported effective disclosure controls and internal control over financial reporting; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Reconcile the FY2011 GMV figures of $548.6m and $558.5m in the filing.
- Confirm actual availability under the credit facility, given the $24.5m and $25.5m figures disclosed.
- Track renewals and operating terms for the DoD contracts, and evaluate the revenue exposure to those contracts and the concentrated commercial seller.
- Assess Jacobs integration, financing and earn-out obligations, goodwill and intangible-asset valuation, and the expected contribution from the Wal-Mart agreement.
- Separate recurring continuing-operations performance from the U.K. discontinued-operation impairment and other unusual acquisition-related charges; consider that adjusted EBITDA is non-GAAP.