Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017. The filing is unaudited. Dollar amounts are in millions unless otherwise stated.
Business context
Liquidity Services operates online marketplaces and related services for surplus, salvage and scrap assets. Its reportable segments are Capital Assets Group (CAG), Retail Supply Chain Group (RSCG) and GovDeals. The company introduced this three-segment presentation in the quarter; it did not change consolidated financial statements.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $65.5 | $85.2 | $208.7 | $237.9 |
| Gross profit | $29.9 | $43.2 | $96.7 | $124.3 |
| Operating income (loss) | $(8.8) | $0.1 | $(25.4) | $(8.9) |
| Net income (loss) | $(8.6) | $(0.1) | $(25.2) | $(6.2) |
| Diluted loss per share | $(0.27) | $0.00 | $(0.80) | $(0.20) |
| Adjusted EBITDA, non-GAAP | $(5.2) | $4.8 | $(13.9) | $4.4 |
- Gross margin was approximately 45.7% in Q3 versus 50.8% a year earlier; for the nine months it was approximately 46.4% versus 52.2%.
- Q3 revenue fell 23.1%; nine-month revenue fell 12.3%. Gross merchandise volume was down 9.9% in Q3 but up 0.3% for the nine-month period.
- Cash used in operations was $14.3 for the nine months, compared with $38.6 provided in the prior-year period. Investing used $6.3; financing provided $0.1. Cash declined $20.6 to $113.9.
- At June 30, cash was $113.9, current assets $154.7 and current liabilities $77.4. Total liabilities were $88.0; the company reported no debt. Approximately $17.0 of cash was held overseas and unavailable for domestic operations without repatriation taxes.
- Capital expenditures were $6.2 for the nine months. Management said existing cash should cover anticipated needs for at least 12 months. The former $75 million credit facility was terminated in March 2016 with no borrowings outstanding.
Material changes and unusual items
- CAG revenue declined 36.5% in Q3 and 22.3% for the nine months, mainly from lower Surplus-contract volume and service revenue, plus weakness in industrial activity. CAG gross profit fell 40.7% in Q3 and 33.1% for the nine months.
- GovDeals grew: Q3 revenue rose 16.3% and nine-month revenue 16.6%. RSCG revenue was nearly flat in Q3 and increased 6.2% for the nine months.
- Client distributions nearly doubled year over year in both periods, primarily reflecting the DLA Scrap contract’s revenue-sharing terms. An IronDirect inventory reserve of $1.9 and long-lived-asset impairment and business realignment charges contributed to reported losses.
- Operating cash flow was also affected by working-capital movements, including changes in accrued liabilities and distributions payable. Prior-year operating cash flow benefited from a $34.7 tax recovery.
- Registered buyers reached 3.106 million, up about 5% over the prior 12 months; Q3 auction participants and completed transactions declined year over year.
Outlook, risks and contingencies
- The DLA Surplus contract, which contributed 26.4% of Q3 revenue, is extended through December 14, 2017, with further one-year options at the DLA’s discretion. The DLA held a pre-proposal conference on August 2, 2017 about a planned solicitation; no formal solicitation had been issued as of the filing. The contract permits termination for convenience.
- Management expects Surplus-contract service fee revenue to decline as lower pricing takes effect. The new reduced fees were expected to be fully reflected in second-quarter fiscal 2018 results, assuming the next option year is exercised.
- The DLA Scrap contract contributed 12.3% of Q3 revenue and requires a payment of 64.5% of gross resale proceeds to the DLA. A separate commercial-client arrangement contributed 16.1% of Q3 revenue.
- Management expects future tax rates to remain near zero until there is sufficient evidence to reverse the deferred-tax valuation allowance. The filing records a $6.5 valuation-allowance charge for the nine months.
- Risks include dependence on government contracts and inventory supply, lower retail-electronics volumes and margins, competition, technology and execution risks, and potential impairment of goodwill or intangible assets. The company cited ongoing securities class and derivative lawsuits; it said it could not estimate potential liability.
- No formal earnings guidance was provided. Management expects continued spending on its LiquidityOne platform and related implementation and education efforts.
Important facts for investors to verify
- Any formal DLA solicitation, contract award or renewal decision, and the resulting effect on Surplus revenue, service fees and inventory volume.
- Whether operating cash flow improves and whether cash balances remain adequate as losses and platform investment continue.
- Performance and margins in CAG, including Scrap distributions, and evidence of recovery in RSCG and IronDirect.
- Changes in deferred-tax valuation allowances, potential tax benefits, and the collectability of the $11.3 promissory note receivable from the Jacobs Trading asset sale.
- Developments in the securities class action and derivative litigation, including any updated estimate of exposure.