Liquidity Services, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. This is an annual report, not a standalone quarterly filing; the quarter ended September 30, 2012 is shown separately below. Amounts are in U.S. dollars.
Business context
Liquidity Services operates online marketplaces for surplus and salvage goods, combining auctions with logistics, merchandising and transaction services. It reports one operating segment. Growth during FY2012 included the Jacobs Trading acquisition, completed October 1, 2011, and GoIndustry, acquired in July 2012. The UK operation was discontinued in FY2011; FY2012 results contain no discontinued-operation loss.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change or context |
|---|---|---|---|
| Total revenue | $475.3 million | $327.4 million | Up 45.2% |
| Gross merchandise volume (GMV) | $864.2 million | $548.6 million | Up 57.5% |
| Income from continuing operations before interest and other expense | $82.2 million | $37.3 million | 17.3% of revenue in FY2012 |
| Income before taxes | $79.9 million | $36.1 million | |
| Net income | $48.3 million | $8.5 million | FY2011 included a $12.2 million discontinued-operations loss |
| Diluted EPS | $1.47 | $0.29 | Continuing-operations diluted EPS was $1.47 versus $0.71 |
| Adjusted EBITDA | $110.1 million | $58.9 million | Non-GAAP measure |
| Cash from continuing operating activities | $52.6 million | $40.6 million | |
| Cash and cash equivalents, at year-end | $104.8 million | $129.0 million | Working capital was $53.2 million, down from $111.7 million |
| Debt and credit availability | $40.0 million seller note outstanding at year-end; no revolver borrowings | $70.5 million available under the $75 million facility, net of letters of credit; seller note repaid after year-end |
FY2012 operating cash flow was below net income and included working-capital movements. Investing activities used $78.6 million, primarily for acquisitions ($71.8 million) and capital expenditures ($6.8 million). Financing activities provided $2.4 million; the company repurchased and retired approximately $30.0 million of shares. Total assets rose to $400.4 million, including $185.8 million of goodwill and $34.2 million of net intangible assets. Total liabilities were $150.4 million and equity was $250.0 million.
September 2012 quarter: Revenue was $122.3 million, pretax income $8.8 million and continuing-operations net income $5.5 million; diluted EPS was $0.17. Compared with the September 2011 quarter, revenue rose from $79.2 million, while pretax income declined from $9.6 million and continuing-operations income from $6.7 million.
Material changes versus prior periods
- Commercial revenue grew 99.7%, principally reflecting Jacobs, GoIndustry and new retailer and manufacturer programs. Jacobs contributed $94.8 million of revenue after acquisition.
- DoD surplus revenue increased 26.4%, supported by higher property flow and a richer mix of capital assets. DoD scrap revenue fell 11.1%, with lower property flow and commodity prices cited as factors.
- Revenue mix shifted toward purchase-model sales: purchase-model revenue was 71.4% of total revenue, while consignment revenue was 12.5%. Consignment represented 52.3% of GMV.
- Cost of goods sold rose to 41.7% of revenue from 38.6%, partly reflecting Jacobs’ purchase-model mix. Profit-sharing distributions fell to 9.1% of revenue from 15.1%.
- Technology and operations, sales and marketing, and general and administrative expenses increased in dollars, but each declined as a share of revenue. Contract-intangible amortization rose to $7.9 million, primarily due to Jacobs.
- Registered buyers increased 36.3% to approximately 2.19 million. Completed transactions rose to 501,000 from 475,000.
Outlook, risks and unusual items
- Management expected FY2013 capital expenditures of $6–7 million, funded primarily from operating cash flow, and stated existing cash should cover anticipated needs for at least 12 months. No earnings or revenue guidance was provided.
- Management estimated a future effective tax rate of approximately 40%. The company expected to contribute $1.7 million to the acquired GoIndustry defined-benefit pension plan in FY2013.
- The DoD contracts and Wal-Mart programs are material concentrations. The Surplus Contract contributed 27.2% of FY2012 revenue; the Scrap Contract contributed 16.1%. Wal-Mart accounted for approximately 20% of GMV. Contract renewal, termination, supply and compliance risks could materially affect results.
- Scrap results are exposed to commodity prices and asset availability. Purchase-model activity also exposes the company to inventory valuation, demand, obsolescence and resale-price risk.
- Acquisition execution and valuation warrant attention: goodwill increased to $185.8 million, and the Jacobs earn-out was valued at $14.5 million at year-end. GoIndustry purchase accounting was preliminary. NESA was acquired November 1, 2012 for $18.3 million cash, with an estimated $17.8 million earn-out; its purchase-price allocation was not yet prepared.
- The $40 million Jacobs seller note, bearing 5%, was repaid after year-end for $41 million including accrued interest. The $75 million revolving facility matures May 31, 2014 and includes financial covenants; the company reported compliance at year-end.
- FY2012 acquisition costs included contingent-consideration adjustments: a $7.0 million reversal for TruckCenter.com and approximately $6.3 million of additional Jacobs earn-out accrual. Management reported no material pending or threatened legal claims.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether DoD contract renewals, performance benchmarks and asset flows remain favorable, and whether customer concentration changes.
- Wal-Mart program volumes and economics, including the agreement term through May 2016 and subsequent month-to-month continuation.
- Acquisition integration, realized synergies, GoIndustry final purchase accounting, NESA earn-out exposure and potential goodwill or intangible impairment.
- Cash conversion and working-capital needs as purchase-model sales grow; confirm the post-year-end seller-note repayment and remaining credit availability.
- Underlying earnings quality and margin trends, including the non-GAAP adjustments in adjusted EBITDA and the sharp September-quarter profit decline versus the prior-year quarter.