Liquidity Services, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014. The unaudited filing covers an online auction marketplace operator for surplus and salvage assets.
Financial results and liquidity
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Total revenue | $125.1 million | $121.9 million |
| Operating income (loss) | $(85.0) million | $11.8 million |
| Net income (loss) | $(64.1) million | $7.1 million |
| Diluted EPS | $(2.14) | $0.22 |
| Adjusted EBITDA | $17.0 million | $20.0 million |
| Operating cash flow | $13.1 million | $4.9 million |
- Revenue comprised $98.2 million of sales revenue and $27.0 million of fee revenue. Gross merchandise volume (GMV) rose 4.6% to $245.3 million.
- Reported operating loss included $96.2 million of acquisition-related fair-value adjustments and impairment charges: $85.1 million for goodwill and $10.3 million for the Wal-Mart contract intangible. Operating margin was negative 67.9%, versus positive 9.7% in the prior-year quarter. Adjusted EBITDA, which excludes the impairment and other specified items, declined from $20.0 million to $17.0 million.
- Cash and cash equivalents were $74.2 million at December 31, 2014. The company had no borrowings and reported $67.2 million of availability under its $75.0 million credit facility, subject to letters of credit and a contractual reserve. It reported compliance with credit covenants.
- Current assets were $186.0 million and current liabilities $94.2 million. Total liabilities were $101.7 million; stockholders’ equity was $253.7 million.
- Cash from operations was $13.1 million; investing activities used $1.6 million, primarily for capital expenditures. Cash increased $11.6 million during the quarter.
Material changes and unusual items
- Revenue increased 2.6%, principally from commercial capital-asset and state/local-government marketplaces. Retail commercial revenue declined 7.8%, largely due to the Wal-Mart Agreement termination. Retail GMV fell 22.6%.
- Wal-Mart gave notice in December 2014 terminating a contract effective December 8, alleging service-level and merchandise-disposition violations; the company disputed the allegations. In January 2015, the parties settled and waived claims, with Wal-Mart agreeing to pay $7.5 million. The company recorded the settlement as a receivable and reduction of inventory at December 31, 2014.
- The impairment charges followed the Wal-Mart contract termination, a significant decline in market capitalization, and uncertainty in projections. The company said further goodwill impairment could result if business plans or assumptions are not achieved.
- The company’s new DoD non-rolling-stock surplus contract requires payment of 4.35% of original acquisition value, up from 1.8% under the prior contract. It expects higher cost of goods sold. It did not win the rolling-stock contract and expects to stop selling that inventory; rolling stock historically represented approximately 30–35% of revenue under the prior surplus contract.
- DoD surplus and scrap contracts remained significant, representing approximately 26.0% and 14.3% of quarterly revenue, respectively. The current surplus contract was extended through February 13, 2015; the scrap contract expires in June 2015.
Outlook, risks and contingencies
- Management expected fiscal 2015 capital expenditures of $8–9 million and said existing cash and cash equivalents should meet anticipated cash needs for at least 12 months.
- Management estimated a fiscal 2015 effective tax rate of approximately 24.6%, lower than historical rates primarily because of tax effects from impairment; it expected future-year rates of 38–40%. No specific revenue or earnings guidance is provided in the filing text.
- Risks include dependence on DoD contracts and asset flows, higher acquisition costs and lost rolling-stock revenue under the new contract, customer concentration and contract termination, and possible further impairment. The filing also describes a shareholder class action alleging securities-law violations; the company considers the claims meritless, intends to seek dismissal, and cannot estimate potential liability.
- The company planned a commercial-market brand relaunch in Q2 FY2015 and continued its Liquidity One initiative to unify processes and technology across marketplaces.
Important facts for investors to verify
- How the higher DoD purchase rate and loss of rolling-stock business affect revenue, margins, and cash generation in subsequent quarters.
- Whether the $7.5 million Wal-Mart settlement was received and whether the contract loss causes further operating or impairment impacts.
- Assumptions supporting the goodwill valuation and the possibility of additional impairment charges.
- Renewal or replacement arrangements for the DoD scrap contract, due to expire in June 2015, and the company’s performance under the new surplus contract.
- Progress and potential costs of the Liquidity One program, brand relaunch, and planned capital expenditures.