Liquidity Services, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. The filing also reports results for the quarter ended September 30, 2015 (Q4). Unless otherwise stated, amounts are U.S. dollars.
Business context and reporting period
Liquidity Services operates online marketplaces for surplus and salvage assets, supported by transaction, logistics and other value-added services. The company reported one operating segment. Its marketplaces recorded $799.0 million of gross merchandise volume (GMV) and $397.1 million of total revenue in FY2015. Registered buyers rose 8.8% to 2.845 million, while auction participants declined to 2.483 million from 2.538 million.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $397.1 million | $495.7 million |
| GMV | $799.0 million | $931.6 million |
| Operating income (loss) | $(144.2) million | $50.4 million |
| Net income (loss) | $(104.8) million | $30.4 million |
| Diluted EPS | $(3.50) | $0.97 |
| Adjusted EBITDA | $33.1 million | $63.0 million |
| Cash from operating activities | $43.5 million | $11.9 million |
Total revenue fell 19.9% and GMV fell 14.2% year over year. Operating margin was negative 36.3%, compared with positive 10.2% in FY2014; the loss chiefly reflects $147.4 million of goodwill and long-lived asset impairment and an $8.0 million business disposition loss. The filing reports no separate gross-margin percentage.
In Q4 FY2015, revenue was $79.3 million, net loss was $43.7 million and basic and diluted loss per share were each $1.46.
At year-end, cash and cash equivalents were $95.5 million and working capital was $119.2 million. The company had no borrowings under its $75.0 million senior credit facility; reported borrowing availability was $37.5 million, including $13.9 million used for letters of credit. It was in compliance with facility covenants. Total liabilities were $72.5 million. Operating cash flow improved from FY2014; investing activities used $9.8 million, and financing activities provided $0.1 million.
Material changes versus the prior comparable period
- Retail commercial marketplace revenue declined 27.9%, primarily following termination of the Wal-Mart Agreement; commercial retail GMV fell 31.8%.
- DoD contract revenue declined 22.2%, reflecting lower flows of lower-value property. State and local government marketplace revenue increased 14.8%, while capital assets marketplace revenue increased 13.4%.
- Goodwill and long-lived asset impairment expense totaled $147.4 million. The company recorded goodwill impairment charges of $85.1 million in Q1 and $51.2 million in Q4; goodwill impairment for the year was $136.2 million.
- Liquidity Services sold certain Jacobs Trading assets on September 30, 2015, recording an $8.0 million loss and receiving a five-year $12.3 million promissory note. The balance sheet also included a $33.5 million tax refund receivable related to the disposition and tax-loss carrybacks.
- Operating expenses declined in absolute dollars in several categories, but technology and operations, sales and marketing, and general and administrative expenses increased as a share of revenue amid falling sales.
Outlook, commentary, risks and unusual items
- DoD surplus contract: The company won the non-rolling-stock contract at 4.35% of original acquisition value, versus 1.8% under the prior contract, and warned this would materially increase cost of goods sold in FY2016 and beyond. It withdrew from bidding on the rolling-stock contract after concluding the bidding was economically unsustainable. The prior contract’s wind-down period was extended in November 2015 by ten months for usable non-rolling stock property.
- DoD scrap contract: A June 2015 amendment changed the government profit-sharing distribution to 65% (leaving 35% to the company), eliminated a small-business incentive and allowed termination by location or commodity category with notice. The company reported it had met required performance benchmarks through FY2015.
- Management plans: The company described growth ambitions through expanding buyers and sellers, services, technology and marketplaces. Its Liquidity One transformation continued; a new HR information system was implemented in Q4, with financial ERP design and configuration underway. No quantified FY2016 revenue or earnings guidance is provided in the filing.
- Tax and liquidity outlook: Management said existing cash should cover anticipated needs for at least 12 months. It expected cash-tax benefits of approximately $33.5 million from prior-year tax refunds and $7 million for FY2015; actual timing and realization remain relevant to monitor.
- Concentration and execution risks: The DoD surplus and scrap contracts represented 24.7% and 15.3% of FY2015 revenue, respectively. Risks include contract renewal, reduced property flows, higher acquisition costs, commodity-price exposure, competition, and execution of the new technology platform. The company also identifies cybersecurity, service interruption, regulatory and export-control compliance risks.
- Legal contingency: A securities class action remained pending; the company disputed the allegations, and it could not estimate potential liability.
- Audit and controls: Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported disclosure controls and internal control as effective.
Most important facts for investors to verify
- Whether the new DoD non-rolling-stock contract’s higher 4.35% purchase price and the scrap-contract amendment affect FY2016 costs, margins and cash flow as expected.
- Whether buyer and seller activity stabilizes after the Wal-Mart Agreement termination, and whether growth in GovDeals and capital assets can offset weakness in retail and DoD flows.
- The assumptions and sensitivity behind the $147.4 million impairment charge, remaining goodwill of $64.1 million, and the possibility of further impairment.
- Collection and timing of the $12.3 million promissory note and the expected tax refunds and tax benefits associated with the Jacobs Trading disposition.
- The status and potential financial impact of the securities class action, for which the filing provides no estimable liability range.