Liquidity Services, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013. Unaudited results are for the three months ended December 31, 2013, compared with the same period in 2012. The company operates online marketplaces for surplus and salvage assets and reports one operating segment.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $121.9 million | $122.2 million | Down 0.2% |
| Net income | $7.1 million | $6.7 million | Up 5.7% |
| Diluted EPS | $0.22 | $0.20 | Up $0.02 |
| Income from operations | $11.8 million | $10.3 million | Up 15.5% |
| Adjusted EBITDA | $20.0 million | $24.2 million | Down 17.3% |
| Operating cash flow | $4.9 million | $(0.2) million | Improved |
- Revenue comprised $93.5 million of merchandise revenue and $28.5 million of fee revenue. Merchandise revenue declined from $104.3 million, while fee revenue rose from $17.9 million.
- Operating margin increased to 9.7% from 8.4%; net margin increased to 5.8% from 5.5%. Adjusted EBITDA declined despite higher GAAP operating income, in part because the prior-year period included $5.4 million of acquisition costs versus $0.1 million this quarter.
- Gross merchandise volume was $234.4 million, up 0.4%. The company completed approximately 129,000 transactions and had approximately 2.47 million registered buyers, up 10.3% over the prior 12 months.
- Cash and cash equivalents were $101.5 million at quarter-end. Current assets were $181.3 million and current liabilities $86.9 million. No borrowings were outstanding under the $75 million senior credit facility; $65.9 million remained available, subject to letters of credit and a contractual reserve. The facility was due May 31, 2014, and the company was in covenant compliance.
- Cash increased $6.4 million during the quarter. Investing activities used $2.7 million, mainly for capital expenditures; financing activities provided $3.4 million, including tax benefits from stock-option exercises. The company expected fiscal 2014 capital expenditures of $6–7 million and believed existing cash would cover anticipated needs for at least 12 months.
- Acquisition earn-out payable was $18.5 million, measured using Level 3 estimates. Total liabilities were $108.1 million; stockholders’ equity was $328.5 million.
Material changes, outlook, and risks
- Technology and operations expense rose 13.6% to $25.6 million, reflecting staffing and consulting costs for technology infrastructure and planned marketplace-as-a-service and valuation-as-a-service offerings. Management also cited higher operating needs as DoD surplus property flow remained above historical levels but shifted toward lower-value, smaller items.
- Profit-sharing distributions rose 20.5% to $10.1 million, primarily due to increased DoD scrap-property flow. General and administrative expense fell 11.9% to $12.3 million, primarily from streamlining GoIndustry operations and reducing external costs.
- In January 2014, the DoD awarded a follow-on Surplus Contract with a ten-month base term and two one-month renewal options, potentially extending the term to February 2015. The DLA had restarted its RFP process and planned separate awards for rolling stock and other surplus property in April 2014. The Surplus Contract represented approximately 24.5% of quarterly revenue, including buyer premiums; the Scrap Contract represented approximately 16.0%.
- The company’s DoD Surplus Contract requires it to purchase usable surplus property at 1.8% of the DoD’s original acquisition value and exposes it to inventory, operating-cost, and contract-renewal risks. The Scrap Contract distributes a portion of profits to the DoD and has performance-based termination provisions; the company reported performance above benchmarks through December 31, 2013.
- Management estimated a fiscal 2014 effective tax rate of approximately 40%. No material tax liability was anticipated from examinations of fiscal 2010 and 2011 returns. Management reported no material off-balance-sheet arrangements or pending or threatened legal matters expected to have a material adverse effect.
- The filing highlights general forward-looking risks, including uncertainty in future results, customer and market conditions, and the possibility that additional financing may be needed for future growth or acquisitions. The company also noted potential goodwill and intangible impairment if business conditions or customer relationships deteriorate.
Important facts for investors to verify
- Outcome and timing of the DLA’s planned contract awards, and the terms and continuity of the follow-on Surplus Contract.
- Whether elevated DoD property volumes, lower item values, and added staffing, space, and operating costs affect future margins and cash generation.
- Drivers of the decline in adjusted EBITDA and whether technology investment produces the anticipated new services and broader customer reach.
- Valuation and eventual payment of the $18.5 million NESA earn-out, which depends on management’s EBITDA projections and other Level 3 assumptions.
- Renewal or replacement of the $75 million credit facility due May 31, 2014, and the use of the authorized share-repurchase capacity; no shares were repurchased during the quarter.