Liquidity Services, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing is an annual report, not a standalone fourth-quarter filing; unaudited Q4 results are identified separately below. The company operates online marketplaces and related services for surplus and salvage assets.
Financial performance and key metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $505.9 million | $475.3 million | +6.4% |
| Gross merchandise volume (GMV) | $973.3 million | $864.2 million | +12.6% |
| Income from continuing operations before tax | $68.7 million | $79.9 million | Down |
| Net income | $41.1 million | $48.3 million | -14.9% |
| Diluted earnings per share | $1.26 | $1.47 | Down |
| Operating cash flow | $46.7 million | $52.6 million | Down $5.9 million |
| Adjusted EBITDA (non-GAAP) | $104.6 million | $110.1 million | Down |
Continuing-operations income from operations was $68.0 million, about 13.4% of revenue; net margin was about 8.1%, versus 10.2% in FY2012. Revenue growth reflected GoIndustry and NESA acquisitions, higher GovDeals activity, and increased DoD surplus property flow. Fee revenue rose to $101.8 million from $59.5 million, while reported merchandise revenue fell to $404.0 million from $415.8 million. The shift toward fee-based consignment activity contributed to higher GMV growth than revenue growth.
Fiscal Q4 2013: Revenue was $129.1 million, pretax income was $17.1 million, and net income was $10.4 million; diluted EPS was $0.32. The filing provides no clear year-over-year Q4 comparison in the supplied quarterly table.
Cash, debt, and liquidity
- At September 30, 2013, cash and cash equivalents were $95.1 million, working capital was $79.3 million, total assets were $421.3 million, and total liabilities were $106.5 million.
- No borrowings were outstanding under the $75 million senior credit facility; $67.8 million was available after letters of credit, including a $1 million contractual reserve. The facility was due May 31, 2014, and the company reported covenant compliance.
- The $40 million 5% seller subordinated note from the Jacobs acquisition was repaid in November 2012. FY2013 financing cash outflow included $39.0 million of principal repayment and $8.2 million of acquisition contingent-liability payments.
- Investing cash outflow was $20.2 million, including $14.7 million for acquisitions and related goodwill/intangibles and $5.5 million of capital expenditures. Cash declined by $9.7 million during the year.
- Management said existing cash was expected to meet anticipated needs for at least 12 months. FY2014 capital expenditures were estimated at $6–7 million, primarily funded from operating cash flow.
Material changes and business developments
- GMV increased 12.6%, completed transactions rose to approximately 530,000 from 501,000, and registered buyers grew 10.9% to approximately 2.424 million.
- Technology and operations expense increased 33.3% to $90.1 million; sales and marketing rose 28.5% to $40.2 million; general and administrative expense increased 31.9% to $49.0 million. Acquired-business costs and investment in technology infrastructure contributed to expense growth.
- DoD Scrap Contract revenue declined 10.9% to $68.3 million, attributed to reduced property flow; lower commodity prices also reduced profit-sharing distributions. DoD Surplus Contract revenue increased 9.3% to approximately $140 million.
- The company acquired NESA in November 2012 for an upfront payment of approximately $18.3 million, with an estimated $18.3 million earn-out liability at year-end. GoIndustry contributed $38.6 million of FY2013 revenue.
- Goodwill and intangible assets totaled approximately $239.9 million at year-end, making acquisition performance and impairment assumptions relevant to investors.
Outlook, risks, and unusual items
- Management expected its GoIndustry restructuring to support profitable operations in FY2014; this is a management expectation, not quantified earnings guidance. No formal revenue or EPS guidance is provided in the filing.
- The DoD suspended the Surplus Contract RFP process in November 2013; the company continued operating under the existing contract. The Scrap Contract renewal options had been exercised through June 2014. DoD may alter supply, terminate or rebid contracts, and the two DoD contracts represented 41.2% of FY2013 revenue combined.
- Wal-Mart accounted for approximately 11% of FY2013 GMV across multiple programs. The principal salvage agreement runs through May 16, 2016, then continues month-to-month; management expected it to remain significant.
- Other principal risks include dependence on attracting sellers and active buyers, competition, inventory and commodity-price exposure, acquisition integration, technology and cybersecurity disruptions, shipping and distribution interruptions, and government-contract compliance, export controls, and audit findings.
- Unusual items included $5.9 million in acquisition costs, including earn-out fair-value adjustments, and a $1.0 million gain from early repayment of the Jacobs note. No discontinued-operations loss was reported in FY2013; UK retail supply-chain operations had been discontinued in 2011.
- The company reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls. No material pending legal proceeding was identified in the filing.
Most important facts for investors to verify
- DoD contract renewal, rebid timing, property availability, and the margin and revenue effects of any contract changes.
- Whether the GoIndustry restructuring achieved the stated FY2014 profitability objective, and whether NESA integration and earn-out performance met expectations.
- Whether revenue and earnings stabilize after FY2013’s lower net income despite higher GMV, and whether acquired-business costs and operating expenses moderate.
- Future Wal-Mart program volumes and terms, and the extent of customer and seller concentration.
- Cash conversion, working-capital needs, inventory valuation, and the company’s ability to fund operations and planned capital spending while maintaining liquidity.