Liquidity Services, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2016; unaudited. The company operates online auction marketplaces for surplus and salvage assets and reports one operating segment. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter ended Mar. 31, 2016 | Prior-year quarter | Six months ended Mar. 31, 2016 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $86.9 | $102.9 | $152.8 | $228.1 |
| Fee revenue | $20.5 | $19.7 | $36.1 | $46.6 |
| Operating income (loss) | $(1.5) | $3.8 | $(8.9) | $(81.2) |
| Net income (loss) | $(0.9) | $1.4 | $(6.0) | $(62.7) |
| Diluted EPS | $(0.03) | $0.05 | $(0.20) | $(2.09) |
| Adjusted EBITDA, non-GAAP | $2.9 | $8.6 | $(0.4) | $25.7 |
| Gross merchandise volume (GMV) | $153.0 | $189.4 | $304.4 | $434.7 |
- Quarter revenue fell 15.6%; six-month revenue fell 33.0%. GMV decreased 19.2% and 30.0%, respectively. Fee revenue increased in the quarter but declined for the six-month period.
- Operating margin was approximately (1.7)% for the quarter and (5.8)% for the six months, versus 3.7% and (35.6)% in the comparable periods. Six-month net loss improved substantially year over year largely because the prior-year period included $96.2 million of acquisition-related, goodwill and long-lived-asset impairment charges. No comparable charge was recorded in the current six months.
- Six-month operating cash flow was $24.7 million, compared with $28.9 million; capital expenditures were $2.7 million. The company attributed much of current-period operating cash flow to a $34.7 million net tax recovery, primarily associated with the Jacobs Trading sale tax loss.
- At March 31, cash and cash equivalents were $117.5 million; current assets were $176.7 million and current liabilities $68.3 million. Total liabilities were $71.5 million. The company had no debt after terminating its $75 million senior credit facility effective March 25, 2016; there were no borrowings when it was terminated.
- Cash increased $22.1 million from September 30, 2015. The balance sheet also showed inventory of $32.2 million and goodwill of $64.4 million. Approximately $20.0 million of cash was held overseas and unavailable for domestic operations without potential repatriation taxes.
Material changes and management commentary
- Management linked weaker revenue and GMV to the fiscal 2015 sale of Jacobs Trading, the wind-down of the NESA refurbishment business, reduced retail product flows, weakness in energy, and lower DoD commodity prices and a shift toward lower-valued property. GovDeals growth and stronger capital-assets deal flow partly offset these pressures.
- The company said cost reductions did not fully offset lower revenue: technology and operations expense was flat year over year in the quarter, while these expenses and other overhead categories rose as a share of revenue. Quarter cost of goods sold was also higher as a share of revenue, at 46.0% versus 41.4%.
- Registered buyers reached approximately 2.923 million at March 31, up 8.7% over 12 months. Auction participants were approximately 636,000 for the quarter versus 640,000; completed transactions rose to approximately 153,000 from 146,000.
- Management stated existing cash should meet anticipated needs for at least 12 months. It forecast FY2016 capital expenditures of $8.0–$9.5 million, primarily funded from operating cash flow. No formal revenue or earnings guidance was provided.
- The company continued developing its LiquidityOne platform and analytical tools and investing in new ventures, including the IronDirect construction marketplace. Future spending needs could vary with growth, product development, sales and marketing, marketplaces, and distribution-center requirements.
Contracts, contingencies, and risks
- DoD contracts: The current Surplus Contract requires purchases at 4.35% of the DoD’s original acquisition value; its two-year base term ends in December 2016, with extension options exercisable by DLA. The DoD can determine what property is made available and can retrieve or restrict property. Surplus-contract revenue, including buyer premiums, represented approximately 31.2% of quarterly revenue.
- Scrap Contract: On April 8, 2016, after quarter-end, DLA awarded the company a new 36-month base contract, with two 12-month extension options. The company will pay DLA 64.5% of gross resale proceeds and bear sorting, merchandising and sale costs. The contract is expected to commence in Q4 FY2016 or Q1 FY2017.
- Litigation: A securities class action alleging misstatements about the company’s growth and financial condition remained pending. On March 31, 2016, the court granted the company’s motion to dismiss in part and denied it in part. The company considered the claims meritless but said it could not estimate potential liability.
- Pension guarantee: The company guarantees certain UK subsidiary obligations to a defined-benefit pension scheme up to £10 million. The filing does not provide a current quantified expected payment under the guarantee.
- Impairment and inventory estimates: Management reported no new impairment indicators in the six months, following substantial goodwill impairments in prior periods. Goodwill and other intangible assets totaled $67.7 million. Inventory reserves were approximately $2.2 million, up from $0.8 million at September 30, 2015.
- The company cited exposure to lower retail supply and per-unit prices, commodity prices and property mix, contract terms and customer relationships, execution of its business plans, and potential future goodwill impairment. It reported no material off-balance-sheet arrangements and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the new DoD Scrap Contract’s 64.5% revenue-sharing payment and associated costs support attractive margins and cash generation when it begins.
- Whether commercial and DoD product flows, commodity prices, retail supply, and GMV stabilize, and whether GovDeals growth continues to offset declines elsewhere.
- How much of reported operating cash flow depends on tax refunds and working-capital movements, and the timing of the remaining expected $1.4 million tax refund in FY2017.
- Whether revenue and operating performance improve enough to absorb relatively fixed operating costs; assess non-GAAP adjusted EBITDA alongside GAAP results.
- Developments in the securities litigation, the pension scheme’s funded position and guarantee exposure, and potential future impairment indicators.
- The availability of domestic liquidity given overseas cash, planned capital expenditures, and the board’s authorization for up to $10.1 million of potential share repurchases.