Liquidity Services, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015; comparative period is the three months ended December 31, 2014. The company operates online marketplaces for surplus and salvage assets. Financial amounts below are in U.S. dollars unless noted.
Financial performance and liquidity
- Revenue: $65.9 million, down 47.4% from $125.1 million. Merchandise revenue was $50.1 million and fee revenue was $15.7 million.
- Profitability: Operating loss was $7.4 million (11.3% of revenue); net loss was $5.2 million, or $0.17 per diluted share. Adjusted EBITDA, a non-GAAP measure, was negative $3.3 million, versus positive $17.0 million a year earlier.
- Cash flow: Operating cash outflow was $8.3 million, compared with $13.1 million of operating cash flow in the prior-year quarter. Investing cash outflow was $1.5 million; financing cash outflow was approximately $0.05 million.
- Cash and liquidity: Cash and equivalents were $85.5 million at December 31, down from $95.5 million at September 30, 2015. Current assets were $179.6 million and current liabilities $67.1 million. The company reported $37.5 million of borrowing availability under its $75 million credit facility; $5.9 million was used for letters of credit.
- Debt: No borrowings were outstanding under the credit facility. The company reported compliance with its financial and other covenants.
- Other metrics: GMV was $151.4 million, down 38.3%. Auction participants declined to approximately 561,000 from 631,000, and completed transactions to approximately 133,000 from 146,000. Registered buyers totaled approximately 2.875 million, up 8.6% year over year.
Changes versus the prior-year quarter
- Revenue fell primarily due to the sale of Jacobs Trading, the wind-down of the NESA refurbishment business, fewer principal transactions, continued weakness in the energy vertical, and reduced DoD property flows and commodity prices. GovDeals revenue increased 12.9%.
- The 2014 quarter included $96.2 million of acquisition-related, goodwill and long-lived-asset impairment charges, including an $85.1 million goodwill impairment and a write-off associated with the terminated Wal-Mart agreement. Their absence in 2015 was the main reason the reported net loss narrowed substantially; underlying operating results remained weak.
- Technology and operations expense declined 15.1% to $22.8 million, but rose to 34.6% of revenue from 21.5% as revenue contracted. Sales and marketing expense declined in dollars but increased to 14.4% of revenue. General and administrative expense increased 5.7% to $10.1 million.
- Cost of goods sold declined to $26.9 million and 40.8% of revenue from $54.3 million and 43.4%. Profit-sharing distributions fell to $2.4 million from $9.6 million, reflecting lower DoD scrap flows and commodity prices.
Outlook, commentary, risks and unusual items
- The company expected fiscal 2016 capital expenditures of $8.0–$9.5 million and said existing cash and cash equivalents should cover anticipated cash needs for at least 12 months. First-quarter capital expenditures were $1.4 million; no firm capital-expenditure commitments were reported.
- The DoD non-rolling-stock surplus contract price increased from 1.8% to 4.35% of original acquisition value when the new contract became effective in November 2015. Management noted this would significantly increase cost of goods sold. A separate wind-down period under the prior contract was extended by ten months.
- The DoD amended the Scrap Contract in June 2015 to provide for a 65% profit-sharing distribution to the agency and allow certain location- or commodity-based terminations with notice. The next Scrap Contract was expected to be solicited as early as March 2016; the company anticipated that timing, but disclosed no award outcome.
- Management cited near-term pressure on consumer-electronics supply and retail resale prices and margins, and lower per-unit prices and margins as consumers seek value. It also described longer-term potential from e-commerce, returned goods, sustainability needs and outsourced asset disposition.
- Goodwill and other intangible assets totaled $67.2 million. No impairment indicators were identified in the quarter, but the company cautioned that adverse business developments or weaker forecasts could lead to future impairment.
- A shareholder class action alleging securities-law violations was awaiting a court decision on the company’s motion to dismiss. The company said it could not estimate potential liability. The company also guaranteed certain UK pension-scheme obligations up to £10 million.
- The company expected a $31.5 million cash benefit from prior-year income taxes and $2.0 million of additional future tax credits related to the Jacobs Trading divestiture; the filing does not establish that the expected cash benefit had been received by quarter-end.
Important facts for investors to verify
- Whether GMV, transaction activity and revenue stabilize, particularly in commercial marketplaces and DoD-related businesses.
- The realized margin and inventory effects of the 4.35% DoD surplus-contract purchase price, and the outcome and terms of the next Scrap Contract.
- Operating cash flow, inventory levels and the timing and realization of the anticipated tax benefit from the Jacobs Trading divestiture.
- Credit-facility availability and covenant compliance as operating performance evolves; the filing reports no outstanding borrowings but does not eliminate covenant risk.
- Developments in the securities class action, pension guarantee exposure and any new goodwill impairment indicators.