Liquidity Services, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; unaudited. Unless noted, amounts are in U.S. dollars. The company operates online marketplaces for surplus and salvage assets and reports one operating segment.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Continuing-operations revenue | $106.0 million | $75.5 million |
| Income from continuing operations | $9.1 million | $2.1 million |
| Net income | $9.1 million | $1.4 million |
| Diluted EPS | $0.28 | $0.05 |
| Operating cash flow, continuing operations | $12.1 million | $7.4 million |
| Adjusted EBITDA, continuing operations (non-GAAP) | $22.7 million | $11.9 million |
- Revenue increased 40.5%; gross merchandise volume (GMV) rose 44.9% to $179.2 million. Completed transactions were approximately 107,000, and registered buyers reached 1.641 million, up 12.3% year over year.
- Operating income was $16.3 million, or 15.3% of revenue, versus $3.8 million, or 5.0%. Net income benefited from higher revenue and lower acquisition costs; the prior-year quarter included a $4.7 million acquisition-related charge.
- Cash and cash equivalents were $68.8 million at December 31, 2011, down from $129.0 million at September 30. The decrease primarily reflected $80.0 million of cash paid for the Jacobs Trading acquisition. Total assets were $322.8 million; stockholders’ equity was $206.6 million.
- Cash used in investing activities was $81.2 million, including the Jacobs purchase and $1.2 million of capital expenditures. Cash provided by financing activities was $8.9 million, mainly option exercises and related tax benefits.
- Working capital was $51.0 million, based on current assets of $121.8 million and current liabilities of $70.9 million. The company had no borrowings under its $30 million senior credit facility and reported $25.5 million of availability, including a $1 million contractual reserve and $4.5 million of letters of credit.
- Acquisition financing included a $40 million unsecured seller note bearing 5% interest; principal payments of $8 million, $12 million, and $20 million are due in October 2012, 2013, and 2014, respectively. The balance sheet reports $8.5 million as current and $32.0 million as long-term.
Material changes versus the prior comparable period
- Revenue growth reflected Jacobs Trading, acquired October 1, 2011, and TruckCenter.com, acquired in June 2011, as well as growth in DoD and state/local government activity. Jacobs contributed $21.0 million of revenue after acquisition.
- Commercial revenue increased 73.4% to $54.8 million, primarily from acquisitions and new retailer programs. Scrap revenue grew 18.9%, attributed to higher commodity prices and a richer mix of metals; surplus revenue rose 15.1% with increased DoD property flow and higher-value assets.
- Operating expense ratios generally improved with scale: technology and operations fell to 14.9% of revenue from 16.6%; sales and marketing to 6.2% from 7.6%; and general and administrative to 7.4% from 8.3%. Contract-intangible amortization increased to $2.0 million from $0.2 million, largely due to Jacobs.
- The UK subsidiary’s results were classified as discontinued operations after it ceased operations and substantially liquidated. The prior-year quarter included a $0.8 million discontinued-operations loss; none was reported in the current quarter.
Outlook, risks, contingencies and unusual items
- Management expected fiscal 2012 capital expenditures of $5–$6 million, principally funded by operating cash flow, and said existing cash and investments should meet anticipated needs for at least 12 months. No revenue or earnings guidance was provided.
- The DoD surplus and scrap contracts are significant revenue sources. The DoD exercised the first renewal option for each; the surplus contract’s base term expires in February 2012 and the scrap contract’s base term in June 2012. Contract terms include termination provisions, and the surplus contract permits mutual termination for convenience.
- Jacobs’ earn-out is based on trailing-12-month EBITDA through December 2012 and 2013, with a maximum possible payment of $30 million; the company estimated its fair value at $8.2 million at quarter-end. Fair-value estimates rely on management projections and could differ materially from eventual payments.
- Goodwill and intangible assets totaled approximately $187.1 million. Management identified impairment testing as dependent on estimates and assumptions, including projected cash flows, market conditions, and discount rates.
- The company reported compliance with senior-credit-facility covenants, no material off-balance-sheet arrangements, and no pending or threatened legal claims expected to have a material adverse effect. Disclosure controls were assessed as effective.
- Management cited forward-looking risks including economic and competitive conditions, buyer and seller relationships, and the possibility that actual results differ materially from expectations. The filing states foreign-currency exposure was minimal and that the company had not used hedging derivatives.
Important facts for investors to verify
- How much of reported growth and future profitability is attributable to Jacobs and TruckCenter, and how those acquisitions perform against expectations.
- Renewal status and economics of the DoD contracts, including the effect of property availability, commodity prices, and termination provisions.
- Cash conversion and inventory requirements following the acquisition-related cash outflow, alongside upcoming seller-note repayments and earn-out obligations.
- The assumptions supporting the $8.2 million Jacobs earn-out estimate and the carrying values of goodwill and acquired intangible assets.
- Whether reported improvement in operating margins is sustained as acquisition-related amortization and integration costs continue.