Business context and reporting period
Ritchie Bros. Auctioneers Incorporated provides global asset disposition services through live auctions, online marketplaces, brokerage, and related services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; amounts below are in U.S. dollars. Comparatives were restated for the adoption of ASC 606, which increased reported revenue by presenting inventory and certain services gross rather than net, without changing operating income, net income, or cash flows.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $245.3M | $227.4M | $814.1M | $679.4M |
| Operating income | $31.2M | $16.9M | $128.9M | $67.4M |
| Operating margin | 12.7% | 7.4% | 15.8% | 9.9% |
| Net income attributable to stockholders | $23.1M | $10.3M | $86.0M | $38.3M |
| Diluted EPS | $0.21 | $0.09 | $0.79 | $0.35 |
| Gross Transaction Value (GTV) | $1.04B | $1.02B | $3.63B | $3.17B |
Q3 revenue rose 8%, while stockholder net income increased 125%. For the nine-month period, revenue increased 20% and stockholder net income increased 125%. Management attributed growth to IronPlanet acquisition volume, partial fee harmonization, higher inventory and service revenue, and improved auction performance. Q3 GTV grew 2%; online marketplace GTV rose 16%, partly offset by a 1% decline in live auction GTV. Management reported A&M revenue rate of 21.0% for Q3 and 20.0% year to date.
Cash provided by operating activities was $97.1M for the first nine months, versus $98.5M a year earlier. Investing activities used $28.8M, compared with $701.6M in 2017, which included the IronPlanet acquisition. Financing activities used $92.2M, including $58.8M of long-term debt repayments and $56.1M of dividends. Cash and cash equivalents were $228.8M at September 30, 2018; restricted cash was $75.3M. Trailing-12-month operating free cash flow, a non-GAAP measure, was $106.6M.
At September 30, total debt was $762.3M, down from $819.9M at December 31, 2017; long-term debt was $751.8M. Working capital was $150.9M, up from $120.0M at year-end. The company had $477.0M of unused committed revolving facilities, of which $472.9M was available through October 2021, and reported compliance with its debt covenants. Trailing-12-month adjusted net debt to adjusted EBITDA, a non-GAAP measure, was 2.2x versus 3.2x a year earlier.
Material changes, outlook, and risks
- Drivers and costs: Q3 operating income benefited from higher service revenue and auction performance. SG&A rose 4%; nine-month SG&A rose 25%, reflecting acquisition-related scale, business investment, share-unit expense, and costs supporting a U.S. Defense Logistics Agency contract. The company reduced live on-site auction counts and cited calendar and site optimization.
- Unusual items: Q3 other income included a $4.9M gain on sale of an equity-accounted investment. Q3 acquisition-related costs included $1.5M of severance associated with integration and cost-control measures. No impairment loss was recorded in the first nine months of 2018; the 2017 period included an $8.9M technology-asset impairment.
- Debt and capital allocation: The company made $50.0M of voluntary term-loan prepayments and reduced revolving-facility capacity by $185.0M in June. Senior unsecured notes of $500M mature in January 2025; substantial scheduled term-loan principal is due in 2021. Dividends paid in the first nine months totaled $56.1M; a $0.18-per-share dividend was declared after quarter-end.
- Seasonality and operating exposure: Revenue and GTV are typically strongest in the second and fourth quarters; the third quarter is seasonally less active as equipment is in use. Underwritten contracts expose the company to possible losses if auction proceeds fall below guarantees. At quarter-end, $67.0M of assets were under guarantee contracts, with 93% expected to sell before year-end. Inventory-purchase commitments ranged from $11.1M minimum to $51.0M maximum, subject to supplier availability.
- Tax, accounting, and contingencies: The company had not completed its analysis of certain Tax Act effects; further tax adjustments could be recorded in Q4 2018. Adoption of the new lease standard was planned for January 1, 2019 and was expected to increase reported lease assets and liabilities, but not materially affect net earnings or current covenant compliance. Management said ordinary-course legal claims were not expected to have a material effect; no material legal proceedings or changes in risk factors were reported.
- Outlook: The filing provides no specific numerical earnings or revenue guidance. Management’s forward-looking statements remain subject to risks and uncertainties, including those incorporated from the 2017 Form 10-K.
Most important facts for investors to verify
- How much reported growth reflects underlying auction activity and fee changes versus the IronPlanet acquisition and ASC 606 gross presentation.
- Whether margin and cash generation persist after seasonality, working-capital movements, integration costs, and the one-time investment-sale gain.
- The company’s ability to reduce debt while funding dividends, capital spending, inventory purchases, and business investment; review the 2021 debt maturities.
- Realized results and potential downside from guarantee contracts and inventory exposure, including the Defense Logistics Agency contract.
- Final Tax Act accounting and the balance-sheet effect of adopting the new lease standard.
- Non-GAAP measures cited by management, including adjusted EPS, adjusted EBITDA, and adjusted leverage, should be reviewed against their reconciliations and not treated as substitutes for GAAP results.