RB Global Inc. (formerly Ritchie Bros. Auctioneers Incorporated) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited financial statements are prepared under U.S. GAAP; amounts below are U.S. dollars. The company provides global equipment disposition services through auctions, online marketplaces, listings, and brokerage. Its business is seasonal, with activity generally highest in the second and fourth quarters.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $166.2m | $158.8m | $290.7m | $290.8m |
| Operating income | $26.9m | $53.6m | $50.5m | $92.8m |
| Operating margin | 16.2% | 33.8% | 17.4% | 31.9% |
| Net income attributable to shareholders | $17.6m | $39.7m | $28.0m | $69.1m |
| Diluted EPS | $0.16 | $0.37 | $0.26 | $0.65 |
| Gross Auction Proceeds (GAP; operational measure) | $1.26bn | $1.28bn | $2.16bn | $2.30bn |
| Revenue Rate | 13.22% | 12.45% | 13.48% | 12.67% |
- Q2 revenue rose 5%, primarily from IronPlanet, acquired May 31; excluding IronPlanet, revenue declined 2%. First-half revenue was flat, but declined 4% excluding IronPlanet. IronPlanet contributed $10.9m of revenue and $0.3m of net income from acquisition through June 30.
- Q2 net income attributable to shareholders fell 56%; first-half income fell 59%. Results included acquisition-related costs, higher interest expense, and a technology-asset impairment. Management’s non-GAAP adjusted diluted EPS was $0.33 for Q2 and $0.45 for the first half, versus $0.37 and $0.65, respectively, in 2016.
- Adjusted operating income, a non-GAAP measure, was $51.1m in Q2 (down 5%) and $74.7m for the first half (down 20%). Adjusted EBITDA was $65.4m in Q2 (up 1%) and $100.7m for the first half (down 13%). These measures exclude specified items and are not substitutes for GAAP results.
- Commission and fee revenue were $212.3m and $78.4m, respectively, for the first half. Revenue Rate improved, aided by IronPlanet and value-added services, while lower auction volumes pressured revenue. Underwritten contracts declined to 16% of first-half GAP from 25% a year earlier.
Cash flow, debt, and liquidity
- First-half cash from operations was $114.7m, versus $148.1m in 2016. Investing cash outflow was $686.0m, largely reflecting $674.1m paid for IronPlanet, net of acquired cash; financing provided $170.4m.
- At June 30, cash and cash equivalents were $254.1m and current restricted cash was $113.4m. Working capital was $111.5m, down from $125.2m at December 31, 2016. Cash, cash equivalents, and restricted cash totaled $367.5m.
- Total debt was $828.4m, including $500m of 5.375% senior notes due 2025 and delayed-draw term loans used to finance IronPlanet. The company reported $814.3m of long-term debt and $14.1m of short-term debt. It had $658.1m of committed revolving facilities available and reported compliance with applicable covenants.
- Management reported adjusted net debt/adjusted EBITDA of 2.9x and debt/net income of 16.2x on a trailing 12-month basis. First-half dividends paid to shareholders totaled $36.3m; a further $0.17-per-share dividend was declared after quarter-end.
Material changes, outlook, and risks
- IronPlanet acquisition: The company completed its $776.6m acquisition on May 31, 2017 and began a five-year Caterpillar strategic alliance, under which it became Caterpillar’s preferred, nonexclusive global auction partner. Acquisition goodwill was provisionally recorded at $567.4m; purchase accounting remained subject to finalization.
- Unusual expenses: First-half acquisition-related costs were $31.6m. A $8.9m impairment was recorded on software and software under development after integration decisions reduced expected use of those assets. First-half interest expense was $16.8m, versus $2.4m in 2016. A $2.3m charge related to an unfavorable tax-dispute outcome and increased uncertain tax positions.
- Market conditions: Management cited constrained used-equipment supply, fewer disposals in some markets, and lower Core Auction volumes as pressures on GAP. Equipment pricing generally improved in the first half, particularly for late-model construction equipment, but varied by sector and geography. Management said it remained selective on underwriting guarantees, given supply and pricing risks.
- Strategy and outlook: Management emphasized IronPlanet integration, broader multichannel offerings, international expansion, and the Caterpillar alliance as growth opportunities. EquipmentOne and IronPlanet’s DailyMarketplace were expected to be combined under the Marketplace E brand later in 2017. The filing provides no quantitative earnings or revenue guidance.
- Other risks and contingencies: Outstanding guarantee contracts totaled $63.3m before estimated sale proceeds; most were expected to be sold by late 2017, with some IronPlanet guarantees extending into 2018. Management did not expect ordinary-course legal claims to materially affect results. Key risks include integration and realization of acquisition synergies, market supply and pricing, seasonality, foreign exchange, and debt service. The company planned to adopt the new revenue standard in 2018; management expected gross presentation of certain inventory and ancillary-service revenue to change income-statement presentation.
Investor verification priorities
- Track IronPlanet integration, realized synergies, acquired business contribution, and final purchase-price allocation.
- Assess the debt burden, floating-rate exposure, covenant headroom, cash available after restricted balances, and dividend coverage.
- Separate acquisition, impairment, and other adjusting items from recurring operating performance; review the company’s non-GAAP reconciliations.
- Monitor GAP, Core Auction volumes and per-lot proceeds, Revenue Rate, and equipment supply and pricing trends.
- Verify guarantee-contract exposure and the effects of the planned 2018 revenue-standard adoption on reported revenue and key metrics.