Business context and reporting period
Ritchie Bros. Auctioneers Incorporated (NYSE/TSX: RBA) provides live and online auctions, marketplaces, brokerage, and related services for used industrial equipment and other durable assets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $393.2m | $308.5m | $696.7m | $568.7m |
| Operating income | $78.0m | $64.8m | $111.6m | $97.7m |
| Net income attributable to stockholders | $54.0m | $45.7m | $72.2m | $62.9m |
| Diluted EPS | $0.49 | $0.42 | $0.66 | $0.58 |
| Operating margin | 19.8% | 21.0% | 16.0% | 17.2% |
- Q2 service revenue rose 9% to $234.6m; inventory sales revenue rose 68% to $158.6m. For the first half, service revenue increased 4% and inventory sales revenue increased 62%.
- Q2 gross transaction value (GTV), an operating measure rather than revenue, increased 5% to $1.50bn; management reported 7% growth excluding foreign exchange. First-half GTV increased 3% (5% excluding foreign exchange).
- Q2 adjusted EBITDA, a non-GAAP measure, increased 18% to $95.7m; first-half adjusted EBITDA increased 13% to $147.6m. No adjusting items were reported for the quarter or first half.
- Effective tax rates increased to 22.1% in Q2 and 23.4% in the first half, from 16.5% and 18.5%, respectively, primarily reflecting U.S. tax reform effects and a greater share of income in higher-tax jurisdictions.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $160.4m, up 49% from $107.9m. Investing cash outflow was $17.2m; financing cash outflow was $111.5m, including $42.0m of share repurchases and $39.2m of dividends.
- At June 30, cash and cash equivalents were $210.4m and restricted cash was $128.6m. Total debt was $712.9m, down from $731.2m at December 31, 2018. Cash-adjusted net debt was $502.5m, as defined in the company’s non-GAAP reconciliation.
- Unused committed revolving credit facilities totaled $486.0m, of which $481.3m was available until October 2021. The company reported compliance with applicable debt covenants.
- Current assets were $827.3m and current liabilities were $665.5m. Auction proceeds payable, a significant operating liability, was $458.1m.
- Adjusted net debt/adjusted EBITDA was 1.8x for the trailing 12 months, compared with 2.5x a year earlier. The company noted that this non-GAAP measure is not a liquidity measure.
Material changes and management commentary
- Q2 revenue growth included a large pipeline-equipment dispersal at the $94m Columbus, Ohio auction, growth in the GovPlanet non-rolling-stock program, and increased inventory contracts. Inventory sales were 40.3% of Q2 revenue, versus 30.5% a year earlier; this mix shift affected reported revenue growth.
- Service revenue benefited from higher fees, including full implementation of buyer-fee harmonization in June, and improved commission performance. Higher inventory costs, including lower price performance on certain equipment categories, contributed to operating margin contraction.
- Management cited seasonality: revenue and GTV are generally strongest in the second and fourth quarters, with third-quarter equipment supply often lower.
- The company began applying the new lease accounting standard in January 2019, recognizing operating lease right-of-use assets and liabilities. Adoption had no reported effect on retained earnings, cash flows, or covenant compliance.
- The board authorized a $100m share repurchase program for the 12 months ending May 8, 2020; $42.0m was repurchased in Q2. The quarterly dividend was increased 11% to $0.20 per share; the post-quarter dividend was declared but unpaid as of June 30.
- CEO Ravi Saligram announced he would step down effective October 1, 2019. The board was searching for a successor; the filing identifies transition disruption and delay in appointing a successor as potential risks.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings, or GTV guidance. Management cautions that forward-looking statements depend on assumptions and are subject to risks and uncertainties. Key considerations include auction and equipment-market conditions, seasonality, foreign exchange, the mix and performance of underwritten guarantee and inventory contracts, tax uncertainty, and the CEO transition.
- At June 30, assets subject to guarantee contracts totaled $70.8m, before estimated auction proceeds; 60% was expected to sell by September 30, 2019 and the remainder by March 31, 2020.
- The U.S. Defense Logistics Agency contract requires purchases of available surplus property within specified annual ranges. The company had purchased $11.0m under the April 2019–March 2020 period as of June 30.
- Management said ordinary-course legal claims were not expected to materially affect the financial statements; no material legal proceedings were reported.
Important facts for investors to verify
- How much of the sharp inventory-sales growth and related revenue mix is repeatable, and how the inventory portfolio performs at resale.
- Whether GTV and service-revenue trends remain healthy after the Columbus dispersal, buyer-fee changes, foreign-exchange effects, and seasonal patterns.
- Whether margin pressure from inventory costs and operating expenses persists, and how the higher effective tax rate develops.
- CEO succession timing and any effect on operations or strategy; progress on the announced buyback and dividend.
- Debt, lease obligations, restricted-cash availability, and exposure under guarantee contracts and the government inventory-purchase commitment.