RB Global Inc. (Ritchie Bros. Auctioneers Incorporated) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Financial amounts are in U.S. dollars. The filing was made November 9, 2016. The registrant reports that it transitioned from IFRS to U.S. GAAP beginning January 1, 2016, with comparative periods presented retrospectively.
Business context and operating performance
The company provides asset disposition services through unreserved auctions, online marketplaces, listing and software services, and related offerings. Its principal activity is the Core Auction business. Recent additions included Mascus, Petrowsky and full ownership of Ritchie Bros. Financial Services (RBFS); it also held a 75% interest in Xcira. Gross Auction Proceeds (GAP) is an operating measure, not GAAP revenue.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $128.9m | $109.3m | $419.6m | $380.4m |
| Operating income | $2.3m | $28.6m | $95.1m | $124.4m |
| Operating margin | 1.8% | 26.2% | 22.7% | 32.7% |
| Net income (loss) attributable to shareholders | $(5.1)m | $20.8m | $64.0m | $89.7m |
| Diluted EPS attributable to shareholders | $(0.05) | $0.19 | $0.60 | $0.83 |
| GAP | $998.9m | $894.5m | $3,294.5m | $3,112.2m |
| Revenue rate | 12.90% | 12.22% | 12.74% | 12.22% |
Revenue rose 18% in Q3 and 10% year to date, supported by higher GAP and stronger revenue rates. Q3 GAP was a record, up 12%; online marketplace GTV was $42.1m, up 39%. For the nine months, GAP rose 6% and online marketplace GTV was $107.4m, up 28%. Management attributed the higher revenue rate chiefly to straight-commission performance and increased fee revenue. Fee revenue represented 3.28% of Q3 GAP versus 2.87% a year earlier.
Financial position, cash flow and material changes
| Metric | September 30, 2016 | Comparator |
|---|---|---|
| Cash and cash equivalents | $231.0m | $210.1m at December 31, 2015 |
| Working capital | $131.6m | $140.1m at December 31, 2015 |
| Total debt | $140.6m | $110.3m at December 31, 2015 |
| Current assets / current liabilities | $572.0m / $440.3m | At September 30, 2016 |
For the first nine months, operating cash flow was $163.4m, up 3% from $158.4m. Investing cash outflow was $97.3m, versus $12.2m, largely reflecting the RBFS interest purchase, Mascus and Petrowsky acquisitions, and higher intangible-asset additions. Financing cash outflow was $49.6m, compared with $66.3m. Cash increased $20.8m during the period.
Q3 operating results were sharply reduced by a $28.2m impairment charge: $23.6m against EquipmentOne goodwill and $4.7m against customer relationships. The company cited lower actual and forecast revenue and operating income than previously projected. The reported Q3 effective tax rate was 329.4%, mainly reflecting the estimated non-deductibility of goodwill impairment and acquisition costs. Management’s non-GAAP adjusted operating income was $30.5m for Q3, up 7%; adjusted net income attributable to shareholders was $21.3m, up 2%. These measures exclude the impairment and are not GAAP results.
Debt at quarter-end comprised $39.0m short-term and $101.6m long-term. The company reported $256.8m of available committed revolving facilities and $193.4m of available uncommitted facilities, plus a seasonal bulge facility. On October 27, 2016, after quarter-end, it entered a five-year credit agreement providing up to $675m of multicurrency revolving facilities and a $325m delayed-draw term loan. It terminated prior facilities, repaid outstanding borrowings using the new facilities, and incurred $6.9m in early termination fees. Draws under the new facilities totaled $160.4m as of November 8, 2016.
Outlook, transactions and risks
- Market and outlook: Management described the used-equipment market as stable through the first nine months, with marginal pricing improvement in Q3; pricing remained below the Q1 2015 peak. Oil and gas and mining showed some positive commodity-price movement. No specific financial guidance or quantified forecast for the company is provided in the filing.
- IronPlanet merger: The August 29 agreement contemplated acquiring IronPlanet for approximately $740m cash plus assumed unvested equity interests, for an estimated total transaction value of $758.5m. Completion remained subject to regulatory and other conditions, including antitrust and foreign investment reviews. The associated Caterpillar strategic alliance would take effect only if the merger closes.
- Financing and integration: The company expected to incur substantial additional debt to fund the merger, and disclosed risks from higher leverage, floating interest rates, covenants, secured assets after closing, integration costs, management distraction, and failure to realize expected synergies. The filing states that merger completion and timing were uncertain.
- Other notable items: The company acquired the remaining 49% of RBFS for $44.1m total consideration, including contingent consideration; acquired Mascus for cash consideration of $29.6m plus potential contingent payments; and acquired Petrowsky assets for $6.25m plus potential contingent consideration. The board declared a $0.17-per-share quarterly dividend after quarter-end, payable December 19, 2016.
- Other risks and contingencies: Auction operations are seasonal, with activity generally higher in the second and fourth quarters. At quarter-end, assets under auction guarantee contracts included $30.1m of industrial assets and $18.7m of agricultural assets; these undiscounted amounts are before estimated auction proceeds. Management said ordinary-course legal claims were not expected to materially affect the company.
Important facts for investors to verify
- Whether the IronPlanet merger closed, its final purchase price, financing mix, and realized integration costs and synergies.
- Whether EquipmentOne’s performance stabilized and whether further impairment or changes to its forecasts, valuation assumptions, or useful lives followed.
- Actual borrowing, leverage, interest expense, covenant headroom, and collateral terms under the post-quarter credit agreement.
- Whether revenue and fee growth continued, and how much was attributable to acquired businesses versus the core auction business and changes in GAP or revenue rates.
- Cash conversion and liquidity trends, including working-capital movements driven by auction proceeds payable and receivables, and the sustainability of dividends and share repurchases.
- The outcomes of contingent payments and auction guarantees, and any material changes to merger-related or other legal and regulatory contingencies.