Business context and reporting period
Ritchie Bros. Auctioneers Incorporated (now associated with RB Global) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. It operates industrial equipment auctions and online marketplaces, plus related listing, software, and value-added services. Financial statements are in U.S. dollars and prepared under U.S. GAAP; the company transitioned from IFRS to U.S. GAAP beginning in 2016, retrospectively.
Financial and operating performance
Unless stated otherwise, amounts are U.S. dollars. Percentages compare with the corresponding 2015 period.
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Revenue | $158.8 million, up 2% | $290.8 million, up 7% |
| Operating income | $53.6 million, down 15%; margin 33.8% vs. 40.4% | $92.8 million, down 3%; margin 31.9% vs. 35.3% |
| Net income attributable to stockholders | $39.7 million, down 12% | $69.1 million, essentially flat |
| Diluted EPS attributable to stockholders | $0.37 vs. $0.42, down 12% | $0.65 vs. $0.64, up 2% |
| Gross Auction Proceeds (GAP), an operating measure | $1.276 billion, up 1% | $2.296 billion, up 4% |
| Revenue Rate (revenue divided by GAP) | 12.45% vs. 12.32% | 12.67% vs. 12.22% |
| Cash provided by operating activities | Not reported separately for the quarter | $37.6 million vs. $133.2 million |
Q2 revenue growth reflected higher GAP and fees, partly offset by lower commissions. Fee revenue rose to $40.6 million from $30.9 million, while commissions fell to $118.2 million from $124.6 million. Fees represented 3.18% of GAP versus 2.45%; the average commission rate declined to 9.26% from 9.87%. Management attributed the higher Revenue Rate mainly to stronger fee-based services and straight-commission contract performance.
Costs pressured profitability: Q2 costs of services rose 16% to $19.8 million and SG&A rose 14% to $74.6 million, reflecting acquired businesses, higher headcount, auction volume, and strategic advertising. First-half EBITDA was $115.1 million, down 3%, with a 39.6% margin versus 44.0%.
Liquidity, cash flow, and debt
At June 30, 2016, cash and cash equivalents were $166.5 million, down from $210.1 million at December 31, 2015; restricted cash was $196.2 million, up from $83.1 million. Working capital increased to $175.7 million from $140.1 million. Management notes auction timing and restrictions on use of auction cash can make operating cash flow volatile.
First-half operating cash flow fell 72% to $37.6 million, primarily because of changes in operating assets and liabilities, particularly restricted cash and inventory. Investing cash outflow was $38.6 million, including $28.1 million for Mascus. Financing cash outflow was $48.7 million, including $36.7 million of share repurchases and $34.2 million of dividends, partly offset by debt activity and share-option proceeds.
Total debt was $125.2 million ($22.4 million short-term and $102.7 million long-term), compared with $110.3 million at year-end. The company refinanced a $43.3 million term loan due in May 2016 using its committed revolving facility. It reported a 0.6x debt/adjusted EBITDA ratio and compliance with credit-facility covenants. Management said working capital and available credit were sufficient for operating needs and future growth.
Material changes and unusual items
- Acquired Mascus, an online equipment-listing business, on February 19 for $29.6 million cash plus contingent consideration; it contributed $3.3 million of revenue through June 30 and insignificant net income. The acquisition added $19.7 million of goodwill.
- After quarter-end, acquired the remaining 49% of Ritchie Bros. Financial Services (RBFS) on July 12 for $44.1 million, including contingent consideration. Also announced a minority investment in Machinio and acquired Petrowsky Auctioneers on August 1 for $7.0 million cash plus potential additional consideration of up to $3.0 million.
- Shareholders approved changes allowing the company to settle certain performance share units in cash or shares; some awards were reclassified from liability to equity accounting.
- Inventory write-downs were $1.4 million in the second quarter and first half, versus $0.3 million for the first half of 2015.
- The company repurchased 1.46 million shares for $36.7 million in March. It paid $0.16 per share quarterly dividends and declared a post-quarter dividend of $0.17 per share.
Outlook, management commentary, and risks
No specific financial guidance was provided. Management described the used-equipment market as broadly stable in the first half, but prices remained below the early-2015 peak and varied by sector. It cited strength in some construction assets, excess North American transportation equipment, and continued pricing pressure for oil-and-gas and mining assets. The business is seasonal, with revenues generally highest in the second and fourth quarters.
Management reported record first-half GAP and said more than half of second-quarter GAP was generated through online transactions for the first time. Auction lots increased, but GAP per core-auction lot declined. Currency translation reduced reported Q2 GAP by an estimated $28.1 million and first-half GAP by $49.6 million versus constant exchange rates; management said the natural hedge between foreign-currency revenue and expenses partly mitigated operating-income effects.
Guarantee contracts covered $37.3 million of industrial assets and $20.0 million of agricultural assets at June 30, before estimated auction proceeds; most were expected to sell by September. Actual losses depend on sale proceeds. The filing also cites market, foreign-exchange, acquisition-integration, seasonality, and financing risks. Management said ordinary-course legal claims were not expected to materially affect the financial statements and reported no material change in risk factors.
Important facts for investors to verify
- Whether higher fees and online-marketplace growth can offset lower commission rates and weaker GAP per lot.
- Whether cost growth moderates and operating margins recover after acquisition, headcount, and auction-related spending.
- The drivers and sustainability of sharply lower first-half operating cash flow, including restricted-cash and inventory movements.
- Integration, contingent consideration, and returns from Mascus, RBFS, Machinio, and Petrowsky; distinguish post-quarter developments from June 30 balances.
- Potential outcomes of guaranteed auctions and the company’s foreign-currency and credit-facility exposure.