RB Global, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Figures are in U.S. dollars unless noted. RB Global operates an omnichannel marketplace and services platform for used commercial assets and vehicles. Results include IAA from its March 20, 2023 acquisition; the quarter includes IAA’s first full quarter. The company now reports one operating segment.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1,106.5 million | $484.5 million | $1,618.9 million | $878.5 million |
| Operating income | $179.6 million | $91.6 million | $154.7 million | $324.4 million |
| Net income | $86.8 million | $53.4 million | $58.6 million | $231.5 million |
| Net income available to common stockholders | $77.4 million | $53.4 million | $44.2 million | $231.5 million |
| Diluted EPS available to common stockholders | $0.42 | $0.48 | $0.29 | $2.07 |
| Adjusted EBITDA (non-GAAP) | $307.8 million | $136.2 million | $440.5 million | $241.0 million |
- Q2 revenue rose 128%; service revenue increased 181% to $806.1 million and inventory sales revenue rose 52% to $300.4 million. IAA contributed $560.4 million, or 51%, of quarterly revenue. Excluding IAA, revenue grew 13%.
- Q2 GTV, a company operating metric rather than GAAP revenue, rose 146% to $4.14 billion. Excluding IAA, it increased 13% (15% excluding foreign exchange effects). IAA represented $2.24 billion of Q2 GTV.
- Q2 operating income increased 96%, while the operating margin was approximately 16.2%, compared with 18.9% a year earlier. Higher acquisition-related costs, depreciation and amortization, and service costs affected results.
- Q2 GAAP net income rose 63%, but diluted EPS fell 13%, reflecting a substantially larger share count and earnings allocated to the new preferred shares. Adjusted diluted EPS increased 15% to $0.85.
- Six-month operating income and net income fell 52% and 75%, respectively, largely because the prior-year period included a $169.1 million gain on the Bolton property sale. Six-month adjusted EBITDA increased 83%.
- Inventory return was $8.5 million in Q2 versus $21.8 million; the inventory rate fell to 2.8% from 11.0%. Management attributed the decline mainly to weaker pricing, particularly in North America, and softer results on some inventory packages.
Cash flow, debt and liquidity
- For the first six months, operating cash flow was $49.9 million, down from $198.0 million. The company cited working-capital outflows, higher tax payments, and IAA-related prepaid vehicle charges and lease payments. Investing cash flow was negative $2.89 billion, principally reflecting $2.76 billion for IAA and $24.7 million for VeriTread. Financing cash flow was positive $2.78 billion, primarily from acquisition financing.
- At June 30, cash and cash equivalents were $432.9 million and restricted cash was $140.4 million. Total debt was $3.14 billion, compared with $610.6 million at year-end 2022. Long-term operating lease liabilities were $1.29 billion; total assets were $11.91 billion.
- Debt includes $1.81 billion of term loans and $1.35 billion principal of 2023 notes: $550 million secured notes at 6.75% due 2028 and $800 million unsecured notes at 7.75% due 2031. The USD term loan bears a weighted-average rate of 7.67%; the Canadian-dollar term loan rate was 7.58%.
- Unused committed revolving capacity was $715.9 million, available through September 2026 subject to covenants. The company reported compliance with applicable covenants. Management said working capital and available facilities were sufficient for current operating requirements and contractual obligations.
- Adjusted net debt/adjusted EBITDA was 4.1x for the trailing twelve months, versus 0.7x a year earlier. The company’s debt/net income ratio was 21.4x versus 2.2x; management noted that the acquisition increased debt while IAA contributed only a partial period of earnings.
Material changes, outlook and risks
- IAA acquisition: Completed March 20 for consideration of approximately $6.65 billion, including $1.71 billion cash, 70.3 million RB Global shares, and repayment of IAA debt. Purchase-price allocations remain preliminary and could change; acquired goodwill was approximately $3.72 billion. Integration and acquisition-related costs were $46.3 million in Q2 and $172.5 million for the first half.
- Other transactions and capital: RB Global acquired 75% of VeriTread and issued $485 million of Series A preferred shares and $15 million of common shares to Starboard. The preferred shares carry a 5.5% initial dividend and participate in common dividends. Common shares outstanding increased substantially, including shares issued for IAA.
- Management commentary and outlook: Management expects IAA to broaden the company’s automotive presence and create growth and integration opportunities, including potential revenue and cost synergies; these are expectations, not quantified guidance. The filing provides no formal revenue or earnings guidance. Management said inflation-related costs remained elevated. Operations are seasonal and event-driven; asset supply is generally lower in Q3.
- Operating risks: Management cited declining prices for construction and transportation assets, weaker inventory-contract returns, unfavorable foreign exchange effects, and integration execution. IAA’s facility leases materially increase lease obligations. Higher debt and interest costs increase sensitivity to rates and covenant headroom; the filing says leverage covenants could become more restrictive if markets deteriorate.
- Tax contingency: The CRA is auditing several tax years and proposed that a Luxembourg subsidiary was Canadian-resident for 2010–2015. If the CRA’s position is upheld, estimated additional federal and provincial tax is $26–$30 million, excluding interest and penalties. RB Global disputes the claim, responded to the proposal, and is awaiting a response; resolution could take years.
- Other items: $73.2 million of assets were subject to sale guarantees at quarter-end, before estimated auction proceeds. No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were considered effective; IAA systems and controls are being integrated. On August 2, the company announced Jim Kessler as CEO following Ann Fandozzi’s departure and Megan Cash as Principal Finance and Accounting Officer following Eric Jacobs’ departure.
Investor verification priorities
- Track IAA integration, realization of anticipated synergies, and final purchase-price allocation and resulting amortization, depreciation, and lease accounting.
- Assess whether operating cash generation and working capital improve, given first-half operating cash flow of $49.9 million and the acquisition-related cash demands.
- Monitor debt repayment, variable-rate interest expense, covenant compliance, and leverage after the increase in debt to $3.14 billion.
- Test whether inventory returns recover from the 2.8% Q2 rate and whether pricing, volumes, and asset mix support reported growth excluding IAA.
- Follow the CRA tax matter, including any assessment, potential interest and penalties, and the status of audits for other years.
- Review preferred-share dividends and terms, dilution from the enlarged share base, and the sustainability of common dividends.