RB Global Inc. (formerly Ritchie Bros. Auctioneers Incorporated) — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed February 28, 2019. Amounts are in U.S. dollars unless stated otherwise. The company operates global live and online marketplaces, auctions and related services for used industrial equipment and other assets. Its 2017 IronPlanet acquisition expanded online channels; 2018 included a full year of IronPlanet activity.
Key financial and operating metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $1,170.0 million | $971.2 million | +20% |
| Operating income | $185.2 million | $107.5 million | +72% |
| Operating margin | 15.8% | 11.1% | +470 bps |
| Net income attributable to stockholders | $121.5 million | $75.0 million | +62% |
| Diluted EPS attributable to stockholders | $1.11 | $0.69 | +61% |
| Cash from operating activities | $144.3 million | $147.6 million | -2% |
| Operating free cash flow (non-GAAP) | $111.9 million | $113.2 million | -1% |
| Gross Transaction Value (GTV) | $4,964.2 million | $4,468.0 million | +11% |
| Total debt | $731.2 million | $819.9 million | -11% |
At December 31, 2018, cash and cash equivalents were $237.7 million, with a further $67.8 million restricted; working capital was $163.4 million. Unused committed revolving facilities were $467.8 million. The company reported compliance with its debt covenants. Long-term debt included $500 million of 5.375% senior notes due January 2025.
Revenue included $749.5 million of service revenue and $420.5 million of inventory-sale revenue. The company adopted Topic 606 retrospectively; this increased the gross presentation of revenue and related costs but did not change operating income, net income, or cash flows. GTV is an operating measure, not revenue or a GAAP financial performance or liquidity measure.
Material changes and performance
- Revenue growth reflected a full year of IronPlanet, partial fee harmonization, higher inventory-sale revenue and favorable foreign exchange effects. A&M revenue rose 20% to $1,046.5 million; Other Services revenue rose 23% to $123.5 million.
- Online marketplace GTV increased 59% to $829.3 million and represented 17% of GTV, versus 12% in 2017. Live on-site auction GTV increased 5% to $4,134.8 million. Online buyers purchased 59% of total GTV, up from 54%.
- A&M revenue rate increased to 21.1% from 19.5%, attributed to partial fee harmonization and online listing fees. Underwritten contracts represented approximately 17% of GTV, compared with 16% in 2017 and 25% in 2016.
- Operating expenses increased 14%, including higher SG&A, service costs and depreciation and amortization. SG&A rose 18%, reflecting acquisition-related staffing and technology support, growth initiatives, share-based compensation and GovPlanet’s government contract.
- Interest expense increased 16% to $44.5 million, primarily because acquisition debt was outstanding for a full year. Income-tax expense rose to $31.0 million from $2.1 million; the prior-year effective tax rate benefited from a deferred-tax remeasurement associated with U.S. tax reform. The 2018 effective tax rate was 20.3%, versus 2.7%.
Cash, debt, outlook and risks
Operating cash flow declined slightly despite higher earnings, mainly due to working-capital movements, including increased inventory. Investing activities used $31.0 million, compared with $711.0 million in 2017, when the IronPlanet acquisition was completed. The company made $80.0 million of voluntary term-loan prepayments in 2018 and paid $75.7 million in dividends. The regular quarterly dividend was raised to $0.18 per share during 2018; the board retains discretion over future dividends.
Management described used-equipment availability as constrained amid strong demand and high utilization, particularly in U.S. construction, and reported 11% GTV growth. It highlighted online-channel growth, auction-calendar optimization, progress on IronPlanet integration, the launch of Marketplace-E and RB Asset Solutions, and an expectation that the MARS operating-platform implementation would continue through 2019 and conclude in 2020. RB Financial Services funded volume grew 41% to $431.5 million; management expected continued strong results in 2019. The filing provides no quantified consolidated revenue or earnings guidance.
- Key risks: equipment supply, demand and pricing are cyclical; competition could pressure commission rates and business volumes; guarantee and inventory contracts expose the company to resale losses.
- Integration and technology execution remain important, including the multichannel systems transformation. The company also identifies service interruption, cybersecurity, privacy and data-protection risks.
- Debt, floating-rate exposure and restrictive covenants could limit flexibility. A 100-basis-point increase in the U.S. prime rate was estimated to increase annual pre-tax interest by approximately $3.1 million.
- Other exposures include foreign-currency fluctuations (the company did not hedge foreign currency at the time), DLA inventory purchase and resale obligations, tax uncertainties, environmental and regulatory requirements, and ordinary-course litigation.
- At year-end, guarantee-contract exposure was reported as approximately $40.0 million in MD&A and $41.5 million in the financial-statement note; management expected the related auction proceeds to cover the exposure. Verify the differing disclosed amounts and underlying terms.
Unusual items and reporting notes: 2018 included $5.1 million of acquisition-related costs, a $4.9 million gain on the sale of an equity-accounted investment, and no impairment loss; 2017 included $8.9 million of technology-asset impairment and substantial acquisition costs. The SEC requested discontinuation of the company’s non-GAAP agency-proceeds measure; the company stated it would stop disclosing it in earnings releases beginning in Q1 2019. The company expected adoption of the new lease standard in 2019 to materially increase reported assets and liabilities, without materially affecting net earnings or covenant compliance. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Fourth-quarter snapshot
Unaudited Q4 2018 revenue was $356.0 million, operating income was $56.3 million, net income attributable to stockholders was $35.5 million, and diluted EPS was $0.32. Q4 2017 comparable figures were $291.8 million, $40.0 million, $36.8 million, and $0.34, respectively. The filing notes seasonality, with activity generally higher in the second and fourth quarters.
Investor verification priorities
- Separate underlying growth from acquisition contribution, fee harmonization, foreign exchange and the gross revenue presentation required by Topic 606.
- Review operating cash conversion and inventory growth, including GovPlanet non-rolling-stock inventory and its turnover or resale outcomes.
- Assess debt repayment capacity, interest-rate sensitivity, covenant headroom and the maturity profile of the term loans and 2025 notes.
- Track whether online growth, MARS implementation and IronPlanet integration deliver sustainable margins and customer growth, and whether DLA obligations produce acceptable returns.
- Reconcile the guarantee-exposure figures and evaluate inventory-contract and consignor-advance risks; also distinguish GAAP results from management’s non-GAAP measures.