Business context and reporting period
Ritchie Bros. Auctioneers Incorporated (now RB Global Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company provides industrial asset disposition services through live and online auctions, online marketplaces, brokerage, and listing services. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted. First-quarter results are seasonally affected: the company typically holds more auctions in the second and fourth quarters.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $124.5 | $131.9 | (6%) |
| Operating income / margin | $23.6 / 19.0% | $39.2 / 29.7% | (40%); down 1,070 bps |
| Net income attributable to stockholders | $10.4 | $29.4 | (65%) |
| Diluted EPS | $0.10 | $0.27 | (63%) |
| Operating cash flow | $134.5 | $165.7 | (19%) |
| Gross Auction Proceeds (GAP) | $899.4 | $1,019.9 | (12%) |
| Revenue Rate | 13.84% | 12.94% | Up 90 bps |
Revenue comprised $91.9 million of commissions and $32.6 million of fees. The higher Revenue Rate and lower costs of services partly cushioned the effect of reduced GAP; fee revenue was 3.62% of GAP versus 3.15% a year earlier. Online buyers purchased $428.8 million of assets, down 4% year over year. The company reported adjusted EBITDA of $35.3 million, down 30%, and an adjusted EBITDA margin of 28.3%, down 1,000 bps; these are non-GAAP measures.
Costs of services fell 16% to $12.8 million, while SG&A rose 5% to $70.6 million. Acquisition-related costs increased to $8.6 million from $1.2 million, mainly for IronPlanet regulatory review and integration planning. Interest expense rose to $8.1 million from $1.4 million, including $6.7 million of interest on the $500 million notes held in escrow. The effective tax rate increased to 41.2% from 24.1%, including a $2.3 million charge associated with increased uncertain tax positions and estimated nondeductible acquisition costs.
Liquidity, cash flow and debt
At March 31, 2017, cash and cash equivalents were $236.9 million; current and non-current restricted cash totaled $638.0 million, including proceeds from the notes held in escrow for the planned IronPlanet transaction. Working capital was $126.4 million, versus $125.2 million at December 31, 2016. Current assets were $546.0 million and current liabilities were $419.6 million; the increase in both included auction-related balances.
Net cash from investing activities was $6.0 million used, and financing activities used $15.1 million. Cash, cash equivalents, and restricted cash increased by $116.8 million to $874.9 million. Operating cash flow was supported by a $112.0 million net inflow from changes in operating assets and liabilities, principally auction proceeds payable; it should not be read as earnings alone. Q1 net capital spending was $6.0 million.
Total debt was $621.1 million, comprising $24.6 million short-term debt and $596.4 million long-term debt. The latter included the $500 million, 5.375% senior notes due 2025, whose proceeds remained restricted in escrow. The company reported $125.1 million of adjusted debt after excluding the escrowed notes (non-GAAP). It had $548.1 million of committed revolving facilities available and a further $325 million delayed-draw term facility for the proposed merger; the company reported compliance with applicable debt covenants. The board declared a $0.17-per-share quarterly dividend after quarter-end, payable June 13, 2017.
Material changes and management commentary
- Management attributed lower revenue and GAP primarily to lower auction volumes, fewer large dispersals, and a changed auction calendar, including the absence of a large Grande Prairie sale held in Q1 2016. Industrial and agricultural auction lots fell 8%; core auction GAP per lot fell 6%.
- Supply was constrained in the U.S. and Western Canada: U.S. construction activity encouraged owners to retain equipment, while improved commodity prices contributed to fewer Western Canadian oil-and-gas dispersals. Management described used-equipment pricing as generally improving, with variation by sector and region.
- The underwritten-contract share of GAP fell to 14% from 23%, while management said the performance of those contracts helped lift the Revenue Rate and average commission rate. The company said it remained selective on guarantees, particularly in pressured sectors.
- The company agreed to acquire IronPlanet for approximately $740 million in cash plus assumed unvested equity interests, for an estimated total transaction value of $758.5 million, subject to regulatory review and closing conditions. Management expected regulatory review to finish by the end of Q2 2017 and anticipated closing shortly thereafter if approval was obtained. The alliance with IronPlanet and Caterpillar is contingent on the merger.
- Management said it had reprioritized capital allocation toward debt repayment after the merger and allowed its share-repurchase program to expire to conserve cash. It reported no material change in risk factors or market-risk disclosures during the quarter and no material pending legal proceedings beyond ordinary-course matters.
Guidance, risks, contingencies and unusual items
The filing provides no specific numerical earnings or revenue guidance. The outlook depends on equipment supply and pricing, auction volumes and timing, seasonality, underwritten-contract results, foreign exchange, and successful execution of growth initiatives and acquisitions. Management highlighted planned system integration, sales productivity, geographic expansion, and preparation for IronPlanet integration.
IronPlanet closing remained uncertain and subject to U.S. and foreign antitrust clearances and CFIUS review. If the merger is not completed by October 31, 2017, or the agreement is terminated earlier, the notes are to be redeemed at par plus accrued and unpaid interest. Additional merger-related financing and advisory costs, up to $13.75 million and $8.625 million respectively, were contingent on closing and not recognized at quarter-end. Guarantee contracts covered $62.3 million of industrial and agricultural assets before estimated auction proceeds; this is not the company’s estimated loss exposure. Ordinary-course legal claims were not believed by management to be material.
Unusual or noteworthy items included the $2.3 million uncertain-tax-position charge; $8.6 million of acquisition-related costs; $6.7 million of interest on escrowed notes; and a $0.6 million gain on Orlando excess land included in the reported gain on property disposition. The company also recorded a $0.4 million inventory write-down. The quarter’s results exclude the prior-year Mascus acquisition cash outflow from Q1 2017 comparisons.
Important facts for investors to verify
- Whether IronPlanet received required regulatory approvals and closed, and the resulting purchase accounting, integration costs, and financing needs.
- Whether auction supply and GAP recovered after the seasonally weaker first quarter, particularly in Western Canada and the U.S.
- Whether the elevated Revenue Rate and underwritten-contract performance are sustainable as contract mix and market conditions change.
- How operating cash flow develops excluding auction timing and working-capital movements, and whether dividends remain supportable amid lower earnings and planned debt repayment.
- The liquidity actually available for operations: substantial reported cash was restricted, including the escrowed note proceeds; monitor debt, facility availability, covenants, and merger-related obligations.