RB Global Inc. (Ritchie Bros. Auctioneers Incorporated) — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars. The company provides asset disposition services through auctions, online marketplaces, brokerage and related services.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $273.3 million | $303.4 million; down 10% |
| Service revenue | $183.1 million | $172.4 million; up 6% |
| Inventory sales revenue | $90.1 million | $131.1 million; down 31% |
| Operating income / margin | $34.1 million / 12.5% | $33.6 million / 11.1% |
| Net income attributable to stockholders | $22.8 million | $18.2 million; up 26% |
| Diluted EPS | $0.21 | $0.17; up 24% |
| Cash provided by operating activities | $4.1 million | $71.9 million |
| Cash, cash equivalents and restricted cash | $355.9 million | $420.3 million at Dec. 31, 2019 |
Operating cash flow was pressured by a $46.7 million net cash outflow from operating asset and liability changes, including receivables and auction timing. Investing activities used $7.3 million; financing activities used $48.4 million, including $53.2 million of share repurchases and $21.9 million of dividends.
At March 31, the company had $290.1 million of unrestricted cash and $65.8 million of restricted cash. Total debt was $663.6 million, including $33.1 million short-term debt; net debt using unrestricted cash was approximately $373.5 million. Unused committed revolving credit capacity was approximately $461.7 million. The company reported compliance with applicable debt covenants. Current assets were $709.5 million and current liabilities were $584.0 million.
Changes and operating performance
- Gross Transaction Value (GTV), an operating measure and not revenue, declined 2% to $1.147 billion. Service GTV increased 1%, while inventory GTV fell 31%.
- Lower inventory sales revenue largely reflected nonrecurring large Europe and Asia inventory deals in Q1 2019 and lower inventory-contract volume. Service revenue growth reflected higher fees, including buyer-fee harmonization and activity at Leake and GovPlanet.
- Auction and Marketplaces revenue declined 11% to $244.9 million; Other Services revenue declined 2% to $28.4 million. International A&M revenue fell 49%, while U.S. A&M revenue rose 4%.
- The operating margin improved despite lower total revenue, in part because inventory cost of sales declined 32%, faster than inventory sales revenue. SG&A increased 3% and costs of services increased 9%.
- Net income also benefited from $1.7 million of contingent consideration related to an equity investment, lower net interest expense, and a lower effective tax rate. The effective tax rate was 19.8%, versus 26.8% a year earlier.
COVID-19, outlook and risks
- COVID-19 led to postponement of four live auctions, which had generated $63.0 million of GTV in the prior-year quarter; the auctions were rescheduled for Q2. The company shifted live events to online bidding, restricted public attendance and continued equipment drop-off, inspection and pickup under safety measures. Online buyers accounted for 75% of GTV, versus 60% a year earlier.
- Management said Q1 operations were not materially impacted overall, but stated it could not reasonably estimate the pandemic’s future effects on operations, results, cash flows, financial performance or dividend capacity. Risks include further government restrictions or site closures, supply and demand changes, buyer financing or payment difficulties, and disruption among vendors and service providers.
- The company reported a strong liquidity position and said current working capital and credit availability were sufficient for present requirements. It was taking steps to conserve cash and had contingency plans for a prolonged adverse impact. No specific financial guidance was provided.
- Management’s quarter-end qualitative assessments found no impairment indicators for goodwill, long-lived assets or indefinite-lived intangible assets; it also reported no significant COVID-related impact on expected credit losses. These assessments depend on uncertain estimates and future conditions.
- Subsequent to quarter-end, tax regulations were finalized that deny approximately $7.0 million of tax benefits recorded in 2019 and Q1 2020. Management expected an unfavorable adjustment of approximately $7.0 million in Q2 earnings.
- Guarantee contracts covered $110.7 million of assets at quarter-end, before estimated auction proceeds; 89% was expected to sell before June 30, 2020. The company also had a U.S. government surplus-property purchase commitment, with annual purchases expected to range from $11.1 million to $51.0 million subject to availability.
Important facts for investors to verify
- Whether postponed auctions and online-converted events were completed as scheduled, and whether GTV and service revenue recovered in subsequent quarters.
- Whether operating cash flow improved as auction timing and working-capital balances normalized, and how much unrestricted cash and revolver capacity remained available.
- The Q2 recognition and final earnings impact of the approximately $7.0 million tax adjustment.
- Performance and potential losses on the $110.7 million of guaranteed assets, as well as inventory valuation and buyer collection risks.
- Future compliance with leverage and interest-coverage covenants if pandemic-related disruption weakens earnings or cash generation.
- Dividends and capital allocation: the company declared a $0.20-per-share dividend payable in June 2020 and repurchased $53.2 million of shares during Q1.