RB Global Inc. (Ritchie Bros. Auctioneers Incorporated) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. Unaudited financial statements are prepared under U.S. GAAP. Unless noted, amounts below are in U.S. dollars.
Business context
The company operates a global marketplace for used commercial assets, including auctions, online marketplaces, brokerage, inventory sales and related services. Its reportable segment is Auctions and Marketplaces (A&M); other activities include Rouse, financing, listings and logistics. The Rouse acquisition closed in December 2020.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $331.6 million | $273.3 million | +21% |
| Service revenue | $206.0 million | $183.1 million | +13% |
| Inventory sales revenue | $125.5 million | $90.1 million | +39% |
| Operating income | $44.5 million | $34.1 million | +31% |
| Operating margin | 13.4% | 12.5% | +0.9 percentage points |
| Net income attributable to stockholders | $28.2 million | $22.8 million | +24% |
| Diluted EPS | $0.25 | $0.21 | +19% |
| Adjusted EBITDA (non-GAAP) | $66.3 million | $56.1 million | +18% |
| Cash provided by operating activities | $180.7 million | $4.1 million | — |
- GTV, an operating measure and not revenue, increased 11% to $1.275 billion (8% excluding foreign exchange). A&M revenue rose 21% to $296.3 million; Other Services revenue rose 24% to $35.3 million. Rouse contributed $5.6 million of revenue in its first full quarter after acquisition.
- SG&A increased 18% to $116.1 million, reflecting higher wages, headcount, incentives and severance. Costs of services fell 8%; acquisition-related costs were $2.9 million. The effective tax rate rose to 23.0% from 19.8%, partly due to nondeductible expenses, income mix by jurisdiction and a deferred tax asset write-off.
- Operating cash flow was exceptionally strong versus the prior-year quarter, substantially reflecting timing and working-capital movements, including auction proceeds payable. Management attributed the change to auction timing and activity, inventory turnover and other working-capital factors.
- At March 31, cash and cash equivalents were $294.4 million and restricted cash was $147.2 million. Unused committed revolving capacity was $461.1 million. Total debt was $662.7 million, including $626.2 million of long-term debt and $25.9 million of short-term debt. The company reported covenant compliance. Adjusted net debt/adjusted EBITDA was 1.0x for the trailing 12 months, versus 1.3x a year earlier (non-GAAP).
- Current assets were $843.7 million and current liabilities were $784.9 million; auction proceeds payable, a significant operating liability, was $517.5 million. Cash, cash equivalents and restricted cash totaled $441.6 million.
- The company paid $24.2 million in dividends during the quarter, or $0.22 per share. A further $0.22-per-share dividend was declared after quarter-end. No shares were repurchased in Q1; the existing authorization ran through August 23, 2021.
Material changes versus the prior comparable period
- Results improved as GTV and revenue rose, with strong used-equipment pricing and higher auction activity. The company cited shifted auction dates versus Q1 2020, additional auction days, robust demand, and growth in Canada and international markets. Foreign exchange also favored revenue.
- Inventory sales revenue grew faster than service revenue, increasing to 37.9% of total revenue from 33.0%; inventory mix can materially affect reported revenue growth.
- Net income growth was partly offset by the non-recurrence of $1.7 million of contingent-consideration income recognized in Q1 2020 and by the higher tax rate.
- Operating cash flow increased sharply from the prior-year quarter, but the filing attributes much of the movement to timing of auctions and working capital rather than solely to earnings growth.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said current working capital and credit availability were sufficient for present operating needs and contractual obligations.
- COVID-19 remained a significant uncertainty. Online auction operations continued, but future effects on equipment supply, buyer demand, pricing, payment and financing, cross-border logistics, vendors and financial performance could not be reasonably estimated. The company noted seasonal revenue and margins generally tend to be higher in Q2 and Q4.
- Guarantee contracts covered $56.3 million of assets at quarter-end, before expected auction proceeds; 83% was expected to sell by June 30, 2021. These contracts create exposure if sale proceeds fall short of guaranteed amounts.
- The existing U.S. Government Defense Logistics Agency contract was set to end June 1, 2021. Two replacement contracts awarded April 1, 2021 commence that date; during their first two years, combined purchases may reach up to 600,000 assets or an expected minimum value of up to $77 million, whichever is less.
- Management reported no material expected impact from routine legal claims and no material change in risk factors. A non-binding letter of intent signed April 30, 2021 contemplated purchasing approximately 104.5 acres in Canada to relocate an auction site; no purchase agreement had been executed.
- Control weakness: Disclosure controls were deemed ineffective because material weaknesses disclosed in the 2020 Form 10-K remained unremediated. Issues involved review and documentation of manual journal entries in one geography and completeness and accuracy of reports used in revenue controls. The company was developing remediation, adding monitoring and engaging a third-party adviser; Rouse was excluded from the internal-control assessment as a recent acquisition.
Important facts for investors to verify
- Whether the elevated operating cash flow persists after auction-proceeds and other working-capital timing effects normalize.
- Revenue mix, GTV growth and realized commission rates, separating organic performance, foreign exchange, auction timing and Rouse’s contribution.
- Progress and testing of remediation for the material weaknesses and the timing of any conclusion that controls are effective.
- Guarantee-contract outcomes, inventory exposure and the financial terms and purchase activity under the new DLA contracts.
- Debt, covenant headroom, revolving-credit availability and any continuing effects of COVID-19 on liquidity, demand and operations.