Business context and reporting period
Ritchie Bros. Auctioneers Incorporated (now RB Global) filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company provides live auction, online marketplace, brokerage and related services for used industrial equipment and other assets. Figures below are in U.S. dollars; financial statement amounts are generally shown in millions for readability.
Results include IronPlanet, acquired May 31, 2017. Effective January 1, 2018, the company retrospectively adopted Topic 606: certain inventory, ancillary and logistical revenues and related expenses are now presented gross. The change increased reported revenue but did not affect operating income, net income, cash flows or the balance sheet; comparative figures were restated.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $260.2 million | $199.4 million | +30% |
| Agency proceeds, non-GAAP | $169.8 million | $124.5 million | +36% |
| Operating income | $32.9 million | $23.6 million | +39% |
| Operating margin | 12.6% | 11.8% | +0.8 percentage points |
| Net income attributable to shareholders | $17.1 million | $10.4 million | +65% |
| Diluted EPS | $0.16 | $0.10 | +60% |
| Operating cash flow | $67.2 million | $134.5 million | -50% |
- GTV, an operating measure rather than GAAP revenue, was $1.16 billion, up 29%. Adjusted EBITDA, a non-GAAP measure, was $49.6 million, up 41%; net income margin was 6.6%, versus 5.2%.
- Revenue growth reflected the IronPlanet acquisition, more inventory contracts in Canada and Europe, stronger live auction service revenue and partial transaction-fee harmonization. Reported revenue growth should be read alongside the gross-presentation change.
- Operating expenses rose: SG&A increased 38% to $97.5 million, costs of services increased 51% to $36.7 million, and depreciation and amortization rose 57% to $16.2 million. Lower acquisition-related costs ($1.6 million versus $8.6 million) partly offset these increases.
- Cash from operations fell despite higher earnings, principally because cash generated by working-capital changes was $25.3 million, versus $112.0 million in Q1 2017. Management cited the settlement timing of auction proceeds payable. Investing cash outflow was $13.2 million, including the Leake Auction Company acquisition; financing cash outflow was $45.4 million, including debt repayments and dividends.
- At March 31, cash and cash equivalents were $278.9 million, restricted cash $62.4 million, working capital $114.9 million (down from $120.0 million at year-end), and total debt $786.2 million. Long-term debt was $780.3 million. The company prepaid $25 million of U.S.-dollar term debt and reported $646.8 million available under committed revolving facilities in MD&A. It was in compliance with debt covenants.
- Interest expense increased 39% to $11.3 million, primarily due to acquisition-related borrowing and higher short-term interest. The effective tax rate declined to 23% from 41%; management cited jurisdictional earnings mix and prior-year tax items, partly offset by estimated BEAT.
Material changes, outlook and risks
- GTV growth included a 384% increase in online marketplace GTV, to $186.7 million, alongside 13% growth in live-auction GTV. Live industrial and agricultural lots sold declined 7%; management cited fewer auctions and sale days and continuing equipment-supply constraints. Equipment pricing was strong in several markets and categories, but supply and pricing softened in others.
- The business is seasonal and event-driven: revenue and GTV are typically highest in the second and fourth quarters. Management gave no specific earnings or revenue guidance in the provided filing text.
- Management described the Tax Act accounting as provisional and said further analysis of deferred taxes, foreign earnings and related adjustments remained necessary; subsequent changes could affect tax expense.
- Guarantee contracts covered $103.3 million of assets at quarter-end, before estimated auction proceeds; 87% was expected to sell by June 30, 2018. The company may incur losses if sale proceeds fall below guaranteed amounts. Management said ordinary-course legal claims were not expected to have a material effect.
- IronPlanet represented 40% of consolidated assets and 13% of revenue; its internal controls were excluded from the quarter’s disclosure-controls assessment under acquisition guidance. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- The company cited no material change in risk factors or market-risk disclosures. It was evaluating the effect of the forthcoming lease standard; it had approximately 480 operating and 115 finance leases as lessee and expected most operating leases to be recognized on the balance sheet upon adoption.
Important facts for investors to verify
- Assess underlying growth using GTV and agency proceeds as well as GAAP revenue, given Topic 606’s gross presentation and IronPlanet’s inclusion.
- Monitor whether working-capital timing and auction-proceeds settlement continue to weigh on operating cash flow and trailing-twelve-month operating free cash flow, which fell 64% to $42.0 million.
- Review debt service, interest costs and leverage: adjusted net debt/adjusted EBITDA was 2.5x for the trailing twelve months, versus negative 0.6x a year earlier.
- Track equipment supply, auction activity, pricing, and whether the expected sales of guaranteed assets occur on schedule.
- Check subsequent tax-accounting updates and clarify revolving-credit availability: the filing reports $646.8 million in MD&A and approximately $651.8 million available in a debt note.