RB GLOBAL INC. quarterly report, Q3 FY2017

Business context and reporting period

Ritchie Bros. Auctioneers Incorporated filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company provides global asset-disposition services through live auctions, online marketplaces, brokerage, and related services. Results include IronPlanet from its May 31, 2017 acquisition; the acquisition and integration materially changed the company’s scale, costs, debt, and reporting.

Financial results and key metrics

Amounts are in U.S. dollars. Figures below are in millions unless stated otherwise.

• Q3 gross transaction value (GTV), a company-defined operating measure, rose 2% to $1.019 billion. The consolidated revenue rate increased to 13.84% from 12.90%; the Auctions and Marketplaces segment rate rose to 12.78% from 12.12%.
• For the nine months, GTV fell 4% to $3.173 billion, while the consolidated revenue rate rose to 13.61% from 12.74%. Live-auction GTV declined 12%; online-auction and marketplace GTV rose 231%, partly reflecting IronPlanet.
• Q3 reported operating income and net income improved substantially against a prior-year quarter containing a $28.2 million impairment. Management’s adjusted measures show a weaker underlying comparison: adjusted operating income fell 45% to $16.9 million, adjusted EBITDA fell 23% to $31.8 million, and adjusted net income fell 52% to $10.3 million.
• Nine-month operating income declined 29%; adjusted operating income fell 26% to $91.6 million and adjusted EBITDA fell 15% to $132.5 million. Higher acquisition costs, SG&A, depreciation and amortization, and service costs weighed on results.
• Cash from operations was $97.2 million for the nine months, down 40% year over year. Investing used $701.6 million, principally the $675.9 million net cash outflow for IronPlanet. Financing provided $143.3 million. Trailing-12-month operating free cash flow was $79.9 million, down 34%.
• At September 30, cash and cash equivalents were $224.5 million; restricted cash was $89.8 million. Working capital was $102.1 million, down from $125.2 million at year-end 2016.
• Total debt was $826.5 million, including $817.9 million long-term debt and $8.6 million short-term debt. Debt rose substantially to fund IronPlanet; interest expense was $27.3 million for the nine months versus $3.4 million a year earlier. The company reported $637.9 million available under its main revolving facilities and compliance with applicable debt covenants.
• The board declared a quarterly dividend of $0.17 per share, payable December 20, 2017. Trailing-12-month dividend payout was 110% of reported net income attributable to shareholders (78.9% on the company’s adjusted basis).

Material changes, outlook, and risks

• The May 31 IronPlanet acquisition was completed for stated fair-value consideration of $776.5 million. IronPlanet contributed $33.4 million revenue and a $1.4 million net loss from acquisition through September 30; its purchase-price allocation remained provisional. The company also activated its five-year Caterpillar strategic alliance.
• Management said integration was progressing as expected under a multiyear plan, including sales and technology integration. It identified constrained used-equipment supply, fewer auction lots, and some lower sales productivity during integration as headwinds. Q3 auction lots fell 7%; nine-month lots fell 5%. Equipment pricing improved overall, but varied by sector and geography.
• Management described priorities to grow multichannel services, improve operating efficiency, and manage debt while continuing dividends. It provided no specific earnings or revenue guidance in the supplied filing text. The business is seasonal, with activity generally higher in the second and fourth quarters.
• Acquisition-related costs were $35.2 million for the nine months. The company recorded an $8.9 million impairment of technology assets following integration decisions about their future use. The Q3 effective tax rate was unusually negative at 48.2%, reflecting estimated annual taxes and tax-deductibility revisions.
• Outstanding minimum-proceeds guarantees covered $40.7 million of industrial assets and $14.6 million of agricultural assets, before estimated auction proceeds. Management said ordinary-course legal claims were not expected to have a material financial effect; no material legal proceedings were reported.
• Adoption of the new revenue standard was planned for January 1, 2018 using retrospective application. Management expected gross-versus-net presentation to materially increase reported revenue, without changing operating income. It also expected to bring most operating leases onto the balance sheet under the forthcoming lease standard.
• Key risks include equipment supply and pricing, seasonality, integration and realization of acquisition benefits, debt and interest costs, foreign exchange, guarantee-contract exposure, and estimates used in purchase accounting and impairment testing. The company cautioned that forward-looking statements are not guarantees of future performance.

Important facts for investors to verify

• Whether IronPlanet integration delivers the anticipated sales, technology, and cost synergies, and how its results perform beyond the initial post-acquisition period.
• Whether GTV, auction-lot trends, revenue rates, and online-channel growth indicate durable demand and revenue quality, given supply constraints and changing channel mix.
• Debt repayment capacity, borrowing costs, covenant headroom, available revolver capacity, and the sustainability of dividends amid lower cash generation and a 110% trailing payout ratio.
• The final IronPlanet purchase-price allocation, acquired intangible-asset amortization, and the effects of the $8.9 million technology impairment and future impairment assessments.
• The retrospective effects of the new revenue standard on reported revenue and comparability, and the eventual balance-sheet impact of lease accounting changes.