RB Global Inc. (Ritchie Bros. Auctioneers Incorporated) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. All dollar amounts below are U.S. dollars; financial figures are rounded to millions unless stated otherwise. The filing identifies the registrant as Ritchie Bros. Auctioneers Incorporated.
Business context and reporting period
The company provides global asset disposition services through live auctions, online marketplaces, brokerage and related services. It reported second-quarter gross transaction value (GTV) of $1.426 billion, up 14%. IronPlanet, acquired May 31, 2017, contributed three full months of activity in Q2 2018 versus one post-acquisition month in Q2 2017. The company operates one reportable segment, Auctions and Marketplaces (A&M), and reports other activities separately.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Total revenue | $308.5m | $252.6m | $568.7m | $452.0m |
| Operating income | $64.8m | $26.9m | $97.7m | $50.5m |
| Operating margin | 21.0% | 10.6% | 17.2% | 11.2% |
| Net income attributable to stockholders | $45.7m | $17.6m | $62.9m | $28.0m |
| Diluted EPS | $0.42 | $0.16 | $0.58 | $0.26 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $107.9m | $116.0m |
- Q2 service revenue rose 24% to $214.3m; inventory-sale revenue rose 18% to $94.2m. H1 service revenue rose 32% and inventory-sale revenue rose 14%.
- Q2 adjusted EBITDA, a non-GAAP measure, was $81.4m, up 24%; adjusted diluted EPS was $0.42, up 27%. H1 adjusted EBITDA was $131.0m, up 30%; adjusted diluted EPS was $0.58, up 29%. No adjusting items were reported for 2018 periods; prior-period adjustments included acquisition-related costs and an impairment.
- Q2 A&M revenue was $274.3m, up 21%. A&M revenue rate increased to 19.2% from 18.0%; GTV from online marketplaces rose 90%, while live-auction GTV increased 6%.
- H1 operating cash flow declined 7% despite higher earnings, largely reflecting less cash generated by changes in operating assets and liabilities. Trailing-12-month operating free cash flow, a non-GAAP measure, fell 12% to $100.6m.
- At June 30, cash and cash equivalents were $210.6m and restricted cash was $118.7m. Working capital was $128.4m, up from $120.0m at December 31, 2017.
- Total debt was $754.4m at June 30, down from $819.9m at year-end; long-term debt was $750.4m. The company made $50.0m in voluntary term-loan prepayments during H1. It had $481.7m of unused committed revolving facilities, and reported compliance with debt covenants.
- Interest expense increased 27% in Q2 to $10.9m and 33% in H1 to $22.2m. Effective tax rates were 16% for Q2 and 19% for H1, down from 19% and 29%, respectively, in 2017.
Material changes versus prior periods
- Revenue growth reflected the additional IronPlanet contribution, improved auction and online marketplace performance, stronger price realization and equipment mix, partial fee harmonization, and growth in ancillary and logistical services. Foreign exchange also benefited revenue.
- Operating income increased faster than revenue, supported by higher revenue and the absence of 2017 acquisition costs and an $8.9m technology-asset impairment. Higher SG&A and depreciation and amortization partly offset these benefits. SG&A rose 36% in Q2 and 37% in H1, with acquisition-related costs, staffing, incentive compensation and professional fees among the cited drivers.
- Live-auction activity was affected by calendar optimization and the closure of five auction sites. Q2 live auctions fell to 152 from 157; lots sold declined 4%, while live-auction GTV per lot rose 9%. Management also cited constrained used-equipment supply.
- Cash flow comparisons were influenced by auction timing, receivable collections, auction-proceeds settlements and higher inventory-contract volume. H1 investing cash use was $21.1m versus $686.0m in 2017, which included the IronPlanet acquisition.
- Effective January 1, 2018, the company adopted ASC 606 retrospectively. The change presents inventory, ancillary and logistical revenues gross rather than net, increasing reported revenue but not changing operating income, net income, recognition timing, balance sheet or cash flows.
Outlook, commentary, risks and unusual items
- The filing provides no quantified revenue, earnings or GTV guidance. Management describes the business as seasonal and event-driven, with revenue and GTV generally highest in Q2 and Q4; mid-July through August is typically less active.
- Management cited site and auction-calendar optimization, expansion of online marketplaces, and sales-compensation changes as strategic priorities. Online bidders bought 57% of GTV in both Q2 and H1 2018.
- Guarantee contracts covered $57.5m of assets at quarter-end, before estimated auction proceeds; 79% was expected to be sold by September 30, 2018. The company’s exposure can vary, and underwritten contracts can result in losses if sale proceeds are below guarantees.
- The company had not completed its analysis of the U.S. Tax Act’s effects; additional analysis of provisional tax amounts remained underway, with any subsequent adjustments expected to be recorded in Q4 2018. Tax expense also reflected changes in uncertain tax positions and estimated BEAT.
- Management expected most, if not all, operating leases to be recognized on the balance sheet when the new lease standard takes effect; its impact analysis was incomplete. The company reported approximately 570 operating and 135 finance leases as lessee.
- Management said ordinary-course legal claims were not expected to have a material effect, and reported no material changes to risk factors or market risk during the quarter. Forward-looking results remain subject to risks discussed in the filing and the 2017 Form 10-K.
- The board declared a quarterly dividend of $0.18 per share after quarter-end, payable September 19, 2018; the previously paid quarterly dividend was $0.17 per share.
Important facts for investors to verify
- Separate underlying growth from acquisition-related comparisons and from ASC 606’s gross revenue presentation; compare operating income, agency proceeds and margins alongside reported revenue.
- Assess whether higher GTV and pricing can be sustained given equipment-supply constraints, fewer live-auction events and changes in auction timing and equipment mix.
- Track whether SG&A growth, higher interest expense and increased depreciation and amortization affect future margin and earnings conversion.
- Monitor operating cash flow and working-capital movements, especially receivables, inventory contracts and auction-proceeds payable timing.
- Review debt maturities, interest-rate exposure, available revolving capacity, guarantee-contract outcomes and the eventual balance-sheet effect of lease-standard adoption.
- Evaluate the sustainability of the dividend in relation to cash generation and debt repayment; non-GAAP measures cited above are company-defined and may not be comparable across issuers.