Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 001-13425
Ritchie Bros. Auctioneers Incorporated
(Exact Name of Registrant as Specified in its Charter)
Canada
98-0626225
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
9500 Glenlyon Parkway
Burnaby, British Columbia, Canada
V5J 0C6
(Address of Principal Executive Offices)
(Zip Code)
(778) 331-5500
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common shares
RBA
New York Stock Exchange
Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ☐ No ⌧
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date: 108,240,199 common shares, without par value, outstanding as of November 6, 2019.
RITCHIE BROS. AUCTIONEERS INCORPORATED
For the quarter ended September 30, 2019
INDEX
PART I – FINANCIAL INFORMATION
ITEM 1:
Consolidated Financial Statements
1
ITEM 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
ITEM 3:
Quantitative and Qualitative Disclosures About Market Risk
45
ITEM 4:
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
46
ITEM 1A:
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 6:
Exhibits
47
SIGNATURES
48
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Income Statements
(Expressed in thousands of United States dollars, except share and per share data)
(Unaudited)
Three months ended
Nine months ended
September 30,
2019
2018
Revenue:
Service revenue
$
178,577
161,374
585,555
551,736
Inventory sales revenue
111,219
83,972
400,892
262,318
Total revenue
289,796
245,346
986,447
814,054
Operating expenses:
Costs of services
36,382
33,053
122,719
112,743
Cost of inventory sold
102,410
74,341
372,703
231,834
Selling, general and administrative expenses
93,691
88,323
286,589
287,052
Acquisition-related costs
2,007
752
5,039
Depreciation and amortization expenses
17,692
16,723
51,919
49,451
Gain on disposition of property, plant and equipment
(821)
(342)
(1,071)
(958)
Foreign exchange loss
237
1,118
31
Total operating expenses
249,636
214,152
834,729
685,192
Operating income
40,160
31,194
151,718
128,862
Interest expense
(10,090)
(10,473)
(31,023)
(32,720)
Other income, net
1,962
7,182
5,680
8,995
Income before income taxes
32,032
27,903
126,375
105,137
Income tax expense
6,760
4,791
28,800
19,091
Net income
25,272
23,112
97,575
86,046
Net income attributable to:
Stockholders
25,266
23,138
97,466
85,993
Non-controlling interests
6
(26)
109
53
Earnings per share attributable to stockholders:
Basic
0.23
0.21
0.90
0.80
Diluted
0.89
0.79
Weighted average number of shares outstanding:
108,003,390
108,365,427
108,453,525
107,811,391
109,381,173
109,887,194
109,634,195
109,133,378
See accompanying notes to the condensed consolidated financial statements.
Ritchie Bros.
Condensed Consolidated Statements of Comprehensive Income
(Expressed in thousands of United States dollars)
Other comprehensive income (loss), net of income tax:
Foreign currency translation adjustment
(9,703)
3
(8,880)
(7,781)
Total comprehensive income
15,569
23,115
88,695
78,265
Total comprehensive income attributable to:
15,586
23,145
88,614
78,234
(17)
(30)
81
2
Condensed Consolidated Balance Sheets
(Expressed in thousands of United States dollars, except share data)
December 31,
Assets
Cash and cash equivalents
309,555
237,744
Restricted cash
141,832
67,823
Trade and other receivables
249,925
129,257
Inventory
53,092
113,294
Other current assets
44,364
49,055
Income taxes receivable
10,488
6,365
Total current assets
809,256
603,538
Property, plant and equipment
476,776
486,599
Other non-current assets
148,375
29,395
Intangible assets
234,249
245,622
Goodwill
671,378
671,594
Deferred tax assets
17,797
15,648
Total assets
2,357,831
2,052,396
Liabilities and Equity
Auction proceeds payable
453,278
203,503
Trade and other payables
166,796
201,255
Income taxes payable
16,053
2,312
Short-term debt
5,805
19,896
Current portion of long-term debt
18,027
13,126
Total current liabilities
659,959
440,092
Long-term debt
671,301
698,172
Other non-current liabilities
150,400
41,980
Deferred tax liabilities
32,859
35,519
Total liabilities
1,514,519
1,215,763
Commitments
Contingencies
Contingently redeemable performance share units
—
923
Stockholders' equity:
Share capital:
Common stock; no par value, unlimited shares authorized, issued and outstanding shares: 108,210,335 (December 31, 2018: 108,682,030)
159,773
181,780
Additional paid-in capital
59,289
56,885
Retained earnings
684,231
648,255
Accumulated other comprehensive loss
(65,129)
(56,277)
Stockholders' equity
838,164
830,643
Non-controlling interest
5,148
5,067
Total stockholders' equity
843,312
835,710
Total liabilities and equity
Condensed Consolidated Statements of Changes in Equity
(Expressed in thousands of United States dollars, except where noted)
Attributable to stockholders
Contingently
Additional
Accumulated
Non-
redeemable
Common stock
paid-In
other
controlling
performance
Number of
capital
Retained
comprehensive
interest
Total
share units
Three months ended September 30, 2019
shares
Amount
("APIC")
earnings
income (loss)
("NCI")
equity
("PSUs")
Balance, June 30, 2019
107,836,674
150,585
54,633
680,915
(55,449)
5,165
835,849
1,049
Other comprehensive loss
(9,680)
(23)
Stock option exercises
363,217
8,451
(135)
8,316
Issuance of common stock related to vesting of share units
10,444
737
738
(1,083)
Stock option compensation expense
1,653
Equity-classified PSU expense
2,830
21
Equity-classified PSU dividend equivalents
308
(320)
(12)
13
Cash dividends paid
(21,631)
Balance, September 30, 2019
108,210,335
Three months ended September 30, 2018
Balance, June 30, 2018
108,202,351
166,898
41,410
628,341
(50,280)
5,130
791,499
12,965
Other comprehensive income (loss)
7
(4)
381,942
11,721
(2,698)
9,023
17,124
729
(357)
372
(916)
2,228
Modification of PSUs
11,662
1,092
12,754
(12,754)
1,268
1,450
71
(190)
(119)
119
(19,528)
Balance, September 30, 2018
108,601,417
179,348
53,941
632,496
(50,273)
5,100
820,612
864
4
Condensed Consolidated Statements of Changes in Equity (continued)
Nine months ended September 30, 2019
loss
Balance, December 31, 2018
108,682,030
(8,852)
(28)
544,576
14,119
(1,679)
12,440
207,403
5,886
(10,064)
(4,177)
4,852
8,640
114
655
(700)
(45)
(60,791)
Shares repurchased
(1,223,674)
(42,012)
Nine months ended September 30, 2018
Balance, December 31, 2017
107,269,783
138,582
41,005
602,609
(42,514)
5,069
744,751
9,014
(7,759)
(22)
1,154,541
34,876
(7,804)
27,072
177,093
5,890
(1,662)
(434)
3,794
(7,695)
6,711
12,365
958
13,323
(6,622)
3,153
5,826
173
(514)
(341)
341
(56,116)
5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30,
Cash provided by (used in):
Operating activities:
Adjustments for items not affecting cash:
8,754
8,978
Deferred income tax recovery
(4,760)
(3,774)
Unrealized foreign exchange (gain) loss
(129)
501
Amortization of debt issuance costs
2,701
3,032
Gain on disposition of equity investment
(4,935)
Other, net
9,892
(3,678)
Net changes in operating assets and liabilities
139,372
(44,227)
Net cash provided by operating activities
309,105
97,147
Investing activities:
Property, plant and equipment additions
(6,915)
(13,394)
Intangible asset additions
(18,377)
(19,410)
Proceeds on disposition of property, plant and equipment
5,610
2,524
Proceeds on disposal of equity investment
6,147
(1,000)
(4,674)
Net cash used in investing activities
(20,682)
(28,807)
Financing activities:
Share repurchase
Dividends paid to stockholders
Issuances of share capital
Payment of withholding taxes on issuance of shares
(5,260)
(3,901)
Proceeds from short-term debt
10,519
6,949
Repayment of short-term debt
(24,979)
(3,372)
Repayment of long-term debt
(29,022)
(58,825)
Repayment of finance lease obligations
(4,848)
(2,827)
(1,176)
Net cash used in financing activities
(143,953)
(92,196)
Effect of changes in foreign currency rates on cash, cash equivalents, and restricted cash
1,350
(3,215)
Increase (decrease)
145,820
(27,071)
Beginning of period
305,567
331,116
Cash, cash equivalents, and restricted cash, end of period
451,387
304,045
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
1. Summary of significant accounting policies
Ritchie Bros. Auctioneers Incorporated and its subsidiaries (collectively referred to as the “Company”) provide global asset management and disposition services, offering customers end-to-end solutions for buying and selling used industrial equipment and other durable assets through its unreserved live on site auctions, online marketplaces, listing services, and private brokerage services. Ritchie Bros. Auctioneers Incorporated is a company incorporated in Canada under the Canada Business Corporations Act, whose shares are publicly traded on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”).
(a) Basis of preparation
These unaudited condensed consolidated interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). They include the accounts of Ritchie Bros. Auctioneers Incorporated and its subsidiaries from their respective dates of formation or acquisition. All significant intercompany balances and transactions have been eliminated.
Certain information and footnote disclosure required by US GAAP for complete annual financial statements have been omitted and, therefore, these unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, cash flows and changes in equity for the interim periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
(b) Revenue recognition
Revenues are comprised of:
The Company recognizes revenue when control of the promised goods or services is transferred to our customers, or upon completion of the performance obligation, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For live event-based auctions or online auctions, revenue is recognized when the auction sale is complete and the Company has determined that the sale proceeds are collectible. Revenue is measured at the fair value of the consideration received or receivable and is shown net of value-added tax and duties.
Commissions from sales at the Company’s auctions represent the percentage earned by the Company on the gross proceeds from equipment and other assets sold at auction. The majority of the Company’s commissions are earned as a pre-negotiated fixed rate of the gross selling price. Other commissions from sales at the Company’s auctions are earned from underwritten commission contracts, when the Company guarantees a certain level of proceeds to a consignor.
1. Summary of significant accounting policies (continued)
(b) Revenue recognition (continued)
Service revenue (continued)
The Company accepts equipment and other assets on consignment stimulating buyer interest through professional marketing techniques, and matches sellers (also known as consignors) to buyers through the auction or private sale process. Prior to offering an item for sale on its online marketplaces, the Company also performs inspections.
Following the sale of the item, the Company invoices the buyer for the purchase price of the asset, taxes, and, if applicable, the buyer transaction fee, collects payment from the buyer, and remits the proceeds to the seller, net of the seller commissions, applicable taxes, and applicable fees. Commissions are calculated as a percentage of the hammer price of the property sold at auction. Fees are also charged to sellers for listing and inspecting equipment. Other revenue earned in the process of conducting the Company’s auctions include administrative, documentation, and advertising fees.
On the fall of the auctioneer’s hammer, the highest bidder becomes legally obligated to pay the full purchase price, which is the hammer price of the property purchased and the seller is legally obligated to relinquish the property in exchange for the hammer price less any seller’s commissions. Commission and fee revenue are recognized on the date of the auction sale upon the fall of the auctioneer’s hammer.
Under the standard terms and conditions of its auction sales, the Company is not obligated to pay a consignor for property that has not been paid for by the buyer, provided the property has not been released to the buyer. If the buyer defaults on its payment obligation, also referred to as a collapsed sale, the sale is cancelled in the period in which the determination is made, and the property is returned to the consignor or placed in a later event-based or online auction. Historically cancelled sales have not been material.
Online marketplace commission revenue is reduced by a provision for disputes, which is an estimate of disputed items that are expected to be settled at a cost to the Company, related to settlements of discrepancies under the Company’s equipment condition certification program. The equipment condition certification refers to a written inspection report provided to potential buyers that reflects the condition of a specific piece of equipment offered for sale, and includes ratings, comments, and photographs of the equipment following inspection by one of the Company’s equipment inspectors.
The equipment condition certification provides that a buyer may file a written dispute claim during an eligible dispute period for consideration and resolution at the sole determination of the Company if the purchased equipment is not substantially in the condition represented in the inspection report. Typically disputes under the equipment condition certification program are settled with minor repairs or additional services, such as washing or detailing the item; the estimated costs of such items or services are included in the provision for disputes.
Commission revenue are recorded net of commissions owed to third parties, which are principally the result of situations when the commission is shared with a consignor in an auction guarantee risk and reward sharing arrangement.
Underwritten commission contracts can take the form of guarantee contracts. Guarantee contracts typically include a pre-negotiated percentage of the guaranteed gross proceeds plus a percentage of proceeds in excess of the guaranteed amount. If actual auction proceeds are less than the guaranteed amount, commission is reduced; if proceeds are sufficiently lower, the Company can incur a loss on the sale. Losses, if any, resulting from guarantee contracts are recorded in the period in which the relevant auction is completed. If a loss relating to a guarantee contract held at the period end to be sold after the period end is known or is probable and estimable at the financial statement reporting date, the loss is accrued in the financial statements for that period. The Company’s exposure from these guarantee contracts fluctuates over time.
Other services revenue also includes fees for refurbishment, logistical services, financing, appraisal fees and other ancillary service fees. Fees are recognized in the period in which the service is provided to the customer.
8
Underwritten commission contracts can take the form of inventory contracts. Revenue related to inventory contracts is recognized in the period in which the sale is completed, title to the property passes to the purchaser and the Company has fulfilled any other obligations that may be relevant to the transaction. In its role as auctioneer, the Company auctions its inventory to equipment buyers through the auction process. Following the sale of the item, the Company invoices the buyer for the purchase price of the asset, taxes, and, if applicable, the buyer transaction fee, and collects payment from the buyer.
On the fall of the auctioneer’s hammer, the highest bidder becomes legally obligated to pay the full purchase price, which is the hammer price of the property purchased. Title to the property is transferred in exchange for the hammer price, and if applicable, the buyer transaction fee plus applicable taxes.
(c) Costs of services
Costs of services are comprised of expenses incurred in direct relation to conducting auctions (“direct expenses”), earning online marketplace revenue, and earning other fee revenue. Direct expenses include direct labour, buildings and facilities charges, travel, advertising and promotion costs and fees paid to unrelated third parties who introduce the Company to equipment sellers who sell property at the Company’s auctions and marketplaces.
Costs of services incurred to earn online marketplace revenue in addition to the costs listed above also include inspection costs. Inspections are generally performed at the seller’s physical location. The cost of inspections includes payroll costs and related benefits for the Company’s employees that perform and manage field inspection services, the related inspection report preparation and quality assurance costs, fees paid to contractors who perform field inspections, related travel and incidental costs for the Company’s inspection service organization, and office and occupancy costs for its inspection services personnel. Costs of earning online marketplace revenue also include costs for the Company’s customer support, online marketplace operations, logistics, title and lien investigation functions.
Costs of services incurred in earning other fee revenue include ancillary and logistical service expenses, direct labour (including commissions on sales), software maintenance fees, and materials. Costs of services exclude depreciation and amortization expenses.
(d) Cost of inventory sold
Cost of inventory sold includes the purchase price of assets sold for the Company’s own account and is determined using a specific identification basis.
(e) Share-based payments
The Company classifies a share-based payment award as an equity or liability payment based on the substantive terms of the award and any related arrangement.
Equity-classified share-based payments
Share unit plans
The Company has a senior executive performance share unit (“PSU”) plan and an employee PSU plan that provides for the award of PSUs to certain senior executives and employees, respectively, of the Company. The Company has the option to settle certain share unit awards in cash or shares and expects to settle them in shares. The cost of PSUs granted is measured at the fair value of the underlying PSUs at the grant date. PSUs vest based on the passage of time and achievement of performance criteria.
The Company also has a senior executive restricted share unit (“RSU”) plan and an employee RSU plan that provides for the award of RSUs to certain senior executives and employees, respectively, of the Company. The Company has the option to settle certain share unit awards in cash or shares and expects to settle all grants on and after 2017 in shares. The cost of RSUs granted is measured at the fair value based on the fair value of the Company’s common shares at the grant date. RSUs vest based on the passage of time and include restrictions related to employment.
9
(e) Share-based payments (continued)
Equity-classified share-based payments (continued)
Share unit plans (continued)
This fair value of awards expected to vest under these plans is expensed over the respective remaining service period of the individual awards, on an accelerated recognition basis, with the corresponding increase to APIC recorded in equity. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in earnings, such that the consolidated expense reflects the revised estimate, with a corresponding adjustment to equity. Dividend equivalents on the equity-classified PSUs and RSUs are recognized as a reduction to retained earnings over the service period.
Stock option plans
The Company has three stock option compensation plans that provide for the award of stock options to selected employees, directors and officers of the Company. The cost of options granted is measured at the fair value of the underlying option at the grant date using the Black-Scholes option pricing model. The fair value of options expected to vest under these plans is expensed over the respective remaining service period of the individual awards, on an accelerated recognition basis, with the corresponding increase to APIC recorded in equity. Upon exercise, any consideration paid on exercise of the stock options and amounts fully amortized in APIC are credited to the common shares.
Liability-classified share-based payments
The Company maintains other share unit compensation plans that vest over a period of up to three years after grant. Under those plans, the Company is either required or expects to settle vested awards on a cash basis or by providing cash to acquire shares on the open market on the employee’s behalf, where the settlement amount is determined based on the average price of the Company’s common shares prior to the vesting date or, in the case of deferred share unit (“DSU”) recipients, following cessation of service on the Board of Directors.
These awards are classified as liability awards, measured at fair value at the date of grant and re-measured at fair value at each reporting date up to and including the settlement date. The determination of the fair value of the share units under these plans is described in note 16. The fair value of the awards is expensed over the respective vesting period of the individual awards with recognition of a corresponding liability. Changes in fair value after vesting are recognized through compensation expense. Compensation expense reflects estimates of the number of instruments expected to vest.
The impact of forfeitures and fair value revisions, if any, are recognized in earnings such that the cumulative expense reflects the revisions, with a corresponding adjustment to the settlement liability. Liability-classified share unit liabilities due within 12 months of the reporting date are presented in trade and other payables while settlements due beyond 12 months of the reporting date are presented in other non-current liabilities.
(f) Leases
The Company determines if an arrangement is a lease at inception. The Company may have lease agreements with lease and non-lease components, which are generally accounted for separately. Additionally, for certain vehicle and equipment leases, management applies a portfolio approach to account for the right-of-use (“ROU”) assets and liabilities for assets leased with similar lease terms.
Operating leases
Operating leases are included in other non-current assets, trade and other payables, and other non-current liabilities in our consolidated balance sheets if the initial lease term is greater than 12 months. For leases with an initial term of 12 months or less the Company recognizes those lease payments on a straight-line basis over the lease term.
10
(f) Leases (continued)
Operating leases (continued)
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, management uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Management uses the implicit rate when readily determinable. The Company includes lease payments for renewal or termination options in its determination of lease term, ROU asset, and lease liability when it is reasonably certain that the Company will exercise these options. Lease expense for lease payments is recognized on a straight-line basis over the lease term and are included in Costs of services or Selling, general, and administrative (“SG&A”) expenses.
Finance leases
Finance lease ROU assets are included in property, plant and equipment, trade and other payables, and other non-current liabilities in our consolidated balance sheets.
Finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, management uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Management uses the implicit rate when readily determinable. The Company includes lease payments for renewal, purchase options, or termination options in its determination of lease term, ROU asset, and lease liability when it is reasonably certain that the Company will exercise these options. Finance lease ROU assets are generally amortized over the lease term and are included in depreciation expense. The interest on the finance lease liabilities is included in interest expense.
(g) Inventories
Inventory consists of equipment and other assets purchased for resale in an upcoming live on site auction or online marketplace event. The Company typically purchases inventory for resale through a competitive process where the consignor or vendor has determined this to be the preferred method of disposition through the auction process. In addition, certain jurisdictions require auctioneers to hold title to assets and facilitate title transfer on sale. Inventory is valued at the lower of cost and net realizable value where net realizable value represents the expected sale price upon disposition less make-ready costs and the costs of disposal and transportation. As part of its government business, the Company purchases inventory for resale as part of its commitment to purchase certain surplus government property (note 18). The significant elements of cost include the acquisition price of the inventory and make-ready costs to prepare the inventory for sale that are not selling expenses and in-bound transportation costs. Write-downs to the carrying value of inventory are recorded in cost of inventory sold on the consolidated income statement.
(h) Impairment of long-lived and indefinite-lived assets
Long-lived assets, comprised of property, plant and equipment and intangible assets subject to amortization, are assessed for impairment whenever events or circumstances indicate that their carrying value may not be recoverable. For the purpose of impairment testing, long-lived assets are grouped and tested for recoverability at the lowest level that generates independent cash flows. An impairment loss is recognized when the carrying value of the assets or asset groups is greater than the future projected undiscounted cash flows. The impairment loss is calculated as the excess of the carrying value over the fair value of the asset or asset group. Fair value is based on valuation techniques or third party appraisals. Significant estimates and judgments are applied in determining these cash flows and fair values.
11
(h) Impairment of long-lived and indefinite-lived assets (continued)
Indefinite-lived intangible assets are tested annually for impairment as of December 31, and between annual tests if indicators of potential impairment exist. The Company has the option of performing a qualitative assessment to first determine whether the quantitative impairment test is necessary. This involves an assessment of qualitative factors to determine the existence of events or circumstances that would indicate whether it is more likely than not that the carrying amount of the indefinite-lived intangible asset is less than its fair value. If the qualitative assessment indicates it is not more likely than not that the carrying amount is less than its fair value, a quantitative impairment test is not required. Where a quantitative impairment test is required, the procedure is to compare the indefinite-lived intangible asset’s fair value with its carrying amount. An impairment loss is recognized as the difference between the indefinite-lived intangible asset’s carrying amount and its fair value.
(i) Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise over the fair value assigned to the assets acquired and liabilities assumed in a business combination.
Goodwill is not amortized, but it is tested annually for impairment at the reporting unit level as of December 31, and between annual tests if indicators of potential impairment exist. The Company has the option of performing a qualitative assessment of a reporting unit to first determine whether the quantitative impairment test is necessary. This involves an assessment of qualitative factors to determine the existence of events or circumstances that would indicate whether it is more likely than not that the carrying amount of the reporting unit to which goodwill belongs is less than its fair value. If the qualitative assessment indicates it is not more likely than not that the reporting unit’s carrying amount is less than its fair value, a quantitative impairment test is not required.
If a quantitative impairment test is required, the procedure is to identify potential impairment by comparing the reporting unit’s fair value with its carrying amount, including goodwill. The reporting unit’s fair value is determined using various valuation approaches and techniques that involve assumptions based on what the Company believes a hypothetical marketplace participant would use in estimating fair value on the measurement date. An impairment loss is recognized as the difference between the reporting unit’s carrying amount and its fair value. If the difference between the reporting unit’s carrying amount and fair value is greater than the amount of goodwill allocated to the reporting unit, the impairment loss is restricted by the amount of the goodwill allocated to the reporting unit.
(j) New and amended accounting standards
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The Company adopted the new standard utilizing the “optional transition method”, which permits the Company to apply the new lease standard at the adoption date. As the optional transition method is being utilized, the Company’s reporting for the comparative periods presented in the financial statements in which it adopts Topic 842 will continue to be reported pursuant to Topic 840.
On adoption, the Company elected to utilize the package of practical expedients permitted within the new standard, which among other things, allows the Company to carryforward the historical lease classification. In addition, the Company elected to utilize the hindsight practical expedient to determine the reasonably certain lease term for existing leases. While lease classification will remain unchanged, hindsight will result in generally longer accounting lease terms where the Company has determined that it is reasonably certain to exercise certain renewal options and thereby increasing the useful lives of the corresponding leasehold improvements. The Company also elected not to recognize the lease assets and liabilities for leases with an initial term of 12 months or less and will recognize those lease payments on a straight-line basis over the lease term.
On adoption of the new standard the Company recognized ROU assets of $103,897,000 with a corresponding increase in operating lease liability. Offsetting the increase in ROU assets recognized was the reclassification of prepaid rent and deferred rent liabilities to ROU assets of $5,752,000. There was no impact on retained earnings or cash flows.
The adoption of the standard had no impact on our debt-covenant compliance under our current agreements.
12
(k) Recent accounting standards not yet adopted
2. Significant judgments, estimates and assumptions
The preparation of financial statements in conformity with US GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Future differences arising between actual results and the judgments, estimates and assumptions made by the Company at the reporting date, or future changes to estimates and assumptions, could necessitate adjustments to the underlying reported amounts of assets, liabilities, revenues and expenses in future reporting periods.
Judgments, estimates and underlying assumptions are evaluated on an ongoing basis by management, and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. However, existing circumstances and assumptions about future developments may change due to market changes or circumstances and such changes are reflected in the assumptions when they occur. Significant items subject to estimates include purchase price allocations, the carrying amounts of goodwill, the useful lives of long-lived assets, share based compensation, the determination of lease term and lease liabilities, deferred income taxes, reserves for tax uncertainties, and other contingencies.
3. Seasonality
The Company’s operations are both seasonal and event driven. Revenues tend to be the highest during the second and fourth calendar quarters. The Company generally conducts more live, on site auctions during these quarters than during the first and third calendar quarters. Late December through mid-February and mid-July through August are traditionally less active periods. Online volumes are similarly affected as supply of used equipment is lower in the third quarter as it is actively being used and not available for sale.
4. Segmented information
The Company’s principal business activity is the management and disposition of used industrial equipment and other durable assets. The Company’s operations are comprised of one reportable segment and other business activities that are not reportable as follows:
A&M
Other
Consolidated
150,093
28,484
494,580
90,975
261,312
895,472
21,431
14,951
74,799
47,920
SG&A expenses
88,138
5,553
268,786
17,803
Segment profit
49,333
7,980
57,313
179,184
25,252
204,436
Depreciation and amortization expenses ("D&A")
Gain on disposition of property, plant and equipment ("PPE")
(6,760)
(28,800)
14
4. Segmented information (continued)
134,604
26,770
463,076
88,660
218,576
725,394
20,059
12,994
62,888
49,855
83,542
4,781
272,503
14,549
40,634
49,629
158,169
24,256
182,425
D&A expenses
Gain on disposition of PPE
(4,791)
(19,091)
The Company’s geographic breakdown of total revenue as determined by the revenue and location of assets, which represents property, plant and equipment is as follows:
United
States
Europe
Total revenues for the three months ended:
September 30, 2019
156,380
56,129
34,522
42,765
September 30, 2018
114,410
52,711
43,935
34,290
Total revenues for the nine months ended:
552,186
178,069
136,590
119,602
392,904
201,296
123,335
96,519
5. Revenue
The Company’s revenue from the rendering of services is as follows:
Service revenue:
Commissions
90,928
87,548
317,674
313,539
Fees
87,649
73,826
267,881
238,197
15
6. Operating expenses
Ancillary and logistical service expenses
13,285
11,682
43,516
46,242
Employee compensation expenses
11,555
10,170
37,268
30,120
Buildings, facilities and technology expenses
1,655
1,990
5,961
7,280
Travel, advertising and promotion expenses
5,765
5,921
24,440
20,535
Other costs of services
4,122
3,290
11,534
8,566
60,680
56,959
186,033
186,951
14,569
15,058
45,066
45,767
10,033
9,302
28,400
27,821
Professional fees
3,685
2,983
11,915
12,638
Other SG&A expenses
4,724
4,021
15,175
13,875
Acquisition-related costs consist of operating expenses directly incurred as part of a business combination, due diligence and integration planning related to the IronPlanet acquisition, and continuing employment costs that are recognized separately from our business combinations.
IronPlanet:
Other acquisition-related costs
1,756
82
2,876
Other acquisitions:
Continuing employment costs
34
251
121
2,104
549
59
Depreciation expense
7,305
7,252
21,630
21,460
Amortization expense
10,387
9,471
30,289
27,991
16
7. Income taxes
At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. The estimate reflects, among other items, management’s best estimate of operating results. It does not include the estimated impact of foreign exchange rates or unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.
For the three months ended September 30, 2019, income tax expense was $6,760,000, compared to an income tax expense of $4,791,000 for the same period in 2018. The effective tax rate was 21% in the third quarter of 2019, compared to 17% in the third quarter of 2018. The effective tax rate increased in the third quarter of 2019 compared to the third quarter of 2018 primarily due to a greater proportion of annual income subject to tax in jurisdictions with higher tax rates.
For the nine months ended September 30, 2019, income tax expense was $28,800,000, compared to an income tax expense of $19,091,000 for the same period in 2018. The effective tax rate was 23% for the nine months ended September 30, 2019, compared to 18% for the nine months ended September 30, 2018. The effective tax rate increased in the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, primarily due to a greater proportion of annual income subject to tax in jurisdictions with higher tax rates and impacts of the U.S. tax reform.
The Tax Cuts and Jobs Act, or TCJA was enacted in the United States on December 22, 2017. It is possible that additional legislation, regulations and/or guidance may be issued, and possibly with retroactive effect, in the future that may result in additional adjustments to the tax expense recorded related to the TCJA.
8. Earnings per share attributable to stockholders
Basic earnings per share (“EPS”) attributable to stockholders was calculated by dividing the net income attributable to stockholders by the weighted average (“WA”) number of common shares outstanding during the period. Diluted EPS attributable to stockholders was calculated by dividing the net income attributable to stockholders by the WA number of shares of common stock outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include unvested PSUs, RSUs, and outstanding stock options. The dilutive effect of potentially dilutive securities is reflected in diluted EPS by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
WA
Per
attributable to
number
share
stockholders
of shares
amount
Effect of dilutive securities:
Share units
481,268
430,175
Stock options
896,515
750,495
17
9. Supplemental cash flow information
(123,667)
(159,258)
58,791
(49,140)
Advances against auction contracts
4,528
2,434
Prepaid expenses and deposits
309
(5,282)
(4,123)
10,829
248,587
130,185
(48,882)
15,827
14,050
6,836
Share unit liabilities
1,204
(10,221)
2,138
Interest paid, net of interest capitalized
34,955
36,278
Interest received
2,491
2,009
Net income taxes paid
23,193
7,902
Non-cash purchase of property, plant and equipment under capital lease
10,747
5,490
Cash, cash equivalents, and restricted cash
18
10. Fair value measurement
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement or disclosure:
December 31, 2018
Carrying
Category
Fair value
Fair values disclosed:
Level 1
Level 2
Senior unsecured notes
490,480
521,250
489,136
487,813
Term loans
198,848
200,426
222,162
224,582
The carrying value of the Company’s cash and cash equivalents, restricted cash, trade and other receivables, advances against auction contracts, auction proceeds payable, trade and other payables, and short term debt approximate their fair values due to their short terms to maturity. The carrying value of the term loans, before deduction of deferred debt issue costs, approximates their fair value as the interest rates on the loans were short-term in nature. The fair value of the senior unsecured notes is determined by reference to a quoted market price.
11. Other current assets
11,055
15,558
Assets held for sale
15,051
18,258
18,446
Reclassified from (to) property, plant and equipment
As at September 30, 2019, the Company’s assets held for sale consisted of two excess properties located in the United States. Management made the strategic decision to sell these properties to maximize the Company’s return on invested capital. The estimated sales proceeds are expected to be in excess of the current book value. The properties have been actively marketed for sale, and management expects the sales to be completed within 12 months of September 30, 2019. These properties belong to the A&M reportable segment.
19
12. Other non-current assets
Right-of-use assets
117,898
Tax receivable
12,824
12,705
Equity-accounted investments
4,201
4,010
Deferred debt issue costs
1,564
2,017
11,888
10,663
13. Debt
Carrying amount
Long-term debt:
Term loans:
Denominated in Canadian dollars, secured, bearing interest at a weighted average rate of 3.951%, due in monthly installments of interest only and quarterly installments of principal, maturing in October 2021
157,736
161,891
Denominated in United States dollars, secured, bearing interest at a weighted average rate of 4.200%, due in weekly installments of interest only and quarterly installments of principal, maturing in October 2021
42,690
62,690
Less: unamortized debt issue costs
(1,578)
(2,419)
Senior unsecured notes:
Bearing interest at 5.375% due in semi-annual installments, with the full amount of principal due in January 2025
500,000
(9,520)
(10,864)
Total long-term debt
689,328
711,298
Total debt
695,133
731,194
Current portion
Non-current portion
During the three and nine months ended September 30, 2019, the Company made voluntary prepayments totalling $10,000,000 and $20,000,000, respectively (2018 - $nil and $50,000,000, respectively) on the term loan denominated in United States dollars. Prepayments are applied against future scheduled mandatory payments. The amount available pursuant to the term loan facility was only available to finance the acquisition of IronPlanet and will not be available for other corporate purposes upon repayment of amounts borrowed under that facility.
Short-term debt is comprised of drawings in different currencies on the Company’s committed revolving credit facilities, and for the three months ended September 30, 2019, have a weighted average interest rate of 2.1% (December 31, 2018: 2.3%).
As at September 30, 2019, the Company had unused committed revolving credit facilities aggregating $488,979,000 of which $484,259,000 is available until October 27, 2021.
20
14. Other non-current liabilities
Operating lease liability
112,244
Tax payable
20,159
22,583
Finance lease liability
14,640
10,146
3,357
9,251
15. Equity and dividends
Share capital
Preferred stock
Unlimited number of senior preferred shares, without par value, issuable in series.
Unlimited number of junior preferred shares, without par value, issuable in series.
All issued shares are fully paid. No preferred shares have been issued.
Dividends
Declared and paid
The Company declared and paid the following dividends during the nine months ended September 30, 2019 and 2018:
Dividend
Declaration date
per share
Record date
dividends
Payment date
Nine months ended September 30, 2019:
Fourth quarter 2018
January 25, 2019
0.1800
February 15, 2019
19,568
March 8, 2019
First quarter of 2019
May 8, 2019
May 29, 2019
19,592
June 19, 2019
Second quarter of 2019
August 8, 2019
0.2000
August 28, 2019
21,631
September 18, 2019
Nine months ended September 30, 2018:
Fourth quarter 2017
January 26, 2018
0.1700
February 16, 2018
18,246
March 9, 2018
First quarter of 2018
May 9, 2018
May 30, 2018
18,342
June 20, 2018
Second quarter of 2018
August 7, 2018
August 29, 2018
19,528
September 19, 2018
Declared and undistributed
Subsequent to September 30, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.20 cents per common share, payable on December 18, 2019 to stockholders of record on November 27, 2019. This dividend payable has not been recognized as a liability in the financial statements. The payment of this dividend will not have any tax consequences for the Company.
Foreign currency translation reserve
Foreign currency translation adjustments include intra-entity foreign currency transactions that are of a long-term investment nature, which generated net loss of $4,623,000 and $2,971,000 for the three and nine months ended September 30, 2019 (2018: net losses of $1,072,000 and $6,256,000).
16. Share-based payments
Share-based payments consist of the following compensation costs:
Stock option compensation expense:
2,066
6,354
162
357
Share unit expense:
Equity-classified share units
2,851
2,718
Liability-classified share units
589
300
829
2,245
Employee share purchase plan - employer contributions
567
538
1,692
1,630
5,660
5,784
16,127
19,564
Share unit expense and employer contributions to the employee share purchase plan are recognized in SG&A expenses.
Stock option activity for the nine months ended September 30, 2019 is presented below:
Common
remaining
Aggregate
shares under
exercise
contractual
intrinsic
option
price
life (in years)
value
Outstanding, December 31, 2018
4,013,863
26.41
7.2
25,374
Granted
914,068
34.03
Exercised
(544,576)
22.84
7,939
Forfeited
(61,358)
26.26
Outstanding, September 30, 2019
4,321,997
28.47
49,396
Exercisable, September 30, 2019
2,548,247
25.76
6.1
36,041
The significant assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2019 and 2018 are presented in the following table on a weighted average basis:
Risk free interest rate
2.5
%
2.7
Expected dividend yield
2.06
2.11
Expected lives of the stock options
5 years
Expected volatility
26.8
28.1
As at September 30, 2019, the unrecognized stock-based compensation cost related to the non-vested stock options was $6,309,000, which is expected to be recognized over a weighted average period of 2.2 years.
22
16. Share-based payments (continued)
Share unit activity for the nine months ended September 30, 2019 is presented below:
Equity-classified awards
Liability-classified awards
PSUs
RSUs
DSUs
WA grant
date fair
Number
670,288
31.46
207,986
28.99
113,435
28.16
168,225
36.17
35,251
35.58
19,487
34.93
Vested and settled
(251,883)
30.33
(265)
31.98
(20,282)
31.76
(4,797)
34.89
566,348
33.00
238,175
29.74
132,922
28.90
Senior executive and employee PSU plans
The Company grants PSUs under a senior executive PSU plan and an employee PSU plan (the “PSU Plans”). Under the PSU Plans, the number of PSUs that vest is conditional upon specified market, service, or performance vesting conditions being met. The PSU Plans allow the Company to choose whether to settle the awards in cash or in shares. The Company intends to settle in shares. With respect to settling in shares, the Company has the option to either (i) arrange for the purchase shares on the open market on the employee’s behalf based on the cash value that otherwise would be delivered, or (ii) to issue a number of shares equal to the number of units that vest.
The fair value of the equity-classified PSUs awarded in 2018 is estimated on modification date and on the date of grant using a Monte-Carlo simulation model as these awards are subject to market vesting conditions. The significant assumptions used to estimate the fair value of the equity-classified PSUs awarded during the nine months ended September 30, 2018, are presented in the following table on a weighted average basis:
1.9
2.09
Expected lives of the PSUs
3 years
31.1
Average expected volatility of comparable companies
34.1
The fair value of the equity-classified PSUs awarded in 2019 is estimated based on the Company’s common share price at grant date, as these awards are not subject to market vesting conditions.
As at September 30, 2019, the unrecognized share unit expense related to equity-classified PSUs was $8,751,000, which is expected to be recognized over a weighted average period of 1.8 years.
The Company has RSU plans that are equity-settled and not subject to market vesting conditions.
As at September 30, 2019, the unrecognized share unit expense related to equity-classified RSUs was $3,144,000, which is expected to be recognized over a weighted average period of 1.4 years.
23
The Company has DSU plans that are cash-settled and not subject to market vesting conditions.
Fair values of DSUs are estimated on grant date and at each reporting date. DSUs are granted under the DSU plan to members of the Board of Directors. There is no unrecognized share unit expense related to liability-classified DSUs as they vest immediately and are expensed upon grant.
As at September 30, 2019, the Company had a total share unit liability of $5,159,000 (December 31, 2018: $3,714,000) in respect of share units under the DSU plans.
Employee share purchase plan
The Company has an employee share purchase plan that allows all employees that have completed two months of service to contribute funds to purchase common shares at the current market value at the time of share purchase. Employees may contribute up to 4% of their salary. The Company will match between 50% and 100% of the employee’s contributions, depending on the employee’s length of service with the Company.
17. Leases
The Company’s breakdown of lease expense for the three and nine months ended September 30, 2019 is as follows:
Three months
Nine months
ended
Operating lease cost
4,096
13,379
Finance lease cost
Amortization of leased assets
2,103
5,555
Interest on lease liabilities
211
565
Short-term lease cost
1,889
6,964
Sublease income
(150)
(447)
8,149
26,016
The Company has entered into commercial leases for various auction sites and offices located in North America, Europe, the Middle East and Asia. The majority of these leases are non-cancellable. The Company also has further operating leases for computer equipment, certain motor vehicles and small office equipment where it is not in the best interest of the Company to purchase these assets.
The majority of the Company’s operating leases have a fixed term with a remaining life between one month and 20 years, with renewal options included in the contracts. The leases have varying contract terms, escalation clauses and renewal options. Generally there are no restrictions placed upon the lessee by entering into these leases, other than restrictions on use of property, sub-letting and alterations. At the inception of a lease, the Company determines whether it is reasonably certain to exercise a renewal option and includes the options in the determination of the lease term and the lease liability where it is reasonably certain to exercise the option. If the Company’s intention is to exercise an option subsequent to the commencement of the lease, the Company will re-assess the lease term. The Company has included certain renewal options in its operating lease liabilities for key property leases for locations that have strategic importance to the Company such as its Corporate Head Office. The Company has not included any purchase options available within its operating lease portfolio in its determination of its operating lease liability.
24
17. Leases (continued)
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
Remainder of 2019
3,795
2020
15,922
2021
13,472
2022
12,124
2023
10,384
Thereafter
113,731
Total future minimum lease payments
169,428
less: imputed interest
(46,436)
Total operating lease liability
122,992
less: operating lease liability - current
(10,748)
Total operating lease liability - non current
At September 30, 2019, the weighted average remaining lease term for operating leases is 15.6 years and the weighted average discount rate is 4.2%.
The Company has entered into finance lease arrangements for certain vehicles, computer and yard equipment and office furniture. The majority of the leases have a fixed term with a remaining life of one month to six years with renewal options included in the contracts. In certain of these leases, the Company has the option to purchase the leased asset at fair market value or a stated residual value at the end of the lease term. For certain leases such as vehicle leases the Company has included renewal options in the determination of its lease liabilities. The Company has not included any purchase options available within its finance lease portfolio in its determination of the finance lease liability.
As at September 30, 2019, the net carrying amount of computer and yard equipment and other assets under capital leases is $20,660,000 (December 31, 2018: $14,976,000), and is included in the total property, plant and equipment as disclosed on the consolidated balance sheets.
Net book
As at September 30, 2019
Cost
depreciation
Computer equipment
14,362
(6,812)
7,550
Yard and others
(4,687)
13,110
32,159
(11,499)
20,660
As at December 31, 2018
9,428
(3,992)
5,436
Yard and auto equipment
12,125
(2,585)
9,540
21,553
(6,577)
14,976
25
Finance leases (continued)
The future aggregate minimum lease payments under non-cancellable finance leases are as follows:
1,998
7,246
5,913
4,107
2,517
843
22,624
(1,357)
Total finance lease liability
21,267
less: finance lease liability - current
(6,627)
Total finance lease liability - non current
At September 30, 2019, the weighted average remaining lease term for finance leases is 3.5 years and the weighted average discount rate is 4.0%.
Subleases
As at September 30, 2019, the total future minimum sublease payments expected to be received under non-cancellable subleases is $734,000.
18. Commitments
Commitment for inventory purchase
The Company entered into a two-year non-rolling stock surplus contract with the U.S. Government Defense Logistics Agency (the “DLA”) in December 2017 with the option to extend for up to four-years. Pursuant to the contract the performance period commenced in April 2018 and concludes in March 2020.
The Company has committed to purchase between 150,000 and 245,900 units of property with an expected minimum value of $11,104,000 and up to $51,028,000 annually to the extent that goods are available from the DLA over each 12 month period relating to the purchase of inventory. At September 30, 2019, the Company has purchased $19,328,000 pursuant to the 12 month period of this contract which commenced in April 2019.
19. Contingencies
Legal and other claims
The Company is subject to legal and other claims that arise in the ordinary course of its business. Management does not believe that the results of these claims will have a material effect on the Company’s consolidated balance sheet or consolidated income statement.
Guarantee contracts
In the normal course of business, the Company will in certain situations guarantee to a consignor a minimum level of proceeds in connection with the sale at auction of that consignor’s equipment.
At September 30, 2019, there were $85,777,000 of assets guaranteed under contract, of which 80% is expected to be sold prior to December 31, 2019 with the remainder to be sold by June 30, 2020 (December 31, 2018: $41,461,000 of which 51% was expected to be sold prior to the end of March 31, 2019 with the remainder to be sold by May 31, 2020).
The outstanding guarantee amounts are undiscounted and before estimated proceeds from sale at auction.
26
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Forward-looking statements may appear throughout this report, including the following section “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements are typically identified by such words as “aim”, “anticipate”, “believe”, “could”, “continue”, “estimate”, “expect”, “intend”, “may”, “ongoing”, “plan”, “potential”, “predict”, “will”, “should”, “would”, “could”, “likely”, “generally”, “future”, “long-term”, or the negative of these terms, and similar expressions intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially.
While we have not described all potential risks related to our business and owning our common shares, the important factors discussed in “Part II, Item 1A: Risk Factors” of this Quarterly Report on Form 10-Q and in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com, are among those that we consider may affect our performance materially or could cause our actual financial and operational results to differ significantly from our expectations. Except as required by applicable securities law and regulations of relevant securities exchanges, we do not intend to update publicly any forward-looking statements, even if our expectations have been affected by new information, future events or other developments.
We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“US GAAP”). Except for Gross Transaction Value (“GTV”)1, which is a measure of operational performance and not a measure of financial performance, liquidity, or revenue, the amounts discussed below are based on our consolidated financial statements. Unless indicated otherwise, all tabular dollar amounts, including related footnotes, presented below are expressed in thousands of United States (“U.S.”) dollars.
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial data but not presented in our financial statements prepared in accordance with US GAAP. Certain of these data are considered “non-GAAP financial measures” under the SEC rules. The definitions of these non-GAAP financial measures and the reconciliations to their most directly comparable US GAAP financial measures are included either with the first use thereof or in the Non-GAAP Measures section within the MD&A. Non-GAAP financial measures referred to in this report are labeled as “non-GAAP measure” or designated as such with an asterisk (*). Please see pages 40-44 for explanations of why we use these non-GAAP measures and the reconciliation to the most comparable GAAP financial measures .
Beginning in the first quarter of 2019, we are no longer disclosing agency proceeds*. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2018 for more information.
Overview
Ritchie Bros. Auctioneers Incorporated (“Ritchie Bros.”, the “Company”, “we”, or “us”) (NYSE & TSX: RBA) was founded in 1958 in Kelowna, British Columbia, Canada and is a world leader in asset management and disposition of used industrial equipment and other durable assets, selling $4.96 billion of used equipment and other assets during 2018. Our expertise, unprecedented global reach, market insight, and trusted portfolio of brands provide us with a unique position in the used equipment market. We sell used equipment for our customers through live, unreserved auctions at 40 auction sites worldwide, which are also simulcast online to reach a global bidding audience and through our online marketplaces.
Through our unreserved auctions, online marketplaces, and private brokerage services, we sell a broad range of used and unused equipment, including earthmoving equipment, truck trailers, government surplus, oil and gas equipment and other industrial assets. Construction and heavy machinery comprise the majority of the equipment sold. Customers selling equipment through our sales channels include end users (such as construction companies), equipment dealers, original equipment manufacturers (“OEMs”) and other equipment owners (such as rental companies). Our customers participate in a variety of sectors, including heavy construction, transportation, agriculture, energy, and mining.
1 GTV represents total proceeds from all items sold at our live on site auctions and online marketplaces. GTV is not a measure of financial performance, liquidity, or revenue, and is not presented in our consolidated financial statements.
We operate globally with locations in more than 13 countries, including the U.S., Canada, Australia, the United Arab Emirates (“UAE”), and the Netherlands, and employ more than 2,300 full time employees worldwide.
Service Offerings
As part of our Auction and Marketplace (“A&M”) solutions, we offer our equipment seller and buyer customers multiple distinct, complementary, multi-channel brand solutions that address the range of their needs. Our global customer base has a variety of transaction options, breadth of services, and the widest selection of used equipment available to them. For a complete listing of channels and brand solutions available under our A&M segment, as well as our Other services segment, please refer to our Annual Report on Form 10-K for the year ended December 31, 2018, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com.
Contract options
As part of our A&M business, we offer sellers several contract options to meet their individual needs and sale objectives, including:
We refer to guarantee and inventory contracts as underwritten contracts.
We also provide a wide array of value-added services to make the process of selling and buying equipment convenient for our customers, including repair and refurbishment services, financial services through Ritchie Bros. Financial Services (“RBFS”), logistical services, and appraisals.
Seasonality
Our operations are both seasonal and event-driven. Total revenue and GTV tend to be the highest during the second and fourth calendar quarters. We generally conduct more live on site auctions during these quarters than during the first and third calendar quarters. Late December through mid-February and mid-July through August are traditionally less active periods. Online volumes are similarly affected as supply of used equipment is lower in the third quarter as it is actively being used and not available for sale.
Revenue Mix Fluctuations
Our revenue is comprised of service revenue and inventory sales revenue. Service revenue from A&M segment activities include commissions earned at our live auctions, online marketplaces, and private brokerage services, and various auction-related fees, including listing and buyer transaction fees. We also recognize revenues from our Other Services activities as service revenue. Inventory sales revenue is recognized as part of our A&M activities, and relates to revenues earned through our inventory contracts.
Inventory sales revenue can fluctuate significantly, as it changes based on whether our customers sell using a straight commission contract, guarantee contract, or an inventory contract at time of selling. Straight commission contracts and guarantee contracts will result in the commission being recognized as service revenue, while inventory contracts will result in the GTV of the equipment sold being recorded as inventory sales revenue with the related cost recognized in cost of inventory sold. As a result, a change in the revenue mix between service revenue and inventory sales revenue can have a significant impact on revenue growth percentages.
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Performance Overview
Net income attributable to stockholders for Q3 2019 increased 9% to $25.3 million, diluted earnings per share (“EPS”) attributable to stockholders increased 10% to $0.23 from $0.21 per share, while diluted adjusted EPS attributed to stockholders (non-GAAP measure) increased 28% to $0.23 from $0.18 per share compared to the same period in 2018.
Consolidated results:
Auctions & Marketplaces segment results:
Other Services segment results:
Other Company development:
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Results of Operations
Financial overview
Three months ended September 30,
% Change
(in U.S. $000's, except EPS)
2019 over 2018
Total service revenue
32
Service revenue as a % of total revenue
61.6
65.8
(420)
bps
59.4
67.8
(840)
Inventory sales revenue as a % of total revenue
38.4
34.2
420
40.6
32.2
840
38
61
(0)
Operating expenses
Cost of inventory sold as a % of operating expenses
41.0
34.7
630
44.6
33.8
1,080
Operating income margin
13.9
12.7
120
15.4
15.8
(40)
Net income attributable to stockholders
Adjusted net income attributable to stockholders*
19,328
82,183
Diluted earnings per share attributable to stockholders
Diluted adjusted EPS attributable to stockholders*
0.18
0.75
Effective tax rate
21.1
17.2
390
22.8
18.2
460
Total GTV
1,084,241
1,039,427
3,756,679
3,626,551
Service revenue as a % of total GTV- Rate
16.5
15.5
100
15.6
15.2
40
Inventory sales revenue as a % of total GTV- Mix
10.3
8.1
220
10.7
350
Total revenue increased 18% to $289.8 million in Q3 2019 and increased 21% to $986.4 million for the first nine months of 2019.
In Q3 2019, total service revenue increased 11% with commissions revenue increasing 4% and fee revenue increasing 19%. The increase in commissions revenue was in line with higher Service GTV, and due to strong performance in our US region, where we experienced volume growth through both our live auctions and weekly featured online businesses, combined with strong growth in our global guarantee rates. The increase in fee revenue was driven primarily by our buyer fees harmonization, fee growth from higher GTV and RBFS fee revenue growth.
For the first nine months of 2019, total service revenue increased 6%, driven by 1% increase in commissions revenue and a 12% increase in fee revenue. The slight increase in commissions revenue is in line with Service GTV. The 12% increase in fee revenue was primarily driven by the same reasons noted above.
Inventory sales revenue as a percent of total GTV increased to 10.3% from 8.1% in Q3 2019 and to 10.7% from 7.2% in the first nine months of 2019.
In Q3 2019, Inventory sales revenue increased 32% primarily due to higher inventory volumes at our US live auctions and our GovPlanet business.
30
For the first nine months of 2019, inventory sales revenue increased 53% primarily due to our US region, where we had a greater volume of inventory contracts at our live auctions including a large dispersal of pipeline equipment at the Columbus, Ohio auction in Q2 2019 and increased inventory contracts at our Orlando, Florida auction in Q1 2019. Continued revenue growth in our GovPlanet surplus contract also contributed to the increase in inventory sales revenue. There was also higher volume of inventory sales contracts in the International region, and the increase was partially offset by a non-repeating dispersal of large oil and gas equipment in Canada in Q1 2018.
Income tax expense and effective tax rate
At the end of each interim period, we estimate the effective tax rate expected to be applicable for the full fiscal year. The estimate reflects, among other items, management’s best estimate of operating results. It does not include the estimated impact of foreign exchange rates or unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.
For Q3 2019, income tax expense increased 41% to $6.8 million and our effective tax rate increased 390 bps to 21.1% compared to Q3 2018. For the first nine months of 2019, income tax expense increased by 51% to $28.8 million and our effective tax rate increased 460 bps to 22.8%. Increases in the effective tax rates for Q3 2019, and for the first nine months of 2019 were primarily due to a greater proportion of annual income subject to tax in jurisdictions with higher tax rates. In addition, the higher effective tax rate in the first nine months of 2019 reflects the impact of the US tax reform.
Accounting for the Tax Cuts and Jobs Act (“TCJA”) incorporates assumptions made based on our current enacted interpretations of the TCJA. The accounting may change as we receive additional clarification and implementation guidance of these regulations. In addition, changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the TCJA, could have an impact to our effective tax rate in future periods. We intend to monitor and assess the impact of any future changes in legislative interpretations or standards and adjust our tax provision in the quarter of enactment as new information becomes available.
Net income attributable to stockholders increased 9% to $25.3 million in Q3 2019 and increased 13% to $97.5 million for the first nine months of 2019. These increases were primarily due to higher operating income, partially offset by a non-recurring gain on sale of equity accounted investment recorded in Q3 2018 and higher taxes due to an increase in the effective tax rate.
Diluted EPS
Diluted EPS attributable to stockholders increased 10% to $0.23 per share in Q3 2019 and increased 13% to $0.89 per share for the first nine months of 2019.
U.S. dollar exchange rate comparison
We conduct global operations in many different currencies, with our presentation currency being the U.S dollar. The following table presents the variance in select foreign exchange rates over the comparative reporting periods:
Value of one local currency to U.S dollar
Period-end exchange rate
Canadian dollar
0.7551
0.7745
(3)
Euro
1.0900
1.1605
(6)
Australian dollar
0.6751
0.7226
(7)
Average exchange rate- Three months ended September 30,
0.7572
0.7651
(1)
1.1116
1.1633
0.6851
0.7309
Average exchange rate- Nine months ended September 30,
0.7524
0.7766
1.1236
1.1941
0.6990
(8)
For Q3 2019 and the first nine months of 2019, foreign exchange had an unfavourable impact on total revenue and a favourable impact on expenses. These impacts were primarily due to the fluctuations in the Euro and Canadian dollar exchange rates relative to the U.S. dollar.
Non-GAAP Measures
As part of management’s non-GAAP measures, we may eliminate the financial impact of adjusting items which are after-tax effects of significant non-recurring items that we do not consider to be part of our normal operating results, such as acquisition-related costs, management reorganization costs, severance, retention, gains/losses on sale of an equity accounted for investment, plant and equipment, impairment losses, and certain other items, which we refer to as ‘adjusting items’.
Adjusted net income attributed to stockholders (non-GAAP measure) increased 31%, to $25.3 million in Q3 2019 and increased 19% to $97.5 million for the first nine months of 2019.
Adjusted diluted EPS attributable to stockholders (non-GAAP measure) increased 28% to $0.23 from $0.18 in Q3 2019 and increased 19% to $0.89 from $0.75 for the first nine months of 2019.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (non-GAAP measure) increased 17%, to $59.3 million in Q3 2019 and increased 14% to $206.9 million for the first nine months of 2019.
Debt at the end of Q3 2019 represented 5.2 times net income as at and for the 12 months ended September 30, 2019. This compares to debt at Q3 2018, which represented 6.2 times net income as at and for the 12 months ended September 30, 2018. The decrease in this debt/net income multiplier was primarily due to lower debt balances at September 30, 2019 compared to September 30, 2018, as a result of our voluntary and involuntary debt repayments. The adjusted net debt/adjusted EBITDA (non-GAAP measure) was 1.4 times as at and for the 12 months ended September 30, 2019 compared to 2.2 times as at and for the 12 months ended September 30, 2018.
Segment Performance
We provide our customers with a wide array of services. The following table presents a breakdown of our consolidated results between the A&M segment and Other services segment. A complete listing of channels and brand solutions under the A&M segment, as well as our Other services segment, is available in our Annual Report on Form 10-K for the year ended December 31, 2018.
(in U.S $000's)
1,666
23,097
4,404
79,203
1,312
21,371
3,613
66,501
Auctions and Marketplaces Segment
Results of A&M segment operations are presented below for the comparative reporting periods.
A&M service revenue as a % of total A&M revenue
57.4
55.2
63.8
(860)
Inventory sales revenue as a % of total A&M revenue
42.6
44.8
36.2
860
A&M segment expenses
211,979
177,942
716,288
567,225
Cost of inventory sold as a % of A&M expenses
48.3
41.8
650
52.0
40.9
1110
A&M segment profit
A&M service revenue as a % of total GTV- Rate
13.8
12.9
90
13.2
12.8
33
Gross Transaction Value
We believe it is meaningful to consider revenue in relation to GTV. GTV by channel and by revenue type are presented below for the comparative reporting periods.
GTV by Channel
Live on site auctions
825,294
850,484
3,058,087
3,025,982
Percentage of total
76.1
81.8
81.4
83.4
Online marketplaces including featured(1) and other(2)
258,947
188,943
37
698,592
600,569
23.9
18.6
16.6
GTV
For the three and nine months ended September 30, 2019, GTV increased 4%, and excluding the impact of foreign exchange, GTV increased 5%.
In Q3 2019, the increase in GTV was led by strong growth in online marketplaces of 37%, partially offset by live on site auction volume declining 3%. Online marketplaces increased due to volume growth in International Marketplace-E, US strategic accounts and alliances, and GovPlanet. For our live on site auctions, the US region added new auctions and reported growth performance at our year-on-year industrial auctions. Despite this strong positive live GTV performance from the US, overall live was down due to a calendar shift of the larger Moerdijk, Netherlands auction to Q2 2019, lower demand within the energy and Canadian agriculture sectors, and softer performance at the Dubai, UAE auction from lower demand in the region.
For the first nine months of 2019, the increase in GTV was led by a 16% increase in online marketplaces and 1% growth in live on site auctions. Online marketplaces increased due to GovPlanet, growth in International Marketplace-E, and US strategic accounts and alliances. GTV from live on site auctions increased primarily due to increased volume at our US live on site auctions with growth performance at our year-on-year industrial auctions, as well as a $94 million auction in Columbus, Ohio and our largest auction held in Orlando, Florida. This increase was partially offset by a non-repeat of a large oil and gas equipment dispersal from our Q1 2018 Grande Prairie auction, lower volumes as a result of calendar shifts, and softer performance at the Dubai, UAE auction from lower demand in the region in Q3 2019.
GTV by Revenue Type
Service GTV
973,022
955,455
3,355,787
3,364,233
89.7
91.9
89.3
92.8
Inventory GTV
In Q3 2019, Service GTV increased 2%, while Inventory GTV increased 32%. For the first nine months of 2019, Service GTV was flat while Inventory GTV increased 53%. The increase in Inventory GTV for both the three and nine month periods were primarily driven by a strong volume performance in our US live auctions and continued growth in GovPlanet surplus contract.
We offer our customers the opportunity to use underwritten commission contracts to serve their disposition strategy needs, entering into such contracts where the risk and reward profile of the terms are agreeable. Our underwritten contracts, which includes inventory and guarantee contracts, increased as a percentage of total GTV to 17.8% in Q3 2019 compared to 15.5% in Q3 2018, primarily due to increased GTV signed with inventory contracts. For the first nine months of 2019, our underwritten contracts increased as a percentage of total GTV to 19.9% compared to 15.7% in the prior period.
Online bidding
Across all channels, 67% of total GTV was purchased by online buyers in Q3 2019 compared to 60% in Q3 2018. For the first nine months of 2019, GTV from online buyers was 63% compared to 58% in the comparable prior year period. These increases in internet bidders and online buyers demonstrate the continued growth in adoption of multi-channel participation at our auctions.
Industrial Live On Site Metrics
Total industrial live on site auction metrics
Number of auctions
140
130
Bidder registrations
165,500
123,000
35
508,750
383,500
Consignors
14,000
13,600
43,000
39,050
Buyers
34,800
31,400
109,050
96,750
Lots
98,400
89,000
305,150
273,500
In Q3 2019, we held one additional industrial auction, yet our GTV from our live on site auctions decreased 3%. During the quarter, we added some smaller scale auctions in the US, offset by a calendar shift of our larger Moerdijk, Netherlands auction to Q2 2019. We also held 13 fewer agricultural auctions in Canada, which are not included in the industrial live on site number of auctions.
For the first nine months of 2019, we held 10 additional industrial auctions and these additional auctions contributed to the 1% growth in our live on site auctions GTV. The 10 additional industrial auctions added were each of a smaller scale compared to our average auctions.
In Q3 2019, the total number of industrial lots increased 11% to 98,400 and the total number of lots including agricultural lots increased 6% to 100,000 lots. For the first nine months of 2019, total number of industrial lots increased 12% to 305,150 and the total number of lots including agricultural lots increased 9% to 326,500 lots. These increases were partially due to an increase in small value lots sold in the US.
GTV on a per lot basis generated at our industrial live on site auctions decreased 9% to $8,300 in Q3 2019 compared to $9,100 in Q3 2018, partially due to a higher number of small value lots sold in Canada and US, and price softening of agricultural equipment. For the first nine months of 2019, the GTV on a per lot basis generated at our industrial live on site auctions decreased 9% to $9,500 compared to $10,400 in the prior year for the same reasons discussed above.
12 months average industrial live on site auction metrics
12 months ended September 30,
20.4 million
18.8 million
3,525
2,694
262
2,118
1,846
For the 12 months ended September 30, 2019, we saw an increase in average GTV per industrial auction compared to the prior year periods.
Productivity
The majority of our business continues to be generated by our A&M segment operations. Sales Force Productivity within this segment is an operational statistic that we believe provides a gauge of the effectiveness of our Revenue Producers in increasing GTV. Revenue Producers is a term used to describe our revenue-producing sales personnel. This definition is comprised of Regional Sales Managers and Territory Managers.
Our Sales Force Productivity for the trailing 12-month period ended September 30, 2019 increased 5.3% to $11.9 million per Revenue Producer from $11.3 million per Revenue Producer for the trailing 12-month period ended September 30, 2018.
A&M revenue
Total A&M revenue increased 20% to $261.3 million in Q3 2019 and increased 23% to $895.5 million for the first nine months of 2019.
A&M revenue by geographical region are presented below:
United States
95,172
79,791
308,769
281,113
48,600
23,575
106
204,332
75,110
172
A&M revenue- United States
143,772
103,366
39
513,101
356,223
44
33,793
33,115
119,313
115,812
13,493
12,132
30,651
60,459
(49)
A&M revenue- Canada
47,286
45,247
149,964
176,271
(15)
International
21,128
21,698
66,498
66,151
49,126
48,265
165,909
126,749
A&M revenue- International
70,254
69,963
0
232,407
192,900
A&M total revenue
In Q3 2019, service revenue increased 19% primarily due to an increase in fees revenue driven by our full harmonization of buyer fees implemented in Q2 2019 and fee growth from higher GTV, including additional fees earned through the growth of our GovPlanet operations. Service revenue in the US also increased due to commissions earned from higher volumes on GTV growth, including GovPlanet, strategic accounts and alliances, partly offset by lower GTV transacted within the energy sector. Inventory sales revenue increased 106% due to the continued growth of the GovPlanet surplus contract and increased inventory contracts at the live on site auctions.
For the first nine months of 2019, service revenue increased 10% with fee growth from higher total GTV and also due to our full harmonization of buyer fees. Inventory sales revenue increased 172% primarily due to the continued growth of the GovPlanet surplus contract as it began operations in Q2 2018 and increased volume at our US live on site auctions with growth performance at our year-on-year comparative auctions.
In Q3 2019, service revenue increased 2% primarily due to the full harmonization of buyer fees and increased guarantee commissions rate from our industrial live on site auctions. This was partially offset by lower volume due to lower demand in the overall Canadian Agriculture sector. Inventory sales revenue increased 11% primarily due to a large equipment dispersal in Q3 2019.
For the first nine months of 2019, service revenue increased 3% primarily due to an increase in fee revenue from higher GTV earned, full harmonization of buyer fees and increased proportion of small value lots. Inventory sales revenue decreased 49% primarily due to the non-repeat of a large oil and gas equipment dispersal from our Q1 2018 Grande Prairie auction of $37 million.
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In Q3 2019, service revenue decreased 3% primarily due to lower volume resulting from a calendar shift of the Moerdijk, Netherlands auction to Q2 2019, and softer performance at our Dubai, UAE auction from lower demand in the region. This decrease was partially offset by higher commissions earned from increased volume at our international online marketplaces. Inventory sales revenue increased 2% primarily due to more inventory contracts in Japan and in Australia, and on our online marketplaces which was partially offset by the Moerdijk, Netherlands auction calendar shift.
For the first nine months of 2019, service revenue increased 1% due an increase in fees revenue from the full harmonization of buyer fees offset by lower commissions earned from a decrease in volume in Asia and Europe. The 31% increase in Inventory sales revenue was driven by a higher number of inventory contracts resulting from macroeconomic conditions in parts of Europe and Asia creating a more favourable supply environment. Australia also had an increased volume of inventory contracts compared to the same period prior year.
A&M costs of services increased 7% to $21.4 million in Q3 2019. The increase was primarily in line with growth in service revenue, including incremental GovPlanet operating costs.
For the first nine months of 2019, A&M cost of services increased 19% to $74.8 million primarily due to a one-time fee paid to an unrelated third party in connection with a dispersal of the pipeline equipment at our Columbus, Ohio auction, overall cost growth in-line with the growth in service revenue, and on-going costs to support the growth of our GovPlanet operations.
A&M cost of inventory sold increased 38% to $102.4 million in Q3 2019, in line with the overall increase in inventory sales volume.
For the first nine months of 2019, A&M cost of inventory sold increased 61% to $372.7 million, in line with the overall increase in inventory sales volume, as well as a result of the trailing effect of selling through some lower performing inventory packages acquired within our International region.
In Q3 2019, A&M SG&A expenses increased 6% to $88.1 million primarily due to higher year-over-year incentive compensation expenses on improved performance and to a lesser extent, on-going incremental GovPlanet costs, partially offset by the favourable impact of foreign exchange fluctuations.
For the first nine months of 2019, A&M segment SG&A expenses decreased 1% to $268.8 million due to foreign exchange fluctuations, offset by on-going incremental costs related to GovPlanet operations.
Other Services Segment
Results of Other Services segment operations are presented below for the comparative reporting periods.
Other services profit
(11)
In Q3 2019, Other Services revenue increased 6% to $28.5 million primarily due to $1.4 million higher revenue from RBFS.
In the first nine months of 2019, Other Services revenue increased 3% to $91.0 million primarily due to growth of RBFS revenue of $4.2 million, offset by lower ancillary service revenue of $2.6 million.
RBFS revenue increased 29% in Q3 2019 and 26% in the first nine months of 2019 driven by the growth in funded volume. Funded volume, which represents the amount of lending brokered by RBFS, increased 23% to $105.5 million in Q3 2019 and increased 31% to $404.3 million in the first nine months of 2019.
In Q3 2019, Other Services profit decreased 11% to $8.0 million primarily due to higher cost of services driven by our Ancillary operations and SG&A expenses from RBFS. For the first nine months of 2019, Other services profit increased 4% to $25.3 million in line with higher revenue in this segment.
Liquidity and Capital Resources
We assess our liquidity based on our ability to generate cash to fund operating, investing and financing activities. Our liquidity is primarily affected by fluctuations in cash provided by operating activities, payment of dividends, voluntary repayments of term debt, share repurchases, our net capital spending and significant acquisitions of businesses.
Operating activities continue to be the primary source of our cash, as well as borrowings from our revolving credit facilities to fund significant acquisitions and various business activities. Cash provided by operating activities can fluctuate significantly from period to period due to factors such as differences in the timing, size and number of auctions during the period, the volume of our inventory contracts, the timing of the receipt of auction proceeds from buyers and of the payment of net amounts due to consignors, as well as the location of the auction with respect to restrictions on the use of cash generated therein.
Cash flows
Operating activities
218
Investing activities
Financing activities
56
Effect of changes in foreign currency rates
142
Net increase in cash, cash equivalents, and restricted cash
639
Cash provided by operating activities increased $212.0 million in the first nine months of 2019. This increase was primarily due to a net positive impact in our operating assets and liabilities that was driven by our reduction in inventory, net cash flow from a higher number of auctions that transacted at the end of Q3 2019, and the increase in our net income over the comparative period.
Net cash used in investing activities decreased $8.1 million in the first nine months of 2019. This decrease was primarily due to $6.5 million less cash spent on property, plant and equipment additions over the comparative period, as well as a $4.7 million acquisition of Leake Auction Company in the first quarter of 2018. This was partially offset by net $3.0 million less proceeds on the sale of assets, with $6.1 million on the sale of an equity accounted for investment in the third quarter of 2018, offset by $3.1 million higher proceeds on the sale of property, plant and equipment over the comparative period.
Net cash used in financing activities increased $51.8 million in the first nine months of 2019. This increase was driven primarily by our $42.0 million share repurchase in the second quarter of 2019. Also contributing to the increase was an $18.0 million increase in net repayment of short-term debt, a $14.6 million reduction in cash raised from the issuance of share capital, and a $4.7 million increase in dividend payments over the comparative period. These were partially offset by $30.0 million lower net voluntary term debt repayments over the comparative period.
Dividend information
We declared and paid a regular cash dividend of $0.18 per common share for the quarter ended September 30, 2018, December 31, 2018, and March 31, 2019. We declared and paid a regular cash dividend of $0.20 per common share for the quarter ended June 30, 2019. We have declared, but not yet paid, a dividend of $0.20 per common share for the quarter ended September 30, 2019. All dividends that we pay are “eligible dividends” for Canadian income tax purposes unless indicated otherwise.
Our dividend payout ratio, which we calculate as dividends paid to stockholders divided by net income attributable to stockholders, decreased to 60.5% for the 12 months ended September 30, 2019 from 60.6% for the 12 months ended September 30, 2018. This reduction is primarily due to the increase in net income attributable to stockholders over the comparative period. Our adjusted dividend payout ratio (non-GAAP measure) decreased to 60.5% for the 12 months ended September 30, 2019 from 67.3% for the 12 months ended September 30, 2018.
Return on average invested capital
Our return on average invested capital is calculated as net income attributable to stockholders divided by our average invested capital. We calculate average invested capital over a trailing 12-month period by adding the average long-term debt over that period to the average stockholders’ equity over that period.
Return on average invested capital increased 70 bps to 8.6% for the 12-month period ending September 30, 2019 from 7.9% for the 12-month period ending September 30, 2018. This increase is primarily due to an increase in net income attributable to stockholders over the comparative period. Return on invested capital (“ROIC”) (non-GAAP measure) increased 150 bps to 8.6% during the 12 months ended September 30, 2019 compared to 7.1% for the 12 months period ending September 30, 2018. This increase was due to higher adjusted net income attributable to stockholders over the comparative period.
Debt covenants
We were in compliance with all financial and other covenants applicable to our credit facilities at September 30, 2019.
Share repurchase program
On May 9, 2019, we announced a share repurchase program for the repurchase of up to $100 million worth of our common shares, approved by the Toronto Stock Exchange (“TSX”), over a period of 12 months, ending May 8, 2020.
For the first nine months of 2019, we executed the following share repurchases at a total cost of $42.0 million.
Issuer purchases of equity securities
(d) Maximum
(c) Total number of
approximate dollar
shares purchased as part
value of shares that may
(a) Total number of shares
(b) Average price paid
of publicly announced
yet be purchased under
purchased
program
the program
May 23-31, 2019
387,480
33.49
87.0 million
June 1-21, 2019
836,194
34.71
58.0 million
1,223,674
34.32
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, financial performance, liquidity, capital expenditures or capital resources.
Critical Accounting Policies, Judgments, Estimates and Assumptions
Aside from the adoption of ASU 2016-02, Leases (Topic 842), noted below, there were no material changes in our critical accounting policies, judgments, estimates and assumptions from those disclosed in the following our Annual Report on Form 10-K for the year ended December 31, 2018, or in the notes to our consolidated financial statements included in “Part I, Item 1: Consolidated Financial Statements” in this Quarterly Report on Form 10-Q.
Effective January 1, 2019, we adopted Topic 842, which requires lessees to recognize almost all leases, including operating leases, on the balance sheet through a right-of-use asset and a corresponding lease liability. We utilized the optional transition approach, which permits us to apply the new lease standards at the adoption date.
On adoption of the new standard, we recognized a right-of-use asset relating to operating leases of $103,897,000 with a corresponding increase in operating lease liability. Offsetting the increase in the ROU asset recognized was the reclassification of a deferred rent liability from other non-current liability to ROU asset of $5,752,000. There was no impact on retained earnings or cash flows.
We reference various non-GAAP measures throughout this Quarterly Report on Form 10-Q. These measures do not have a standardized meaning and are, therefore, unlikely to be comparable to similar measures presented by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with generally accepted accounting principles. Non-GAAP financial measures referred to in this report are labeled as “non-GAAP measure” or designated as such with an asterisk (*).
Adjusted Operating Income* Reconciliation
Adjusting operating income* eliminates the financial impact of adjusting items which are significant non-recurring items that we do not consider to be part of our normal operating results, such as acquisition-related costs, management reorganization costs, and certain other items, which we refer to as ‘adjusting items’.
The following table reconciles adjusted operating income to operating income, which is the most directly comparable GAAP measure in our consolidated income statements.
(in U.S. $000's)
Pre-tax adjusting items:
Severance and retention
1,501
(100)
Adjusted operating income*
32,695
130,363
Adjusted Net Income Attributable to Stockholders* and Diluted Adjusted EPS Attributable to Stockholders* Reconciliation
We believe that adjusted net income attributable to stockholders* provides useful information about the growth or decline of our net income attributable to stockholders for the relevant financial period and eliminates the financial impact of adjusting items we do not consider to be part of our normal operating results. Diluted Adjusted EPS attributable to stockholders* eliminates the financial impact of adjusting items which are after-tax effects of significant non-recurring items that we do not consider to be part of our normal operating results, such as acquisition-related costs, management reorganization costs, and certain other items, which we refer to as ‘adjusting items’.
The following table reconciles adjusted net income attributable to stockholders* and diluted adjusted EPS attributable to stockholders* to net income attributable to stockholders and diluted EPS attributable to stockholders, which are the most directly comparable GAAP measures in our consolidated income statements.
(in U.S. $000's, except share and per share data)
Gain on sale of equity accounted for investment
Current income tax effect of adjusting items:
(376)
Weighted average number of dilutive shares outstanding
Diluted adjusted EPS attributable to Stockholders*
Adjusted EBITDA*
We believe adjusted EBITDA* provides useful information about the growth or decline of our net income when compared between different financial periods.
The following table reconciles adjusted EBITDA* to net income, which is the most directly comparable GAAP measures in, or calculated from, our consolidated income statements:
Add: depreciation and amortization expenses
Add: interest expense
10,090
10,473
31,023
32,720
(5)
Less: interest income
(517)
(780)
(34)
(2,435)
(2,009)
Add: income tax expense
41
51
59,297
50,885
206,882
181,865
Adjusted Net Debt* and Adjusted Net Debt/Adjusted EBITDA* Reconciliation
We believe that comparing adjusted net debt/adjusted EBITDA* on a trailing 12-month basis for different financial periods provides useful information about the performance of our operations as an indicator of the amount of time it would take us to settle both our short and long-term debt. We do not consider this to be a measure of our liquidity, which is our ability to settle only short-term obligations, but rather a measure of how well we fund liquidity. Measures of liquidity are noted under “Liquidity and Capital Resources”.
The following table reconciles adjusted net debt* to debt, adjusted EBITDA* to net income, and adjusted net debt*/ adjusted EBITDA* to debt/ net income respectively, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements.
As at and for the 12 months ended September 30,
(in U.S. $millions)
5.8
10.5
689.3
751.8
Debt
695.1
762.3
(9)
Less: cash and cash equivalents
(309.6)
(228.8)
Adjusted net debt*
385.5
533.5
133.0
122.9
69.1
65.1
42.8
43.7
(2)
(3.3)
(2.7)
40.7
208
3.7
(4.9)
282.3
241.0
Debt/net income
5.2x
6.2x
(16)
Adjusted net debt*/adjusted EBITDA*
1.4x
2.2x
(36)
Operating Free Cash Flow* (“OFCF”) Reconciliation
We believe OFCF*, when compared on a trailing 12-month basis to different financial periods provides an effective measure of the cash generated by our business and provides useful information regarding cash flows remaining for discretionary return to stockholders, mergers and acquisitions, or debt reduction. Our balance sheet scorecard includes OFCF* as a performance metric. OFCF* is also an element of the performance criteria for certain annual short-term and long-term incentive awards.
The following table reconciles OFCF* to cash provided by operating activities, which is the most directly comparable GAAP measure in, or calculated from, our consolidated statements of cash flows:
Cash provided by operating activities
356.2
146.2
144
10.4
16.1
(35)
25.1
27.5
Proceeds on disposition of property plant and equipment
(13.7)
(4.0)
243
Net capital spending
21.8
39.6
OFCF*
334.4
106.6
214
Adjusted Net Income Attributable to Stockholders* and Adjusted Dividend Payout Ratio* Reconciliation
We believe that adjusted net income attributable to stockholders* provides useful information about the growth or decline of our net income attributable to stockholders for the relevant financial period and eliminates the financial impact of adjusting items we do not consider to be part of our normal operating results. We believe that disclosing our adjusted dividend payout ratio* for different financial periods provides useful information about how well our net income supports our dividend payments.
The following table reconciles adjusted net income attributable to stockholders* and adjusted dividend payout ratio* to net income attributable to stockholders, and dividend payout ratio, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:
80.4
74.3
122.7
(0.6)
Deferred income tax effect of adjusting items:
(0.4)
Deferred tax adjusting item:
Remeasurement of deferred taxes
(10.1)
110.4
Dividend payout ratio
60.5
60.6
(10)
Adjusted dividend payout ratio*
67.3
(680)
42
Adjusted Net Income Attributable to Stockholders* and ROIC* Reconciliation
We believe that comparing ROIC on a trailing 12-month basis for different financial periods, provides useful information about the after-tax return generated by our investments.
The following table reconciles adjusted net income attributable to stockholders* and ROIC* to net income attributable to stockholders and return on average invested capital which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:
Opening long-term debt
817.9
Ending long-term debt
Average long-term debt
720.6
784.9
Opening stockholders' equity
815.5
714.7
Ending stockholders' equity
838.2
Average stockholders' equity
826.9
765.1
Average invested capital
1,547.5
1,550.0
8.6
7.9
70
ROIC*
7.1
150
43
Adjusting items during the trailing 12-months ended September 30, 2019 were:
Recognized in the third quarter of 2019
Recognized in the second quarter of 2019
Recognized in the first quarter of 2019
Recognized in the fourth quarter of 2018
Adjusting items during the trailing 12-months ended September 30, 2018 were:
Recognized in the third quarter of 2018
Recognized in the second quarter of 2018
Recognized in the first quarter of 2018
Recognized in the fourth quarter of 2017
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risk during the nine months ended September 30, 2019 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com.
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management of the Company, including the interim Co-Chief Executive Officers (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of our disclosure controls and procedures as at September 30, 2019. The term “disclosure controls and procedures” means controls and other procedures we have established that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our interim Co-CEOs and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based upon their evaluation of our disclosure controls and procedures, the interim Co-CEOs and the CFO concluded that, as at September 30, 2019, the disclosure controls are effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the interim Co-CEOs and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.
We, including our interim Co-CEOs and CFO, do not expect that our internal controls and procedures will prevent or detect all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Changes in Internal Control over Financial Reporting
Management, with the participation of the interim Co-CEOs and CFO, concluded that there were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1: LEGAL PROCEEDINGS
We have no material legal proceedings pending, other than ordinary routine litigation incidental to the business, and we do not know of any material proceedings contemplated by governmental authorities.
ITEM 1A: RISK FACTORS
Our business is subject to a number of risks and uncertainties and our past performance is no guarantee of our performance in future periods. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties discussed in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com, before purchasing our common shares. Our business could also be affected by additional risks not currently known to us or that we currently deem to be immaterial. If any of the risks actually occur, our business, financial condition and results of operations could materially suffer. As a result, the trading price of our common shares could decline and you may lose all or part of your investment.
Except as set forth below, there were no material changes in risk factors during the nine months ended September 30, 2019.
We are currently undergoing a Chief Executive Officer transition, which could be disruptive to, or cause uncertainty in, our business.
On June 24, 2019, the Company announced that Ravi Saligram, Chief Executive Officer, would resign effective October 1, 2019. The Board has appointed Sharon Driscoll and Karl Werner to act as interim Co-CEOs and is currently in the process of searching for Mr. Saligram’s permanent successor. Failure to appoint a CEO successor with the desired level of experience and expertise in a timely manner could have a material adverse effect on our results of operations, financial condition and the market price of our common stock.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to that certain Grant Agreement dated August 11, 2014, and as amended on May 1, 2017 and September 11, 2018, between the Company and Mr. Saligram (as more particularly described in the Company’s 2019 Proxy Statement filed on the EDGAR and SEDAR websites and posted on the Company’s website and the Company’s Current Report on Form 8-K filed on September 13, 2018), the Company granted to Mr. Saligram approximately 102,375 sign-on grant PSUs (“SOG PSUs”), which became eligible for vesting at a rate of 25% per year starting on the second anniversary of the grant date, with the actual number of units to vest to be determined based on achievement of pre-established performance criteria as set out therein. The fourth tranche of the SOG PSUs vested during the third quarter of 2019, pursuant to which Mr. Saligram was determined to be entitled to a payment, based on the Company’s absolute total shareholder return performance over the applicable period, net of applicable taxes, of $375,164. On September 3, 2019, the Company satisfied this payment obligation by issuing to Mr. Saligram 10,444 common shares in respect of the vested SOG PSUs.
The Company did not and will not receive any proceeds from the vesting of SOG PSUs or the issuance of common shares as payment for vested SOG PSUs under the Grant Agreement. The SOG PSUs were issued for compensatory purposes.
To the extent that the vesting of SOG PSUs or issuance of common shares as payment for vested SOG PSUs under the Grant Agreement constitutes a “sale” of securities, the Company relies on the exemption under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). Section 4(a)(2) generally provides an exemption from registration for transactions by an issuer not involving any public offering. Mr. Saligram is the Company’s CEO and an accredited investor as defined in Rule 501 under the Securities Act. No sales involved the use of an underwriter and no commissions were paid in connection with the sale of any securities.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS
The exhibits listed in below are filed as part of this Quarterly Report on Form 10-Q and incorporated herein by reference.
Exhibit
Document
10.1
Employment Agreement between Ritchie Bros. Auctioneers (Canada) Ltd. and Kieran Holm, dated August 9, 2019
10.2
Employment Agreement between Ritchie Bros. Auctioneers (Canada) Ltd. and Kari Taylor, dated March 29, 2019
Certification of Co-Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2
Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1
Certification of Co-Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive Data Files Pursuant to Rule 405 of Regulation S-T , for the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Condensed Consolidated Income Statements; (ii) Condensed Consolidated Balance Sheets; (iii) Condensed Consolidated Statements of Changes in Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to the Condensed Consolidated Financial Statements.
104
Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL and contained in Exhibit 101
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 7, 2019
By:
/s/ Sharon R. Driscoll
Sharon R. Driscoll
Co-Chief Executive Officer and Chief Financial Officer
/s/ Karl Werner
Karl Werner
Co-Chief Executive Officer