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, 2020
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
Common Share Purchase Rights
N/A
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: 109,400,129 common shares, without par value, outstanding as of November 4, 2020.
RITCHIE BROS. AUCTIONEERS INCORPORATED
For the quarter ended September 30, 2020
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
49
ITEM 4:
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
50
ITEM 1A:
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
51
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5:
Other Information
ITEM 6:
Exhibits
52
SIGNATURES
53
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,
2020
2019
Revenue:
Service revenue
$
222,679
178,577
639,941
585,555
Inventory sales revenue
108,863
111,219
353,906
400,892
Total revenue
331,542
289,796
993,847
986,447
Operating expenses:
Costs of services
39,223
36,382
118,026
122,719
Cost of inventory sold
96,253
102,410
320,972
372,703
Selling, general and administrative expenses
110,186
93,691
309,203
286,589
Acquisition-related costs
—
45
752
Depreciation and amortization expenses
18,436
17,692
55,586
51,919
Gain on disposition of property, plant and equipment
(276)
(821)
(1,536)
(1,071)
Foreign exchange loss
336
237
1,330
1,118
Total operating expenses
264,158
249,636
803,581
834,729
Operating income
67,384
40,160
190,266
151,718
Interest expense
(8,737)
(10,090)
(26,801)
(31,023)
Other income, net
2,280
1,962
6,714
5,680
Income before income taxes
60,927
32,032
170,179
126,375
Income tax expense
15,437
6,760
48,741
28,800
Net income
45,490
25,272
121,438
97,575
Net income attributable to:
Stockholders
45,387
25,266
121,239
97,466
Non-controlling interests
103
6
199
109
Earnings per share attributable to stockholders:
Basic
0.42
0.23
1.11
0.90
Diluted
0.41
1.10
0.89
Weighted average number of shares outstanding:
109,018,469
108,003,390
108,887,026
108,453,525
110,369,718
109,381,173
110,060,712
109,634,195
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
12,549
(9,703)
7,445
(8,880)
Total comprehensive income
58,039
15,569
128,883
88,695
Total comprehensive income attributable to:
57,910
15,586
128,654
88,614
129
(17)
229
81
2
Condensed Consolidated Balance Sheets
(Expressed in thousands of United States dollars, except share data)
December 31,
Assets
Cash and cash equivalents
470,285
359,671
Restricted cash
120,014
60,585
Trade and other receivables
333,110
142,627
Less: allowance for credit losses
(4,635)
(5,225)
Inventory
62,101
64,956
Other current assets
26,279
50,160
Income taxes receivable
5,619
6,810
Total current assets
1,012,773
679,584
Property, plant and equipment
481,047
484,482
Other non-current assets
134,973
145,679
Intangible assets
220,791
233,380
Goodwill
672,746
672,310
Deferred tax assets
15,659
13,995
Total assets
2,537,989
2,229,430
Liabilities and Equity
Auction proceeds payable
496,936
276,188
Trade and other payables
215,110
194,279
Income taxes payable
11,241
7,809
Short-term debt
20,285
4,705
Current portion of long-term debt
9,926
18,277
Total current liabilities
753,498
501,258
Long-term debt
622,635
627,204
Other non-current liabilities
144,677
151,238
Deferred tax liabilities
52,312
42,743
Total liabilities
1,573,122
1,322,443
Commitments and Contingencies (Note 19 and Note 20 respectively)
Stockholders' equity:
Share capital:
Common stock; no par value, unlimited shares authorized, issued and outstanding shares: 109,381,891 (December 31, 2019: 109,337,781)
195,727
194,771
Additional paid-in capital
48,253
52,110
Retained earnings
767,188
714,051
Accumulated other comprehensive loss
(51,684)
(59,099)
Stockholders' equity
959,484
901,833
Non-controlling interest
5,383
5,154
Total stockholders' equity
964,867
906,987
Total liabilities and equity
3
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, 2020
shares
Amount
("APIC")
earnings
loss
("NCI")
equity
("PSUs")
Balance, June 30, 2020
108,630,537
169,255
47,958
746,048
(64,207)
5,254
904,308
Other comprehensive income (loss)
12,523
26
Stock option exercises
751,268
26,470
(5,701)
20,769
Issuance of common stock related to vesting of share units
86
(7)
(5)
Stock option compensation expense
1,671
Equity-classified share units expense
4,138
Equity-classified share units dividend equivalents
194
(194)
Cash dividends paid
(24,053)
Balance, September 30, 2020
109,381,891
Three months ended September 30, 2019
Balance, June 30, 2019
107,836,674
150,585
54,633
680,915
(55,449)
5,165
835,849
1,049
(9,680)
(23)
363,217
8,451
(135)
8,316
10,444
737
738
(1,083)
1,653
2,830
21
308
(320)
(12)
13
(21,631)
Balance, September 30, 2019
108,210,335
159,773
59,289
684,231
(65,129)
5,148
843,312
4
Nine months ended September 30, 2020
Balance, December 31, 2019
109,337,781
7,415
30
1,430,545
50,611
(10,417)
40,194
138,877
3,515
(7,459)
(3,944)
4,401
9,155
463
(463)
(67,639)
Shares repurchased
(1,525,312)
(53,170)
Nine months ended September 30, 2019
Balance, December 31, 2018
108,682,030
181,780
56,885
648,255
(56,277)
5,067
835,710
923
Other comprehensive loss
(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)
46
(60,791)
(1,223,674)
(42,012)
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:
Equity-classified share unit expense
8,754
Deferred income tax expense (recovery)
8,250
(4,760)
Unrealized foreign exchange (gain) loss
2,049
(129)
Amortization of debt issuance costs
2,375
2,701
Amortization of right-of-use assets
9,194
8,867
Gain on contingent consideration from equity investment
(1,700)
Other, net
2,427
1,025
Net changes in operating assets and liabilities
53,912
139,372
Net cash provided by operating activities
265,551
309,105
Investing activities:
Property, plant and equipment additions
(9,865)
(6,915)
Intangible asset additions
(19,886)
(18,377)
Proceeds on disposition of property, plant and equipment
16,277
5,610
Distribution from equity investment
4,212
Proceeds on contingent consideration from equity investment
1,700
(2,630)
(1,000)
Net cash used in investing activities
(10,192)
(20,682)
Financing activities:
Share repurchase
Dividends paid to stockholders
Issuances of share capital
Payment of withholding taxes on issuance of shares
(3,870)
(5,260)
Proceeds from short-term debt
35,799
10,519
Repayment of short-term debt
(22,357)
(24,979)
Repayment of long-term debt
(11,134)
(29,022)
Debt issue costs
(2,038)
Repayment of finance lease obligations
(6,927)
(4,848)
Net cash used in financing activities
(91,142)
(143,953)
Effect of changes in foreign currency rates on cash, cash equivalents, and restricted cash
5,826
1,350
Increase
170,043
145,820
Beginning of period
420,256
305,567
Cash, cash equivalents, and restricted cash, end of period
590,299
451,387
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, 2019, 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.
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the world. The extent of the impact of the COVID-19 pandemic on the operational and financial performance of the Company, including the ability to execute on business strategies and initiatives, will depend on future developments, including the duration and spread of the pandemic and related restrictions placed by oversight bodies and respective global governments, as well as supply and demand impacts driven by the Company’s consignor and buyer base, all of which are uncertain and cannot be easily predicted. Given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19 on its business operations, results of operations, cash flows or financial performance.
(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.
7
1. Summary of significant accounting policies (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 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
The 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 17. 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.
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.
10
Finance leases
Finance lease ROU assets and liabilities 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 19). 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.
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.
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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
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.
As of September 30, 2020, the Company performed a qualitative assessment of the A&M reporting unit and the Mascus reporting unit with consideration of the current global economic downturn as a result of COVID-19 and the Company concluded there were no indicators of impairment.
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3. Seasonality
The Company’s operations are both seasonal and event driven. Historically, 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.
The restrictions imposed and effects of the overall economic environment as a result of the COVID-19 pandemic may continue to impact these trends.
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
188,949
33,730
543,340
96,601
297,812
897,246
21,733
17,490
69,018
49,008
Selling, general and administrative expenses ("SG&A")
103,933
6,253
290,077
19,126
Segment profit
75,893
9,987
85,880
217,179
28,467
245,646
Depreciation and amortization expenses ("D&A")
Gain on disposition of property, plant and equipment ("PPE")
(15,437)
(48,741)
4. Segmented information (continued)
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
49,333
7,980
57,313
179,184
25,252
204,436
D&A expenses
Gain on disposition of PPE
(6,760)
(28,800)
The Company’s geographic breakdown of total revenue is as follows:
United
States
Europe
Total revenue for the three months ended:
September 30, 2020
177,883
58,059
41,891
53,709
September 30, 2019
156,380
56,129
34,522
42,765
Total revenue for the nine months ended:
573,001
191,692
115,659
113,495
552,186
178,069
136,590
119,602
5. Revenue
The Company’s revenue breakdown is as follows:
Service revenue:
Commissions
112,762
90,928
331,711
317,674
Fees
109,917
87,649
308,230
267,881
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6. Operating expenses
Ancillary and logistical service expenses
16,550
13,285
45,368
43,516
Employee compensation expenses
11,442
11,555
35,057
37,268
Buildings, facilities and technology expenses
1,655
7,768
5,961
Travel, advertising and promotion expenses
4,782
5,765
17,518
24,440
Other costs of services
4,796
4,122
12,315
11,534
78,430
60,680
211,732
186,033
15,901
14,569
46,108
45,066
5,479
10,033
20,565
28,400
Professional fees
4,546
3,685
13,570
11,915
Other SG&A expenses
5,830
4,724
17,228
15,175
Depreciation expense
7,705
7,305
23,278
21,630
Amortization expense
10,731
10,387
32,308
30,289
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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, 2020, income tax expense was $15,437,000, compared to an income tax expense of $6,760,000 for the same period in 2019. The effective tax rate was 25% in the third quarter of 2020, compared to 21% in the third quarter of 2019.
The effective tax rate increased in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to an increased proportion of income taxed in jurisdictions with higher tax rates, a greater income tax expense related to increases in tax uncertainties in 2020 compared to 2019, and a higher estimate of non-deductible expenses. The higher estimate of non-deductible expenses are primarily due to final regulations published on April 8, 2020 by the United States Department of Treasury and the Internal Revenue Service (“IRS”) that clarified income tax benefits related to hybrid financing arrangements would not be deductible (“Hybrid Interest”).
For the nine months ended September 30, 2020, income tax expense was $48,741,000, compared to an income tax expense of $28,800,000 for the same period in 2019. The effective tax rate was 29% for the nine months ended September 30, 2020, compared to 23% for the nine months ended September 30, 2019.
The effective tax rate increased in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to Hybrid Interest benefits that are no longer deductible as of January 1, 2019. The Company had recorded approximately $6,228,000 in Hybrid Interest benefits in the twelve months ended December 31, 2019. In addition, there was greater income tax expense related to increases in tax uncertainties in 2020 than in 2019, and a greater proportion of income taxed in jurisdictions with higher tax rates. Partially offsetting these increases was the reduced impact of the US tax reform.
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, unvested 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
548,859
519,915
Stock options
802,390
(0.01)
653,771
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8. Earnings per share attributable to stockholders (continued)
481,268
430,175
896,515
750,495
9. Supplemental cash flow information
(185,899)
(123,667)
3,938
58,791
Advances against auction contracts
6,566
4,528
Prepaid expenses and deposits
2,184
309
1,191
(4,123)
213,596
248,587
20,675
(48,882)
4,179
14,050
Operating lease obligation
(8,809)
(10,762)
(3,709)
541
Interest paid, net of interest capitalized
31,173
34,955
Interest received
1,775
2,491
Net income taxes paid
32,750
23,193
Non-cash purchase of property, plant and equipment under finance lease
8,431
10,747
Non-cash right of use assets obtained (reassessed) in exchange for new lease obligations
595
28,121
Cash, cash equivalents, and restricted cash
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:
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10. Fair value measurement (continued)
December 31, 2019
Carrying
Category
Fair
value
Fair values disclosed:
Level 1
Level 2
Senior unsecured notes
492,281
515,000
490,933
520,625
Term loan
96,330
96,782
154,548
155,355
Long-term revolver loan
43,950
44,251
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 loan and long-term revolver loan, before deduction of deferred debt issue costs, approximates their fair values as the interest rate on the loans is short-term in nature. The fair value of the senior unsecured notes is determined by reference to a quoted market price.
11. Trade receivables
Trade receivables are generally secured by the equipment that they relate to as it is Company policy that equipment is not released until payment has been collected. The following table presents the activity in the allowance for expected credit losses for the period ended September 30, 2020:
Opening balance at January 1, 2020
Current period provision
(2,507)
Write-off charged against the allowance
3,097
12. Other current assets
6,442
12,925
Assets held for sale
15,051
19,837
22,184
Reclassified from (to) property, plant and equipment
(6,888)
Disposal
(8,163)
During the nine months ended September 30, 2020, the Company sold excess auction site acreage in the United States. The Company also sold the property that was reclassified to property, plant and equipment during the first quarter of 2020. The sale of the two properties resulted in combined proceeds of $15,555,000 and a combined pre-tax gain of $1,090,000.
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13. Other non-current assets
Right-of-use assets
106,710
116,209
Tax receivable
11,306
11,792
Equity-accounted investments
4,276
Deferred debt issue costs
2,465
1,403
14,492
11,999
During the three months ended March 31, 2020, the Company received a final distribution of its equity-accounted investments in the Cura Classis entities. The transaction did not result in a significant gain or loss.
14. Debt
Carrying amount
Long-term debt:
Term loan and long-term revolver loan:
Term loan denominated in Canadian dollars, secured, bearing interest at a weighted average rate of 2.509%, due in monthly installments of interest only and quarterly installments of principal, maturing in October 2023
Long-term revolver loan denominated in Canadian dollars, secured, bearing interest at a weighted average rate of 2.509%, due in monthly installments of interest only, maturing in October 2023
Less: unamortized debt issue costs
(753)
(807)
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
(7,719)
(9,067)
Total long-term debt
632,561
645,481
Total debt
652,846
650,186
Current portion
Non-current portion
On August 14, 2020, the Company entered into an amendment of the Credit Agreement dated October 27, 2016, totaling US$630.0 million with a syndicate of lenders comprising:
The amendment, among other things, (i) extended the maturity date of the Facilities from October 27, 2021 to October 27, 2023, (ii) increased the applicable margin for base rate loans and LIBOR loans by 0.50% at each pricing tier level, (iii) increased the applicable percentage per annum used to calculate the commitment fee in respect of the unused commitments under the Revolving Facilities by 0.10% at each pricing tier level, and (iv) increased the aggregate amount available under the Revolving Facilities from $490.0 million
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to $530.0 million. Immediately prior to the amendment, the aggregate principal amount outstanding under the Delayed-Draw Facility was $141.0 million. In connection with the amendment, the Company prepaid $41.0 million of such amount with the proceeds from a borrowing under the Revolving Facilities. The Delayed-Draw Facility will continue to amortize in equal quarterly installments in an annual amount of 10%, with the balance payable at maturity.
The Company incurred debt issue costs of $2,038,000 in connection with the amendment. At September 30, 2020, the Company had unamortized deferred debt issue costs relating to the Credit Agreement of $3,218,000.
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, 2020, have a weighted average interest rate of 2.4% (December 31, 2019: 2.3%).
As at September 30, 2020, the Company had unused committed revolving credit facilities aggregating $469,407,000 of which $464,996,000 is available until October 27, 2023 subject to certain covenant restrictions. The Company was in compliance with all financial and other covenants applicable to the credit facilities at September 30, 2020.
15. Other non-current liabilities
Operating lease liability
103,244
111,322
Tax payable
21,240
20,232
Finance lease liability
17,079
16,336
3,114
3,348
16. 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.
There were no share repurchases made during the three months ended September 30, 2020 (three months ended September 30, 2019: nil). There were 1,525,312 common shares repurchased for $53,170,000 during the nine months ended September 30, 2020 (nine months ended September 30, 2019: 1,223,674 common shares repurchased for $42,012,000).
On August 5, 2020, the Board of Directors approved a share repurchase program for the repurchase of up to $100.0 million worth of the Company’s common shares, approved by the Toronto Stock Exchange, over a period of 12 months, ending August 23, 2021.
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Dividends
Declared and paid
The Company declared and paid the following dividends during the nine months ended September 30, 2020 and 2019:
Dividend
Declaration date
per share
Record date
dividends
Payment date
Nine months ended September 30, 2020:
Fourth quarter 2019
January 24, 2020
0.2000
February 14, 2020
21,905
March 6, 2020
First quarter 2020
May 6, 2020
May 27, 2020
21,681
June 17, 2020
Second quarter 2020
August 5, 2020
0.2200
August 26, 2020
24,053
September 16, 2020
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
August 28, 2019
21,631
September 18, 2019
Declared and undistributed
Subsequent to September 30, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.22 cents per common share, payable on December 16, 2020 to stockholders of record on November 25, 2020. 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 within other comprehensive income include intra-entity foreign currency transactions that are of a long-term investment nature, which generated a net gain of $5,634,000 and $3,300,000 for the three and nine months ended September 30, 2020 (2019: net loss of $4,623,000 and $2,971,000).
17. Share-based payments
Share-based payments consist of the following compensation costs:
Stock option compensation expense:
Share unit expense:
Equity-classified share units
2,851
Liability-classified share units
2,123
589
1,938
829
Employee share purchase plan - employer contributions
636
567
1,835
1,692
8,568
5,660
17,329
16,127
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, 2020 is presented below:
Common
remaining
Aggregate
shares under
exercise
contractual
intrinsic
option
price
life (in years)
Outstanding, December 31, 2019
2,797,189
29.05
7.1
38,874
Granted
816,227
41.74
Exercised
(1,430,545)
28.10
31,798
Forfeited
(55,567)
33.53
Expired
(2,064)
20.74
Outstanding, September 30, 2020
2,125,240
34.46
7.8
52,688
Exercisable, September 30, 2020
801,352
28.28
6.3
24,820
The significant assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2020 and 2019 are presented in the following table on a weighted average basis:
Risk free interest rate
0.7
%
2.5
Expected dividend yield
1.96
2.06
Expected lives of the stock options
years
Expected volatility
27.9
26.8
22
17. Share-based payments (continued)
Stock option plans (continued)
As at September 30, 2020, the unrecognized stock-based compensation cost related to the non-vested stock options was $5,796,000, which is expected to be recognized over a weighted average period of 2.3 years.
Share unit activity for the nine months ended September 30, 2020 is presented below:
Equity-classified awards
Liability-classified awards
PSUs
RSUs
DSUs
WA grant
date fair
Number
428,724
32.89
237,420
29.72
118,368
29.64
300,595
42.00
26,610
40.52
15,427
43.29
Vested and settled
(156,238)
31.94
(7,911)
36.23
(29,863)
36.39
(48,243)
27.85
543,218
38.01
207,876
31.29
133,795
31.21
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.
As at September 30, 2020 the unrecognized share unit expense related to equity-classified PSUs was $12,485,000, which is expected to be recognized over a weighted average period of 2.1 years.
The Company has RSU plans that are equity-settled and not subject to market vesting conditions.
As at September 30, 2020, the unrecognized share unit expense related to equity-classified RSUs was $1,272,000, which is expected to be recognized over a weighted average period of 1.2 years.
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, 2020, the Company had a total share unit liability of $7,685,000 (December 31, 2019: $5,130,000) 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.
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18. Leases
The Company’s breakdown of lease expense is as follows:
Operating lease cost
4,310
4,096
12,780
13,379
Finance lease cost
Amortization of leased assets
2,355
2,103
6,664
5,555
Interest on lease liabilities
219
211
680
565
Short-term lease cost
2,115
1,889
7,146
6,964
Sublease income
(110)
(150)
(406)
(447)
8,889
8,149
26,864
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.
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
Remainder of 2020
3,457
2021
13,755
2022
12,366
2023
10,730
2024
8,891
Thereafter
104,956
Total future minimum lease payments
154,155
less: imputed interest
(41,088)
Total operating lease liability
113,067
less: operating lease liability - current
(9,823)
Total operating lease liability - non-current
At September 30, 2020 the weighted average remaining lease term for operating leases is 15.4 years and the weighted average discount rate is 4.2%.
24
18. Leases (continued)
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, 2020, the net carrying amount of computer and yard equipment and other assets under capital leases is $24,834,000 (December 31, 2019: $23,258,000), and is included in the total property, plant and equipment as disclosed on the consolidated balance sheets.
Net book
As at September 30, 2020
Cost
depreciation
Computer equipment
14,385
(7,568)
6,817
Yard and others
27,288
(9,271)
18,017
41,673
(16,839)
24,834
As at December 31, 2019
15,314
(7,832)
7,482
21,525
(5,749)
15,776
36,839
(13,581)
23,258
The future aggregate minimum lease payments under non-cancellable finance leases are as follows:
2,498
9,083
7,198
5,084
2,796
469
27,128
(1,504)
Total finance lease liability
25,624
less: finance lease liability - current
(8,545)
Total finance lease liability - non-current
At September 30, 2020 the weighted average remaining lease term for finance leases is 3.4 years and the weighted average discount rate is 3.8%.
Subleases
As at September 30, 2020, the total future minimum sublease payments expected to be received under non-cancellable subleases is $81,000.
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19. 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 original performance period commenced in April 2018 and concluded in March 2020. The Company has exercised its option for one year, extending the performance period to March 2021.
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. At September 30, 2020, the Company has purchased $9,278,000 pursuant to the 12-month period of this contract which commenced in April 2020.
20. 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, 2020, there were $75,897,000 of assets guaranteed under contract, of which 85% is expected to be sold prior to December 31, 2020, with the remainder to be sold by September 30, 2021 (December 31, 2019: $63,612,000 of which 39% was expected to be sold prior to the end of March 31, 2020 with the remainder to be sold by June 30, 2020).
The outstanding guarantee amounts are undiscounted and before estimated proceeds from sale at auction.
21. Subsequent event
On October 28, 2020, the Company entered into a definitive agreement to acquire Rouse Services, a privately held company that provides data intelligence and performance benchmarking solutions. Its subscription-based revenue is generated by three Data-as-a-service (DaaS) solutions: rental analytics, equipment sales support, and fleet appraisals.
Under the terms of the transaction, Ritchie Bros. will acquire 100% of the equity of Rouse Services LLC for approximately $275 million, comprised of approximately $250 million in cash and $25 million in common stock of Ritchie Bros., subject to adjustment. Completion of the acquisition is subject to customary closing conditions, including, among other conditions, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
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, 2019, 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 and reasons we use 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 43-48 for explanations of why we use these non-GAAP measures and the reconciliation to the most comparable GAAP financial measures.
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 $5.14 billion of used equipment and other assets during 2019. 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.
We operate globally with locations in more than 12 countries, including the U.S., Canada, Australia, the United Arab Emirates, and the Netherlands, and employ more than 2,500 full time employees worldwide.
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.
Proposed Acquisition of Rouse Services
On October 28, 2020, we entered into a definitive agreement to acquire Rouse Services, a privately held company that provides data intelligence and performance benchmarking solutions to help customers make better decisions. Its subscription-based revenue is generated by three Data-as-a-service (DaaS) solutions: rental analytics, equipment sales support, and fleet appraisals.
Under the terms of the transaction, we will acquire 100% of the equity of Rouse Services LLC for approximately $275 million, comprised of approximately $250 million in cash and $25 million in our common stock, subject to adjustment. Completion of the acquisition is subject to customary closing conditions, including, among other conditions, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Impact of COVID-19 to our Business
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the world. The COVID-19 pandemic has resulted in significant global economic disruption and has materially impacted a number of countries and regions in which we operate, including the United States, Canada, Europe, the Middle East and Asia. It has resulted in travel restrictions and business slowdowns or shutdowns in affected areas and has negatively disrupted global manufacturing and workforce participation, including our own.
During the third quarter, many regions continued to lift lockdown policies and eased border restrictions, improving our ability to move equipment to and from our auction sites. Notwithstanding, our European region continued to experience some constraints by the cross-border quarantine requirements making equipment transport challenging and consequently impacting our overall auction volumes. Our North America region also lifted lockdown policies which positively impacted our businesses but unlike Europe and Asia, the dependency to move equipment across country borders within Canada and the US was not as large a factor in our ability to operate our business.
Our top priority with regard to the COVID-19 pandemic remains the health and welfare of our employees, customers, suppliers and others with whom we partner to run our business activities. We are strictly enforcing all local government and jurisdictional safety guidelines, and, in some instances, the Company is applying additional over-and-above safety measures. In the first quarter of 2020, we implemented our business continuity plans and instructed employees at many of our offices across the globe (including our corporate headquarters) to work from home on a temporary basis and implemented travel restrictions. These work-from-home orders and travel restrictions continued to be observed and were enforced throughout the third quarter.
For the third quarter, the Company was able to operate and serve our customers’ equipment and immediate liquidity needs through our platform of auction technology solutions and online auction capabilities. In addition to running our IronPlanet weekly featured online auction, our online Marketplace-E solution and GovPlanet online auctions, we modified our live operations in March 2020 to transition all our traditional live onsite industrial auctions to online bidding. Buyers are still able to visit our live auction sites in advance of the virtual auctions to conduct inspections and pick up equipment post auction, but we are restricting attendance at our live theatres. We are enforcing rigid guidelines for equipment drop off, buyer inspections and post auction pickup of equipment to ensure the highest regard for the safety of our employees and customers. In addition, as implemented in the first quarter, we are using our Time Auctioned Lots (TAL) solution for selected events.
We have actively taken steps to be prudent on expenses and other cash outflows. Our priority is to support our employees, and we are actively monitoring the situation and changing dynamics in each of our respective regions and adjusting our operations as necessary. To this date, layoffs or furlough activities related to the COVID-19 pandemic have been limited in scope. As at the end of the third quarter, we held a solid balance sheet and strong liquidity position. As of September 30, 2020, we have $470.3 million of unrestricted cash and $469.4 million of unused committed capacity under our revolving credit facility. With respect to the announced Rouse acquisition, we are well positioned financially to close on the transaction and we have prudently taken steps to maximize positive cash flow and have also developed comprehensive contingency plans should the COVID-19 pandemic have a prolonged adverse impact on our business impeding our ability to generate revenue. Additionally, in the third quarter we amended and extended our credit facilities totaling US$630.0 million to expire in October 2023.
The extent of the ongoing impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives, will depend on future developments, including the duration and spread of the pandemic and any related restrictions placed by respective global governments, as well as supply and demand impacts driven by our consignor and buyer base, all of which are uncertain and cannot be easily predicted. Although at the time of this filing, we continue operating our modified live site operations in all of the jurisdictions in which we operate, there is no assurance that our operations could not be impacted in the future. If we were to be subject to government orders or other restrictions on the operation of our business, we may be required to limit our operations at, or temporarily close, certain live site locations in the future. Any such limitations or closures could have an adverse impact on our ability to service our customers and on our business, and results of operations.
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We are actively monitoring the situation and remain ready to take additional actions based on any new governmental guidance or recommendations. We are continuously reviewing and assessing the pandemic’s impacts on our customers, our suppliers and our business so that we can seek to address the effect on our business and service our customers. It is unknown how long the pandemic will last, how many people are ultimately going to be affected by it, and the long-term implications to local or global economies. Equally, it is still not easily discernable at this time to understand the real effects of the COVID-19 pandemic on equipment supply, buyer demand, and potential pricing volatility, nor the potential impact on our buyers’ ability to pay or secure financing. Additionally, there is a level of uncertainty on the impact COVID-19 may have on our third party vendors, partners and the service providers we currently do business with today. Their ability to partner with us may be temporarily or permanently constrained and for some, the business terms under which they continue to partner with us could change as they manage their business through these unprecedented times. As such, given the ongoing nature of this situation, the Company cannot reasonably estimate the future impacts of the COVID-19 pandemic on our business operations, results of operations, cash flows, financial performance or the ability to pay dividends.
Service Offerings
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 Auctions & Marketplace ("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, 2019, 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
We offer consignors several contract options to meet their individual needs and sale objectives. Through our A&M business, options include:
We collectively refer to guarantee and inventory contracts as underwritten or “at-risk” contracts.
Value-added services
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 GTV and associated A&M segment revenues are affected by the seasonal nature of our business. GTV and A&M segment revenues tend to increase during the second and fourth calendar quarters, during which time we generally conduct more business than in the first and third calendar quarters. Given the operating leverage inherent in our business model, the second and fourth quarter also tend to produce higher operating margins, given the higher volume and revenue generated in those quarters.
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 or guarantee commission contract, or an inventory contract at time of selling. Straight or guarantee commission contracts will result in the commission being recognized as service revenue, while inventory contracts will result in the gross transaction value 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 revenues and revenue from inventory sales can have a significant impact on revenue growth percentages.
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Performance Overview
Net income attributable to stockholders increased 80% to $45.4 million, compared to $25.3 million in Q3 2019. Diluted earnings per share (“EPS”) attributable to stockholders increased 78% to $0.41 per share in Q3 2020 as compared to Q3 2019. Diluted adjusted EPS attributable to stockholders* which excludes $4.3 million of severance costs ($3.2 million net of tax), increased 91% to $0.44 per share at Q3 2020 as compared to Q3 2019.
Consolidated results:
Auctions & Marketplaces segment results:
Other Services segment results:
Other Company developments:
Results of Operations
Financial overview
Three months ended September 30,
% Change
(in U.S. $000's, except EPS and percentages)
2020 over 2019
Total service revenue
(2)
Service revenue as a % of total revenue
67.2
61.6
560
bps
64.4
59.4
500
Inventory sales revenue as a % of total revenue
32.8
38.4
(560)
35.6
40.6
(500)
(4)
(6)
(14)
Operating expenses
Cost of inventory sold as a % of operating expenses
36.4
41.0
(460)
39.9
44.6
(470)
68
Operating income margin
20.3
13.9
640
19.1
15.4
370
Net income attributable to stockholders
80
Adjusted net income attributable to stockholders*
48,605
92
130,685
34
Diluted earnings per share attributable to stockholders
78
Diluted adjusted EPS attributable to stockholders*
0.44
91
1.19
Effective tax rate
25.3
21.1
420
28.6
22.8
580
Total GTV
1,321,379
1,084,241
3,962,386
3,756,679
Service GTV
1,212,516
973,022
3,608,480
3,355,787
Service GTV as a % of total GTV - Mix
91.8
89.7
210
91.1
89.3
180
Service revenue as a % of total GTV- Rate
16.9
16.5
40
16.2
15.6
60
Inventory GTV
Inventory sales revenue as a % of total GTV-Mix
8.2
10.3
(210)
8.9
10.7
(180)
Total revenue increased 14% to $331.5 million in Q3 2020 and increased 1% to $993.8 million for the first nine months of 2020.
In Q3 2020, total service revenue increased 25% with commissions revenue increasing 24% and fees revenue increasing 25%. Service revenues comprise of commissions which are earned on Service GTV, and Fees which are earned on total GTV as well as from our Other Services such as RBFS and Ancillary Services.
In Q3 2020, Service GTV increased 25% to $1.2 billion with increases across all regions, most notably in the US and Canada. The increase in the US Service GTV was primarily due to strong execution by the US strategic accounts and regional sales teams driving year-over-year positive growth at both our live and online auctions, with strong performance at our Fort Worth auction. In Canada, Service GTV increased mainly due to positive year-over-year performance at Canadian live auctions. Also, the quarter benefited from auction calendar movement, which resulted in the shifting of the Toronto and Lethbridge auctions to Q3 2020, partially offset by shifting the Grand Prairie auction from Q3 2020 to Q4 2020. The International sales team delivered higher Service GTV as earlier lockdown measures lifted and border restrictions eased in Europe.
In Q3 2020, fees revenue was up 25% driven by higher fees from total GTV which was up 22%. We also had positive performance in Ancillary as we earned more fees from refurbishing and transporting sellers’ equipment driven by greater GTV activity in the US. Fees also grew due to RBFS as well as higher buyer fees on more favorable mix. Commissions revenue increased 24%, primarily in line with the increase in Service GTV.
For the first nine months of 2020, total service revenue increased 9% to $639.9 million.
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For the first nine months of 2020, Service GTV increased 8% with increases in the US and Canada offsetting lower performance in International. Service GTV in the US and Canada increased for the same reasons discussed above. This increase was partially offset by the non-repeat of the Columbus, Ohio auction in June 2019 and lower GTV in the Orlando live auction. International, mainly in Europe, was lower due to the impact of the COVID-19 pandemic.
For the first nine months of 2020, fee revenue increased 15%, partially related to the increase in total GTV of 5%. The remaining increase was driven by higher fees revenue from the full harmonization of buyer fees and change in our GTV mix resulting in improved buyer fee rate performance. We also recognized higher Other Segment fees and an increase in listing fees driven by greater online volume. This increase was partially offset by lower RB Logistics revenue earned due to lower activity in the International region during the first nine months of 2020. Commissions revenue increased 4% on Services GTV growth of 8%, with softer rate performance due to a higher proportion of GTV sourced from strategic accounts. This decrease was partially offset by improved guarantee rate performance in the US.
Inventory sales revenue as a percent of total GTV decreased to 8.2% from 10.3% in Q3 2020 and to 8.9% from 10.7% in the first nine months of 2020.
In Q3 2020, inventory sales revenue decreased 2% representing lower inventory sales volume. The lower sales volume was offset by strong year-over-year improvement in the inventory sales margin rate performance in the US and Canada. The decrease in the inventory volume was attributable to lower government surplus contracts in the US due to COVID-19 related government shutdowns and the shift of the Canadian Grand Prairie auction to Q4 2020. Partially offsetting these decreases was positive volume growth in International as border restrictions eased in Europe during Q3 2020 together with large private treaty deals in Australia.
For the first nine months of 2020, inventory sales revenue decreased 12% primarily related to lower inventory sales revenue in the International due to the severe impact of the COVID-19 pandemic in this region and selling through certain non-repeating large inventory deals from Europe and Asia in Q3 2019. In addition, there was a non-recurring large dispersal of pipeline equipment as part of the $94 million Columbus, Ohio auction in June 2019, as well as a drop in revenue from our government surplus contracts due to government shutdowns in response to the COVID-19 pandemic. Inventory revenue was impacted by the auction calendar shifts discussed above. This decrease was partially offset by strong year-over-year performance in the US and Canada.
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, decreased to 15.4% in Q3 2020, compared to 17.8% in Q3 2019. For the first nine months of 2020, our underwritten contracts were 18.7% compared to 19.9% in the prior period.
Operating Income
For Q3 2020, operating income increased 68% or $27.2 million to $67.4 million, primarily related to the $41.7 million increase in revenue and strong flow through to operating income. For the first nine months of 2020, operating income increased 25% or $38.6 million to $190.3 million, mainly due to lower operating expenses incurred during this period.
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 2020, income tax expense increased 128% to $15.4 million and our effective tax rate increased 423 bps to 25.3% as compared to Q3 2019. For the nine months ended September 30, 2020, income tax expense increased 69% to $48.7 million and our effective tax rate increased 585 bps to 28.6% as compared to the nine months ended September 30, 2019.
The increase in the effective tax rates for Q3 2020 as compared to Q3 2019 was primarily due to an increased proportion of income taxed in jurisdictions with higher tax rates, a greater income tax expense related to increases in tax uncertainties in 2020 than in 2019, and a higher estimate of non-deductible expenses. The higher estimate of non-deductible expenses is primarily due to final regulations published on April 8, 2020 by the United States Department of Treasury and the Internal Revenue Service (“IRS”) that clarified income tax benefits related to hybrid financing arrangements would not be deductible (“Hybrid Interest”).
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The increase in the effective tax rate for the nine months ended September 30, 2020 was primarily due to Hybrid Interest benefits that are no longer deductible as of January 1, 2019. We had recorded approximately $6,228,000 in Hybrid Interest benefits in the twelve months ended December 31, 2019. In addition, there was greater income tax expense related to increases in tax uncertainties in 2020 than in 2019, and a greater proportion of income taxed in jurisdictions with higher tax rates. Partially offsetting these increases was the reduced impact of the US tax reform.
In Q3 2020, net income attributable to stockholders increased 80% to $45.4 million, primarily related to the higher operating income, lower interest expense, and partially offset by the increase in the effective tax rate as discussed above. For the first nine months of 2020, net income attributable to stockholders increased 24% to $121.2 million, primarily for the same reasons noted above.
Diluted EPS
Diluted EPS attributable to stockholders increased 78% to $0.41 per share for Q3 2020 and increased 24% to $1.10 per share for the first nine months of 2020.
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
0.7514
0.7551
(0)
Euro
1.1732
1.0900
Australian dollar
0.7171
0.6751
Average exchange rate -Three months ended September 30,
0.7506
0.7572
(1)
1.1686
1.1116
0.7148
0.6851
Average exchange rate -Nine months ended September 30,
0.7391
0.7524
1.1242
1.1236
0
0.6764
0.6990
(3)
For Q3 2020, foreign exchange had a favourable impact on total revenue and an unfavourable impact on expenses. These impacts were primarily due to the fluctuations in the Euro and Australian dollar exchange rates relative to the U.S. dollar. For the first nine months of 2020, foreign exchange had an unfavourable impact on total revenue and a favourable impact on expenses. These impacts were mainly due to the fluctuations in the Canadian and Australian dollar exchanges 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’. In Q3 2020 we excluded $4.3 million ($3.2 million net of tax) of severance costs related to the realignment of leadership to support the new global operations organization, in line with strategic growth priorities led by the new CEO. There were no adjusting items in Q3 2019.
Adjusted net income attributed to stockholders (non-GAAP measure) increased 92% to $48.6 million in Q3 2020 and increased 34% to $130.7 million for the first nine months of 2020.
Diluted Adjusted EPS attributable to stockholders (non-GAAP measure) increased 91% to $0.44 per share in Q3 2020 and increased 34% to $1.19 per share for the first nine months of 2020.
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Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (non-GAAP measure) increased 55% to $91.9 million in Q3 2020 and increased 23% to $255.1 million for the first nine months of 2020.
Debt at the end of Q3 2020, represented 3.8 times net income as at and for the 12 months ended September 30, 2020. This compares to debt at Q3 2019, which represented 5.2 times net income as at and for the 12 months ended September 30, 2019. The decrease in this debt/net income multiplier was primarily due to higher cash and cash equivalents balance and also lower debt balances at September 30, 2020 compared to September 30, 2019, as a result of our voluntary and mandatory debt repayments. The adjusted net debt/adjusted EBITDA (non-GAAP measure) was 0.5 times as at and for the 12 months ended September 30, 2020 compared to 1.4 times as at and for the 12 months ended September 30, 2019.
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, 2019.
(in U.S $000's)
940
22,673
3,640
72,658
1,666
23,097
4,404
79,203
Auctions and Marketplaces Segment
Results of A&M segment operations are presented below for the comparative reporting periods.
2020 over
(in U.S. $000's, except percentages)
A&M service revenue as a % of total A&M revenue
63.4
57.4
600
60.6
55.2
540
Inventory sales revenue as a % of total A&M revenue
36.6
42.6
(600)
39.4
44.8
(540)
(8)
A&M segment expenses
221,919
211,979
680,067
716,288
Cost of inventory sold as a % of A&M expenses
43.4
48.3
(490)
47.2
52.0
(480)
A&M segment profit
54
A&M service revenue as a % of total GTV- Rate
14.3
13.8
13.7
13.2
Gross Transaction Value
In response to the COVID-19 pandemic, beginning in March 2020, we transitioned all our traditional live on site auctions to online bidding utilizing our existing online bidding technology and simultaneously ceased all public attendance at our live auction theaters. Our core online auction channels (IronPlanet.com, GovPlanet.com, Marketplace-E) continued to operate as usual.
To facilitate the live auction process transition to a virtual platform and under strict safety guidelines, we enabled equipment drop off at our physical yards prior to the online event, with buyers able to conduct inspections pre-auction and collect equipment post auction. In addition, where auctioneers were not able to attend a physical site, we used Time Auctioned Lots (TAL) solutions for selected International and on-the-farm agriculture events.
GTV recognized through online bidding at live on site auctions and TAL have been counted towards the Live on site auction metrics. The percentage of live GTV dollars that transacted on TAL rose to 30% in Q3 2020, up from 10% in the prior year, and increased to 25%, up from 8% in the first nine months of 2020.
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 period.
GTV by Channel
Live on site auctions
971,904
825,294
3,062,963
3,058,087
Percentage of total
73.6
76.1
77.3
81.4
Online marketplaces including featured (1) and other (2)
349,475
258,947
35
899,423
698,592
26.4
23.9
22.7
18.6
GTV
Percentage of total GTV purchased by online buyers
100
58
4200
3300
Online marketplaces including featured(1) and other(2)
3200
89
62
2700
GTV increased 22% to $1.3 billion in Q3 2020 and increased 5% to $4.0 billion for the first nine months of 2020.
For Q3 2020, live on site GTV increased 18% to $971.9 million. The 18% increase in GTV was primarily due to strong execution of the US strategic accounts and regional sales teams, strong year-over-year growth performance across regions as earlier lockdown measures lifted and border restrictions eased particularly in the International region, and live auction calendar shifts as discussed below. Partially offsetting these increases, Australia switched their selling platform from Live to Online, which transferred GTV to the online channel.
Due to the COVID-19 pandemic, we postponed our (1) Caorso, Italy, (2) Ocana, Spain, and (3) Polotitlan, Mexico auctions from the first half of 2020 to Q3 2020. We also had some auction calendar shifts in Canada, unrelated to the COVID-19 pandemic, where we shifted the Toronto and Lethbridge into Q3 2020, offset by a Grand Prairie auction that will be held in Q4 2020.
For the first nine months of 2020, live on site GTV was flat at $3.1 billion. This was primarily driven by strong execution of the US strategic accounts and regional sales teams, and positive year-over-year growth performance in US and Canada, offset by Australia switching their selling platform from Live to Online and softness in the International region due to the COVID-19 pandemic.
For Q3 2020, online marketplace GTV increased 35% primarily due to increased online performance driven from strong execution by the US strategic accounts and regional sales teams, and the shift of our Australia live on site auctions to our online platform. This increase was partially offset by lower volume in International Marketplace-E.
For the first nine months of 2020, online marketplaces GTV increased 29% for the same reasons discussed above.
Online bidding
Across all channels, 100% of total GTV was purchased by online buyers in Q3 2020 compared to 68% in Q3 2019. For the first nine months of 2020, GTV from online buyers was 89% compared to 62% in the comparable prior year period. The increase in internet bidders and online buyers is a direct impact of the COVID-19 pandemic, as we pivoted to 100% online bidding at our live auctions where onsite attendance was not permitted. Prior to the COVID-19 pandemic restrictions, 67% of total GTV was purchased by online buyers.
Industrial Live On Site Metrics
Total industrial live on site auction metrics
Number of auctions
42
(9)
123
140
Bidder registrations
231,500
165,500
677,100
508,750
Consignors
15,100
14,000
40,450
43,000
Buyers
40,000
34,800
114,250
109,050
Lots
115,350
98,400
312,450
305,150
In Q3 2020, we held four fewer industrial live on site auctions, yet our GTV from live on site auctions increased 18%, primarily due to regional combined auctions in the US. For the first nine months of 2020, we held 12% or 17 less live on site auctions.
In Q3 2020, the total number of industrial lots increased 17% to 115,350 and the total number of lots including agricultural lots increased 17% to 116,750. For the first nine months of 2020, total number of industrial lots increased 2% to 312,450 and the total number of lots including agricultural lots increased 1% to 329,900 lots.
GTV on a per lot basis generated at our industrial live on site auctions decreased 1% to $8,150 in Q3 2020 compared to $8,300 in Q3 2019. For the first nine months of 2020, the GTV on a per lot basis generated at our industrial live on site auctions decreased 1.5% to $9,390 compared to $9,500 in the prior year.
12 months average metrics per industrial live on site auction
12 months ended September 30,
22.5 million
20.4 million
5,090
3,525
44
318
300
2,429
2,118
For the 12 months ended September 30, 2020, we saw a 10% increase in average GTV per industrial auction compared to the prior year period, and a 44% increase in average bidder registration per auction representing higher demand from buyers.
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, 2020 was $13.0 million per Revenue Producer compared to $11.9 million per Revenue Producer for the trailing 12-month period ended September 30, 2019.
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A&M revenue
Total A&M revenue increased 14% to $297.8 million in Q3 2020 and remained flat at $897.2 million for the first nine months of 2020.
A&M revenue by geographical region are presented below:
(in U.S. $000's)
United States
121,810
95,172
357,944
308,769
40,399
48,600
169,543
204,332
A&M revenue- United States
162,209
143,772
527,487
513,101
40,591
33,793
126,508
119,313
7,725
13,493
(43)
35,046
30,651
A&M revenue- Canada
48,316
47,286
161,554
149,964
International
26,548
21,128
58,888
66,498
(11)
60,739
49,126
149,317
165,909
(10)
A&M revenue- International
87,287
70,254
208,205
232,407
A&M total revenue
In Q3 2020, service revenue increased 28% primarily due to an increase in commission revenue driven by a higher volume on Service GTV growth, with strong execution from the US strategic accounts and regional sales teams, and higher rates on our guarantee contracts. Service revenue in the US also increased due to fees earned from higher total GTV and an increase in listing fees on greater online volume.
In Q3 2020, inventory sales revenue decreased 17% resulting from lower inventory earned from government surplus contracts due to the COVID-19 pandemic government shutdowns, which ceased certain shipments of surplus contract inventories.
For the first nine months of 2020, service revenue increased 16% primarily due to higher fees revenue earned on total GTV, harmonization of buyer fees, change in our GTV mix resulting in improved buyer fee rate performance, and other auction service fees earned driven by higher GTV. The increase in commissions is largely driven by higher volumes on Service GTV and higher rates earned on our guarantee contracts. This increase was partially offset by softer commission rate performance from a higher proportion of GTV sourced from strategic accounts. Inventory sales revenue decreased 17% due to the non-recurring large dispersal of pipeline equipment as part of the $94 million Columbus, Ohio auction in June 2019, and lower inventory revenue earned through our government surplus contracts as discussed above.
In Q3 2020, service revenue increased 20% primarily due to higher commissions and fees revenue driven by higher total GTV. Canada also earned higher fees revenue due to a greater proportion of small value lots. Inventory sales revenue decreased 43% primarily due to the shift of Grand Prairie auction from Q3 2020 to Q4 2020.
For the first nine months of 2020, service revenue increased 6% due to the full harmonization of buyer fees, fees earned on higher total GTV, and higher commissions revenue driven by Service GTV growth. Inventory sales revenue increased 14% to $35.0 million primarily due to year-over-year growth performance at our Western Canada auctions, partially offset by the Grand Prairie auction shift as discussed above.
In Q3 2020, service revenue increased 26% primarily due to higher fees and commissions revenue driven by services GTV growth and a change in our GTV mix resulting in improved buyer fee rate performance. Inventory sales revenue increased 24% driven by large private treaty deals closed in Australia and strong performance at our Maltby and Dubai auctions as border restrictions eased in Q3 2020, partially offset by the non-repeat of the 2019 Narita auction.
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For the first nine months of 2020, service revenue decreased 11% with lower commissions earned on lower GTV, partially offset by higher fees revenue as a result of the buyer fee harmonization. Inventory sales revenue decreased 10% due to the unfavourable performance as this region was severely impacted by thee COVID-19 pandemic, and the non-repeat of supply contracts in Europe and Asia that were garnered in a more favourable supply environment in the first nine months of 2019.
A&M costs of services increased 1% to $21.7 million in Q3 2020 compared to Q3 2019. This increase is primarily driven by the 22% increase in total GTV, offset by significant cost reductions in employee compensation, and travel, advertising and promotion as a result of our response to the COVID-19 pandemic. Our response included transitioning our live on site auctions to online bidding, utilizing TAL solutions for selected International and on-the-farm agricultural events, and implementing travel restrictions.
For the first nine months of 2020, A&M costs of services decreased 8% to $69.0 million for the same reasons noted above. In addition, the decrease was partially offset by additional facilities costs incurred to support our Q1 2020 Leake auction and expenses incurred to support our government surplus contracts. We also incurred lower net fees related to referral payments.
A&M cost of inventory sold decreased 6% to $96.3 million in Q3 2020 compared to Q3 2019, primarily in line with lower activity in inventory sales revenue. Cost of inventory sold decreased at a higher rate than the decrease of inventory sales revenue, indicating an increase in the revenue margin. The margin improved due to rate improvement in US and Canada.
For the first nine months of 2020, A&M cost of inventory sold decreased 14% to $321.0 million due to the reasons noted above, and we also had rate improvement in International during this period.
A&M SG&A expenses increased 18% to $103.9 million in Q3 2020 compared to Q3 2019. The increase was primarily due to $8.8 million higher short-term and long-term incentive expenses driven by strong performance, higher headcount to support our growth initiatives, and a one-time $4.3 million severance costs related to the realignment of leadership to support the new global operations organization, in line with strategic growth priorities led by the new CEO. These increases were partially offset by lower SG&A expenses related to lower travel, advertising, and promotion costs as we implemented travel restrictions.
For the first nine months of 2020, A&M segment SG&A expenses increased 8% to $290.1 million primarily due to the same reasons noted above.
Other Services Segment
(44)
Other services profit
In Q3 2020, Other Services revenue increased 18% to $33.7 million primarily due to an increase in Ancillary revenue of $4.7 million and RBFS revenue of $1.1 million. In the first nine months of 2020, Other Services revenue increased 6% to $96.6 million due to higher revenue in Ancillary of $5.5 million and RBFS of $2.6 million. This increase was partially offset by lower revenue from RB Logistics of $2.6 million caused by lower inventory sales in Europe requiring logistics.
Ancillary revenue was higher due to fees earned on refurbishing and transporting sellers’ equipment driven by higher GTV activity.
RBFS revenue increased 19% in Q3 2020, driven by an increase in funded volume and the rate of fees earned from facilitating financing arrangements. In Q3 2020, our funded volume, which represents the amount of lending brokered by RBFS, increased 11% to $117.0 million in Q3 2020, and increased 12% when excluding the impact of foreign exchange. In the first nine months of 2020, our funded volume increased 1% to $374.5 million, and increased 3% when excluding the impact of foreign exchange. Credit
38
approvals were tightened by lenders in Q3 2020 compared to Q3 2019 due to the economic uncertainties during the COVID-19 pandemic.
In Q3 2020, Other Services profit increased 25% to $10.0 million driven by our Ancillary, Mascus and RBFS operations. In the first nine months of 2020, Other Services profit increased 13% to $28.5 million primarily due to the same reasons noted above. The lower revenue from RB Logistics resulted in a similar magnitude decrease in logistical service expenses.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash provided by operating activities and borrowings from our revolving credit facilities, which we renewed on August 14, 2020.
In the first nine months of 2020, our operational liquidity was not materially impacted by the COVID-19 pandemic. Today we believe that our existing working capital and availability under our credit facilities are sufficient to satisfy our present operating requirements and contractual obligations. With the future uncertainty, we will continue to evaluate the nature and extent of any impacts to our liquidity as events unfold. Our future growth strategies continue to include but are not limited to the development of our A&M, RBFS, and Mascus operating segments, as well as other growth opportunities including mergers and acquisitions.
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.
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
Our cash, cash equivalents, and restricted cash was $590.3 million at September 30, 2020, a 31% increase over the $451.4 million balance at September 30, 2019. The $24.2 million of cash generated over the comparative period is detailed in the following table:
Operating activities
Investing activities
(51)
Financing activities
(37)
Effect of changes in foreign currency rates
332
Net increase in cash, cash equivalents, and restricted cash
Net cash provided by operating activities decreased $43.6 million in the first nine months of 2020. This decrease was primarily due to a net negative impact in our operating assets and liabilities, partially offset by an increase in our net income over the comparative period. We saw net negative cash flows from changes in our operating assets and liabilities primarily driven by the timing of auctions and changes in inventory levels over the comparative period. At the end of 2018, we saw particularly high levels of inventory in Europe, which turned over in the first nine months of 2019. These cash outflows were partially offset by a net positive movement in our trade and other payables related to the timing of employee compensation payments, as well as the timing of payments related to our GovPlanet business.
Net cash used in investing activities decreased $10.5 million in the first nine months of 2020. This decrease was primarily due to $10.7 million more net proceeds on disposal of property, plant and equipment over the comparative period, which included $15.5 million on the sale of land in the United States, as well as $4.2 million on the distribution of equity investments in the first nine months of 2020. This increase was partially offset by a $4.4 million increase in property, plant and equipment and intangible asset additions over the comparative period.
Net cash used in financing activities decreased $52.8 million in the first nine months of 2020. This decrease was driven by a $27.9 million increase in net proceeds from short-term debt draws, primarily to fund inventory purchases in Australia. In addition, we raised $27.8 million more cash from the issuance of share capital related to stock option exercises in the first nine months of 2020 over the
39
comparative period in 2019. Further, we had $17.9 million fewer repayments of long-term debt, primarily due to $20.0 million of voluntary term loan repayments in the first nine months of 2019 compared to no voluntary debt repayments in the first nine months of 2020. Partially offsetting this was an increase of $11.2 million in share repurchases in the first nine months of 2020 versus the first nine months of 2019.
Dividend information
We declared and paid a regular cash dividend of $0.20 per common share for the quarter ended September 30, 2019, December 31, 2019, and March 31, 2020. We declared a dividend of $0.22 per common share for the quarter ended June 30, 2020. We have declared, but not yet paid, a dividend of $0.22 per common share for the quarter ended September 30, 2020. 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 51.7% for the 12 months ended September 30, 2020 from 60.5% for the 12 months ended September 30, 2019. This decrease 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 50.0% for the 12 months ended September 30, 2020 from 60.5% for the 12 months ended September 30, 2019.
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 250 bps to 11.1% for the 12-month period ending September 30, 2020 from 8.6% for the 12-month period ending September 30, 2019. 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 290 bps to 11.5% during the 12 months ended September 30, 2020 compared to 8.6% for the 12 months period ending September 30, 2019.
Credit facilities
On August 14, 2020, we amended the Credit Agreement dated October 27, 2016, totaling US$630.0 million with a syndicate of lenders comprising:
The amendments, among other things, (i) extended the maturity date of the Facilities from October 27, 2021 to October 27, 2023, (ii) increased the applicable margin for base rate loans and LIBOR loans by 0.50% at each pricing tier level, (iii) increased the applicable percentage per annum used to calculate the commitment fee in respect of the unused commitments under the Revolving Facilities by 0.10% at each pricing tier level, and (iv) increased the aggregate amount available under the Revolving Facilities from $490.0 million to $530.0 million.
Credit facilities at September 30, 2020 and December 31, 2019 were as follows:
Committed
.
Term loan facility
(38)
Revolving credit facilities
540,000
Total credit facilities
636,782
655,355
Unused
469,407
489,937
Total credit facilities unused
Debt covenants
We were in compliance with all financial and other covenants applicable to our credit facilities at September 30, 2020. Our debt covenants did not change as a result of amending our Credit Agreement.
Our ability to borrow under our syndicated revolving credit facility is subject to compliance with a consolidated leverage ratio covenant and a consolidated interest coverage ratio covenant. In the event of sustained deterioration of global markets and economies, we expect the covenants pertaining to our leverage ratio would be the most restrictive to our ability to access funding under our credit agreement. We continue to assess the impact of the COVID-19 pandemic on our business and evaluate courses of action to maintain current levels of liquidity and compliance with our debt covenants.
Share repurchase program
On May 8, 2019, our Board of Directors authorized a share repurchase program for the repurchase of up to $100 million worth of our common shares, approved by the Toronto Stock Exchange, over a total period of 12 months. In 2020, we repurchased 1,525,312 common shares for $53,170,000 as part of this program until it ended on May 8, 2020.
On August 5, 2020, our Board of Directors authorized a share repurchase program for the repurchase of up to $100.0 million worth of our common shares, approved by the Toronto Stock Exchange, over a period of 12 months, ending August 23, 2021. No share repurchases were made during the three months ended September 30, 2020.
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
In preparing our consolidated financial statements in conformity with US GAAP, we must make decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the relevant circumstances and historical experience. The COVID-19 pandemic resulted in significant global economic disruption, which can cause a greater degree of uncertainty around our long-term cash projections. As a result, we have further evaluated our judgments and estimates, particularly in the following areas:
The following discussion of critical accounting policies and estimates is intended to supplement the significant accounting policies presented in the notes to our consolidated financial statements included in “Part II, Item 8: Financial Statements and Supplementary Data” presented in our Annual Report on Form 10-K, which summarize the accounting policies and methods used in the preparation of those consolidated financial statements. The policies and the estimates discussed below are included here because they require more significant judgments and estimates in the preparation and presentation of our consolidated financial statements than other policies and estimates. Actual amounts could differ materially from those estimated by us at the time our consolidated financial statements are prepared.
Recoverability of goodwill
We perform impairment tests on goodwill and indefinite-lived intangible assets on an annual basis in accordance with US GAAP, or more frequently if events or changes in circumstances indicate that those assets might be impaired. Goodwill is tested for impairment at a reporting unit level, which is at the same level or one level below an operating segment. We determined our reporting units to be at the same level as our operating segments for A&M and Mascus.
In accordance with Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), we begin with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the
41
reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units have generated sufficient returns to recover the cost of goodwill.
A&M reporting unit
For the nine months ended September 30, 2020, we performed a qualitative assessment of the A&M reporting unit with consideration of the current global economic downturn as a result of the COVID-19 pandemic and we concluded there were no indicators of impairment that existed.
Mascus reporting unit
For the nine months ended September 30, 2020, we performed a qualitative assessment of the Mascus reporting unit with consideration of the current global economic downturn as a result of the COVID-19 pandemic and we concluded there were no indicators of impairment that existed.
Recoverability of long-lived and indefinite-lived assets
We test long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount 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. As a result of the COVID-19 pandemic, we reviewed for any events or changes in circumstances that indicate the carrying amount of our long-lived assets may not be recoverable. Our assessment concluded that despite the economic impact of the COVID-19 pandemic, we believe the carrying amounts of our long-lived assets are recoverable as at September 30, 2020.
Indefinite-lived intangible assets are tested at least annually for impairment, and between annual tests if indicators of potential impairment exist. Amid the COVID-19 pandemic, we determined there are potential indicators of impairment and prepared 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. Based on our qualitative assessment, we determined there were no indicators of impairment of our indefinite-lived intangible assets at September 30, 2020.
Recoverability of trade receivables
Our trade receivables are generally secured by the equipment, and we determined the COVID-19 pandemic did not have a significant impact on our allowance for expected credit losses. Refer to Note 11 of the financial statements, Trade Receivables, regarding the activity in the allowance for expected credit losses.
Valuation of inventories
Inventory consists of equipment and other assets purchased for resale in an upcoming live on site auction or online marketplace event. We typically purchase 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. We value our Inventory 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.
For the nine months ended September 30, 2020, we reviewed our inventories balance to ensure that it is recorded at the lower of cost and net realizable value. Specific consideration was given to the impact on the net realizable value of our inventories balance given the global economic downturn triggered by the COVID-19 pandemic.
Adoption of New Standards
Topic 326
Effective January 1, 2020, we adopted Topic 326, which replaces the ‘incurred loss methodology’ credit impairment model with a new forward-looking methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of the standard had no material effect on the carrying values of our financial assets on the transition date. Periods prior to January 1, 2020 that are presented for comparative purposes have not been adjusted.
Topic 848
Effective January 1, 2020, we adopted Topic 848, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides relief for companies preparing for discontinuation of reference rates such as LIBOR. This guidance is effective immediately and can be applied until December 31, 2022. Our use of LIBOR is applicable on short term drawings on the committed revolving credit facilities in certain jurisdictions. If applicable, we will use the optional expedients available when reference rate changes occur.
Topic 842
Effective January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). Refer to Note 18 of the financial statements, Leases, for a discussion of our lease accounting.
In addition, effective January 1, 2020, we adopted ASU 2018-15, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40), Customer’s Accounting for implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract on a prospective basis. The adoption of ASU 2018-15 on January 1, 2020 using the prospective transition approach did not result in a material impact to the consolidated financial statements.
For a discussion of our new and amended accounting standards refer to Note 1 of the financial statements, Summary of significant accounting policies.
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.
Pre-tax adjusting items:
Severance
4,283
Adjusted operating income*
71,667
194,549
43
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,
and percentages)
Current income tax effect of adjusting items:
(1,065)
(100)
Current income tax adjusting item:
Change in uncertain tax provision
766
Deferred tax adjusting item:
5,462
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
8,737
10,090
(13)
26,801
31,023
Less: interest income
(510)
(517)
(1,775)
(2,435)
(27)
Add: income tax expense
128
69
91,873
59,297
55
255,074
206,882
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, except percentages)
5.8
250
632.6
689.3
Debt
652.9
695.1
Less: Cash and cash equivalents
(470.3)
(309.6)
Adjusted net debt*
182.6
385.5
(53)
173.0
133.0
74.2
69.1
37.1
42.8
(3.1)
(3.3)
40.7
Share-based payment expense recovery
(4.1)
4.3
343.0
282.3
Debt/net income
3.8
x
5.2
Adjusted net debt*/adjusted EBITDA*
0.5
1.4
(64)
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:
(in U.S. $ millions, except percentages)
Cash provided by operating activities
289.2
356.2
(19)
10.4
59
28.9
25.1
Proceeds on disposition of property plant and equipment
(16.6)
(13.7)
Net capital spending
28.8
21.8
OFCF*
260.4
334.4
(22)
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:
%Change
89.4
80.4
172.8
(1.1)
Deferred income tax effect of adjusting items:
0.8
Change in uncertain tax provisions
5.5
178.9
Dividend payout ratio
51.7
60.5
(880)
Adjusted dividend payout ratio*
50.0
(1050)
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
751.8
Ending long-term debt
Average long-term debt
661.0
720.6
Opening stockholders' equity
838.2
815.5
Ending stockholders' equity
959.5
Average stockholders' equity
898.9
826.9
Average invested capital
1,559.9
1,547.5
11.1
8.6
ROIC*
11.5
290
47
Adjusting items during the trailing 12-months ended September 30, 2020 were:
Recognized in the third quarter of 2020
Recognized in the second quarter of 2020
Recognized in the first quarter of 2020
Recognized in the fourth quarter of 2019
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
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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, 2020 from those disclosed in Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2019, 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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of the Company’s disclosure controls and procedures as at September 30, 2020. The term “disclosure controls and procedures” means controls and other procedures established by the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits 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 required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based upon their evaluation of the Company’s disclosure controls and procedures, the CEO and the CFO concluded that, as at September 30, 2020, the disclosure controls are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the CEO 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.
The Company, including its CEO and CFO, does not expect that its 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 CEO and CFO, concluded that there were no changes in our internal control over financial reporting during the quarter ended September 30, 2020 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, 2019, 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 out below, there were no material changes in risk factors during the three months or nine months ended September 30, 2020.
Our business operations, results of operations, cash flows and financial performance may be affected by the recent COVID-19 pandemic.
An outbreak of a novel strain of coronavirus (COVID-19) has occurred, including in all of the countries in which we operate. National, state, provincial and local governments have responded to the COVID-19 pandemic in a variety of ways, including, without limitation, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), and in certain cases, ordering businesses to close or limit operations or people to stay at home.
The COVID-19 pandemic has caused certain disruptions to our business and operations and could cause further material disruptions to our business and operations in the future as a result of, among other things, quarantines, worker absenteeism as a result of illness or other factors, social distancing measures and other travel, health-related, business or other restrictions. For similar reasons, the COVID-19 pandemic has also adversely impacted, and may continue to adversely impact, the businesses and needs of our customers. Depending on the extent and duration of all of the above-described effects on our business and operations and the business and operations of our customers, our costs could increase, including our costs to address the health and safety of personnel, our ability to source assets to sell may be adversely impacted, our ability to transport and/or sell the assets that we source may be adversely impacted, our ability to service certain customers could be adversely impacted, and our ability to transfer ownership to the assets that we do sell could be adversely impacted. As a result of the foregoing, our business operations, results of operations, cash flows and financial performance could be materially adversely affected.
Although we have been permitted to continue to operate our auction sites in most of the jurisdictions in which we operate, including in jurisdictions that have mandated the closure of certain businesses, we have had to either forbid customer access altogether or limit the number of customers that are able to access our auction sites; in each case leading to online-only bidding for our live auctions. There is no assurance that we will be permitted to operate under every future government order or other restriction and in every location. If we were to be subject to government orders or other restrictions on the operation of our business, we may be required to limit our operations at, or close, certain auction sites and office locations in the future. Any limitations on, or closures of, our auction sites or our customers’ sites could have a material adverse impact on our ability to carry out auctions or facilitate online sales, allow customers or our inspection teams to inspect assets or allow customers to retrieve purchased assets. Any such limitations or closures could have a material adverse impact on our business operations, results of operations, cash flows and financial performance.
Any sustained disruption in the capital markets from the COVID-19 pandemic could negatively impact our ability to raise capital. As of the end of our third fiscal quarter of 2020 we have a strong balance sheet and do not anticipate the need to raise capital. However, we cannot predict when the macro-economic disruption stemming from the COVID-19 pandemic will ebb or when the economy will return to pre-COVID-19 pandemic levels, if at all. If the macro-economic disruption continues for prolonged periods we may need to raise capital and capital may not be available on acceptable terms, or at all. The impact of the COVID-19 pandemic on economic activity, and its effect on our sales force and our customers are uncertain at this time and could have a material adverse effect on our results, especially to the extent these effects persist or exacerbate over an extended period of time. Additionally, any such impact could also result in financial and/or operational constraints for our service providers, buyers of the assets sold through our sales channel, as well as other counterparties, thereby increasing the risk that such counterparties default on their obligations to us.
The acquisition of Rouse Services LLC (“Rouse”) is subject to a number of conditions and may not be completed on the terms or timeline currently contemplated, or at all.
The completion of the acquisition of Rouse is subject to certain conditions, including, among other things: (a) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (b) no governmental authority shall have enacted, issued, promulgated, enforced or entered any order which is in effect and has the effect of making the acquisition of Rouse illegal, otherwise restraining or prohibiting consummation of the acquisition or causing any portion of the acquisition to be rescinded following completion thereof, and (c) the shares to be issued in connection with the acquisition shall have been (i) conditionally approved for listing by the Toronto Stock Exchange, and (ii) approved for listing by the New York Stock Exchange.
We cannot assure you that the acquisition will be consummated on the terms or timeline currently contemplated, or at all. Many of the conditions to completion of the acquisition are not within our control, and we cannot predict when or if these conditions will be satisfied. The failure to meet all of the required conditions could delay the completion of the acquisition for a significant period of time or prevent it from occurring. Any delay in completing the acquisition could cause us not to realize some or all of the benefits that it expects to achieve if the acquisition is successfully completed within its expected timeframe.
We may not realize the anticipated benefits of, and synergies from, the acquisition of Rouse and may become responsible for certain liabilities and integration costs.
Business acquisitions involve the integration of new businesses that have previously operated independently from us. The integration of our operations with those of Rouse is expected to result in financial and operational benefits. There can be no assurance, however, regarding when or the extent to which we will be able to realize these and other benefits. Integration may also be difficult, unpredictable and subject to delay and may divert the attention of management to integration matters. We may have difficulties integrating information systems, assimilating corporate cultures or retaining key Rouse employees. Difficulties associated with the integration of acquired businesses could have a material adverse effect on our business, financial condition and results of operations.
In addition, in connection with the acquisition of Rouse, we have assumed certain potential liabilities, some of which may not be covered by indemnification obligations of Rouse or third parties. To the extent we do not identify such liabilities or to the extent indemnifications obtained from third parties are insufficient to cover such liabilities, these liabilities could have a material adverse effect on our business, financial condition and results of operations.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
Third Amendment to Credit Agreement, dated as of August 14, 2020, among the Company, certain of its subsidiaries, each as a borrower and/or a guarantor, the lenders party thereto and Bank of America, N.A., as administrative agent, U.S. swing line lender and letter of credit issuer (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 17, 2020)
10.2
Employment Agreement between Ritchie Bros. Auctioneers (Canada) Ltd. and Kevin Geisner, dated August 4, 2020
Membership Interest Purchase Agreement dated October 28, 2020 among the Company, Ritchie Bros. Auctioneers (America) Inc., Rouse Services LLC (“Rouse”), the members of Rouse, and Scott Rouse, in his capacity as seller representative
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial 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 three and nine months ended September 30, 2020, 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 three and nine months ended September 30, 2020, 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 5, 2020
By:
/s/ Ann Fandozzi
Ann Fandozzi
Chief Executive Officer
/s/ Sharon R. Driscoll
Sharon R. Driscoll
Chief Financial Officer