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, | ||
| ||
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) (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 | New York Stock Exchange |
Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ No¨◻
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☒ 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 | ☐ | | |
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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¨☐ Nox⌧
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date: 107,184,927109,400,129 common shares, without par value, outstanding as of November 7, 2017.4, 2020.
RITCHIE BROS. AUCTIONEERS INCORPORATED
FORM 10-Q
For the quarter ended September 30, 20172020
INDEX
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |||
49 | ||||
49 | ||||
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50 | ||||
50 | ||||
51 | ||||
51 | ||||
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Cautionary Note Regarding Forward-Looking Statements
The information discussed in this Quarterly Report on Form 10-Q of Ritchie Bros. Auctioneers Incorporated (“Ritchie Bros.”, the “Company”, “we” or “us”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Canadian securities laws. These statements are based on our current expectations and estimates about our business and markets, and include, among others, statements relating to:
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”, “period to period”, “long-term”, or the negative of these terms, and similar expressions intended to identify forward-looking statements. Our forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.
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, 2016, which is available on our website atwww.rbauction.com, on EDGAR atwww.sec.gov, or on SEDAR atwww.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. You should consider our forward-looking statements in light of the factors listed or referenced under “Risk Factors” herein and other relevant factors.
PART I – FINANCIAL INFORMATION
| 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, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues (note 6) | $ | 141,047 | $ | 128,876 | $ | 431,732 | $ | 419,626 | ||||||||
| Costs of services, excluding depreciation and amortization (note 7) | 19,583 | 14,750 | 53,987 | 49,821 | ||||||||||||
| 121,464 | 114,126 | 377,745 | 369,805 | |||||||||||||
| Selling, general and administrative expenses (note 7) | 85,335 | 68,293 | 230,287 | 209,395 | ||||||||||||
| Acquisition-related costs (note 7) | 3,587 | 5,398 | 35,162 | 7,198 | ||||||||||||
| Depreciation and amortization expenses (note 7) | 14,837 | 10,196 | 37,047 | 30,560 | ||||||||||||
| Gain on disposition of property, plant and equipment | (42 | ) | (570 | ) | (1,071 | ) | (1,017 | ) | ||||||||
| Impairment loss (note 7) | - | 28,243 | 8,911 | 28,243 | ||||||||||||
| Foreign exchange loss (gain) | 816 | 281 | (7 | ) | 332 | |||||||||||
| Operating income | 16,931 | 2,285 | 67,416 | 95,094 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 517 | 369 | 2,459 | 1,354 | ||||||||||||
| Interest expense | (10,558 | ) | (934 | ) | (27,311 | ) | (3,357 | ) | ||||||||
| Equity income (loss) (note 17) | (109 | ) | 213 | (158 | ) | 1,209 | ||||||||||
| Other, net | 184 | 247 | 4,045 | 1,214 | ||||||||||||
| (9,966 | ) | (105 | ) | (20,965 | ) | 420 | ||||||||||
| Income before income taxes | 6,965 | 2,180 | 46,451 | 95,514 | ||||||||||||
| Income tax expense (recovery) (note 8): | ||||||||||||||||
| Current | 1,402 | 9,652 | 17,565 | 35,767 | ||||||||||||
| Deferred | (4,760 | ) | (2,472 | ) | (9,583 | ) | (5,838 | ) | ||||||||
| (3,358 | ) | 7,180 | 7,982 | 29,929 | ||||||||||||
| Net income (loss) | $ | 10,323 | $ | (5,000 | ) | $ | 38,469 | $ | 65,585 | |||||||
| Net income (loss) attributable to: | ||||||||||||||||
| Stockholders | $ | 10,261 | $ | (5,137 | ) | $ | 38,273 | $ | 63,979 | |||||||
| Non-controlling interests | 62 | 137 | 196 | 1,606 | ||||||||||||
| $ | 10,323 | $ | (5,000 | ) | $ | 38,469 | $ | 65,585 | ||||||||
| Earnings (loss) per share attributable to stockholders (note 9): | ||||||||||||||||
| Basic | $ | 0.10 | $ | (0.05 | ) | $ | 0.36 | $ | 0.60 | |||||||
| Diluted | $ | 0.09 | $ | (0.05 | ) | $ | 0.35 | $ | 0.60 | |||||||
| Weighted average number of shares outstanding (note 9): | ||||||||||||||||
| Basic | 107,120,618 | 106,622,376 | 106,993,358 | 106,595,088 | ||||||||||||
| Diluted | 108,178,303 | 107,525,051 | 108,069,624 | 107,221,390 | ||||||||||||
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 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 | |
Net income | | $ | 45,490 | | $ | 25,272 | | $ | 121,438 | | $ | 97,575 | |
| | | | | | | | | | | | | |
Earnings per share attributable to stockholders: | |
|
| |
|
| |
|
| |
|
| |
Basic | | $ | 0.42 | | $ | 0.23 | | $ | 1.11 | | $ | 0.90 | |
Diluted | | $ | 0.41 | | $ | 0.23 | | $ | 1.10 | | $ | 0.89 | |
| | | | | | | | | | | | | |
Weighted average number of shares outstanding: | |
|
| |
|
| |
|
| |
|
| |
Basic | |
| 109,018,469 | |
| 108,003,390 | |
| 108,887,026 | |
| 108,453,525 | |
Diluted | |
| 110,369,718 | |
| 109,381,173 | |
| 110,060,712 | |
| 109,634,195 | |
See accompanying notes to the condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income
(Expressed in thousands of United States dollars)
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income (loss) | $ | 10,323 | $ | (5,000 | ) | $ | 38,469 | $ | 65,585 | |||||||
| Other comprehensive income, net of income tax: | ||||||||||||||||
| Foreign currency translation adjustment | 6,009 | 590 | 22,822 | 7,990 | ||||||||||||
| Total comprehensive income (loss) | $ | 16,332 | $ | (4,410 | ) | $ | 61,291 | $ | 73,575 | |||||||
| Total comprehensive income (loss) attributable to: | ||||||||||||||||
| Stockholders | 16,256 | (4,550 | ) | 61,045 | 71,798 | |||||||||||
| Non-controlling interests | 76 | 140 | 246 | 1,777 | ||||||||||||
| $ | 16,332 | $ | (4,410 | ) | $ | 61,291 | $ | 73,575 | ||||||||
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||||
|
| September 30, | | September 30, | | ||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
Net income | | $ | 45,490 | | $ | 25,272 | | $ | 121,438 | | $ | 97,575 | |
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: | |
|
| |
|
| |
|
| |
|
| |
Stockholders | | $ | 57,910 | | $ | 15,586 | | $ | 128,654 | | $ | 88,614 | |
Non-controlling interests | |
| 129 | |
| (17) | |
| 229 | |
| 81 | |
| | $ | 58,039 | | $ | 15,569 | | $ | 128,883 | | $ | 88,695 | |
See accompanying notes to the condensed consolidated financial statements.
| |
Ritchie Bros. | 2 |
Condensed Consolidated Balance Sheets
(Expressed in thousands of United States dollars, except share data)
(Unaudited)
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 224,474 | $ | 207,867 | ||||
| Restricted cash (note 10) | 89,846 | 50,222 | ||||||
| Trade and other receivables | 212,330 | 52,979 | ||||||
| Inventory (note 12) | 46,333 | 28,491 | ||||||
| Advances against auction contracts | 9,983 | 5,621 | ||||||
| Prepaid expenses and deposits | 16,422 | 19,005 | ||||||
| Assets held for sale (note 13) | 654 | 632 | ||||||
| Income taxes receivable | 21,413 | 13,181 | ||||||
| 621,455 | 377,998 | |||||||
| Property, plant and equipment (note 14) | 530,495 | 515,030 | ||||||
| Equity-accounted investments (note 17) | 7,287 | 7,326 | ||||||
| Restricted cash (note 10) | - | 500,000 | ||||||
| Deferred debt issue costs (note 18) | 4,054 | 6,182 | ||||||
| Other non-current assets | 7,198 | 4,027 | ||||||
| Intangible assets (note 15) | 261,122 | 72,304 | ||||||
| Goodwill (note 16) | 669,646 | 97,537 | ||||||
| Deferred tax assets | 28,607 | 19,129 | ||||||
| $ | 2,129,864 | $ | 1,599,533 | |||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Auction proceeds payable | $ | 360,517 | $ | 98,873 | ||||
| Trade and other payables | 132,045 | 124,694 | ||||||
| Income taxes payable | 1,277 | 5,355 | ||||||
| Short-term debt (note 18) | 8,567 | 23,912 | ||||||
| Current portion of long-term debt (note 18) | 16,985 | - | ||||||
| 519,391 | 252,834 | |||||||
| Long-term debt (note 18) | 800,900 | 595,706 | ||||||
| Share unit liabilities | 2,444 | 4,243 | ||||||
| Other non-current liabilities | 18,118 | 14,583 | ||||||
| Deferred tax liabilities | 62,068 | 36,387 | ||||||
| 1,402,921 | 903,753 | |||||||
| Contingencies (note 21) | ||||||||
| Contingently redeemable performance share units (note 20) | 7,230 | 3,950 | ||||||
| Stockholders' equity (note 19): | ||||||||
| Share capital: | ||||||||
| Common stock; no par value, unlimited shares authorized, issued and outstanding shares: 107,180,726 (December 31, 2016: 106,822,001) | 135,919 | 125,474 | ||||||
| Additional paid-in capital | 38,907 | 27,638 | ||||||
| Retained earnings | 584,263 | 601,071 | ||||||
| Accumulated other comprehensive loss | (44,354 | ) | (67,126 | ) | ||||
| Stockholders' equity | 714,735 | 687,057 | ||||||
| Non-controlling interest | 4,978 | 4,773 | ||||||
| 719,713 | 691,830 | |||||||
| $ | 2,129,864 | $ | 1,599,533 | |||||
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
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; 0 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 | | $ | 2,537,989 | | $ | 2,229,430 |
See accompanying notes to the condensed consolidated financial statements.
| |
Ritchie Bros. | 3 |
Condensed Consolidated Statements of Changes in Equity
(Expressed in thousands of United States dollars, except where noted)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | — |
Net income | | — | |
| — | |
| — | |
| 45,387 | |
| — | |
| 103 | |
| 45,490 | |
| — |
Other comprehensive income (loss) | | — | |
| — | |
| — | |
| — | |
| 12,523 | |
| 26 | |
| 12,549 | |
| — |
| | — | |
| — | |
| — | |
| 45,387 | |
| 12,523 | |
| 129 | |
| 58,039 | |
| — |
Stock option exercises | | 751,268 | |
| 26,470 | |
| (5,701) | |
| — | |
| — | |
| — | |
| 20,769 | |
| — |
Issuance of common stock related to vesting of share units | | 86 | |
| 2 | |
| (7) | |
| — | |
| — | |
| — | |
| (5) | |
| — |
Stock option compensation expense | | — | |
| — | |
| 1,671 | |
| — | |
| — | |
| — | |
| 1,671 | |
| — |
Equity-classified share units expense | | — | |
| — | |
| 4,138 | |
| — | |
| — | |
| — | |
| 4,138 | |
| — |
Equity-classified share units dividend equivalents | | — | |
| — | |
| 194 | |
| (194) | |
| — | |
| — | |
| — | |
| — |
Cash dividends paid | | — | |
| — | |
| — | |
| (24,053) | |
| — | |
| — | |
| (24,053) | |
| — |
Balance, September 30, 2020 | | 109,381,891 | | $ | 195,727 | | $ | 48,253 | | $ | 767,188 | | $ | (51,684) | | $ | 5,383 | | $ | 964,867 | | | — |
| | | | | | | | | | | | | | | | | | | | | | | |
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 |
Net income |
| — | |
| — | |
| — | |
| 25,266 | |
| — | |
| 6 | |
| 25,272 | |
| — |
Other comprehensive income (loss) |
| — | |
| — | |
| — | |
| — | |
| (9,680) | |
| (23) | |
| (9,703) | |
| — |
|
| — | |
| — | |
| — | |
| 25,266 | |
| (9,680) | |
| (17) | |
| 15,569 | |
| — |
Stock option exercises |
| 363,217 | | | 8,451 | |
| (135) | |
| — | |
| — | |
| — | |
| 8,316 | |
| — |
Issuance of common stock related to vesting of share units |
| 10,444 | | | 737 | |
| — | |
| 1 | |
| — | |
| — | |
| 738 | |
| (1,083) |
Stock option compensation expense |
| — | |
| — | |
| 1,653 | |
| — | |
| — | |
| — | |
| 1,653 | |
| — |
Equity-classified share units expense |
| — | |
| — | |
| 2,830 | |
| — | |
| — | |
| — | |
| 2,830 | |
| 21 |
Equity-classified share units dividend equivalents |
| — | |
| — | |
| 308 | |
| (320) | |
| — | |
| — | |
| (12) | |
| 13 |
Cash dividends paid |
| — | |
| — | |
| — | |
| (21,631) | |
| — | |
| — | |
| (21,631) | |
| — |
Balance, September 30, 2019 |
| 108,210,335 | | $ | 159,773 | | $ | 59,289 | | $ | 684,231 | | $ | (65,129) | | $ | 5,148 | | $ | 843,312 | | | — |
| |
Ritchie Bros. | 4 |
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 | ||||||||||||||||||||||||||
| shares | Amount | ("APIC") | earnings | income (loss) | ("NCI") | equity | ("PSUs") | |||||||||||||||||||||||||
| Balance, December 31, 2016 | 106,822,001 | $ | 125,474 | $ | 27,638 | $ | 601,071 | $ | (67,126 | ) | $ | 4,773 | $ | 691,830 | $ | 3,950 | ||||||||||||||||
| Net income | - | - | - | 38,273 | - | 196 | 38,469 | - | ||||||||||||||||||||||||
| Other comprehensive income | - | - | - | - | 22,772 | 50 | 22,822 | - | ||||||||||||||||||||||||
| - | - | - | 38,273 | 22,772 | 246 | 61,291 | - | |||||||||||||||||||||||||
| Stock option exercises | 355,514 | 10,354 | (2,420 | ) | - | - | - | 7,934 | - | |||||||||||||||||||||||
| Stock option compensation expense (note 20) | - | - | 10,996 | - | - | - | 10,996 | - | ||||||||||||||||||||||||
| Assumption of stock options on acquisition of IronPlanet (note 22) | - | - | 2,330 | - | - | - | 2,330 | - | ||||||||||||||||||||||||
| Settlement of equity-classified PSUs | 3,211 | 91 | 91 | (172 | ) | |||||||||||||||||||||||||||
| Modification of PSUs (note 20) | - | - | - | (382 | ) | - | - | (382 | ) | 1,803 | ||||||||||||||||||||||
| Equity-classified PSU expense (note 20) | - | - | 340 | - | - | - | 340 | 1,531 | ||||||||||||||||||||||||
| Equity-classified PSU dividend equivalents | - | - | 23 | (126 | ) | - | - | (103 | ) | 103 | ||||||||||||||||||||||
| Change in value of contingently redeemable equity-classified PSUs | - | - | - | (15 | ) | - | - | (15 | ) | 15 | ||||||||||||||||||||||
| Cash dividends paid (note 19) | - | - | - | (54,558 | ) | - | (41 | ) | (54,599 | ) | - | |||||||||||||||||||||
| Balance, September 30, 2017 | 107,180,726 | $ | 135,919 | $ | 38,907 | $ | 584,263 | $ | (44,354 | ) | $ | 4,978 | $ | 719,713 | $ | 7,230 | ||||||||||||||||
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
|
| Attributable to stockholders |
| | | | | |
| Contingently | |||||||||||||
| | | | | | | Additional | | | | | Accumulated | | Non- | | | | | redeemable | ||||
| | Common stock | | paid-In | | | | | other | | controlling | | | | | performance | |||||||
| | Number of | | | | | capital | | Retained | | comprehensive | | interest | | Total | | share units | ||||||
Nine months ended September 30, 2020 |
| shares |
| Amount |
| ("APIC") |
| earnings |
| loss |
| ("NCI") |
| equity |
| ("PSUs") | |||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2019 | | 109,337,781 | | $ | 194,771 | | $ | 52,110 | | $ | 714,051 | | $ | (59,099) | | $ | 5,154 | | $ | 906,987 | | $ | — |
Net income | | — | |
| — | |
| — | |
| 121,239 | |
| — | |
| 199 | |
| 121,438 | |
| — |
Other comprehensive income (loss) | | — | |
| — | |
| — | |
| — | |
| 7,415 | |
| 30 | |
| 7,445 | |
| — |
| | — | |
| — | |
| — | |
| 121,239 | |
| 7,415 | |
| 229 | |
| 128,883 | |
| — |
Stock option exercises | | 1,430,545 | |
| 50,611 | |
| (10,417) | |
| — | |
| — | |
| — | |
| 40,194 | |
| — |
Issuance of common stock related to vesting of share units | | 138,877 | |
| 3,515 | |
| (7,459) | |
| — | |
| — | |
| — | |
| (3,944) | |
| — |
Stock option compensation expense | | — | |
| — | |
| 4,401 | |
| — | |
| — | |
| — | |
| 4,401 | |
| — |
Equity-classified share units expense | | — | |
| — | |
| 9,155 | |
| — | |
| — | |
| — | |
| 9,155 | |
| — |
Equity-classified share units dividend equivalents | | — | |
| — | |
| 463 | |
| (463) | |
| — | |
| — | |
| — | |
| — |
Cash dividends paid | | — | |
| — | |
| — | |
| (67,639) | |
| — | |
| — | |
| (67,639) | |
| — |
Shares repurchased | | (1,525,312) | | | (53,170) | | | — | | | — | | | — | | | — | | | (53,170) | | | — |
Balance, September 30, 2020 | | 109,381,891 | | $ | 195,727 | | $ | 48,253 | | $ | 767,188 | | $ | (51,684) | | $ | 5,383 | | $ | 964,867 | | $ | — |
| | | | | | | | | | | | | | | | | | | | | | | |
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 |
Net income |
| — | |
| — | |
| — | |
| 97,466 | |
| — | |
| 109 | |
| 97,575 | |
| — |
Other comprehensive loss |
| — | |
| — | |
| — | |
| — | |
| (8,852) | |
| (28) | |
| (8,880) | |
| — |
|
| — | |
| — | |
| — | |
| 97,466 | |
| (8,852) | |
| 81 | |
| 88,695 | |
| — |
Stock option exercises |
| 544,576 | |
| 14,119 | |
| (1,679) | |
| — | |
| — | |
| — | |
| 12,440 | |
| — |
Issuance of common stock related to vesting of share units |
| 207,403 | |
| 5,886 | |
| (10,064) | |
| 1 | |
| — | |
| — | |
| (4,177) | |
| (1,083) |
Stock option compensation expense |
| — | |
| — | |
| 4,852 | |
| — | |
| — | |
| — | |
| 4,852 | |
| — |
Equity-classified share units expense |
| — | |
| — | |
| 8,640 | |
| — | |
| — | |
| — | |
| 8,640 | |
| 114 |
Equity-classified share units dividend equivalents |
| — | |
| — | |
| 655 | |
| (700) | |
| — | |
| — | |
| (45) | |
| 46 |
Cash dividends paid |
| — | |
| — | |
| — | |
| (60,791) | |
| — | |
| — | |
| (60,791) | |
| — |
Shares repurchased | | (1,223,674) | | | (42,012) | | | — | | | — | | | — | | | — | | | (42,012) | | | — |
Balance, September 30, 2019 |
| 108,210,335 | | $ | 159,773 | | $ | 59,289 | | $ | 684,231 | | $ | (65,129) | | $ | 5,148 | | $ | 843,312 | | $ | — |
See accompanying notes to the condensed consolidated financial statements.
| |
Ritchie Bros. | 5 |
Condensed Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
(Unaudited)
| Nine months ended September 30, | 2017 | 2016 | ||||||
| Cash provided by (used in): | ||||||||
| Operating activities: | ||||||||
| Net income | $ | 38,469 | $ | 65,585 | ||||
| Adjustments for items not affecting cash: | ||||||||
| Depreciation and amortization expenses (note 7) | 37,047 | 30,560 | ||||||
| Inventory write down (note 12) | 778 | 2,284 | ||||||
| Impairment loss (note 7) | 8,911 | 28,243 | ||||||
| Stock option compensation expense (note 20) | 10,996 | 4,025 | ||||||
| Equity-classified PSU expense (note 20) | 1,871 | 1,222 | ||||||
| Deferred income tax recovery | (9,583 | ) | (5,838 | ) | ||||
| Equity loss (income) less dividends received | 158 | (1,209 | ) | |||||
| Unrealized foreign exchange (gain) loss | (1,011 | ) | 586 | |||||
| Change in fair value of contingent consideration | (2,194 | ) | - | |||||
| Gain on disposition of property, plant and equipment | (1,071 | ) | (1,017 | ) | ||||
| Debt issue cost amortization | 2,058 | - | ||||||
| Other, net | 239 | - | ||||||
| Net changes in operating assets and liabilities (note 10) | 10,547 | 36,980 | ||||||
| Net cash provided by operating activities | 97,215 | 161,421 | ||||||
| Investing activities: | ||||||||
| Acquisition of IronPlanet, net of cash acquired (note 22) | (675,851 | ) | - | |||||
| Acquisition of Mascus (note 22) | - | (28,123 | ) | |||||
| Acquisition of Petrowsky (note 22) | - | (6,250 | ) | |||||
| Acquisition of contingently redeemable NCI (note 23) | - | (41,092 | ) | |||||
| Acquisition of NCI (note 22) | - | (226 | ) | |||||
| Property, plant and equipment additions | (8,086 | ) | (12,600 | ) | ||||
| Intangible asset additions | (20,482 | ) | (12,041 | ) | ||||
| Proceeds on disposition of property, plant and equipment | 3,487 | 3,259 | ||||||
| Other, net | (667 | ) | (243 | ) | ||||
| Net cash used in investing activities | (701,599 | ) | (97,316 | ) | ||||
| Financing activities: | ||||||||
| Issuances of share capital | 7,934 | 20,702 | ||||||
| Share repurchase (note 19) | - | (36,726 | ) | |||||
| Dividends paid to stockholders (note 19) | (54,558 | ) | (52,303 | ) | ||||
| Dividends paid to NCI | (41 | ) | (3,436 | ) | ||||
| Proceeds from short-term debt | 6,850 | 52,584 | ||||||
| Repayment of short-term debt | (22,793 | ) | (28,641 | ) | ||||
| Proceeds from long-term debt | 325,000 | 46,572 | ||||||
| Repayment of long-term debt | (104,729 | ) | (46,568 | ) | ||||
| Debt issue costs | (12,624 | ) | (844 | ) | ||||
| Repayment of finance lease obligations | (1,565 | ) | (1,282 | ) | ||||
| Other, net | (129 | ) | 332 | |||||
| Net cash provided by (used in) financing activities | 143,345 | (49,610 | ) | |||||
| Effect of changes in foreign currency rates on cash, cash equivalents, and restricted cash | 17,270 | 6,656 | ||||||
| Cash, cash equivalents, and restricted cash: | ||||||||
| Increase (decrease) | (443,769 | ) | 21,151 | |||||
| Beginning of period | 758,089 | 293,246 | ||||||
| Cash, cash equivalents, and restricted cash, end of period (note 10) | $ | 314,320 | 314,397 | |||||
| | | | | | | |
Nine months ended September 30, |
| 2020 |
| 2019 | | ||
Cash provided by (used in): |
| |
|
| |
|
|
Operating activities: |
| |
|
| |
|
|
Net income | | $ | 121,438 | | $ | 97,575 | |
Adjustments for items not affecting cash: | |
| | |
|
| |
Depreciation and amortization expenses | |
| 55,586 | |
| 51,919 | |
Stock option compensation expense | |
| 4,401 | |
| 4,852 | |
Equity-classified share unit expense | |
| 9,155 | |
| 8,754 | |
Deferred income tax expense (recovery) | |
| 8,250 | |
| (4,760) | |
Unrealized foreign exchange (gain) loss | |
| 2,049 | |
| (129) | |
Gain on disposition of property, plant and equipment | |
| (1,536) | |
| (1,071) | |
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 | |
| — | |
Other, net | |
| (2,630) | |
| (1,000) | |
Net cash used in investing activities | |
| (10,192) | |
| (20,682) | |
Financing activities: | |
| | |
|
| |
Share repurchase | | | (53,170) | | | (42,012) | |
Dividends paid to stockholders | |
| (67,639) | |
| (60,791) | |
Issuances of share capital | |
| 40,194 | |
| 12,440 | |
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 | |
See accompanying notes to the condensed consolidated financial statements.
| |
Ritchie Bros. | 6 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
1. General information
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”).
2. Significant accounting policies
(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, 2016,2019, 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:
| ● | Service revenue, including the following: |
| Revenue from auction and marketplace (“A&M”) activities, including commissions earned at |
| Other services revenue, including revenue from listing services, refurbishment, logistical services, financing, appraisal fees |
| ● | Inventory sales revenue as part of A&M activities |
The Company recognizes revenue when persuasive evidencecontrol of an arrangement exists, delivery has occurredthe promised goods or services have been rendered,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 fixedallocated to each distinct performance obligation and recognized as revenue when, or determinable, and collectabilityas, the performance obligation is reasonably assured.satisfied. For auctionlive event-based auctions or online marketplace sales,auctions, revenue is recognized when the auction or online marketplace 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.
Service revenue
Commissions from sales at the Company’s auctions represent the percentage earned by the Company on the gross auction 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 or purchases inventory to be sold at auction. Commissions also include those earned on online marketplace sales.consignor.
| |
Ritchie Bros. | 7 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant1. Summary of significant accounting policies (continued)
(b) Revenue recognition (continued)
Commission and fee revenues from sales at auction
The Company accepts equipment and other assets on consignment or takes title for a short period of time prior to auction, stimulatesstimulating buyer interest through professional marketing techniques and matches sellers (also known as consignors) to buyers through the auction or private sale process.
In Prior to offering an item for sale on its role as auctioneer,online marketplaces, the Company matches buyers to sellers of equipment on consignment, as well as to inventory held by the Company, through the auction process. also performs inspections.
Following the auction,sale of the item, the Company invoices the buyer for the purchase price of the property,asset, taxes, and, if applicable, the buyer transaction fee, collects payment from the buyer, and where applicable, remits the proceeds to the consignorseller, net of the net sale proceeds after deducting itsseller commissions, expenses,applicable taxes, and applicable taxes.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 isare recognized on the date of the auction sale upon the fall of the auctioneer’s hammer, which is the point in time when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Subsequent to the date of the auction sale, the Company’s remaining obligations for its auction services relate only to the collection of the purchase price from the buyer and the remittance of the net sale proceeds to the seller. These remaining service obligations are not an essential part of the auction services provided by the Company.
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. InIf the rare event wherebuyer defaults on its payment obligation, also referred to as a buyer refuses to take title of the property,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 in relationmaterial.
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 aggregate hammer priceCompany, related to settlements of property solddiscrepancies 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 auction.
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 revenuesrevenue are recorded net of commissions owed to third parties, which are principally the result of situations when the commission is shared with a consignor or with the counterparty in an auction guarantee risk and reward sharing arrangement. Additionally, in certain situations, commissions are shared with third parties who introduce the Company to consignors who sell property at auction.
Underwritten commission contracts can take the form of guarantee or inventory 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 (note 21).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.
Revenues
| |
Ritchie Bros. | 8 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
1. Summary of significant accounting policies (continued)
Inventory sales revenue
Underwritten commission contracts can take the form of inventory contracts. Revenue related to inventory contracts areis 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, including, but not limited to, delivery of the property. Revenue from inventory sales is presented net of costs within revenues on the consolidated income statement,transaction. In its role as auctioneer, the Company takes title only for a short period of time andauctions its inventory to equipment buyers through the risks and rewards of ownership are not substantially different than the Company’s other underwritten commission contracts.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant accounting policies (continued)
(b) Revenue recognition (continued)
Commissions and fees on online marketplace sales
Through its online marketplaces, the Company typically sells equipment or other assets on consignment from sellers and stimulates buyer interest through sales and marketing techniques in order to match online marketplace sellers with buyers. Prior to offering an item for sale on its online marketplaces, the Company performs required inspections, title and lien searches, and make-ready activities to prepare the item for sale.
Online marketplace revenues are primarily driven by seller commissions, fees charged to sellers for listing and inspecting equipment, and amounts paid by buyers, including buyer transaction fees and buyer’s premiums. The Company also generates revenue from related online marketplace services including make-ready activities, logistics coordination, storage, private auction hosting, and asset appraisals. Online marketplace sale commission and fee revenues are recognized when the sale is complete, which is generally at the conclusion of the marketplace transaction between the seller and buyer. This occurs when a buyer has become legally obligated to pay the purchase price and buyer transaction fee for an asset that the seller is obligated to relinquish in exchange for the sales price less seller commissions and listing fees. At that time, the Company has substantially performed what it must do to be entitled to receive the benefits represented by its commissions and fees.
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, or buyer’s premium,and collects payment from the buyer, and remitsbuyer.
On the proceeds – netfall of the seller commissions, listing fees, and applicable taxes – toauctioneer’s hammer, the seller. The Company notifies the seller when the buyer payment has been received in order to clear release of the equipment or other asset to the seller. These remaining service obligations are not viewed to be an essential part of the services provided by the Company.
Under the Company’s standard terms and conditions, it is nothighest bidder becomes legally obligated to pay the sellerfull purchase price, which is the hammer price of the property purchased. Title to the property is transferred in exchange for items in an online marketplace sale in whichthe hammer price, and if applicable, the buyer has not paid for the purchased item. If the buyer defaults on its payment obligation, the equipment or other assets may be returned to the seller or moved into a subsequent online marketplace event.
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. This provision is related to settlement 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.
For guarantee contracts, if actual online marketplace sale proceeds are less than the guaranteed amount, the commission earned is reduced; if proceeds are sufficiently lower, the Company may incur a loss on the sale. If such consigned equipment sells above the minimum price, the Company may be entitled to a share of the excess proceeds as negotiated with the seller. The Company’s share of the excess, if any, is recorded in revenue together with the related online marketplace sale commission. Losses, if any, resulting from guarantee contracts are recorded in revenue in the period in which the relevant online marketplace sale was 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 (note 21).
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant accounting policies (continued)
(b) Revenue recognition (continued)
Commissions and fees on online marketplace sales (continued)
For inventory contracts related to online marketplace sales, revenue from the sale of inventory through the Company’s online marketplaces are recorded net of acquisition costs because the acquisition of equipment in advance of an online marketplace sale is an ancillary component of the Company’s business and, in general, the risks and rewards of ownership are not substantially different than the Company’s other guarantee contracts. Since the online marketplace sale business is a net business, gross sales proceeds are not reported as revenue in the consolidated income statement. Rather, the net commission earned from online marketplace sales is reported as revenue, which reflects the Company’s agency relationship between buyers and sellers of equipment.
Other fees
Fees from value-added services include financing, appraisal, and technology service fees. Fees are recognized in the period in which the service is provided to the customer.
transaction fee plus applicable taxes.
(c) Costs of services excluding depreciation and amortization expenses
Costs of services are comprised of expenses incurred in direct relation to conducting auctions (“direct expenses”), earning online marketplace revenues,revenue, and earning other fee revenues.revenue. Direct expenses include direct labour, buildings and facilities charges, and travel, advertising and promotion costs.
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 revenuesrevenue in addition to the costs listed above also include inspection costs, facilities costs, inventory management, referral, sampling, and appraisal fees.costs. Inspections are generally performed at the seller’s physical location. The cost of inspections includeincludes 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 revenuesrevenue also include costs for the Company’s customer support, online marketplace operations, logistics, title and lien investigation functions, and lease and operations costs related to the Company’s third-party data centers at which its websites are hosted.
functions.
Costs of services incurred in earning other fee revenuesrevenue 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
(d)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 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 Company also has a senior executive performance share unit (“PSU”) plan and an employee PSU plan that provides for the award of PSUs to selectedcertain 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 usingdate. PSUs vest based on the passage of time and achievement of performance criteria.
The Company also has a binomial model.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.
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Ritchie Bros. | 9 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
(d) Share-based payments (continued)
Equity-classified share-based payments (continued)
ThisThe 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.
Any consideration paid on exercise of the stock options is credited to the common shares. Dividend equivalents on the equity-classified PSUs and RSUs are recognized as a reduction to retained earnings over the service period.
Stock option plans
PSUs awarded underThe Company has three stock option compensation plans that provide for the senior executiveaward of stock options to selected employees, directors and employee PSU plans (described in note 20) are contingently redeemable in cash in the event of deathofficers of the participant.Company. The contingently redeemable portioncost of options granted is measured at the fair value of the senior executive PSU awards, which represents the amount that would be redeemable based on the conditionsunderlying option at the grant date using the Black-Scholes option pricing model. The fair value of grant,options expected to the extent attributable to prior service,vest under these plans is recognized as temporary equity. The balance reported in temporary equity increases on the same basis as the related compensation expenseexpensed over the respective remaining service period of the award,individual awards, on an accelerated recognition basis, with the corresponding increase to APIC recorded in equity. Upon exercise, any excessconsideration paid on exercise of the temporary equity value overstock options and amounts fully amortized in APIC are credited to the amount recognized in compensation expense charged against retained earnings. In the event it becomes probable an award is going to become eligible for redemption by the holder, the award would be reclassified to a liability award.common shares.
Liability-classified share-based payments
The Company maintains other share unit compensation plans that vest over a period of up to fivethree 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 usingbased on the volume weighted average price of the Company’s common shares for the twenty days 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 20.17. 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
(e) Restricted cashThe 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
In certain jurisdictions, local laws requireOperating 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 hold cashuse 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 segregated bank accounts, which are used to settle auction proceeds payable resulting from auctionsdetermining 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 online marketplace sales conducted in those regions. In addition,lease liability when it is reasonably certain that the Company also holds cash generated from its EquipmentOne online marketplace saleswill exercise these options. Lease expense for lease payments is recognized on a straight-line basis over the lease term and are included in separate escrow accounts, for settlementCosts of the respective online marketplace transactions as a partservices or Selling, general, and administrative (“SG&A”) expenses.
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Ritchie Bros. | 10 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
(e) Restricted cash (continued)
Finance leases
DuringFinance 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 period from December 21, 2016 through May 31, 2017, non-current restricted cash consistedpresent value of funds heldlease 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 escrow pursuant todetermining the offeringpresent value of senior unsecured notes (note 18), which were only availablelease 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 received approval to acquire IronPlanet Holdings, Inc. (“IronPlanet”)will exercise these options. Finance lease ROU assets are generally amortized over the lease term and whose use was restricted toare included in depreciation expense. The interest on the funding of the IronPlanet acquisition (note 22).finance lease liabilities is included in interest expense.
(f)(g) Inventories
Inventory consists of equipment and other assets purchased for resale in an upcoming Companylive 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. The specific identification method is used to determine amounts removed from inventory.expenses and in-bound transportation costs. Write-downs to the carrying value of inventory are recorded in revenue incost of inventory sold on the consolidated income statement.
(g) Intangible(h) Impairment of long-lived and indefinite-lived assets
IntangibleLong-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 measuredgrouped and tested for recoverability at cost less accumulated amortization and accumulatedthe lowest level that generates independent cash flows. An impairment losses. Cost includes all expenditures that are directly attributable toloss is recognized when the acquisitioncarrying value of the assets or developmentasset 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 netor 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 any amounts received in relationDecember 31, and between annual tests if indicators of potential impairment exist. The Company has the option of performing a qualitative assessment to those assets, including scientific research and experimental development tax credits. Costsfirst determine whether the quantitative impairment test is necessary. This involves an assessment of internally developed software are amortized on a straight-line basis overqualitative factors to determine the remaining estimated economic lifeexistence of events or circumstances that would indicate whether it is more likely than not that the carrying amount of the software product. Costs relatedindefinite-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 software incurred prior to establishing technological feasibility orcompare the beginning of the application development stage of software are charged to operations as such costs are incurred. Once technological feasibility is established or the application development stage has begun, directly attributable costs are capitalized until the software is available for use.
Amortizationindefinite-lived intangible asset’s fair value with its carrying amount. An impairment loss is recognized in net earnings on a straight-line basis overas the estimated useful lives ofdifference between the indefinite-lived intangible assets from the date that they are available for use. The estimated useful lives are:asset’s carrying amount and its fair value.
Customer relationships includes relationships with buyers and sellers.
(h)(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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Ritchie Bros. | 11 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
(h) Goodwill (continued)
WhereIf 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.
ASU 2017-04 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments are applied on a prospective basis. Because the amendments reduce the cost and complexity of goodwill impairment testing, the Company has early adopted ASU 2017-04 in the first quarter of 2017.
Adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
(j) New and amended accounting standards
| a. | Effective January 1, |
Adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant accounting policies (continued)
(k) Recent accounting standards not yet adopted
The amendments also contain extensive disclosure requirements designed to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB delayed the effective date of ASU 2014-09 by one year so that ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. ASU 2014-09 permits the use of either the retrospective or modified retrospective (cumulative effect) transition method.
In 2015, the Company established a global new revenue accounting standard adoption team, consisting of financial reporting and accounting advisory representatives from across all geographical regions and business operations (the “Team”). The Team developed an adoption framework that continues to be used as guidance in identifying the Company’s significant contracts with customers. In 2016, the Team commenced its analysis, with the initial focus being on the impact of the amendments on accounting for the Company’s straight commission contracts, underwritten (inventory and guarantee) commission contracts, and ancillary service contracts. The Team is currently in the process of identifying the appropriate changes to our business processes, systems, and controls required to adopt the amendments based on preliminary findings.
Since its inception, the Team has regularly reported the findings and progress of the adoption project to management and the Audit Committee. Based on these findings and analysis, management has determined that the Company will not early adopt ASU 2014-09. The Company had previously planned on using a modified retrospective (cumulative-effect) method of adoption. The reason for not early adopting and for electing to use a modified retrospective method was primarily due to the Company’s acquisition of IronPlanet Holdings, Inc. (“IronPlanet”) on May 31, 2017. The IronPlanet acquisition added complexity to applying the amendments retrospectively, and as such, the modified retrospective method of adoption was chosen.
As the Team continues to make progress in its adoption project, it now believes that it will be able to adopt ASU 2014-09 using a full retrospective method, which it anticipates will provide more useful comparative information to financial statement users. The Company also continues to evaluate recently issued guidance on practical expedients as part of the adoption method decision.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant accounting policies (continued)
(k) Recent accounting standards not yet adopted (continued)
The Team concluded that one of the most significant impacts of the adoption of ASU 2014-09 will be a change in the presentation of revenue from the majority of inventory, ancillary service, and Ritchie Bros. Logistical Services contracts as gross as a principal versus net as an agent. The Team’s analysis of these significant contracts with customers was aided by the FASB issuing ASU 2016-08,Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations, focusing on whether an entity controls a specified good or service before that good or service is transferred to a customer.
SEC Regulation S-X Rule 5-03.1 requires revenue from the sale of tangible products to be presented as a separate line item of the face of the consolidated income statement from revenues from services where income from one or both of those classes is more than 10 percent the sum of total revenues. Similarly, SEC Regulation Rule 5-03.2 requires the costs related to those revenue classes to be presented in the same manner. Based on historical information, the Team expects revenue from inventory contracts that are recognized gross as a principal selling tangible products to exceed 10 percent of total revenues.
Presenting most inventory contract revenues gross as a principal selling a tangible product versus net as an agent providing a service will significantly change the face of the Company’s consolidated income statement. Currently, all revenue from inventory sales is presented net of costs within service revenues on the income statement. After ASU 2014-09 is adopted, service revenues will exclude revenue from inventory sales and cost of inventory sold for inventory contracts recorded on a gross basis. Those amounts will instead be presented gross as separate line items on the face of the consolidated income statement in accordance with SEC Regulation S-X Rules 5-03.1 and 5-03.2. Ancillary service revenues will be presented within service revenues, but on a gross basis, with ancillary service costs presented separately within costs of services.
The Team, together with oversight from the Audit Committee, will also continue to closely monitor FASB activity related to ASU 2014-09 to conclude on specific interpretative issues. Over the remaining term until ASU 2014-09 takes effect, the Team will complete its assessment of the impact of the new standard on remaining contracts with customers, as well as evaluate the impact on financial statement disclosures and processes that capture information required for the revised financial statement presentation. The Team will also continue to work with management to determine the impact of the change in presentation on the key performance metrics used to evaluate operational performance of the Company.
Expected impact to reported results
While continuing to assess all potential impacts of adoption of ASU 2014-09, the Team’s current analysis indicates that the most significant change will be the gross versus net presentation described above. This presentation is expected to increase the amount of revenue compared to the current presentation. Presenting these revenues as gross as a principal versus net as an agent has no impact on operating income. The Company expects the effects of this change to be as follows:
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant accounting policies (continued)
(k) Recent accounting standards not yet adopted (continued)
| As reported | New revenue standard | |||||||||||||||||
| Three months ended September 30, | 2017 | 2016 | Three months ended September 30, | 2017 | 2016 | |||||||||||||
| Revenue from inventory sales | $ | 82,213 | $ | 176,381 | ||||||||||||||
| Service revenues | 145,843 | 124,595 | ||||||||||||||||
| Revenues | $ | 141,047 | $ | 128,876 | Total revenues | 228,056 | 300,976 | |||||||||||
| Cost of inventory sold | (73,131 | ) | (159,850 | ) | ||||||||||||||
| Costs of services, excluding | ||||||||||||||||||
| depreciation and amortization ("D&A") | (19,583 | ) | (14,750 | ) | Costs of services, excluding D&A | (33,461 | ) | (27,000 | ) | |||||||||
| $ | 121,464 | $ | 114,126 | Gross profit | $ | 121,464 | $ | 114,126 | ||||||||||
| As reported | New revenue standard | |||||||||||||||||
| Nine months ended September 30, | 2017 | 2016 | Nine months ended September 30, | 2017 | 2016 | |||||||||||||
| Revenue from inventory sales | $ | 238,515 | $ | 411,970 | ||||||||||||||
| Service revenues | 442,474 | 420,177 | ||||||||||||||||
| Revenues | $ | 431,732 | $ | 419,626 | Total revenues | 680,989 | 832,147 | |||||||||||
| Cost of inventory sold | (209,151 | ) | (376,364 | ) | ||||||||||||||
| Costs of services, excluding D&A | (53,987 | ) | (49,821 | ) | Costs of services, excluding D&A | (94,093 | ) | (85,978 | ) | |||||||||
| $ | 377,745 | $ | 369,805 | Gross profit | $ | 377,745 | $ | 369,805 | ||||||||||
ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Both lessees and lessors must apply ASU 2016-02 using a “modified retrospective transition”, which reflects the new guidance from the beginning of the earliest period presented in the financial statements. However, lessees and lessors can elect to apply certain practical expedients on transition.
Management continues to perform a detailed inventory and analysis of all the Company’s leases, of which there are approximately 395 operating and 90 finance leases for which the Company is a lessee at the reporting date. The most significant operating leases in terms of the amount of rental charges and duration of the contract are for various auction sites and offices located in North America, Europe, the Middle East, and Asia. However, in terms of the number of leases, the majority consist of leases for computer, automotive, and yard equipment.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant accounting policies (continued)
(k) Recent accounting standards not yet adopted (continued)
The Company continues to evaluate the new guidance to determine the impact it will have on its consolidated financial statements. Under the expectation that the majority, if not all, of the operating leases will be brought onto the Company’s balance sheet on adoption of ASU 2016-02, management is also investigating the functionality within the Company’s systems to automate the lease accounting process.
The adoption of ASU 2016-02 is expected to add complexity to the accounting for leases, as well as require extensive system and process changes to manage the large number of operating leases that the Company anticipates will be brought onto its balance sheet. As a result, management has determined that the Company will not early adopt ASU 2016-02, and will continue to evaluate the elections available to the Company involving the application of practical expedients on transition.
The effective date and transition requirements of ASU 2016-08 are the same as for ASU 2014-09, which is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The impact of adoption of ASU 2016-08 on the Company’s consolidated financial statements has been considered as part of the ASU 2014-09 adoption project discussed above.
| b. | In |
| c. | Effective January 1, 2020, the Company adopted ASU 2018-15, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40), |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
2. Significant accounting policies (continued)
(k) Recent accounting standards not yet adopted (continued)
The amendments also provide a framework to assist in evaluating whether both an input and a substantive process are present, and this framework includes two sets of criteria to consider that depend on whether a set has outputs. Finally, the amendments narrow the definition of the term “output” so the term is consistent with how outputs are described in Topic 606Revenue from Contracts with Customers.
ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments are applied prospectively on or after the effective date. No disclosures are required at transition. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
ASU 2017-05 is effective at the same time as ASU 2014-09, which is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in ASU 2017-05 must be applied at the same time as the amendments in ASU 2014-09. Entities may elect to apply these amendments retrospectively to each period presented in the financial statements or using a modified retrospective basis as of the beginning of the fiscal year of adoption. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.
3. 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. ExistingHowever, existing circumstances and assumptions about future developments however, may change due to market changes or circumstancecircumstances 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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Ritchie Bros. | 12 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
4.3. Seasonality of operations
The Company'sCompany’s operations are both seasonal and event driven. RevenuesHistorically, 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.
5.
4. Segmented information
The Company’s principal business activity is the management and disposition of used industrial equipment and other durable assets. During the three months ended September 30, 2017, the Company continued to integrate its IronPlanet acquisition, which resulted in changes in the basisThe Company’s operations are comprised of organization of the Company, including its leadership structure, sales processes,1 reportable segment and management reporting. Most significantly, the Chief Operating Decision Maker (“CODM”) began to assess the performance of theother business and allocate resources based on whether the Company’s servicesactivities that are transactional (generating value from the disposition of assets) or non-transactional in nature, and redesigned key metrics accordingly.
These changes resulted in the identification of the following new operating segmentsnot reportable as of September 30, 2017:
follows:
| ● | Auctions and Marketplaces – This is the Company’s only reportable segment, which consists of the Company’s live on site auctions, its online auctions and marketplaces, and its brokerage service; |
| ● | Other includes the results of Ritchie Bros. Financial Services (“RBFS”) |
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Nine months ended September 30, 2020 | | ||||||||||||||
|
| A&M |
| Other |
| Consolidated |
| A&M |
| Other |
| Consolidated | | ||||||
Service revenue | | $ | 188,949 | | $ | 33,730 | | $ | 222,679 | | $ | 543,340 | | $ | 96,601 | | $ | 639,941 | |
Inventory sales revenue | |
| 108,863 | |
| — | |
| 108,863 | |
| 353,906 | |
| — | |
| 353,906 | |
Total revenue | | $ | 297,812 | | $ | 33,730 | | $ | 331,542 | | $ | 897,246 | | $ | 96,601 | | $ | 993,847 | |
Costs of services | |
| 21,733 | |
| 17,490 | |
| 39,223 | |
| 69,018 | |
| 49,008 | |
| 118,026 | |
Cost of inventory sold | |
| 96,253 | |
| — | |
| 96,253 | |
| 320,972 | |
| — | |
| 320,972 | |
Selling, general and administrative expenses ("SG&A") | |
| 103,933 | |
| 6,253 | |
| 110,186 | |
| 290,077 | |
| 19,126 | |
| 309,203 | |
Segment profit | | $ | 75,893 | | $ | 9,987 | | $ | 85,880 | | $ | 217,179 | | $ | 28,467 | | $ | 245,646 | |
Depreciation and amortization expenses ("D&A") | |
|
| |
|
| |
| 18,436 | |
|
| |
|
| |
| 55,586 | |
Gain on disposition of property, plant and equipment ("PPE") | |
|
| |
|
| |
| (276) | |
|
| |
|
| |
| (1,536) | |
Foreign exchange loss | |
|
| |
|
| |
| 336 | |
|
| |
|
| |
| 1,330 | |
Operating income | |
|
| |
|
| | $ | 67,384 | |
|
| |
|
| | $ | 190,266 | |
Interest expense | |
|
| |
|
| |
| (8,737) | |
|
| |
|
| |
| (26,801) | |
Other income, net | |
|
| |
|
| |
| 2,280 | |
|
| |
|
| |
| 6,714 | |
Income tax expense | |
|
| |
|
| |
| (15,437) | |
|
| |
|
| |
| (48,741) | |
Net income | |
|
| |
|
| | $ | 45,490 | |
|
| |
|
| | $ | 121,438 | |
| |
Ritchie Bros. | 13 |
The “other” category also includes results from various value-added services and make-ready activities, including the Company’s equipment refurbishment services, Asset Appraisal Services, and Ritchie Bros. Logistical Services.
| Three months ended September 30, 2017 | Nine months ended September 30, 2017 | |||||||||||||||||||||||
| Auctions and Marketplaces | Other | Consolidated | Auctions and Marketplaces | Other | Consolidated | |||||||||||||||||||
| Revenues | $ | 130,242 | $ | 10,805 | $ | 141,047 | $ | 400,565 | $ | 31,167 | $ | 431,732 | ||||||||||||
| Costs of services, excluding D&A | (18,383 | ) | (1,200 | ) | (19,583 | ) | (51,948 | ) | (2,039 | ) | (53,987 | ) | ||||||||||||
| Selling, general and administrative ("SG&A") expenses | (81,964 | ) | (3,371 | ) | (85,335 | ) | (220,555 | ) | (9,732 | ) | (230,287 | ) | ||||||||||||
| Impairment loss | - | - | - | (8,911 | ) | - | (8,911 | ) | ||||||||||||||||
| Segment profit | $ | 29,895 | $ | 6,234 | $ | 36,129 | $ | 119,151 | $ | 19,396 | $ | 138,547 | ||||||||||||
| Acquisition-related costs | (3,587 | ) | (35,162 | ) | ||||||||||||||||||||
| D&A expenses | (14,837 | ) | (37,047 | ) | ||||||||||||||||||||
| Gain on disposition of Property, plant and equipment ("PPE") | 42 | 1,071 | ||||||||||||||||||||||
| Foreign exchange gain (loss) | (816 | ) | 7 | |||||||||||||||||||||
| Operating income | $ | 16,931 | $ | 67,416 | ||||||||||||||||||||
| Other expense | (9,966 | ) | (20,965 | ) | ||||||||||||||||||||
| Income tax recovery (expense) | 3,358 | (7,982 | ) | |||||||||||||||||||||
| Net income | $ | 10,323 | $ | 38,469 | ||||||||||||||||||||
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
4. Segmented information (continued)
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | | ||||||||||||||
|
| A&M |
| Other |
| Consolidated |
| A&M |
| Other |
| Consolidated | | ||||||
Service revenue | | $ | 150,093 | | $ | 28,484 | | $ | 178,577 | | $ | 494,580 | | $ | 90,975 | | $ | 585,555 | |
Inventory sales revenue | |
| 111,219 | |
| — | |
| 111,219 | |
| 400,892 | |
| — | |
| 400,892 | |
Total revenue | | | 261,312 | |
| 28,484 | |
| 289,796 | | $ | 895,472 | | $ | 90,975 | | $ | 986,447 | |
Costs of services | |
| 21,431 | |
| 14,951 | |
| 36,382 | |
| 74,799 | |
| 47,920 | |
| 122,719 | |
Cost of inventory sold | |
| 102,410 | |
| — | |
| 102,410 | |
| 372,703 | |
| — | |
| 372,703 | |
SG&A expenses | |
| 88,138 | |
| 5,553 | |
| 93,691 | |
| 268,786 | |
| 17,803 | |
| 286,589 | |
Segment profit | | $ | 49,333 | |
| 7,980 | |
| 57,313 | | $ | 179,184 | | $ | 25,252 | | $ | 204,436 | |
Acquisition-related costs | |
| | |
|
| |
| 45 | |
|
| |
|
| |
| 752 | |
D&A expenses | |
|
| |
| | |
| 17,692 | |
|
| |
|
| |
| 51,919 | |
Gain on disposition of PPE | |
| | |
| | |
| (821) | |
|
| |
|
| |
| (1,071) | |
Foreign exchange loss | |
| | |
| | |
| 237 | |
|
| |
|
| |
| 1,118 | |
Operating income | |
| | |
| | |
| 40,160 | |
|
| |
|
| | $ | 151,718 | |
Interest expense | |
| | |
|
| |
| (10,090) | |
|
| |
|
| |
| (31,023) | |
Other income, net | |
| | |
|
| |
| 1,962 | |
|
| |
|
| |
| 5,680 | |
Income tax expense | |
|
| |
|
| |
| (6,760) | |
|
| |
|
| |
| (28,800) | |
Net income | |
|
| |
|
| |
| 25,272 | |
|
| |
|
| | $ | 97,575 | |
| Three months ended September 30, 2016 | Nine months ended September 30, 2016 | |||||||||||||||||||||||
| Auctions and Marketplaces | Other | Consolidated | Auctions and Marketplaces | Other | Consolidated | |||||||||||||||||||
| Revenues | $ | 121,111 | $ | 7,765 | $ | 128,876 | $ | 395,228 | $ | 24,398 | $ | 419,626 | ||||||||||||
| Costs of services, excluding D&A | (14,493 | ) | (257 | ) | (14,750 | ) | (49,213 | ) | (608 | ) | (49,821 | ) | ||||||||||||
| SG&A expenses | (65,346 | ) | (2,947 | ) | (68,293 | ) | (200,967 | ) | (8,428 | ) | (209,395 | ) | ||||||||||||
| Impairment loss | (28,243 | ) | - | (28,243 | ) | (28,243 | ) | - | (28,243 | ) | ||||||||||||||
| Segment profit | $ | 13,029 | $ | 4,561 | $ | 17,590 | $ | 116,805 | $ | 15,362 | $ | 132,167 | ||||||||||||
| Acquisition-related costs | (5,398 | ) | (7,198 | ) | ||||||||||||||||||||
| D&A expenses | (10,196 | ) | (30,560 | ) | ||||||||||||||||||||
| Gain on disposition of PPE | 570 | 1,017 | ||||||||||||||||||||||
| Foreign exchange loss | (281 | ) | (332 | ) | ||||||||||||||||||||
| Operating income | $ | 2,285 | $ | 95,094 | ||||||||||||||||||||
| Other income (expense) | (105 | ) | 420 | |||||||||||||||||||||
| Income tax expense | (7,180 | ) | (29,929 | ) | ||||||||||||||||||||
| Net income (loss) | $ | (5,000 | ) | $ | 65,585 | |||||||||||||||||||
The carrying valueCompany’s geographic breakdown of goodwill of $648,819,000 has been allocated to Auctions and Marketplaces and $20,827,000 has been allocated to other. As in prior periods, the CODM does not evaluate the performance of its operating segments based on segment assets and liabilities, nor does the Company classify liabilities on a segmented basis.total revenue is as follows:
| | | | | | | | | | | | | | | |
| | United | | | | | | |
| | | | | | |
| | States | | Canada | | Europe | | Other | | Consolidated | |||||
Total revenue for the three months ended: |
| |
|
| |
|
| |
|
| |
|
| |
|
September 30, 2020 | | $ | 177,883 | | $ | 58,059 | | $ | 41,891 | | $ | 53,709 | | $ | 331,542 |
September 30, 2019 | | | 156,380 | |
| 56,129 | |
| 34,522 | |
| 42,765 | |
| 289,796 |
Total revenue for the nine months ended: | |
| | |
| | |
| | |
| | |
| |
September 30, 2020 | | $ | 573,001 | | $ | 191,692 | | $ | 115,659 | | $ | 113,495 | | $ | 993,847 |
September 30, 2019 | | | 552,186 | |
| 178,069 | |
| 136,590 | |
| 119,602 | |
| 986,447 |
6. Revenues
5. Revenue
The Company’s revenue from the rendering of servicesbreakdown is as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | ||||||||||||||||
| | Three months ended | | Nine months ended | | ||||||||||||||||||||||||
|
| September 30, | | September 30, | | ||||||||||||||||||||||||
|
| 2020 | | 2019 | | 2020 | | 2019 | | ||||||||||||||||||||
Service revenue: | | |
|
| |
|
| |
|
| |
| | ||||||||||||||||
| Commissions | $ | 97,683 | $ | 96,110 | $ | 310,007 | $ | 314,084 | | $ | 112,762 | | $ | 90,928 | | $ | 331,711 | | $ | 317,674 | | ||||||||
| Fees | 43,364 | 32,766 | 121,725 | 105,542 | |
| 109,917 | |
| 87,649 | |
| 308,230 | |
| 267,881 | | ||||||||||||
| $ | 141,047 | $ | 128,876 | $ | 431,732 | $ | 419,626 | ||||||||||||||||||||||
| |
| 222,679 | |
| 178,577 | |
| 639,941 | |
| 585,555 | | ||||||||||||||||
Inventory sales revenue | |
| 108,863 | |
| 111,219 | |
| 353,906 | |
| 400,892 | | ||||||||||||||||
| | $ | 331,542 | | $ | 289,796 | | $ | 993,847 | | $ | 986,447 | | ||||||||||||||||
Net profits on inventory sales included in commissions are:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue from inventory sales | $ | 93,275 | $ | 176,381 | $ | 255,156 | $ | 411,970 | ||||||||
| Cost of inventory sold | (82,733 | ) | (159,850 | ) | (222,956 | ) | (376,364 | ) | ||||||||
| $ | 10,542 | $ | 16,531 | $ | 32,200 | $ | 35,606 | |||||||||
| |
Ritchie Bros. | 14 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
7.6. Operating expenses
Certain prior period operating expenses have been reclassified to conform with current year presentation.
Costs of services excluding depreciation and amortization
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | ||||||||||||||||
| | Three months ended | | Nine months ended | | ||||||||||||||||||||||||
| | September 30, | | September 30, | | ||||||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||||||||||||||||||
Ancillary and logistical service expenses | | $ | 16,550 |
| $ | 13,285 | | $ | 45,368 |
| $ | 43,516 | | ||||||||||||||||
| Employee compensation expenses | $ | 10,032 | $ | 6,593 | $ | 24,321 | $ | 21,731 | | | 11,442 | |
| 11,555 | | | 35,057 | |
| 37,268 | | ||||||||
| Buildings, facilities and technology expenses | 1,872 | 1,709 | 5,819 | 6,015 | | | 1,653 | |
| 1,655 | | | 7,768 | |
| 5,961 | | ||||||||||||
| Travel, advertising and promotion expenses | 5,562 | 4,991 | 17,644 | 18,287 | | | 4,782 | |
| 5,765 | | | 17,518 | |
| 24,440 | | ||||||||||||
| Other costs of services | 2,117 | 1,457 | 6,203 | 3,788 | | | 4,796 | |
| 4,122 | | | 12,315 | |
| 11,534 | | ||||||||||||
| $ | 19,583 | $ | 14,750 | $ | 53,987 | $ | 49,821 | ||||||||||||||||||||||
| | $ | 39,223 | | $ | 36,382 | | $ | 118,026 | | $ | 122,719 | | ||||||||||||||||
SG&A expenses
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | ||||||||||||||||
| | Three months ended | | Nine months ended | | ||||||||||||||||||||||||
| | September 30, |
| September 30, | | ||||||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||||||||||||||||||
| Employee compensation expenses | $ | 55,560 | 42,370 | $ | 147,420 | $ | 133,370 | | $ | 78,430 |
| $ | 60,680 | | $ | 211,732 | | $ | 186,033 | | |||||||||
| Buildings, facilities and technology expenses | 13,494 | 12,466 | 39,083 | 36,671 | |
| 15,901 |
| | 14,569 | |
| 46,108 | |
| 45,066 | | ||||||||||||
| Travel, advertising and promotion expenses | 8,431 | 6,273 | 21,218 | 18,595 | |
| 5,479 |
| | 10,033 | |
| 20,565 | |
| 28,400 | | ||||||||||||
| Professional fees | 3,381 | 3,675 | 9,705 | 9,524 | |
| 4,546 |
| | 3,685 | |
| 13,570 | |
| 11,915 | | ||||||||||||
| Other SG&A expenses | 4,469 | 3,509 | 12,861 | 11,235 | |
| 5,830 |
| | 4,724 | |
| 17,228 | |
| 15,175 | | ||||||||||||
| $ | 85,335 | $ | 68,293 | $ | 230,287 | $ | 209,395 | ||||||||||||||||||||||
| | $ | 110,186 |
| $ | 93,691 | | $ | 309,203 | | $ | 286,589 | | ||||||||||||||||
Depreciation and amortization expenses
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||||
| | September 30, |
| September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
Depreciation expense | | $ | 7,705 | | $ | 7,305 | | $ | 23,278 | | $ | 21,630 | |
Amortization expense | |
| 10,731 | |
| 10,387 | |
| 32,308 | |
| 30,289 | |
| | $ | 18,436 | | $ | 17,692 | | $ | 55,586 | | $ | 51,919 | |
| |
Ritchie Bros. | 15 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
7. Operating expenses (continued)
Acquisition-related costs
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| IronPlanet: (note 22) | ||||||||||||||||
| Stock option compensation expense (note 20) | $ | - | $ | - | $ | 4,752 | $ | - | ||||||||
| Legal costs | 248 | 2,264 | 8,843 | 2,264 | ||||||||||||
| Other acquisition-related costs | 2,464 | 2,250 | 18,996 | 2,250 | ||||||||||||
| Mascus: (note 22) | ||||||||||||||||
| Continuing employment costs | 126 | 262 | 404 | 701 | ||||||||||||
| Other acquisition-related costs | - | - | 22 | 749 | ||||||||||||
| Xcira: | ||||||||||||||||
| Continuing employment costs | 447 | 305 | 1,112 | 917 | ||||||||||||
| Petrowsky: (note 22) | ||||||||||||||||
| Continuing employment costs | 134 | 140 | 554 | 140 | ||||||||||||
| Other acquisition-related costs | - | 177 | 3 | 177 | ||||||||||||
| Kramer: (note 22) | ||||||||||||||||
| Continuing employment costs | 122 | - | 351 | - | ||||||||||||
| Other acquisition-related costs | - | - | 78 | - | ||||||||||||
| Other | 46 | - | 47 | - | ||||||||||||
| $ | 3,587 | $ | 5,398 | $ | 35,162 | $ | 7,198 | |||||||||
Depreciation and amortization expenses
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Depreciation expense | $ | 7,228 | $ | 7,751 | $ | 20,813 | $ | 23,466 | ||||||||
| Amortization expense | 7,609 | 2,445 | 16,234 | 7,094 | ||||||||||||
| $ | 14,837 | $ | 10,196 | $ | 37,047 | $ | 30,560 | |||||||||
Impairment loss
The Company did not record an impairment loss during the three months ended September 30, 2017. During the three months ended June 30, 2017, management identified indicators of impairment on certain software and software under development intangible assets (the “technology assets”). The indicators consisted of decisions made after the acquisition of IronPlanet that adversely impacted the extent or manner in which certain technology assets would be utilized. As part of its integration activities the Company determined that it was more likely than not that certain technology assets would not be utilized or developed as originally intended and no longer had value. As a result, management performed an impairment test that resulted in the recognition of an impairment loss of $8,911,000 on the technology assets.
During the three months ended September 30, 2016, the Company recorded an impairment loss on the EquipmentOne reporting unit goodwill of $23,574,000 and a pre-tax impairment loss on the EquipmentOne reporting unit customer relationships of $4,669,000.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
8. 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 Company’s consolidated effective tax rate was 25% in respectthe third quarter of operations for2020, 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, 20172020, income tax expense was -48.2%$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 17.2%, respectively (2016: 329.4% and 31.3%). 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.
9.8. 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.outstanding during the period. Diluted EPS attributable to stockholders was calculated by dividing the net income attributable to stockholders after giving effect to outstanding dilutive stock options and PSUs by the WA number of shares of common stock outstanding adjusted for allif 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.
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
| Net income | WA | Net income | WA | ||||||||||||||||||||||||||||||||||||||
| attributable to | number | Per share | attributable to | number | Per share | ||||||||||||||||||||||||||||||||||||
| stockholders | of shares | amount | stockholders | of shares | amount | ||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
| | Three months ended | | Nine months ended | | ||||||||||||||||||||||||||||||||||||
| | September 30, 2020 | | September 30, 2020 | | ||||||||||||||||||||||||||||||||||||
| | Net income | | WA | | Per | | Net income | | WA | | Per | | ||||||||||||||||||||||||||||
|
| attributable to |
| number |
| share | | attributable to |
| number |
| share |
| ||||||||||||||||||||||||||||
|
| stockholders |
| of shares |
| amount |
| stockholders |
| of shares |
| amount | | ||||||||||||||||||||||||||||
| Basic | $ | 10,261 | 107,120,618 | $ | 0.10 | $ | 38,273 | 106,993,358 | $ | 0.36 | | $ | 45,387 |
| 109,018,469 | | $ | 0.42 | | $ | 121,239 |
| 108,887,026 | | $ | 1.11 | | ||||||||||||||
| Effect of dilutive securities: | |
| |
| | |
| | |
| |
| | |
| | | ||||||||||||||||||||||||
| PSUs | - | 214,304 | - | (50 | ) | 337,570 | - | ||||||||||||||||||||||||||||||||||
Share units | |
| — |
| 548,859 | |
| — | |
| — |
| 519,915 | |
| — | | ||||||||||||||||||||||||
| Stock options | - | 843,381 | (0.01 | ) | - | 738,696 | (0.01 | ) | |
| — |
| 802,390 | |
| (0.01) | |
| — |
| 653,771 | |
| (0.01) | | ||||||||||||||||
| Diluted | $ | 10,261 | 108,178,303 | $ | 0.09 | $ | 38,223 | 108,069,624 | $ | 0.35 | | $ | 45,387 |
| 110,369,718 | | $ | 0.41 | | $ | 121,239 |
| 110,060,712 | | $ | 1.10 | | ||||||||||||||
| Three months ended | Nine months ended | |||||||||||||||||||||||
| September 30, 2016 | September 30, 2016 | |||||||||||||||||||||||
| Net loss | WA | Net income | WA | |||||||||||||||||||||
| attributable to | number | Per share | attributable to | number | Per share | |||||||||||||||||||
| stockholders | of shares | amount | stockholders | of shares | amount | |||||||||||||||||||
| Basic | $ | (5,137 | ) | 106,622,376 | $ | (0.05 | ) | $ | 63,979 | 106,595,088 | $ | 0.60 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||
| PSUs | - | 81,610 | - | - | 27,203 | - | ||||||||||||||||||
| Stock options | - | 821,065 | - | - | 599,099 | - | ||||||||||||||||||
| Diluted | $ | (5,137 | ) | 107,525,051 | $ | (0.05 | ) | $ | 63,979 | 107,221,390 | $ | 0.60 | ||||||||||||
In respect of PSUs awarded under the sign-on grant PSUs, and the senior executive and employee PSU plans (described in note 20), performance and market conditions, depending on their outcome at the end of the contingency period, can reduce the number of vested awards to nil or to a maximum of 200% of the number of outstanding PSUs. For the three and nine months ended September 30, 2017, no PSUs to purchase common shares were outstanding but excluded from the calculation of diluted EPS attributable to stockholders as they were anti-dilutive (2016: 253,646 and 231,671). For the three and nine months ended September 30, 2017, stock options to purchase 901,969 and 585,257 common shares, respectively, were outstanding but excluded from the calculation of diluted EPS attributable to stockholders as they were anti-dilutive (2016: nil and 1,002,929).
| |
Ritchie Bros. | 16 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
8. Earnings per share attributable to stockholders (continued)
| | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | ||||||||||||
| | September 30, 2019 | | September 30, 2019 | ||||||||||||
| | Net income | | WA | | Per | | Net income | | WA | | Per | ||||
|
| attributable to |
| number |
| share | | attributable to |
| number |
| share | ||||
|
| stockholders |
| of shares |
| amount | | stockholders |
| of shares |
| amount | ||||
Basic | | | 25,266 | | 108,003,390 | | | 0.23 | | $ | 97,466 |
| 108,453,525 | | $ | 0.90 |
Effect of dilutive securities: | | | | | | | | | |
| |
| | |
| |
Share units | | | — | | 481,268 | | | — | |
| — |
| 430,175 | |
| — |
Stock options | | | — | | 896,515 | | | — | |
| — |
| 750,495 | |
| (0.01) |
Diluted | | $ | 25,266 | | 109,381,173 | | $ | 0.23 | | $ | 97,466 |
| 109,634,195 | | $ | 0.89 |
10.9. Supplemental cash flow information
| | | | | | | | ||||||||
| Nine months ended September 30, | 2017 | 2016 | | 2020 | | 2019 | | ||||||||
| Trade and other receivables | (139,411 | ) | (129,980 | ) |
| $ | (185,899) |
| $ | (123,667) | | ||||
| Inventory | (16,460 | ) | 15,257 | | | 3,938 | | | 58,791 | | |||||
| Advances against auction contracts | 601 | 914 | | | 6,566 | | | 4,528 | | ||||||
| Prepaid expenses and deposits | 4,498 | (774 | ) | | | 2,184 | | | 309 | | |||||
| Income taxes receivable | (8,062 | ) | (3,387 | ) | | | 1,191 | | | (4,123) | | ||||
| Auction proceeds payable | 186,147 | 172,273 | | | 213,596 | | | 248,587 | | ||||||
| Trade and other payables | (9,451 | ) | (5,331 | ) | | | 20,675 | | | (48,882) | | ||||
| Income taxes payable | (3,075 | ) | (9,410 | ) | | | 4,179 | | | 14,050 | | ||||
| Share unit liabilities | (5,848 | ) | 2,413 | ||||||||||||
Operating lease obligation | | | (8,809) | | | (10,762) | | ||||||||
| Other | 1,608 | (4,995 | ) | | | (3,709) | | | 541 | | |||||
| Net changes in operating assets and liabilities | $ | 10,547 | $ | 36,980 |
| $ | 53,912 |
| $ | 139,372 | | ||||
| | | | | | | | ||||||||
| Nine months ended September 30, | 2017 | 2016 | | 2020 | | 2019 | | ||||||||
| Interest paid, net of interest capitalized | $ | 20,233 | $ | 3,859 |
| $ | 31,173 |
| $ | 34,955 | | ||||
| Interest received | 2,460 | 1,353 | | | 1,775 | | | 2,491 | | ||||||
| Net income taxes paid | 28,037 | 44,869 | | | 32,750 | | | 23,193 | | ||||||
| Non-cash transactions: | |||||||||||||||
| Non-cash purchase of property, plant and equipment under capital lease | 6,851 | 1,009 | |||||||||||||
| | | | | | | | ||||||||
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 | | ||||||||
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Cash and cash equivalents | $ | 224,474 | $ | 207,867 | ||||
| Restricted cash: | ||||||||
| Current | 89,846 | 50,222 | ||||||
| Non-current | - | 500,000 | ||||||
| Cash, cash equivalents, and restricted cash | $ | 314,320 | $ | 758,089 | ||||
On December 21, 2016, the Company completed the offering of $500,000,000 aggregate principal amount of 5.375% senior unsecured notes due January 15, 2025 (note 18). Upon the closing of the offering, the gross proceeds from the offering were deposited in to an escrow account. The funds were released from escrow upon the closing of the acquisition of IronPlanet (note 22).
| | | | | | | |
| | September 30, | | December 31, | | ||
| | 2020 | | 2019 | | ||
Cash and cash equivalents |
| $ | 470,285 | | $ | 359,671 | |
Restricted cash | | | 120,014 | | | 60,585 | |
Cash, cash equivalents, and restricted cash |
| $ | 590,299 | | $ | 420,256 | |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
10. Supplemental cash flow information (continued)
In the fourth quarter of 2016, Company early adopted ASU 2016-18,Statement of Cash Flows (Topic 230), Restricted Cash,which requires that the change in the total of cash, cash equivalents, and restricted cash during a reporting period be explained in the Statement of Cash Flows (“SCF”). Therefore, the Company has included its restricted cash balances when reconciling the total beginning and end of period amounts shown on the face of the SCF. The effect of this change is detailed below.
| Nine months ended September 30, | 2016 | |||
| Net changes in operating assets and liabilities: | ||||
| As reported | $ | 38,982 | ||
| Current presentation | 36,980 | |||
| Net cash provided by operating activities: | ||||
| As reported | 163,423 | |||
| Current presentation | 161,421 | |||
| Effect of changes in foreign currency rates on cash: | ||||
| As reported | 4,339 | |||
| Current presentation | 6,656 | |||
| Increase (decrease) in cash: | ||||
| As reported | 20,836 | |||
| Current presentation | 21,151 | |||
| Cash and cash equivalents | 230,984 | |||
| Total cash, cash equivalents and restricted cash | $ | 314,397 | ||
11. Fair value measurement
All assets and liabilities for which fair value is measured or disclosed in the condensed 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:
| ● | Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at measurement date; |
| ● | Level 2: | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and |
| ● | Level 3: | Unobservable inputs for the asset or liability. |
| |
Ritchie Bros. | 17 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
11.10. Fair value measurement (continued)
| September 30, 2017 | December 31, 2016 | |||||||||||||||||
| Category | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||
| Fair values disclosed, recurring: | ||||||||||||||||||
| Cash and cash equivalents | Level 1 | $ | 224,474 | $ | 224,474 | $ | 207,867 | $ | 207,867 | |||||||||
| Restricted cash | Level 1 | 89,846 | 89,846 | 550,222 | 550,222 | |||||||||||||
| Short-term debt (note 18) | Level 2 | 8,567 | 8,567 | 23,912 | 23,912 | |||||||||||||
| Long-term debt (note 18) | ||||||||||||||||||
| Senior unsecured notes | Level 1 | 486,886 | 526,875 | 495,780 | 509,500 | |||||||||||||
| Revolving loans | Level 2 | - | - | 99,926 | 99,926 | |||||||||||||
| Delayed draw term loans | Level 2 | 330,999 | 335,447 | - | - | |||||||||||||
| | | | | | | | | | | | | | |
| | | | September 30, 2020 | | December 31, 2019 | ||||||||
| | | | Carrying | | | | | Carrying | | | | ||
|
| Category |
| amount |
| Fair value |
| amount |
| Fair value | ||||
Fair values disclosed: |
|
|
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents |
| Level 1 | | $ | 470,285 | | $ | 470,285 | | $ | 359,671 | | $ | 359,671 |
Restricted cash |
| Level 1 | |
| 120,014 | |
| 120,014 | |
| 60,585 | |
| 60,585 |
Short-term debt |
| Level 2 | |
| 20,285 | |
| 20,285 | |
| 4,705 | |
| 4,705 |
Long-term debt | | | |
|
| |
|
| |
|
| |
|
|
Senior unsecured notes |
| Level 1 | |
| 492,281 | |
| 515,000 | |
| 490,933 | |
| 520,625 |
Term loan | | Level 2 | | | 96,330 | | | 96,782 | | | 154,548 | | | 155,355 |
Long-term revolver loan |
| Level 2 | |
| 43,950 | |
| 44,251 | |
| — | |
| — |
The carrying value of the Company‘sCompany’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 and revolving loans approximate their fair values due to their short terms to maturity. The carrying value of the delayed draw term loan and long-term revolver loan, before deduction of deferred debt issue costs, approximates itstheir fair valuevalues as the interest ratesrate on the loans wereis short-term in nature. The fair value of the senior unsecured notes is determined by reference to a quoted market price.
11. Trade receivables
12. Inventory
At each period end, inventory is reviewedTrade receivables are generally secured by the equipment that they relate to ensure thatas it is recorded atCompany policy that equipment is not released until payment has been collected. The following table presents the lower of cost and net realizable value. activity in the allowance for expected credit losses for the period ended September 30, 2020:
| | | |
Opening balance at January 1, 2020 | | (5,225) | |
Current period provision | | (2,507) | |
Write-off charged against the allowance | | 3,097 | |
Balance, September 30, 2020 | | $ | (4,635) |
12. Other current assets
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Advances against auction contracts | | $ | 6,442 | | $ | 12,925 |
Assets held for sale | |
| — | |
| 15,051 |
Prepaid expenses and deposits | |
| 19,837 | |
| 22,184 |
| | $ | 26,279 | | $ | 50,160 |
| | | |
Assets held for sale | | | |
Balance, December 31, 2019 | 15,051 | ||
Reclassified from (to) property, plant and equipment | | (6,888) | |
Disposal | | (8,163) | |
Balance, September 30, 2020 | | $ | — |
During the three and nine months ended September 30, 2017, the Company recorded an inventory write-down of $122,000 and $778,000, respectively (2016: $882,000 and $2,284,000).
Of inventory held at September 30, 2017, 100% is expected to be sold prior to the end of December 2017 (December 31, 2016: 93% sold by the end of March 2017 with the remainder sold by the end of June 2017).
13. Assets held for sale
| Balance, December 31, 2016 | $ | 632 | ||
| Reclassified from property, plant and equipment | 411 | |||
| Disposal | (389 | ) | ||
| Balance, September 30, 2017 | $ | 654 |
In March 2017,2020, the Company sold excess auction site acreage in Orlando,the United States, for netStates. 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 $953,000 resulting in$15,555,000 and a combined pre-tax gain of $564,000.$1,090,000.
As at September 30, 2017, the Company’s assets held for sale consisted of excess auction site acreage located in Denver and Kansas City, United States, and Truro, Canada. Management made the strategic decision to sell this excess acreage to maximize the Company’s return on invested capital. The properties have been actively marketed for sale, and management expects the sales to be completed within 12 months of September 30, 2017. This land belongs to the Auctions and Marketplaces reportable segment.
| |
Ritchie Bros. | 18 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
13. Other non-current assets
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
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 |
Other | |
| 14,492 | |
| 11,999 |
| | $ | 134,973 | | $ | 145,679 |
14. Property, plant and equipment
| As at September 30, 2017 | Cost | Accumulated depreciation | Net book value | |||||||||
| Land and improvements | $ | 377,491 | $ | (67,164 | ) | $ | 310,327 | |||||
| Buildings | 265,816 | (101,301 | ) | 164,515 | ||||||||
| Yard and automotive equipment | 60,125 | (39,489 | ) | 20,636 | ||||||||
| Computer software and equipment | 68,728 | (59,639 | ) | 9,089 | ||||||||
| Office equipment | 24,875 | (18,443 | ) | 6,432 | ||||||||
| Leasehold improvements | 21,369 | (14,492 | ) | 6,877 | ||||||||
| Assets under development | 12,619 | - | 12,619 | |||||||||
| $ | 831,023 | $ | (300,528 | ) | $ | 530,495 | ||||||
| As at December 31, 2016 | Cost | Accumulated depreciation | Net book value | |||||||||
| Land and improvements | $ | 362,283 | $ | (60,576 | ) | $ | 301,707 | |||||
| Buildings | 256,168 | (91,323 | ) | 164,845 | ||||||||
| Yard and automotive equipment | 55,352 | (38,560 | ) | 16,792 | ||||||||
| Computer software and equipment | 66,265 | (57,624 | ) | 8,641 | ||||||||
| Office equipment | 22,963 | (16,706 | ) | 6,257 | ||||||||
| Leasehold improvements | 20,199 | (12,541 | ) | 7,658 | ||||||||
| Assets under development | 9,130 | - | 9,130 | |||||||||
| $ | 792,360 | $ | (277,330 | ) | $ | 515,030 | ||||||
During the three and nine months ended September 30, 2017, interestMarch 31, 2020, the Company received a final distribution of $40,000its equity-accounted investments in the Cura Classis entities. The transaction did not result in a significant gain or loss.
14. Debt
| | | | | | |
|
| Carrying amount | ||||
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Short-term debt | | $ | 20,285 | | $ | 4,705 |
| | | | | | |
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 | |
| 96,782 | |
| 155,355 |
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 | |
| 44,251 | |
| — |
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 | |
| 500,000 |
Less: unamortized debt issue costs | |
| (7,719) | |
| (9,067) |
Total long-term debt | |
| 632,561 | |
| 645,481 |
| | | | | | |
Total debt | | $ | 652,846 | | $ | 650,186 |
| | | | | | |
Long-term debt: | |
|
| |
|
|
Current portion | | $ | 9,926 | | $ | 18,277 |
Non-current portion | |
| 622,635 | |
| 627,204 |
Total long-term debt | | $ | 632,561 | | $ | 645,481 |
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:
| (1) | Multicurrency revolving facilities of up to US$530 Million (the “Revolving Facilities”), and, |
| (2) | A delayed-draw term loan facility of up to US$100 Million (the “Delayed-Draw Facility” and together with the Revolving Facilities, the “Facilities”). |
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 $78,000, respectively, was capitalizedLIBOR loans by 0.50% at each pricing tier level, (iii) increased the applicable percentage per annum used to calculate the costcommitment fee in respect of assetsthe unused commitments under development (2016: $42,000the Revolving Facilities by 0.10% at each pricing tier level, and $65,000). These interest costs relating to qualifying assets are capitalized at a weighted average rate of 2.7% (2016: 4.4%).(iv) increased the aggregate amount available under the Revolving Facilities from $490.0 million
| |
Ritchie Bros. | 19 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
15. Intangible assets
| As at September 30, 2017 | Cost | Accumulated amortization | Net book value | |||||||||
| Trade names and trademarks | $ | 54,229 | $ | (347 | ) | $ | 53,882 | |||||
| Customer relationships | 124,295 | (6,317 | ) | 117,978 | ||||||||
| Software | 96,860 | (22,155 | ) | 74,705 | ||||||||
| Software under development | 14,557 | - | 14,557 | |||||||||
| $ | 289,941 | $ | (28,819 | ) | $ | 261,122 | ||||||
| As at December 31, 2016 | Cost | Accumulated amortization | Net book value | |||||||||
| Trade names and trademarks | $ | 5,585 | $ | (50 | ) | $ | 5,535 | |||||
| Customer relationships | 25,618 | (1,072 | ) | 24,546 | ||||||||
| Software | 36,566 | (13,116 | ) | 23,450 | ||||||||
| Software under development | 18,773 | - | 18,773 | |||||||||
| $ | 86,542 | $ | (14,238 | ) | $ | 72,304 | ||||||
During the nine months ended September 30, 2017, the Company recognized an impairment loss of $8,911,000 dueto $530.0 million. Immediately prior to the impairment of certain software and software under development and duringamendment, the three and nine months ended September 30, 2016 the Company recorded an impairment loss on the Equipment One customer relationships of $4,669,000 (note 7).
During the three and nine months ended September 30, 2017, interest of $74,000 and $140,000, respectively was capitalized to the cost of software under development (2016: $111,000 and $287,000). These interest costs relating to qualifying assets are capitalized at a weighted average rate of 2.70% (2016: 5.32.%).
16. Goodwill
| Balance, December 31, 2016 | $ | 97,537 | ||
| Additions | 567,785 | |||
| Foreign exchange movement | 4,324 | |||
| Balance, September 30, 2017 | $ | 669,646 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
17. Equity-accounted investments
The Company holds a 48% share interest in a group of companies detailed below (together, the Cura Classis entities), which have common ownership. The Cura Classis entities provide dedicated fleet management services in three jurisdictions to a common customer unrelated to the Company. The Company has determined the Cura Classis entities are variable interest entities and the Company is not the primary beneficiary, as it does not have the power to make any decisions that significantly affect the economic results of the Cura Classis entities. Accordingly, the Company accounts for its investments in the Cura Classis entities following the equity method.
A condensed summary of the Company's investments in and advances to equity-accounted investees are as follows (in thousands of U.S. dollars, except percentages):
| Ownership | September 30, | December 31, | ||||||||||
| percentage | 2017 | 2016 | ||||||||||
| Cura Classis entities | 48 | % | $ | 4,650 | $ | 4,594 | ||||||
| Other equity investments | 32 | % | 2,637 | 2,732 | ||||||||
| 7,287 | 7,326 | |||||||||||
As a result of the Company’s investments, the Company is exposed to risks associated with the results of operations of the Cura Classis entities. The Company has no other business relationships with the Cura Classis entities. The Company’s maximum risk of loss associated with these entities is the investment carrying amount.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
18. Debt
| Carrying amount | ||||||||
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Short-term debt | $ | 8,567 | $ | 23,912 | ||||
| Long-term debt: | ||||||||
| Revolving loans: | ||||||||
| Denominated in Canadian dollars, unsecured, bearing interest at a weighted average rate of 2.380%, due in monthly installments of interest only, with the committed, revolving credit facility available until October 2021 | - | 69,926 | ||||||
| Denominated in United States dollars, unsecured, bearing interest at a weighted average rate of 2.075%, due in monthly installments of interest only, with the committed, revolving credit facility available until October 2021 | - | 30,000 | ||||||
| Delayed draw term loan: | ||||||||
| Denominated in Canadian dollars, secured, bearing interest at a weighted average rate of 3.044%, due in monthly installments of interest only and quarterly installments of principal, with the committed credit facility, available until October 2021 | 189,050 | - | ||||||
| Denominated in United States dollars, secured, bearing interest at a weighted average rate of 3.157%, due in monthly installments of interest only and quarterly installments of principal, with the committed credit facility, available until October 2021 | 146,397 | - | ||||||
| Less: unamortized debt issue costs | (4,448 | ) | - | |||||
| 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 | 500,000 | ||||||
| Less: unamortized debt issue costs | (13,114 | ) | (4,220 | ) | ||||
| 817,885 | 595,706 | |||||||
| Total debt | $ | 826,452 | $ | 619,618 | ||||
| Long-term debt: | ||||||||
| Current portion | $ | 16,985 | $ | - | ||||
| Non-current portion | 800,900 | 595,706 | ||||||
| $ | 817,885 | $ | 595,706 | |||||
On October 27, 2016, the Company entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders, and Bank of America, N.A. (“BofA”), as administrative agent which provides the Company with:
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
18. Debt (continued)
The Company may use the proceeds from the Multicurrency Facilities for general corporate purposes. Theaggregate principal amount available pursuant to the Delayed-Draw Facility is only available to finance the acquisition of IronPlanet and will not be available for other corporate purposes upon repayment of amounts borrowed under that facility. On May 31, 2017, the Company borrowed $325,000,000outstanding under the Delayed-Draw Facility to financewas $141.0 million. In connection with the acquisitionamendment, the Company prepaid $41.0 million of IronPlanet.such amount with the proceeds from a borrowing under the Revolving Facilities. The Delayed-Draw Facility amortizeswill continue to amortize in equal quarterly installments in an annual amount of 5% for the first two years and 10% in the third through fifth years,, with the balance payable at maturity. Upon the closing of the acquisition the Syndicated Facilities became secured by the assets of the Company and certain of its subsidiaries in Canada and the United States. The Syndicated Facilities may become unsecured again, subject to the Company meeting specified credit rating or leverage ratio conditions.
The Company has incurred debt issue costs of $9,704,000$2,038,000 in connection with the Syndicated Facilities, of which $4,753,000 was allocated to the Multicurrency Facilities and $4,951,000 was allocated to the Delayed-Draw Facility. As the former allocation is not related to specific draws, the costs have been capitalized as other non-current assets and are being amortized over the term of the Syndicated Facilities. For the later allocation, the costs have been capitalized and reduce the carrying value of the delayed draw term loans to which they relate.amendment. At September 30, 2017,2020, the Company had unamortized deferred debt issue costs relating to the Multicurrency FacilitiesCredit Agreement of $4,054,000 (December 31, 2016: $6,182,000 relating to the Syndicated Facilities) and unamortized deferred debt issue costs of $4,448,000 relating to the delayed draw term loans.
On December 21, 2016, the Company completed the offering of $500,000,000 aggregate principal amount of 5.375% senior unsecured notes due January 15, 2025 (the “Notes”). Interest on the Notes is payable semi-annually. The proceeds from the offering were held in escrow until completion of the acquisition of IronPlanet. On May 31, 2017, the funds were released from escrow to finance the acquisition of IronPlanet. The Notes are jointly and severally guaranteed on an unsecured basis, subject to certain exceptions, by each of the Company’s subsidiaries that is a borrower or guarantees indebtedness under the Credit Agreement. IronPlanet and certain of its subsidiaries were added as additional guarantors in connection with the acquisition of IronPlanet.
The Company has incurred debt issue costs of $13,945,000 in connection with the offering of the Notes. At September 30, 2017, the Company had unamortized deferred debt issue costs relating to the Notes of $13,114,000 (December 31, 2016: $4,220,000)
$3,218,000.
Short-term debt at September 30, 2017 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 2.8%2.4% (December 31, 2016: 2.2%2019: 2.3%).
As at September 30, 2017,2020, the Company had availableunused committed revolving credit facilities aggregating $647,213,000$469,407,000 of which $637,891,000$464,996,000 is available until October 27, 2021.2023 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
19.
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Operating lease liability | | $ | 103,244 | | $ | 111,322 |
Tax payable | | | 21,240 | | | 20,232 |
Finance lease liability | |
| 17,079 | |
| 16,336 |
Other | |
| 3,114 | |
| 3,348 |
| | $ | 144,677 | | $ | 151,238 |
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. NoNaN preferred shares have been issued.
Share repurchase
There were no0 share repurchases made during the three months ended September 30, 2020 (three months ended September 30, 2019: NaN). There were 1,525,312 common shares repurchased for $53,170,000 during the three and nine months ended September 30, 2017 (March 2016: 1,460,000 repurchased2020 (nine months ended September 30, 2019: 1,223,674 common shares which were cancelled on March 15, 2016)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.
| |
Ritchie Bros. | 20 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
19. Equity and dividends (continued)
Dividends
Declared and paid
The Company declared and paid the following dividends during the three and nine months ended September 30, 20172020 and 2016:2019:
| Declaration date | Dividend per share | Record date | Total dividends | Payment date | ||||||||||
| Nine months ended September 30, 2017: | ||||||||||||||
| Fourth quarter 2016 | January 23, 2017 | $ | 0.1700 | February 10, 2017 | $ | 18,160 | March 3, 2017 | |||||||
| First quarter 2017 | May 4, 2017 | 0.1700 | May 23, 2017 | 18,188 | June 13, 2017 | |||||||||
| Second quarter 2017 | August 4, 2017 | 0.1700 | August 25, 2017 | 18,210 | September 15, 2017 | |||||||||
| Nine months ended September 30, 2016: | ||||||||||||||
| Fourth quarter 2015 | January 15, 2016 | $ | 0.1600 | February 12, 2016 | $ | 17,154 | March 4, 2016 | |||||||
| First quarter 2016 | May 9, 2016 | 0.1600 | May 24, 2016 | 17,022 | June 14, 2016 | |||||||||
| Second quarter 2016 | August 5, 2016 | 0.1700 | September 2, 2016 | 18,127 | September 23, 2016 | |||||||||
| | | | | | | | | | | | |
|
| |
| Dividend |
| |
| Total |
| | ||
| | 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 | | | 0.2000 | | 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 | |
| 0.1800 | | May 29, 2019 | |
| 19,592 | | June 19, 2019 |
Second quarter of 2019 | | August 8, 2019 | | | 0.2000 | | August 28, 2019 | | | 21,631 | | September 18, 2019 |
Declared and undistributed
Subsequent to September 30, 2017,2020, the Company’s Board of Directors declared a quarterly dividend of $0.17$0.22 cents per common share, payable on December 20, 201716, 2020 to stockholders of record on November 29, 2017.25, 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 consequenceconsequences 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 gainsgain of $5,838,000$5,634,000 and $17,322,000$3,300,000 for the three and nine months ended September 30, 2017, respectively (2016:2020 (2019: net gainsloss of $958,000$4,623,000 and net gains$2,971,000).
| |
Ritchie Bros. | 21 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
20.17. Share-based payments
Share-based payments consist of the following compensation costs:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Stock option compensation expense: | ||||||||||||||||
| SG&A expenses | $ | 2,920 | 1,555 | $ | 6,244 | $ | 4,025 | |||||||||
| Acquisition-related costs | - | - | 4,752 | - | ||||||||||||
| Share unit expense (recovery): | ||||||||||||||||
| Equity-classified PSUs | (176 | ) | 736 | 1,871 | 1,222 | |||||||||||
| Liability-classified share units | 821 | 1,515 | 246 | 8,295 | ||||||||||||
| Employee share purchase plan -employer contributions | 468 | 403 | 1,350 | 1,152 | ||||||||||||
| $ | 4,033 | $ | 4,209 | $ | 14,463 | $ | 14,694 | |||||||||
| | | | | | | | | | | | | |
| | Three months ended |
| Nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||
Stock option compensation expense: |
| |
|
| |
|
| |
|
| |
| |
SG&A expenses | | $ | 1,671 | | $ | 1,653 | | $ | 4,401 | | $ | 4,852 | |
Share unit expense: | |
| | |
|
| |
|
| |
|
| |
Equity-classified share units | |
| 4,138 | |
| 2,851 | |
| 9,155 | |
| 8,754 | |
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 (recovery) and employer contributions to the employee share purchase plan are recognized in SG&A expenses.
Stock option planplans
The Company has three stock option plans that provide for the award of stock options to selected employees, directors and officers of the Company: a) 1999 Employee Stock Purchase Plan, as amended February 17, 2017, b) IronPlanet 1999 Stock Plan, and c) IronPlanet 2015 Stock Plan. The IronPlanet 1999 Stock Plan and IronPlanet 2015 Stock Plan were assumed by the Company as part of the acquisition of IronPlanet (note 22).
Stock option activity for the nine months ended September 30, 20172020 is presented below:
| WA | ||||||||||||||||
| Common | WA | remaining | Aggregate | |||||||||||||
| shares under | exercise | contractual | intrinsic | |||||||||||||
| option | price | life (in years) | value | |||||||||||||
| Outstanding, December 31, 2016 | 3,366,714 | $ | 24.02 | 7.5 | $ | 33,601 | ||||||||||
| Granted | 960,057 | 31.14 | ||||||||||||||
| Assumed in acquisition (note 22) | 737,358 | 14.26 | ||||||||||||||
| Exercised | (355,514 | ) | 22.32 | $ | 3,202 | |||||||||||
| Forfeited | (124,414 | ) | 18.85 | |||||||||||||
| Outstanding, September 30, 2017 | 4,584,201 | $ | 21.92 | 7.6 | $ | 23,721 | ||||||||||
| Exercisable, September 30, 2017 | 1,917,439 | $ | 23.25 | 6.2 | $ | 14,418 | ||||||||||
| | | | | | | | | | | |
| | | | | | | WA | | | | |
| | Common | | WA | | remaining | | Aggregate | |||
| | shares under | | exercise | | contractual | | intrinsic | |||
|
| option |
| price |
| life (in years) |
| value | |||
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 fair value of the stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model. The weighted average grant date fair value of options granted during the nine months ended September 30, 2017 was $7.24.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
20. Share-based payments (continued)
The significant assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 20172020 and 20162019 are presented in the following table on a weighted average basis:
| | | | | | ||||||||
| Nine months ended September 30, | 2017 | 2016 |
| 2020 |
| 2019 |
| ||||||
| Risk free interest rate | 2.0 | % | 1.1 | % |
| 0.7 | % | 2.5 | % | ||||
| Expected dividend yield | 2.14 | % | 2.36 | % |
| 1.96 | % | 2.06 | % | ||||
| Expected lives of the stock options | 5 years | 5 years |
| 5 | years | 5 | years | ||||||
| Expected volatility | 27.8 | % | 26.9 | % |
| 27.9 | % | 26.8 | % | ||||
The fair value of the assumed stock options is estimated on the IronPlanet acquisition date using the Black-Scholes option pricing model. The weighted average fair value of the assumed options was $16.93. The significant assumptions used to estimate the fair value of these assumed stock options are presented in the following table on a weighted average basis:
| | |||
Ritchie Bros. | ||||
22 | ||||
As at September 30, 2017, the unrecognized stock-based compensation cost related to the non-vested stock options was $8,924,000, which is expected to be recognized over a weighted average period of 2.4 years.
Share unit plans
Share unit activity for the nine months ended September 30, 2017 is presented below:
| Equity-classified awards | Liability-classified awards | |||||||||||||||||||||||||||||||
| PSUs | PSUs (1) | Restricted share units ("RSUs") | DSUs | |||||||||||||||||||||||||||||
| WA grant | WA grant | WA grant | WA grant | |||||||||||||||||||||||||||||
| date fair | date fair | date fair | date fair | |||||||||||||||||||||||||||||
| Number | value | Number | value | Number | value | Number | value | |||||||||||||||||||||||||
| Outstanding, December 31, 2016 | 243,968 | $ | 27.48 | 311,329 | $ | 23.96 | 160,009 | $ | 23.37 | 73,520 | $ | 25.41 | ||||||||||||||||||||
| Granted | 133,452 | 30.31 | 94,982 | 31.40 | 849 | 32.47 | 13,548 | 30.77 | ||||||||||||||||||||||||
| Reclassification on modification | 81,533 | 24.47 | (81,533 | ) | 24.66 | - | - | - | - | |||||||||||||||||||||||
| Vested and settled | (27,326 | ) | 26.82 | (49,873 | ) | 23.64 | (152,544 | ) | 23.26 | - | - | |||||||||||||||||||||
| Forfeited | - | - | (15,806 | ) | 26.31 | - | - | - | - | |||||||||||||||||||||||
| Outstanding, September 30, 2017 | 431,627 | $ | 27.83 | 259,099 | $ | 26.39 | 8,314 | $ | 26.29 | 87,068 | $ | 26.24 | ||||||||||||||||||||
As at September 30, 2017, the unrecognized share unit expense related to equity-classified PSUs was $5,986,000, which is expected to be recognized over a weighted average period of 1.9 years. The unrecognized share unit expense related to liability-classified PSUs was $4,030,000, which is expected to be recognized over a weighted average period of 1.8 years. The unrecognized share unit expense related to liability-classified RSUs was $58,000, which is expected to be recognized over a weighted average period of 1.0 years. There is no unrecognized share unit expense related to liability-classified DSUs as they vest immediately upon grant.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
20.17. 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 plans (continued)
Share unit activity for the nine months ended September 30, 2020 is presented below:
Senior executive and employee PSU plans
| | | | | | | | | | | | | | | | |
| | Equity-classified awards | | Liability-classified awards | ||||||||||||
| | PSUs | | RSUs | | DSUs | ||||||||||
| | | | WA grant | | | | WA grant | | | | | WA grant | |||
| | | | date fair | | | | date fair | | | | | date fair | |||
|
| Number |
| value |
| Number |
| value |
| | Number |
| value | |||
Outstanding, December 31, 2019 |
| 428,724 | | $ | 32.89 |
| 237,420 | | $ | 29.72 |
| $ | 118,368 | | $ | 29.64 |
Granted |
| 300,595 | |
| 42.00 |
| 26,610 | |
| 40.52 |
| | 15,427 | |
| 43.29 |
Vested and settled |
| (156,238) | |
| 31.94 |
| (7,911) | |
| 36.23 |
| | — | |
| — |
Forfeited |
| (29,863) | |
| 36.39 |
| (48,243) | |
| 27.85 |
| | — | |
| — |
Outstanding, September 30, 2020 |
| 543,218 | | $ | 38.01 |
| 207,876 | | $ | 31.29 |
| $ | 133,795 | | $ | 31.21 |
PSUs
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, andor performance vesting conditions being met.
PSUs awarded under the The PSU Plans are subject to market vesting conditions. The fair value of the liability-classified PSUs awarded under the employee PSU plan is estimated on the date of grant and at each reporting date using a binomial model. The significant assumptions used to estimate the fair value of the liability-classified PSUs awarded under the employee PSU plan during the nine months ended September 30, 2017 and 2016 are presented in the following table on a weighted average basis:
| Nine months ended September 30, | 2017 | 2016 | ||||||
| Risk free interest rate | 1.4 | % | 1.2 | % | ||||
| Expected dividend yield | 1.92 | % | 2.49 | % | ||||
| Expected lives of the PSUs | 3 years | 3 years | ||||||
| Expected volatility | 28.2 | % | 29.9 | % | ||||
| Average expected volatility of comparable companies | 37.0 | % | 37.0 | % | ||||
Sign-on grant PSUs
On August 11, 2014, the Company awarded 102,375 one-time sign-on grant PSUs (the “SOG PSUs”). The SOG PSUs were cash-settled and subject to market vesting conditions related to the Company’s share performance over rolling two, three, four, and five-year periods.
Prior to May 1, 2017, the Company was only able to settle the SOG PSU award in cash, and as such, the plan was classified as a liability award. On May 1, 2017 (the “modification date”), the shareholders approved amendments to the SOG PSU grant, allowing the Company to choose whether to settle the award in cash or in shares. With respect to settling in shares, the new settlement options allow the Company to issue a number of shares equal to the number of units that vest. The shareholders authorized 150,000 shares to be issued for settlement of the PSUs.
On the modification date, the SOG PSU award was reclassified to equity award, based on the Company’s settlement intentions. The weighted average fair value of the SOG PSU award outstanding on the modification date was $24.47. The share unit liability, representing the portion of the fair value attributable to past service, was $1,421,000, which was reclassified to equity on that date. No incremental compensation was recognized as a result of the modification. Unrecognized compensation expense based on the fair value of the SOG PSU award on the modification date will be amortized over the remaining service period.
Because the PSUs awarded under the new plans are contingently redeemable in cash in the event of death of the participant, on the modification date, the Company reclassified $1,803,000 to temporary equity, representing the portion of the contingent redemption amount of the SOG PSUs as if redeemable on May 1, 2017, to the extent attributable to prior service.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
20. Share-based payments (continued)
Share unit plans (continued)
Sign-on grant PSUs (continued)
The fair value of the equity-classified SOG PSUs is estimated on modification date and on the date of grant using a binomial model. The significant assumptions used to estimate the fair value of the equity-classified PSUs for the nine months ended September 30, 2017 are presented in the following table on a weighted average basis:
Amendment to RSU plans
The Company has RSU plans that are not subject to market vesting conditions. Prior to November 8, 2017, the Company was only able to settle the RSU awards in cash, and as such, the RSUs were classified as liability awards, which are fair valued on grant date and at each reporting date using the 20-day volume weighted average price of the Company’s common shares listed on the New York Stock Exchange. On November 8, 2017 (the “RSU modification date”), the Board of Directors approved amendments to the RSU plans, allowing the Company to choose whether to settle the awards in cash or in shares for new RSUs granted after the RSU modification date.shares. The Company intends to settle in shares. With respect to settling in shares, the new settlement options allowCompany has the Companyoption 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.
RSUs
The Company has registered 300,000 sharesRSU 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 issued for settlementrecognized over a weighted average period of 1.2 years.
DSUs
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 RSUs which will be proposed for shareholder approvalBoard of Directors. There is 0 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 next annual general meeting.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.
| |
Ritchie Bros. | 23 |
21.Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
18. Leases
The Company’s breakdown of lease expense is as follows:
| | | | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | ||||
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 | |
Operating leases
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 | | $ | 103,244 |
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%.
| |
Ritchie Bros. | 24 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
18. Leases (continued)
Finance leases
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.
| | | | | | | | | |
|
| | |
| Accumulated |
| Net book | ||
As at September 30, 2020 | | Cost | | depreciation | | value | |||
Computer equipment | | $ | 14,385 | | $ | (7,568) | | $ | 6,817 |
Yard and others | |
| 27,288 | |
| (9,271) | |
| 18,017 |
| | $ | 41,673 | | $ | (16,839) | | $ | 24,834 |
| | | | | | | | | |
|
| | |
| Accumulated |
| Net book | ||
As at December 31, 2019 | | Cost |
| depreciation | | value | |||
Computer equipment | | $ | 15,314 | | $ | (7,832) | | $ | 7,482 |
Yard and others | |
| 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:
| | | |
Remainder of 2020 |
| $ | 2,498 |
2021 |
| | 9,083 |
2022 |
| | 7,198 |
2023 |
| | 5,084 |
2024 |
| | 2,796 |
Thereafter |
| | 469 |
Total future minimum lease payments |
| $ | 27,128 |
less: imputed interest |
| | (1,504) |
Total finance lease liability |
| $ | 25,624 |
less: finance lease liability - current |
| | (8,545) |
Total finance lease liability - non-current |
| $ | 17,079 |
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.
| |
Ritchie Bros. | 25 |
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
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.
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At September 30, 20172020, there was $40,722,000were $75,897,000 of industrial assets guaranteed under contract, of which 60%85% is expected to be sold prior to the end of December 2017,31, 2020, with the remainder relating to guarantees issued by IronPlanet to be sold by October 2018September 30, 2021 (December 31, 2016: $3,813,0002019: $63,612,000 of which 100%39% was expected to be sold prior to the end of March 2017).
At September 30, 2017 there was $14,577,000 of agricultural assets guaranteed under contract, of which 77% is expected to be sold prior to the end of December 2017,31, 2020 with the remainder to be sold by the end of April 2018 (December 31, 2016: $11,415,000 of which 100% was expected to be sold prior to the end of July 2017)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.
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Ritchie Bros. | 26 |
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Notes to the Condensed Consolidated FinancialCautionary Note Regarding Forward-Looking Statements
(TabularForward-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 dollars, except where noted)(“U.S.”) dollars.
(Unaudited)
22. Business combinations
On May 31, 2017 (the “IronPlanet Acquisition Date”),In the Company acquired 100%accompanying analysis of the issued and outstanding shares of IronPlanet for a total fair value consideration of $776,474,000. As at the acquisition date, cash consideration of $772,706,000 has been paid to the former shareholders, vested option holders and warrant holders of IronPlanet. In addition to the cash consideration, non-cash consideration of $2,330,000 was issued attributable to the assumption of outstanding IronPlanet options, $1,771,000 was paidfinancial information, we sometimes use information derived from consolidated financial data but not presented in cash related to customary closing adjustments, and $333,000 was related to settlement of intercompany payable transactions.
A summary of the net cash flows and purchase price are detailed below:
| May 31, 2017 | ||||
| Cash consideration paid to former equity holders | $ | 723,810 | ||
| Settlement of IronPlanet's debt | 36,313 | |||
| Settlement of IronPlanet's transaction costs | 12,583 | |||
| Cash consideration paid on closing | 772,706 | |||
| Cash consideration paid related to closing adjustments | 1,771 | |||
| Less: cash and cash equivalents acquired | (95,626 | ) | ||
| Less: restricted cash acquired | (3,000 | ) | ||
| Acquisition of IronPlanet, net of cash acquired | $ | 675,851 | ||
| Cash consideration paid on closing | $ | 772,706 | ||
| Replacement stock option awards attributable to pre- combination services | 4,926 | |||
| Stock option compensation expense from accelerated vesting of awards attributable to post-combination services | (2,596 | ) | ||
| Cash consideration paid relating to closing adjustments | 1,771 | |||
| Settlement of pre-existing intercompany balances | (333 | ) | ||
| Purchase price | $ | 776,474 | ||
As part of the acquisition of IronPlanet, the Company assumed IronPlanet’s existing 1999 and 2015 Stock Option Plans under the same terms and conditions. The fair value of IronPlanet’s stock options at the date of acquisition was determined using the Black-Scholes pricing model. Of the total fair value, $51,678,000 has been attributed as pre-combination service and included as part of the total acquisition consideration. The post-combination attribution of $10,154,000 is made up of two components, 1) $4,752,000 related to acceleration of options upon closing of the transaction, which was immediately recognized in acquisition-related costs, and 2) $5,402,000 related to the remaining unvested options, which will be recognized as compensation expense over the vesting period.
IronPlanet is a leading online marketplace for selling and buying used equipment and other durable assets and an innovative participant in the multi–billion dollar used equipment market. The acquisition expands the breadth and depth of equipment disposition and management solutions the Company can offer its customers.
The acquisition was accounted forour financial statements prepared in accordance with ASC 805,Business CombinationsUS 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 (*). The assets acquiredPlease see pages 43-48 for explanations of why we use these non-GAAP measures and liabilities assumed were recorded at their estimated fair values at the IronPlanet Acquisition Date. Goodwill of $567,410,000 was calculated as the fair value of consideration over the estimated fair value of the net assets acquired.
Notesreconciliation to the Condensed Consolidated Financial Statementsmost comparable GAAP financial measures.
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
22. Business combinations (continued)
IronPlanet provisional purchase price allocation
| May 31, 2017 | ||||
| Purchase price | $ | 776,474 | ||
| Assets acquired: | ||||
| Cash and cash equivalents | $ | 95,626 | ||
| Restricted cash | 3,000 | |||
| Trade and other receivables | 13,021 | |||
| Inventory | 1,012 | |||
| Advances against auction contracts | 4,623 | |||
| Prepaid expenses and deposits | 1,233 | |||
| Income taxes receivable | 170 | |||
| Property, plant and equipment | 2,381 | |||
| Other non-current assets | 2,551 | |||
| Deferred tax assets | 1,497 | |||
| Intangible assets ~ | 188,000 | |||
| Liabilities assumed: | ||||
| Auction proceeds payable | 63,616 | |||
| Trade and other payables | 14,511 | |||
| Income taxes payable | 55 | |||
| Deferred tax liabilities | 25,868 | |||
| Fair value of identifiable net assets acquired | 209,064 | |||
| Goodwill acquired on acquisition | $ | 567,410 | ||
The amounts included in the IronPlanet provisional purchase price allocation are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the IronPlanet Acquisition Date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the IronPlanet Acquisition Date, and is dependent upon finalization of income tax liabilities and the valuation report. Adjustments to the preliminary values during the measurement period will be recorded in the operating results of the reporting period in which the adjustments are determined. Changes to the amounts recorded as assets and liabilities will result in a corresponding adjustment to goodwill.
Goodwill
The main drivers generating goodwill are the anticipated synergies from (1) the Company's auction expertise and transactional capabilities to IronPlanet's existing customer base, (2) IronPlanet providing existing technology to the Company's current customer base, and (3) future growth from international expansion and new Caterpillar dealers. Other factors generating goodwill include the acquisition of IronPlanet's assembled work force and their associated technical expertise.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
22. Business combinations (continued)
Contributed revenue and net income
The results of IronPlanet’s operations are included in these consolidated financial statements from the IronPlanet Acquisition Date. IronPlanet contributed revenues of $22,500,000 and a net loss of $1,696,000 to the Company’s revenues and net income during the three months ended September 30, 2017. IronPlanet contributed revenues of $33,380,000 and a net loss of $1,404,000 to the Company's revenues and net income during period from acquisition to September 30, 2017. IronPlanet’s contributed net loss includes charges related to amortization of intangible assets acquired.
The following table includes the unaudited condensed pro forma financial information that presents the combined results of operations as if the transactions relating to the IronPlanet acquisition and the financing required to fund the acquisition had occurred on January 1, 2016. These transactions include adjustments in each applicable period presented for recurring charges related to amortization of intangible assets acquired, interest expense related to the acquisition financing, changes in fair value of convertible preferred stock warrant liability, certain stock option compensation expenses, and taxes, as well as adjustments to the diluted weighted average number of shares outstanding. In addition, these transactions also include pre-tax adjustments related to non-recurring charges totalling $55,239,000 incurred between the third quarter of 2016 and the second quarter of 2017.The non-recurring transactions include certain acquisition-related and financing costs, stock option compensation expenses, and severance costs, together with the related income tax recovery.
The unaudited pro forma condensed combined financial information does not purport to represent what the Company’s results of operations or financial condition would have been had the IronPlanet acquisition and related transactions occurred on the dates indicated, and it does not purport to project the Company’s results of operations or financial condition for any future period or as of any future date.
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | $ | 141,047 | $ | 153,817 | $ | 481,076 | $ | 503,711 | ||||||||
| Net income (loss) | 10,323 | (9,583 | ) | 57,491 | 2,089 | |||||||||||
| Basic earnings (loss) per share | 0.10 | (0.09 | ) | 0.54 | 0.00 | |||||||||||
| Diluted earnings (loss) per share | 0.09 | (0.09 | ) | 0.53 | 0.00 | |||||||||||
The unaudited pro forma net loss for the third quarter of 2016 includes an impairment loss on the EquipmentOne reporting unit goodwill of $23,574,000 and a pre-tax impairment loss on the EquipmentOne reporting unit customer relationships of $4,669,000.
The pro forma financial information included in the Company’s unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 2017 and 2016 previously filed on August 8, 2017, has been adjusted as per the table below. The adjustments correct a mechanical computation error in determining pro forma net income. The adjustments resulted in an increase to net income by $2,844,000 and $3,343,000 for the three and six months ended June 30, 2017, respectively, and an increase to net income by $3,618,000 for the three months ended June 30, 2016 and a decrease to net income by $16,702,000 for the six months ended June 30, 2016. There were related adjustments to the basic and diluted earnings per share. There was no adjustment to revenues as reported. These adjustments have no impact on the consolidated balance sheets, consolidated income statements, or the consolidated statements of cash flows.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
22. Business combinations (continued)
Contributed revenue and net income (continued)
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue | $ | 185,485 | $ | 187,089 | $ | 340,029 | $ | 349,893 | ||||||||
| Net income | 28,619 | 32,021 | 47,168 | 11,671 | ||||||||||||
| Basic earnings per share | 0.27 | 0.29 | 0.44 | 0.10 | ||||||||||||
| Diluted earnings per share | 0.26 | 0.29 | 0.43 | 0.10 | ||||||||||||
Transactions recognized separately from the acquisition of assets and assumptions of liabilities
Acquisition-related costs
Expenses totalling $32,591,000 for legal fees, stock option compensation expense, and other acquisition-related costs are included in the consolidated income statement for the nine months ended September 30, 2017.
On November 15, 2016 (the “Kramer Acquisition Date”), the Company purchased the assets of Kramer Auctions Ltd. for cash consideration of Canadian dollar 15,300,000 ($11,361,000) comprised of Canadian dollar 15,000,000 ($11,138,000) paid at acquisition date and Canadian dollar 300,000 ($223,000) deferred payments over three years. In addition to cash consideration, consideration of up to Canadian dollar 2,500,000 ($1,856,000) is contingent on Kramer achieving certain operating performance targets over the three-year period following acquisition. Kramer is a leading Canadian agricultural auction company with exceptionally strong customer relationships in central Canada. This acquisition is expected to significantly strengthen Ritchie Bros.’ penetration of Canada’s agricultural sector and add key talent to our Canadian Agricultural sales and operations team.
The acquisition was accounted for in accordance with ASC 805Business Combinations.The assets acquired were recorded at their estimated fair values at the Kramer Acquisition Date. Goodwill of $6,822,000 was calculated as the fair value of consideration over the estimated fair value of the net assets acquired.
Kramer provisional purchase price allocation
| November 15, 2016 | ||||
| Purchase price | $ | 11,138 | ||
| Deferred purchase note consideration | 223 | |||
| Fair value of contingent consideration | 538 | |||
| Total fair value at Petrowsky Acquisition Date | 11,899 | |||
| Assets acquired: | ||||
| Property, plant and equipment | $ | 399 | ||
| Intangible assets ~ | 4,678 | |||
| Fair value of identifiable net assets acquired | 5,077 | |||
| Goodwill acquired on acquisition | $ | 6,822 | ||
~ Consists of customer relationships and trade names with estimated useful lives of 10 and three years, respectively.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
22. Business combinations (continued)
Kramer provisional purchase price allocation (continued)
The amounts included in the Kramer provisional purchase price allocation are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the Kramer Acquisition Date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the Kramer Acquisition Date. Adjustments to the preliminary values during the measurement period will be recorded in the operating results of the period in which the adjustments are determined. Changes to the amounts recorded as assets and liabilities will result in a corresponding adjustment to goodwill.
Assets acquired
At the date of acquisition, the Company determined the fair value of the assets acquired using appropriate valuation techniques.
Goodwill
Kramer is a highly complementary business that will broaden the Company’s base in the agriculture sector in Canada, one of the main drivers generating goodwill.
Contingent consideration
At the date of acquisition, the maximum contingent consideration of Canadian dollar 2,500,000 ($1,856,000) was fair valued at Canadian dollar 725,000 ($538,000). The contingent consideration is based on the cumulative revenue growth during a three-year period ending November 15, 2019. The liability is remeasured on each reporting date at its estimated fair value, which is determined using actual results up to the reporting date and forecasted results over the remainder of the performance period. Changes in the fair value are recognized in other income or expense in the consolidated income statement, as applicable. At September 30, 2017, the Company did not recognize a liability as the estimated fair value of the contingent consideration was nil (December 31, 2016: Canadian dollar 725,000 ($538,000)). In the three and nine months ending September 30, 2017 the Company recognized other income of $626,000 and $620,000, respectively associated with the change in fair value.
Transactions recognized separately from the acquisition of assets and assumptions of liabilities
Acquisition-related costs
Expenses totalling $429,000 for continuing employment costs and other acquisition-related costs are included in the consolidated income statements for the nine months ended September 30, 2017.
Employee compensation in exchange for continued services
The Company may pay an additional amount not exceeding Canadian dollar 1,000,000 ($743,000) over a three-year period based on the continuing employment of four key leaders of Kramer with the Company.
On August 1, 2016 (the “Petrowsky Acquisition Date”), the Company acquired the assets of Petrowsky for cash consideration of $6,250,000. An additional $750,000 was paid for the retention of certain key employees. In addition to cash consideration, consideration of up to $3,000,000 is contingent on Petrowsky achieving certain revenue growth targets over the three-year period following acquisition. Based in North Franklin, Connecticut, Petrowsky caters largely to equipment sellers in the construction and transportation industries. Petrowsky also serves customers selling assets in the underground utility, waste recycling, marine, and commercial real estate industries. The business operates one permanent auction site, in North Franklin, which will continue to hold auctions, and also specializes in off-site auctions held on the land of the consignor.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
22. Business combinations (continued)
The acquisition was accounted for in accordance with ASC 805Business Combinations. The assets acquired were recorded at their estimated fair values at the Petrowsky Acquisition Date. Goodwill of $4,308,000 was calculated as the fair value of consideration over the estimated fair value of the net assets acquired.
Petrowsky purchase price allocation
| August 1, 2016 | ||||
| Purchase price | $ | 6,250 | ||
| Fair value of contingent consideration | 1,433 | |||
| Total fair value at Petrowsky Acquisition Date | 7,683 | |||
| Assets acquired: | ||||
| Property, plant and equipment | $ | 441 | ||
| Intangible assets ~ | 2,934 | |||
| Fair value of identifiable net assets acquired | 3,375 | |||
| Goodwill acquired on acquisition | $ | 4,308 | ||
~Consists of customer relationships with estimated useful lives of 10 years.
Assets acquired and liabilities assumed
At the date of the acquisition, the carrying amounts of the assets and liabilities acquired approximated their fair values, except customer relationships, whose fair value was determined using appropriate valuation techniques.
Goodwill
Petrowsky is a highly complementary business that will broaden the Company’s base of equipment sellers, one of the main drivers generating goodwill. Petrowsky’s sellers are primarily in the construction and transportation industries, which are also well aligned with the Company’s sector focus.
Contingent consideration
As part of the acquisition, contingent consideration of up to $3,000,000 is payable to Petrowsky if certain revenue growth targets are achieved. The contingent consideration is based on the cumulative revenue growth during a three-year period ending July 31, 2019. The liability is remeasured on each reporting date at its estimated fair value, which is determined using actual results up to the reporting date and forecasted results over the remainder of the performance period. Changes in the fair value are recognized in other income or expense in the consolidated income statement, as applicable. In the three and nine months ending September 30, 2017, the Company recognized other income of nil and $1,457,000, respectively, associated with the change in fair value. At September 30, 2017, the Company did not recognize a liability as the estimated fair value of the contingent consideration was nil (December 31, 2016: $1,433,000).
Transactions recognized separately from the acquisition of assets and assumptions of liabilities
Acquisition-related costs
Expenses totalling $557,000 for continuing employment and other acquisition-related costs are included in the condensed consolidated income statement for the nine months ended September 30, 2017.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
22. Business combinations (continued)
Transactions recognized separately from the acquisition of assets and assumptions of liabilities (continued)
Employee compensation in exchange for continued services
As noted above, $750,000 was paid on the Petrowsky Acquisition Date in exchange for the continuing services of certain key employees. In addition, the Company may pay an amount not exceeding $1,000,000 over a three-year period, payable in equal annual installments, on the anniversary date of the acquisition based on the founder of Petrowsky’s continuing employment with the Company. The Company paid $333,000 in this regard during the three months ended September 30, 2017.
On February 19, 2016 (the “Mascus Acquisition Date”), the Company acquired 100% of the issued and outstanding shares of Mascus for cash consideration of €26,553,000 ($29,580,000). In addition to cash consideration, consideration of up to €3,198,000 ($3,563,000) of which, €1,215,000 ($1,302,000) has been paid, is contingent on Mascus achieving certain operating performance targets over the three-year period following acquisition. Mascus is based in Amsterdam and provides an online equipment listing service for used heavy machines and trucks. The acquisition expands the breadth and depth of equipment disposition and management solutions the Company can offer its customers.
The acquisition was accounted for in accordance with ASC 805,Business Combinations. The assets acquired and liabilities assumed were recorded at their estimated fair values at the Mascus Acquisition Date. Goodwill of $19,664,000 was calculated as the fair value of consideration over the estimated fair value of the net assets acquired.
Mascus purchase price allocation
| February 19, 2016 | ||||
| Purchase price | $ | 29,580 | ||
| Fair value of contingent consideration | 3,431 | |||
| Non-controlling interests(1) | 596 | |||
| Total fair value at Mascus Acquisition Date | 33,607 | |||
| Fair value of assets acquired: | ||||
| Cash and cash equivalents | $ | 1,457 | ||
| Trade and other receivables | 1,290 | |||
| Prepaid expenses | 528 | |||
| Property, plant and equipment | 104 | |||
| Intangible assets(2) | 14,817 | |||
| Fair value of liabilities assumed: | ||||
| Trade and other payables | 1,533 | |||
| Other non-current liabilities | 37 | |||
| Deferred tax liabilities | 2,683 | |||
| Fair value of identifiable net assets acquired | 13,943 | |||
| Goodwill acquired on acquisition | $ | 19,664 | ||
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
22. Business combinations (continued)
Mascus purchase price allocation (continued)
Goodwill
The main drivers generating goodwill are the anticipated synergies from (1) the Company's core auction expertise and transactional capabilities to Mascus' existing customer base, and (2) Mascus' providing existing technology to the Company's current customer base. Other factors generating goodwill include the acquisition of Mascus' assembled work force and their associated technical expertise.
Contingent consideration
At the date of acquisition, the maximum contingent consideration of €3,198,000 ($3,563,000) was fair valued at €3,080,000 ($3,431,000). The consideration is contingent upon the achievement of certain operating performance targets during the three-year period following acquisition and is due in three instalments, each occurring after the end of the respective 12-month performance period. During the nine months ended September 30, 2017 after having achieved certain first performance period targets, the Company made the first instalment payment of €1,215,000 ($1,302,000). The remaining liability is remeasured on each reporting date at its estimated fair value, which is determined using actual results up to the reporting date and forecasted results over the remainder of the performance period. Changes in the fair value are recognized in other income or expense in the consolidated income statement, as applicable. At September 30, 2017 the estimated fair value of the contingent consideration was €1,608,000 ($1,900,000) (December 31, 2016: €3,080,000 ($3,431,000)). During the nine months ended September 30, 2017 the Company recognized €178,000 ($193,000) in other income associated with the change in fair value.
Transactions recognized separately from the acquisition of assets and assumptions of liabilities
Acquisition-related costs
Expenses totalling $426,000 for continuing employments costs and other acquisition-related costs are included in the condensed consolidated income statement for the nine months ended September 30, 2017 (2016: $1,450,000).
Employee compensation in exchange for continued services
The Company may pay additional amounts not exceeding €1,625,000 ($1,849,000) over a three-year period ending February 19, 2019 based on key employees’ continuing employment with Mascus. The Company paid €393,000 ($419,000) in this regard during the nine months ended September 30, 2017.
Notes to the Condensed Consolidated Financial Statements
(Tabular amounts expressed in thousands of United States dollars, except where noted)
(Unaudited)
23. Contingently redeemable non-controlling interest in Ritchie Bros. Financial Services
Until July 12, 2016, the Company held a 51% interest in RBFS, an entity that provides loan origination services to enable the Company’s auction customers to obtain financing from third party lenders.
The Company and the NCI holders each held options pursuant to which the Company could acquire, or be required to acquire, the NCI holders’ 49% interest in RBFS. On July 12, 2016, the Company completed its acquisition of the NCI. On that date, the Company acquired the NCI holders’ 49% interest in RBFS for total consideration of 57,900,000 Canadian dollars ($44,141,000).
About Us
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 $3.2$5.14 billion of used equipment and other assets during the first nine months of 2017.2019. Our expertise, unprecedented global reach, market insight, and trusted portfolio of brands provide us with a unique position in the used equipment market. We primarily sell used equipment for our customers through live, unreserved auctions at 4540 auction sites worldwide, which are also simulcast online to reach a global bidding audience. On May 31, 2017, we completedaudience and through our acquisition of IronPlanet Holdings, Inc. (“IronPlanet”), a leading online marketplace for heavy equipment and other durable assets. Between its inception in 1999 and 2016, IronPlanet sold over $5 billion of used heavy equipment online and registered more than 1.5 million users worldwide. These complementary used equipment brand solutions, together with EquipmentOne, an online-only used equipment marketplace we launched in 2013, provide different value propositions to equipment owners and allow us to meet the needs and preferences of a wide spectrum of equipment sellers and buyers. In the past three years, we have also added a private brokerage service (Ritchie Bros. Private Treaty) and an online listing service (Mascus).
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 through our multiple brand solutions.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 2012 countries, including the United States,U.S., Canada, Australia, the United Arab Emirates, and the Netherlands, and employ more than 2,1002,500 full time employees worldwide.
On May 15, 2012, we purchased AssetNation, an online marketplace and solutions provider for surplus and salvage assets based in the United States. Leveraging AssetNation’s technology and e-commerce expertise, we commercially launched1 GTV represents total proceeds from all items sold at our online marketplace, EquipmentOne, in early 2013.
On November 4, 2015, we acquired a 75% interest in Xcira LLC (“Xcira”), a proven leader in simulcast auction technology that provides a seamless customer experience for online bidding at live on site auctions. Through this acquisition, we secured Xcira’s bidding technology, which representsauctions and online marketplaces. GTV is not a significantmeasure of financial performance, liquidity, or revenue, and growing portionis not presented in our consolidated financial statements.
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Ritchie Bros. | 27 |
Proposed Acquisition of Rouse Services
On February 19, 2016,October 28, 2020, we acquiredentered into a definitive agreement to acquire Rouse Services, a privately heldcompany 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 interestsof Rouse Services LLC for approximately $275 million, comprised of approximately $250 million in Mascus International Holding B.V. (“Mascus”). Mascuscash and $25 million in our common stock, subject to adjustment. Completion of the acquisition is based in Amsterdam and operates a global online listing servicesubject to advertise equipment andcustomary closing conditions, including, among other assets for sale. Unlike other sales channels offered by Ritchie Bros., Mascus currently does not process transactions through its website; rather, sales facilitated through Mascus are conducted directly betweenconditions, the seller and buyer.expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
On July 12, 2016, we acquiredImpact of COVID-19 to our Business
In March 2020, the remaining minority interestWorld Health Organization declared the outbreak of Ritchie Bros. Financial Services (“RBFS”), providing us with full ownership of this growing business. RBFS provides financing and leasing options to equipment purchasers,COVID-19 as a brokerage business, through several bank relationships. RBFS does not leverage our balance sheet forpandemic, which continues to spread throughout the loans it originates.
On August 1, 2016, we acquired Petrowsky Auctioneers (“Petrowsky”), a leading regional industrial auctioneerworld. The COVID-19 pandemic has resulted in the Northern United States. Similar to Ritchie Bros. Auctioneers, Petrowsky offers live on sitesignificant global economic disruption and simulcast live online auctions.
On November 15, 2016, we acquired substantially all the assets of Kramer Auctions Ltd. and Kramer Auctions — Real Estate Division Inc. (together, ‘‘Kramer’’), a Canadian agricultural auction company with strong customer relationships in central Canada. Operating for more than 65 years, Kramer operates in Saskatchewan, Alberta and Manitoba as a premier agricultural auctioneer, offering both on-the-farm and live on site auctions for customers selling equipment, livestock and real-estate in the agricultural sector.
On May 31, 2017, we completed the acquisition of a 100% interest in IronPlanet (the “Merger”) pursuant to the Agreement and Plan of Merger we entered into on August 29, 2016. IronPlanet operates online and event-based equipment auctions underhas materially impacted a number of brands,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 discusseduncertain and cannot be easily predicted. Although at the time of this filing, we continue operating our modified live site operations in more detail below.
Our alliance with Caterpillar Inc. (“Caterpillar”), pursuantall 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 Strategic Allianceoperation 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 Remarketing Agreement (the “Alliance”)on our business, and results of operations.
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Ritchie Bros. | 28 |
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 entered intocan seek to address the effect on August 29, 2016, became effective uponour business and service our customers. It is unknown how long the consummationpandemic 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 MergerCOVID-19 pandemic on May 31, 2017.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 discussed in more detail below, undersuch, given the Alliance, we became Caterpillar's preferred global partner for liveongoing nature of this situation, the Company cannot reasonably estimate the future impacts of the COVID-19 pandemic on site and online auctions for used Caterpillar equipment.our business operations, results of operations, cash flows, financial performance or the ability to pay dividends.
Our Service Offering
Offerings
We offer our equipment sellersseller and buyersbuyer customers multiple distinct, complementary, multi-channel brand solutions that address the range of customertheir needs. Our global customer base has a variety of transaction options, breadth of services, and the widest selection of used equipment available to them. TheFor a complete listing of channels and formats with whichbrand solutions available under our customers may choose to dispose and/or buy equipment based on their individual needs are illustrated in the tables below.
Auctions and Marketplaces
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& Marketplace ("A&M") segment, as well as our Other Services
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Overview
The following discussion and analysis summarizes significant factors affecting our consolidated operating results and financial condition for the three and nine months ended September 30, 2017 and 2016. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth 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, 2016,2019, which is available on our website atwww.rbauction.com, on EDGAR atwww.sec.gov, or on SEDAR atwww.sedar.com.
This discussion and analysis should be read in conjunction with the “Cautionary Note Regarding Forward-Looking Statements” and the consolidated financial statements and the notes thereto included in “Part I, Item 1: Consolidated Financial Statements” of this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016. None of the information on our website, EDGAR, or SEDAR is incorporated by reference into this document by this or any other reference.
Contract options
We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“US GAAP”). Except for GTV – 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 and are presented in United States (“U.S.”) dollars. Unless indicated otherwise, all tabular dollar amounts, including related footnotes, presented below are expressed in thousands of dollars.
We reference various non-GAAP financial and performance measures throughout this discussion and analysis. These measures do not have a standardized meaning and are, therefore, unlikelyoffer consignors several contract options to be comparable to similar measures presented by other companies.
Strategy Update
Our strategy is to become a more diversified, multichannel marketplace that offers a full range of asset management and disposition solutions, all on a greater scale that will provide even more choice to customers. We are executing a transformation of our business and the industry that is being driven by our technology, data, and solutions. The following discussion highlights and describes our strategic drivers,Grow,Drive, andOptimize, and provides a post-merger integration update within each applicable section. Our integration activities began in the latter part of the second quarter of 2017, following the closing of the Merger with IronPlanet and, overall, we are currently progressing as expected through our multi-year plan of integration activities and milestones.
GROW Revenues and Net Income
Over the last several years, we have undertaken a meaningful strategic transformation, through both organic and acquisitive growth initiatives, to broaden our service offering and the value propositions we provide to different segments of the used asset and equipment market. The Merger with IronPlanet positions us to accelerate this strategy and take positive and meaningful steps towards meeting our strategic objectives.
The Merger is a transformative transaction that is helping us expand our equipment sales platform to better serve customers globally by enabling customers with varying preferences to choose from a variety of auction formats. We believe the Merger with IronPlanet:
We are committed to pursuing growth initiatives that will further enhance our sector reach, drive geographic depth, meet a broader set of customertheir individual needs and add scale tosale objectives. Through our operations. These growth initiativesA&M business, options include:
Notable integration activities that contributed to ourGROW strategy in the quarter included:
DRIVE Efficiencies and Effectiveness
We are committed to driving efficiencies and effectiveness by:
We continue to evaluate the returns generated at each of our permanent and regional auction sites we operate to assess whether each site and related site capital investments are generating returns that meet predetermined targets. During the first nine months of 2017, we terminated our lease in Panama and began exploring alternative future uses of our auction site land and buildings in Japan beyond a sale of the property.
The Merger impacted our auction site assessment, providing additional opportunities to optimize our auction sites. As a point of reference, in 2016, approximately 20% of IronPlanet’s revenues were driven from event-based auctions. We are undertaking efforts to optimize channel strategies that could eliminate duplicative event-based auctions, enhance equipment offerings at event-based auctions, and maximize auction channels.
Notable integration activities that contributed to ourDRIVE strategy in the quarter included:
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| ● | Inventory contracts, where we purchase, take custody, and hold used equipment and other assets before they are resold in the ordinary course of business. |
We collectively refer to guarantee and inventory contracts as underwritten or “at-risk” contracts.
Over time, we will also complete the third phase of the technology integration –The Operations Optimization Phase. This involves integrating our auction administration systems with real-time data and optimized workflow, leading to common processes and opportunities for further synergies.
OPTIMIZE our Balance Sheet
Value-added services
We will optimizealso provide a wide array of value-added services to make the process of selling and buying equipment convenient for our balance sheet by:customers, including repair and refurbishment services, financial services through Ritchie Bros. Financial Services (“RBFS”), logistical services, and appraisals.
Seasonality
Our GTV and reduce costs
Key Metric Changes
In the third quarter of 2017, we updated ourassociated A&M segment reporting to reflect changes in how we manage and evaluate the business operations. This change was drivenrevenues are affected by the Merger and the growthseasonal nature of our services that do not generate Gross Transaction Value1 (“GTV”). Our new segmented information disclosure distinguishes between revenues and expenses generated from transactional asset disposition services, which are services that generatebusiness. GTV and those that do not generate GTV. GTV replaces the previous term of Gross Auction Proceeds (“GAP”) used by Ritchie Bros. and Gross Merchandise Volume (“GMV”) used by IronPlanet, providing a common nomenclature across all channels.
With the change inA&M segment reporting, we updated our GTV and Revenue Rate key metrics. GTV represents the total proceeds from all items sold in conjunction with our Auctions and Marketplaces segment. We have retrospectively restated GTVrevenues tend to exclude GTV from our Asset Appraisal Services (“AAS”) business. GTV attributable to AAS was $8.0 million during the third quarter of 2017 and $3.1 millionincrease 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.
The restrictions imposed and effects of 2017. In addition, effective August 1, 2017, GTV no longer includes EquipmentOne buyer’s premiums. Excluding AAS GTVthe overall economic environment as a result of the COVID-19 pandemic may continue to impact these trends.
Revenue Mix Fluctuations
Our revenue is comprised of service revenue and EquipmentOne buyer’s premiums hasinventory 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 less than 1%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 GTV reported to date. revenue growth percentages.
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Ritchie Bros. | 29 |
Performance Overview
We also introduced a segment Revenue Rate, which is calculated as Auctions and Marketplaces segment revenue divided by GTV. When referring to the original Revenue Rate metric, which is calculated as total, consolidated revenues divided by GTV, we will use the term ‘Consolidated Revenue Rate’.
Consolidated Financial Highlights
During the quarter, we generated $141.0 million of revenues, an increase of 9% versus the same quarter last year with $10.3 million of netNet income attributable to stockholders.stockholders increased 80% to $45.4 million, compared to $25.3 million in Q3 2019. Diluted earnings per share (“EPS”) attributable to stockholders was $0.09 including $3.6increased 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 acquisition-relatedseverance costs and $10.6($3.2 million net of interest expense,tax), increased 91% to $0.44 per share at Q3 2020 as compared to a diluted loss per share attributable to stockholders of $0.05 in the third quarter of 2016.Q3 2019.
Consolidated results:
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| ● | Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization* (“EBITDA”) (non-GAAP measure) in Q3 2020 increased 55% to $91.9 million as compared to Q3 2019 |
| ● | Cash provided by operating activities |
| ● | Cash on hand at Q3 2020 was $590.3 million, of which $470.3 million was unrestricted |
Auctions & Marketplaces segment results:
| ● | GTV in Q3 2020 increased 22% to $1.3 billion compared to Q3 2019 |
| ● | A&M total revenue in Q3 2020 increased 14% to $297.8 million as compared to Q3 2019 |
Results of Operations
Third Quarter Update
| Financial overview | Three months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| (in U.S. $000's, except EPS) | 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | ||||||||||||
| Revenues | $ | 141,047 | $ | 128,876 | $ | 12,171 | 9 | % | ||||||||
| Costs of services, excluding depreciation and amortization | 19,583 | 14,750 | 4,833 | 33 | % | |||||||||||
| Selling, general and administrative expenses | 85,335 | 68,293 | 17,042 | 25 | % | |||||||||||
| Acquisition-related costs | 3,587 | 5,398 | (1,811 | ) | (34 | )% | ||||||||||
| Depreciation and amortization expenses | 14,837 | 10,196 | 4,641 | 46 | % | |||||||||||
| Gain on disposal of property, plant and equipment | (42 | ) | (570 | ) | 528 | (93 | )% | |||||||||
| Impairment loss | - | 28,243 | (28,243 | ) | (100 | )% | ||||||||||
| Foreign exchange loss | 816 | 281 | 535 | 190 | % | |||||||||||
| Operating income | 16,931 | 2,285 | 14,646 | 641 | % | |||||||||||
| Operating income margin | 12.0 | % | 1.8 | % | n/a | 1020 | bps | |||||||||
| Other expense | (9,966 | ) | (105 | ) | (9,861 | ) | 9391 | % | ||||||||
| Income tax expense (recovery) | (3,358 | ) | 7,180 | (10,538 | ) | (147 | )% | |||||||||
| Net income (loss) attributable to stockholders | 10,261 | (5,137 | ) | 15,398 | 300 | % | ||||||||||
| Diluted earnings (loss) per share attributable to stockholders | $ | 0.09 | $ | (0.05 | ) | $ | 0.14 | 280 | % | |||||||
| Effective tax rate | -48.2 | % | 329.4 | % | n/a | -37760 | bps | |||||||||
| GTV | $ | 1,019,322 | $ | 998,859 | $ | 20,463 | 2 | % | ||||||||
| Consolidated Revenue Rate | 13.84 | % | 12.90 | % | n/a | 94 | bps | |||||||||
| Auctions and Marketplaces segment: | ||||||||||||||||
| Revenues | 130,242 | 121,111 | 9,131 | 8 | % | |||||||||||
| Revenue Rate | 12.78 | % | 12.12 | % | n/a | 66 | bps | |||||||||
Consolidated results
Revenues and Consolidated Revenue Rate
Our revenues are comprised of:
Other Services segment results:
| ● | Other Services total revenue in Q3 2020 increased 18% to $33.7 million as |
| ● | RBFS revenue in Q3 2020 increased 19% to $7.3 million as compared to Q3 2019 |
Other Company developments:
| ● | In Q3 2020, our Board of Directors authorized a share repurchase program for the repurchase of up to $100 million of our common shares over the next 12 months, which was approved by the Toronto Stock Exchange |
| ● | On August 10, 2020, the Company announced the appointment of Kevin Geisner as Chief Strategy Officer |
| ● | On August 14, 2020, the Company amended and extended its credit facilities totaling US$630.0 million with a syndicate of lenders |
| ● | On October 28, 2020, the Company entered into a definitive agreement to acquire Rouse Services, a privately heldcompany that provides data intelligence and performance benchmarking for approximately $275 million |
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Ritchie Bros. | 30 |
Results of Operations
RevenuesFinancial overview
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| | Three months ended September 30, | | Nine months ended September 30, | | | |||||||||||||||
| | | | | | | | % Change | | | | | | | | % Change | | | |||
(in U.S. $000's, except EPS and percentages) |
| 2020 |
| 2019 |
| 2020 over 2019 |
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| 2019 |
| 2020 over 2019 |
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Service revenue: | | | | | | | | | | | | | | | | | | | | | |
Commissions | | $ | 112,762 | | $ | 90,928 | | | 24 | % | | $ | 331,711 | | $ | 317,674 | | | 4 | % | |
Fees | | | 109,917 | | | 87,649 | | | 25 | % | | | 308,230 | | | 267,881 | | | 15 | % | |
Total service revenue | | | 222,679 | | | 178,577 | | | 25 | % | | | 639,941 | | | 585,555 | | | 9 | % | |
Inventory sales revenue | | | 108,863 | | | 111,219 | | | (2) | % | | | 353,906 | | | 400,892 | | | (12) | % | |
Total revenue | | | 331,542 | | | 289,796 | | | 14 | % | | | 993,847 | | | 986,447 | | | 1 | % | |
Service revenue as a % of total revenue | | | 67.2 | % | | 61.6 | % | | 560 | bps | | | 64.4 | % | | 59.4 | % | | 500 | bps | |
Inventory sales revenue as a % of total revenue | |
| 32.8 | % |
| 38.4 | % |
| (560) | bps | |
| 35.6 | % |
| 40.6 | % |
| (500) | bps | |
Costs of services | |
| 39,223 | |
| 36,382 | |
| 8 | % | |
| 118,026 | |
| 122,719 | |
| (4) | % | |
Cost of inventory sold | |
| 96,253 | |
| 102,410 | |
| (6) | % | |
| 320,972 | |
| 372,703 | |
| (14) | % | |
Selling, general and administrative expenses | |
| 110,186 | |
| 93,691 | |
| 18 | % | |
| 309,203 | |
| 286,589 | |
| 8 | % | |
Operating expenses | | | 264,158 | | | 249,636 | | | 6 | % | | | 803,581 | | | 834,729 | | | (4) | % | |
Cost of inventory sold as a % of operating expenses | |
| 36.4 | % |
| 41.0 | % |
| (460) | bps | |
| 39.9 | % |
| 44.6 | % |
| (470) | bps | |
Operating income | |
| 67,384 | |
| 40,160 | |
| 68 | % | |
| 190,266 | |
| 151,718 | |
| 25 | % | |
Operating income margin | | | 20.3 | % | | 13.9 | % | | 640 | bps | | | 19.1 | % | | 15.4 | % | | 370 | bps | |
Net income attributable to stockholders | |
| 45,387 | |
| 25,266 | |
| 80 | % | |
| 121,239 | |
| 97,466 | |
| 24 | % | |
Adjusted net income attributable to stockholders* | |
| 48,605 | |
| 25,266 | |
| 92 | % | |
| 130,685 | |
| 97,466 | |
| 34 | % | |
Diluted earnings per share attributable to stockholders | | $ | 0.41 | | $ | 0.23 | | | 78 | % | | $ | 1.10 | | $ | 0.89 | | | 24 | % | |
Diluted adjusted EPS attributable to stockholders* | | $ | 0.44 | | $ | 0.23 | | | 91 | % | | $ | 1.19 | | $ | 0.89 | | | 34 | % | |
Effective tax rate | |
| 25.3 | % |
| 21.1 | % |
| 420 | bps | |
| 28.6 | % |
| 22.8 | % |
| 580 | bps | |
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Total GTV | | | 1,321,379 | | | 1,084,241 | | | 22 | % | | | 3,962,386 | | | 3,756,679 | | | 5 | % | |
Service GTV | | | 1,212,516 | | | 973,022 | | | 25 | % | | | 3,608,480 | | | 3,355,787 | | | 8 | % | |
Service GTV as a % of total GTV - Mix | | | 91.8 | % | | 89.7 | % | | 210 | bps | | | 91.1 | % | | 89.3 | % | | 180 | bps | |
Service revenue as a % of total GTV- Rate | | | 16.9 | % | | 16.5 | % | | 40 | bps | | | 16.2 | % | | 15.6 | % | | 60 | bps | |
Inventory GTV | | | 108,863 | | | 111,219 | | | (2) | % | | | 353,906 | | | 400,892 | | | (12) | % | |
Inventory sales revenue as a % of total GTV-Mix | | | 8.2 | % | | 10.3 | % | | (210) | bps | | | 8.9 | % | | 10.7 | % | | (180) | bps | |
Total revenue
Total revenue increased $12.2 million, or 9%, in the third quarter of 2017 compared14% to the third quarter of 2016. This increase is primarily due to the performance of live on site auction activities in Europe and Australia, as well as the Merger and increases in revenues from other value-added services, including RBFS. Unaudited pro forma revenues decreased 8% from $153.8$331.5 million in the third quarter of 2016Q3 2020 and increased 1% to $141.0$993.8 million in the third quarter of 2017.
Consolidated Revenue Rate increased from 12.90% for the third quarter of 2016 to 13.84% for the third quarter of 2017. Approximately 66 basis points of the 94-basis point increase in Consolidated Revenue Rate is due to a higher Auctions and Marketplaces segment Revenue Rate, while the remaining 28 basis point increase in Consolidated Revenue Rate is due to a higher percentage of revenues from our non-transactional services.
The distribution of our revenues across the geographic regions in which we operate was as follows, where the geographic location of revenues corresponds to the location in which the sale occurred, or in the case of online sales, where the company earning the revenues is incorporated:
| Revenue distribution | Canada | Outside of Canada | United States | Europe | Other | |||||||||||||||
| Three months ended September 30, 2017 | 24 | % | 76 | % | 55 | % | 11 | % | 10 | % | ||||||||||
| Three months ended September 30, 2016 | 28 | % | 72 | % | 56 | % | 8 | % | 8 | % | ||||||||||
On a U.S. dollar basis, the proportion of revenue earned in the Europe grew in the third quarter of 2017 compared to the third quarter of 2016 primarily due to our live on site auction activities in that region and the growth of our Mascus brand. The increase in revenues from other geographic regions in the third quarter of 2017 compared to the third quarter of 2016 is primarily due to growth of our live on site auction activities in Australia.
Costs of services
Costs of services are comprised of expenses incurred in direct relation to conducting auctions (“direct expenses”), earning online marketplace revenues, and earning other fee revenues. Direct expenses include direct labour, buildings and facilities charges, and travel, advertising and promotion costs. Typically, agricultural auctions and auctions located in frontier regions are costlier than auctions held at our permanent and regional auction sites as they do not benefit from economies of scale and frequency.
Costs of services incurred to earn online marketplace revenues include inspection costs, facilities costs, and inventory management, referral, sampling, and appraisal fees. Costs of services incurred in earning other fee revenues include direct labour (including commissions on sales), software maintenance fees, and materials. Costs of services exclude depreciation and amortization (“D&A”) expenses.
Costs of services increased $4.8 million, or 33%, in the third quarter of 2017 compared to the third quarter of 2016. This increase is primarily due to costs associated with the growth in our inspection and appraisal activities because of the Merger, as well as an increase in the number of agricultural auctions over the comparative period.
Selling, general and administrative (“SG&A”) expenses
SG&A expenses increased $17.0 million, or 25%, in the third quarter of 2017 compared to the third quarter of 2016. This increase is primarily due to the Merger, including increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher bank fees attributable to our new credit facility.
Segment Performance
Auctions and Marketplaces reportable segment
| (in U.S. $000's) | Three months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Revenues | $ | 130,242 | $ | 121,111 | $ | 9,131 | 8 | % | ||||||||
| Costs of services, excluding D&A | (18,383 | ) | (14,493 | ) | (3,890 | ) | 27 | % | ||||||||
| SG&A expenses | (81,964 | ) | (65,346 | ) | (16,618 | ) | 25 | % | ||||||||
| Impairment loss | - | (28,243 | ) | 28,243 | (100 | )% | ||||||||||
| Segment profit | $ | 29,895 | $ | 13,029 | $ | 16,866 | 129 | % | ||||||||
Used equipment market update
Our Auction and Marketplace businesses are influenced by certain market forces of the used equipment market, particularly with regards to supply, age of equipment and pricing.
Supply volume
During the first nine months of 2017, we experienced used equipment market supply volume pressure, particularly2020.
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 United StatesUS and Western Canada. High levelsThe 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 constructionthe 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 United States resultedUS. Fees also grew due to RBFS as well as higher buyer fees on more favorable mix. Commissions revenue increased 24%, primarily in owners holding onto their equipment, rental business utilization reaching peak levels,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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Ritchie Bros. | 31 |
For the first nine months of 2020, Service GTV increased 8% with increases in the US and various dealers being understockCanada offsetting lower performance in International. Service GTV in the US and dealing with long lead times between placing orders with OEMs and productionCanada increased for the same reasons discussed above. This increase was partially offset by the non-repeat of the new equipment. Our customers areColumbus, 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 experiencing longer lead times for new equipment productionrecognized higher Other Segment fees and an increase in listing fees driven by OEMs. We believe these supplygreater 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 constraints negatively impacted GTVwas 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 underwritten commission2020, 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 over the comparative period.
Age of equipment
With owners and dealers utilizing and/or holding onto their equipmentdue to government shutdowns in response to the macro-economic conditionsCOVID-19 pandemic. Inventory revenue was impacted by the auction calendar shifts discussed above, we saw a deterioration in the overall age of equipment coming to market relative to recent years. We observed increases in the age of equipment across all asset sectors and geographies. All other things being equal, older equipment sells for lower prices and reduces the commission-based revenue we earn.
Pricing
Overall, we saw improvement in used equipment market pricing during 2017, a continuation of the marginal improvement that we first observed during the second half of 2016.above. This pricing performance varied among asset sectors and geographies.
Construction assets continued to perform well during 2017, with late model equipment experiencing the most pricing improvement, representative of the tightening equipment supply in North America and increased demand for used equipment. Transportation assets rebounded slightly from 2016, with lower mileage truck tractors experiencing the most lift. Agricultural equipment experienced some pricing weakness in the United States during 2017. Some oil and gas equipment continued to experience the price improvement that we first noted in the second quarter of 2017, indicating that oil and gas equipment pricing may have bottomed in the second half of 2016.
Regionally, North America continued to be our strongest geographical region for equipment values during 2017, responding most favorably to changes in commodity pricing and the overall economic environment. Beginning in the third quarter of 2017, we are also seeing improved pricing in our European operations.
Gross Transaction Value
We use GTV to measure the performance of our Auctions and Marketplaces segment. The following table presents GTV by channel:
| (in U.S. $000's) | Three months ended September 30, | |||||||||||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
| Total GTV | % of total | Total GTV | % of total | 2017 over 2016 | 2017 over 2016 | |||||||||||||||||||
| Live on site auctions | $ | 834,388 | 82 | % | $ | 956,723 | 96 | % | $ | (122,335 | ) | (13 | )% | |||||||||||
| Online auctions and marketplaces | 184,934 | 18 | % | 42,136 | 4 | % | 142,798 | 339 | % | |||||||||||||||
| GTV | $ | 1,019,322 | 100 | % | $ | 998,859 | 100 | % | $ | 20,463 | 2 | % | ||||||||||||
GTV increased $20.5 million, or 2%, in the third quarter of 2017 compared to the third quarter of 2016. The increase in GTV is primarily due to the Merger and the resulting increase in online marketplace GTV, as well as a positive impact of foreign exchange rates over the comparative period. Approximately 82% of third quarter 2017 GTV was generated from live on site auctions and 18% from online marketplaces, compared to 96% and 4% respectively for the third quarter of 2016.
Our live on site auction GTV declined primarily due to a decrease in the number of industrial and agricultural auction lots in the third quarter of 2017 compared to the third quarter of 2016. The total number of lots decreased 7% to 92,000 in the third quarter of 2017 from 98,500 in the third quarter of 2016. We believe the decrease in number of lots was primarily driven by constrained supply on used equipment, as well as some lower sales productivity as we complete the integration of our sales teams post-Merger. The decrease in lots was partially offset by a 9% increase in industrial and agricultural auction GTV per lot from $9,700 per lotstrong year-over-year performance in the third quarter of 2016US and Canada.
We offer our customers the opportunity to $10,600 per lot in the third quarter of 2017.
During the third quarter of 2017, we continued to actively pursue the use of underwritten commission contracts from a strategic perspective, and when the opportunity arose, only enteredto serve their disposition strategy needs, entering into such contracts whenwhere the risk/risk and reward profile of the terms wereare agreeable. The volume ofOur underwritten commissioncontracts, which includes inventory and guarantee contracts, decreased to 18%15.4% in Q3 2020, compared to 17.8% in Q3 2019. For the first nine months of 2020, our GTVunderwritten contracts were 18.7% compared to 19.9% in the third quarter of 2017 from 27% in the third quarter of 2016, primarily dueprior period.
Operating Income
For Q3 2020, operating income increased 68% or $27.2 million to the pressure on used equipment market supply volume. The tight supply of used equipment, coupled with improved pricing, resulted in less seller interest in underwritten commission contracts. Straight commission contracts continue to account for the majority of our GTV.
Revenue and segment Revenue Rate
As this segment revenue is generated from transactional asset disposition services, we believe that these revenues are best understood by considering their relationship to GTV. Therefore, in the third quarter of 2017 we introduced the metric Auctions and Maketplaces segment Revenue Rate, which is calculated as segment revenue divided by GTV.
Segment revenues by geographical region and segment Revenue Rate are presented below:
| (in U.S. $000's) | Three months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| United States | $ | 74,097 | $ | 69,938 | $ | 4,159 | 6 | % | ||||||||
| Canada | 29,367 | 32,320 | (2,953 | ) | (9 | )% | ||||||||||
| International | 26,778 | 18,853 | 7,925 | 42 | % | |||||||||||
| Segment revenues | $ | 130,242 | $ | 121,111 | $ | 9,131 | 8 | % | ||||||||
| GTV | $ | 1,019,322 | $ | 998,859 | $ | 20,463 | 2 | % | ||||||||
| Segment Revenue Rate | 12.78 | % | 12.12 | % | n/a | 66 | bps | |||||||||
Changes in segment revenues in the third quarter of 2017 compared to the third quarter of 2016 were primarily due to:
Segment Revenue Rate grew from 12.12% in the third quarter of 2016 to 12.78% in the third quarter of 2017, primarily due to the Merger, which resulted in higher buyer transaction and listing fees from our online marketplace channel. Our historical segment Revenue Rates are presented in the graph below:
Costs of services
Segment costs of services by nature and as a percentage of GTV are presented below:
| (in U.S. $000's) | Three months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Employee compensation | $ | 9,296 | $ | 6,517 | $ | 2,779 | 43 | % | ||||||||
| Buildings, facilities and technology | 1,669 | 1,511 | 158 | 10 | % | |||||||||||
| Travel, advertising and promotion | 5,323 | 4,991 | 332 | 7 | % | |||||||||||
| Other costs of services | 2,095 | 1,474 | 621 | 42 | % | |||||||||||
| Segment cost of services | $ | 18,383 | $ | 14,493 | $ | 3,890 | 27 | % | ||||||||
| GTV | $ | 1,019,322 | $ | 998,859 | $ | 20,463 | 2 | % | ||||||||
| Segment costs of services as a percentage of GTV | 1.80 | % | 1.45 | % | n/a | 35 | bps | |||||||||
Segment costs of services increased 27% in the third quarter of 2017 compared to the third quarter of 2016 primarily due to the Merger, which drove the increase in our online marketplace GTV and revenues.
The increase in online marketplace revenue resulted in an increase in the costs incurred to earn those revenues, which were$67.4 million, primarily related to inspection activities. Other costs of services include storage and shipping costs, primarily associated with costs to move equipment off government facilities as part of our GovPlanet channel activities.
Thethe $41.7 million increase in segment costsrevenue and strong flow through to operating income. For the first nine months of services was also2020, operating income increased 25% or $38.6 million to $190.3 million, mainly due to an increase in the number of live on site agricultural auctions held during the third quarter of 2017 compared to the third quarter of 2016. We held 28 unreserved agricultural auctions in the third quarter of 2017, compared to 20 in the third quarter of 2016.
SG&A expenses
Segment SG&A expenses by nature are presented below:
| (in U.S. $000's) | Three months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Employee compensation | $ | 53,218 | $ | 40,272 | $ | 12,946 | 32 | % | ||||||||
| Buildings, facilities and technology | 13,070 | 12,102 | 968 | 8 | % | |||||||||||
| Travel, advertising and promotion | 8,106 | 6,039 | 2,067 | 34 | % | |||||||||||
| Professional fees | 3,171 | 3,484 | (313 | ) | (9 | )% | ||||||||||
| Other SG&A expenses | 4,399 | 3,449 | 950 | 28 | % | |||||||||||
| Segment SG&A expenses | $ | 81,964 | $ | 65,346 | $ | 16,618 | 25 | % | ||||||||
Our segment SG&A expenses increased $16.6 million, or 25%, in the third quarter of 2017 compared to the third quarter of 2016. The increase is primarily due to the Merger, including increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher bank fees attributable to our new credit facility.
Impairment loss
There was no impairment in the third quarter of 2017. Comparatively, we recognized an impairment loss of $28.2 million on our EquipmentOne goodwill and customer relationships in the third quarter of 2016.
Other services
Our operating segments, RBFS and Mascus, as well as our other non-transactional services, AAS, equipment refurbishing, and Ritchie Bros. Logistical Services (“RBLS”), are reported in the ‘other’ category for segmented information disclosure purposes.
| (in U.S. $000's) | Three months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Revenues | $ | 10,805 | $ | 7,765 | $ | 3,040 | 39 | % | ||||||||
| Costs of services, excluding D&A | (1,200 | ) | (257 | ) | (943 | ) | 367 | % | ||||||||
| SG&A expenses | (3,371 | ) | (2,947 | ) | (424 | ) | 14 | % | ||||||||
| Other category profit | $ | 6,234 | $ | 4,561 | $ | 1,673 | 37 | % | ||||||||
Revenue from other services grew $3.0 million, or 39%, in the third quarter of 2017 compared to the third quarter of 2016, primarily due to the Merger, which added $1.4 million of AAS revenue in the third quarter of 2017, RBFS, and a 19% increase in Mascus segment revenue from $2.0 million to $2.4 million over the comparative period.
RBFS operating segment
Funded volume, which represents the amount of lending brokered by RBFS, increased 15% from $56.3 million in the third quarter of 2016 to $65.0 million in the third quarter of 2017. RBFS segment revenues were $3.4 million in the third quarter of 2017, a 20% increase compared to the $2.9 million in the third quarter of 2016. RBFS segment profit increased 9% over the same comparative period to $1.7 million from $1.5 million.
Consolidated results (continued)
Acquisition-related costs
Acquisition-related costs consist oflower operating expenses directly incurred as part of a business combination, due diligence and integration planning – including those related to the Merger – and continuing employment costs that are recognized separately from our business combinations. Business combination, due diligence, and integration operating expenses include advisory, legal, accounting, valuation, and other professional or consulting fees, and travel and securities filing fees.during this period.
Third quarter 2017 and 2016 acquisition-related costs were $3.6 million and $5.4 million, respectively, and consisted primarily of costs associated with the Merger of $2.7 million and $4.5 million, respectively.
Foreign exchange loss
We recognized $0.8 million of transactional foreign exchange losses in the third quarter of 2017, compared to $0.3 million in the third quarter of 2016. Foreign exchange losses and gains are primarily the result of settlement of non-functional currency-denominated monetary assets and liabilities.
Operating income
Operating income increased $14.6 million, or 641%, to $16.9 million in the third quarter of 2017 compared to $2.3 million the third quarter of 2016. This improvement was primarily due to the third quarter 2016 impairment loss and higher third quarter 2017 revenues, partially offset by higher third quarter 2017 SG&A expenses, costs of services, and D&A expenses. Adjusted operating income2 (non-GAAP measure) decreased 45% to $16.9 million for the third quarter of 2017 compared to $30.5 million for the third quarter of 2016.
Foreign exchange rates did not have a significant impact on operating income in the third quarter of 2017.
Primarily for the same reasons noted above, operating income margin, which is our operating income divided by revenues, increased 1020 bps to 12.0% in the third quarter of 2017 compared to 1.8% in the third quarter of 2016. Adjusted operating income margin3 (non-GAAP measure) decreased 1170 bps to 12.0% in the third quarter of 2017 from 23.7% in the third quarter of 2016.
Other income (expense)
Other income (expense) is comprised of the following:
| (in U.S. $000's) | Three months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Interest income | $ | 517 | $ | 369 | $ | 148 | 40 | % | ||||||||
| Interest expense | (10,558 | ) | (934 | ) | (9,624 | ) | 1030 | % | ||||||||
| Equity income (loss) | (109 | ) | 213 | (322 | ) | (151 | )% | |||||||||
| Other, net | 184 | 247 | (63 | ) | (26 | )% | ||||||||||
| Other income (expense) | $ | (9,966 | ) | $ | (105 | ) | $ | (9,861 | ) | 9391 | % | |||||
We incurred additional indebtedness to finance the Merger. As of September 30, 2017, our total debt was $826.5 million, compared to $140.6 million as of September 30, 2016. The increase in interest expense is primarily due to our higher debt balances, as well as minimal increases in short-term interest rates.
Income tax expense and effective tax rate
At the end of each interim period, we make our best estimate of the effective tax rate expected to be applicable for the full fiscal year. The estimate reflects, among other items, ourmanagement’s best estimate of operating results, including the jurisdiction in which income is earned.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.
During the third quarter of 2017, we recorded $3.4 million of income tax recovery, compared to a $7.2 millionFor Q3 2020, income tax expense in the third quarter of 2016. Ourincreased 128% to $15.4 million and our effective tax rate was -48.2% in the third quarter of 2017increased 423 bps to 25.3% as compared to 329.4% inQ3 2019. For the third quarter of 2016. The change from third quarter 2016nine months ended September 30, 2020, income tax expense increased 69% to third quarter 2017 income$48.7 million and our effective tax recoveryrate 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 lower estimated annualUnited 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”).
| |
Ritchie Bros. | 32 |
The increase in the effective tax rate for the full 2017 year, whichnine months ended September 30, 2020 was caused byprimarily 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 earningsincome taxed in jurisdictions with lowerhigher tax rates, as well asrates. Partially offsetting these increases was the reduced impact of revised estimates of the US tax deductibility of stock option compensation expenses and acquisition-related costs. Also, the comparative period reflected the impact of a non-deductible goodwill impairment loss recorded in the third quarter of 2016.reform.
Net income
NetIn Q3 2020, net income attributable to stockholders increased $15.480% to $45.4 million, in the third quarter of 2017 comparedprimarily related to the third quarter of 2016. This improvement is primarily due to the increase inhigher operating income, lower interest expense, and decrease in income tax expense, partially offset by the increase in interest expense over the same comparative period. Adjustedeffective tax rate as discussed above. For the first nine months of 2020, net income attributable to stockholders4 (non-GAAP measure) decreased 52% increased 24% to $10.3$121.2 million, in the third quarter of 2017 compared to $21.3 million in the third quarter of 2016.
Primarilyprimarily for the same reasons noted above,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:
| | | | | | | | | |
| | | | |
| | | % Change | |
Value of one local currency to U.S dollar |
| 2020 |
| 2019 |
| 2020 over 2019 | | ||
Period-end exchange rate |
| |
|
| |
|
|
|
|
Canadian dollar | | | 0.7514 | | | 0.7551 |
| (0) | % |
Euro | |
| 1.1732 | |
| 1.0900 |
| 8 | % |
Australian dollar | | | 0.7171 | | | 0.6751 | | 6 | % |
| | | | | | | | | |
Average exchange rate -Three months ended September 30, | |
| | |
| |
| |
|
Canadian dollar | | | 0.7506 | | | 0.7572 |
| (1) | % |
Euro | | | 1.1686 | |
| 1.1116 |
| 5 | % |
Australian dollar | | | 0.7148 | | | 0.6851 | | 4 | % |
| | | | | | | | | |
Average exchange rate -Nine months ended September 30, | |
| | |
| |
| |
|
Canadian dollar | | | 0.7391 | | | 0.7524 |
| (2) | % |
Euro | | | 1.1242 | |
| 1.1236 |
| 0 | % |
Australian dollar | | | 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 $15.392% to $48.6 million or 306%, in Q3 2020 and increased 34% to $130.7 million for the third quarterfirst nine months of 2017 compared2020.
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 third quarterfirst nine months of 2016. 2020.
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Ritchie Bros. | 33 |
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)5 (non-GAAP measure) decreasedincreased 55% to $91.9 million in Q3 2020 and increased 23% to $31.8$255.1 million in the third quarter of 2017 compared to $41.2 million in the third quarter of 2016.
Primarily for the same reasons noted above, net income margin, which is our net income divided by our revenues, increased 1120 bps to 7.3% in the third quarter of 2017 from -3.9% in the third quarter of 2016. Adjusted EBITDA margin6 (non-GAAP measure) decreased 940 bps to 22.6% in the third quarter of 2017 from 32.0% in the third quarter of 2016.
Diluted EPS
Diluted EPS attributable to stockholders increased to $0.09 in the third quarter of 2017 from a diluted loss per share attributable to stockholders of $0.05 in the third quarter of 2016. This increase is primarily due to the increase in net income attributable to stockholders, partially offset by an increase in the weighted average number of dilutive shares outstanding over the same comparative period. Diluted adjusted EPS attributable to stockholders7 (non-GAAP measure) decreased 55% to $0.09 in the third quarter of 2017 from $0.20 in the third quarter of 2016.
Year-to-Date Performance
| Financial overview | Nine months ended September 30, | |||||||||||||||
| $ Change | Change | |||||||||||||||
| (in U.S. $000's, except EPS) | 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | ||||||||||||
| Revenues | $ | 431,732 | $ | 419,626 | $ | 12,106 | 3 | % | ||||||||
| Costs of services, excluding depreciation and amortization | 53,987 | 49,821 | 4,166 | 8 | % | |||||||||||
| Selling, general and administrative expenses | 230,287 | 209,395 | 20,892 | 10 | % | |||||||||||
| Acquisition-related costs | 35,162 | 7,198 | 27,964 | 388 | % | |||||||||||
| Depreciation and amortization expenses | 37,047 | 30,560 | 6,487 | 21 | % | |||||||||||
| Gain on disposal of property, plant and equipment | (1,071 | ) | (1,017 | ) | (54 | ) | 5 | % | ||||||||
| Impairment loss | 8,911 | 28,243 | (19,332 | ) | (68 | )% | ||||||||||
| Foreign exchange loss (gain) | (7 | ) | 332 | (339 | ) | (102 | )% | |||||||||
| Operating income | 67,416 | 95,094 | (27,678 | ) | (29 | )% | ||||||||||
| Operating income margin | 15.6 | % | 22.7 | % | n/a | -710 | bps | |||||||||
| Other income (expense) | (20,965 | ) | 420 | (21,385 | ) | (5092 | )% | |||||||||
| Income tax expense | 7,982 | 29,929 | (21,947 | ) | (73 | )% | ||||||||||
| Net income attributable to stockholders | 38,273 | 63,979 | (25,706 | ) | (40 | )% | ||||||||||
| Diluted EPS attributable to stockholders | $ | 0.35 | $ | 0.60 | $ | (0.25 | ) | (42 | )% | |||||||
| Effective tax rate | 17.2 | % | 31.3 | % | n/a | -1410 | bps | |||||||||
| GTV | $ | 3,173,050 | $ | 3,294,463 | $ | (121,413 | ) | (4 | )% | |||||||
| Consolidated Revenue Rate | 13.61 | % | 12.74 | % | n/a | 87 | bps | |||||||||
| Auctions and Marketplaces segment: | ||||||||||||||||
| Revenues | 400,565 | 395,228 | 5,337 | 1 | % | |||||||||||
| Revenue Rate | 12.62 | % | 12.00 | % | n/a | 62 | bps | |||||||||
Consolidated results
Revenues and Consolidated Revenue Rate
Revenues increased $12.1 million, or 3%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase is primarily due to the Merger, which closed on May 31, 2017, and increases in revenues from other value-added services, including RBFS, partially offset by the impact of lower GTV. Unaudited pro forma revenues decreased 4% from $503.7 million in the first nine months of 2016 to $481.1 million in the first nine months of 2017.
Consolidated Revenue Rate increased from 12.74% for the nine months ended September 30, 2016 to 13.61% for the nine months ended September 30, 2017. Approximately 62 bps of the 87-basis point increase in Consolidated Revenue Rate is due to a higher Auctions and Marketplaces segment Revenue Rate, while the remaining 25-basis point increase in Consolidated Revenue Rate is due a higher percentage of revenues from our non-transactional services.
The distribution of our revenues across the geographic regions in which we operate was as follows, where the geographic location of revenues corresponds to the location in which the sale occurred, or in the case of online sales, where the company earning the revenues is incorporated:
| Revenue distribution | Canada | Outside of Canada | United States | Europe | Other | |||||||||||||||
| Nine months ended September 30, 2017 | 28 | % | 72 | % | 53 | % | 11 | % | 8 | % | ||||||||||
| Nine months ended September 30, 2016 | 31 | % | 69 | % | 51 | % | 9 | % | 9 | % | ||||||||||
On a U.S. dollar basis, the proportion of revenue earned in the United States and Europe grew for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Growth in the United States over the comparative period is primarily due to the Merger. Growth in Europe is primarily due to our live on site auction activities in that region and the growth of our Mascus brand. The increase in revenues from other geographic regions in the first nine months of 2017 compared to the first nine months of 2016 is primarily due to growth of our live on site auction activities in the United Arab Emirates.
Costs of services
Costs of services increased $4.2 million, or 8%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase is primarily due to costs associated with the growth in our inspection and appraisal activities because of the Merger.
SG&A expenses
SG&A expenses increased $20.9 million, or 10%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase is primarily due to post-Merger increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher bank fees attributable to our new credit facility.
Segment Performance
Auctions and Marketplaces reportable segment
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Revenues | $ | 400,565 | $ | 395,228 | $ | 5,337 | 1 | % | ||||||||
| Costs of services, excluding D&A | (51,948 | ) | (49,213 | ) | (2,735 | ) | 6 | % | ||||||||
| SG&A expenses | (220,555 | ) | (200,967 | ) | (19,588 | ) | 10 | % | ||||||||
| Impairment loss | (8,911 | ) | (28,243 | ) | 19,332 | (68 | )% | |||||||||
| Segment profit | $ | 119,151 | $ | 116,805 | $ | 2,346 | 2 | % | ||||||||
Gross Transaction Value
We use GTV to measure the performance of our Auctions and Marketplaces segment. The following table presents GTV by channel:
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||
| Total GTV | % of total | Total GTV | % of total | 2017 over 2016 | 2017 over 2016 | |||||||||||||||||||
| Live on site auctions | $ | 2,817,387 | 89 | % | $ | 3,187,014 | 97 | % | $ | (369,627 | ) | (12 | )% | |||||||||||
| Online auctions and marketplaces | 355,663 | 11 | % | 107,449 | 3 | % | 248,214 | 231 | % | |||||||||||||||
| GTV | $ | 3,173,050 | 100 | % | $ | 3,294,463 | 100 | % | $ | (121,413 | ) | (4 | )% | |||||||||||
GTV decreased $121.4 million, or 4%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The decrease in GTV is primarily due to the performance of our live on site auction channel in the first nine months of 2017 compared to the first nine months of 2016, partially offset by the Merger and the resulting increase in our online marketplace sales, as well as the positive impact of foreign exchange rates over the comparative period.
The live on site auction channel GTV decrease is primarily due to a decrease in the number of industrial and agricultural auction lots and changes in our auction calendar in the nine months ended September 30, 2017 compared to the same period in 2016. The total number of lots decreased 5% to 306,900 in the first nine months of 2017 from 321,400 in the first nine months of 2016. We believe the decrease in number of lots was primarily driven by constrained supply of used equipment, as well as some lower sales productivity as we complete the integration of our sales teams post-Merger. Industrial and agricultural auction GTV per lot remained consistent at $9,900 in the first nine months of 2017 and 2016.
With respect to auction calendar changes, we held the largest-ever auction in Grande Prairie, Canada, in March 2016, which generated more than $46.0 million (62.0 million Canadian dollars) of GTV, with no similar auction on the calendar in the first nine months of 2017.
During 2017, we continued to actively pursue the use of underwritten commission contracts from a strategic perspective, and when the opportunity arose, only entered such contracts when the risk/reward profile of the terms were agreeable. The volume of underwritten commission contracts decreased to 16% of our GTV in the first nine months of 2017 from 25% in the first nine months of 2016, primarily due to the pressure on used equipment market supply volume. The tight supply of used equipment, coupled with improved pricing, resulted in less seller interest in underwritten commission contracts. Straight commission contracts continue to account for the majority of our GTV.
Revenue and segment Revenue Rate
Segment revenues by geographical region and segment Revenue Rate are presented below:
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| United States | $ | 220,375 | $ | 208,677 | $ | 11,698 | 6 | % | ||||||||
| Canada | 107,756 | 120,351 | (12,595 | ) | (10 | )% | ||||||||||
| International | 72,434 | 66,200 | 6,234 | 9 | % | |||||||||||
| Segment revenues | $ | 400,565 | $ | 395,228 | $ | 5,337 | 1 | % | ||||||||
| GTV | $ | 3,173,050 | $ | 3,294,463 | $ | (121,413 | ) | (4 | )% | |||||||
| Segment Revenue Rate | 12.62 | % | 12.00 | % | n/a | 62 | bps | |||||||||
Changes in segment revenues in the first nine months of 2017 compared to the first nine months of 2016 were primarily due to:
Segment Revenue Rate grew from 12.00% in the first nine months of 2016 to 12.62% in the first nine months of 2017, primarily due to the Merger, which resulted in higher buyer transaction and listing fees from our online marketplace channel and improved performance on underwritten transactions. The impact of the improved Revenue Rate was partially offset by the impact of lower GTV.
Costs of services
Segment costs of services by nature and as a percentage of GTV are presented below:
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Employee compensation | $ | 23,204 | $ | 21,568 | $ | 1,636 | 8 | % | ||||||||
| Buildings, facilities and technology | 5,225 | 5,571 | (346 | ) | (6 | )% | ||||||||||
| Travel, advertising and promotion | 17,349 | 18,287 | (938 | ) | (5 | )% | ||||||||||
| Other costs of services | 6,170 | 3,787 | 2,383 | 63 | % | |||||||||||
| Segment cost of services | $ | 51,948 | $ | 49,213 | $ | 2,735 | 6 | % | ||||||||
| GTV | $ | 3,173,050 | $ | 3,294,463 | $ | (121,413 | ) | (4 | )% | |||||||
| Segment costs of services as a percentage of GTV | 1.64 | % | 1.49 | % | n/a | 15 | bps | |||||||||
Segment costs of services increased 6% in the first nine months of 2017 compared to the first nine months of 2016 primarily due to the Merger, which drove the increase in our online marketplace GTV and revenues. The increase in online marketplace revenue resulted in an increase in the costs incurred to earn those revenues, which were primarily related to inspection activities. Other costs of services include storage and shipping costs, primarily associated with costs to move equipment off government facilities as part of our GovPlanet channel activities.
The increase in segment costs of services was also due to an increase in the number of live on site agricultural auctions held during the first nine months of 2017 compared to the first nine months of 2016. We held 135 unreserved agricultural auctions in the first nine months of 2017, compared to 105 in the first nine months of 2016.
SG&A expenses
Segment SG&A expenses by nature are presented below:
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Employee compensation | $ | 140,654 | $ | 127,508 | $ | 13,146 | 10 | % | ||||||||
| Buildings, facilities and technology | 37,879 | 35,608 | 2,271 | 6 | % | |||||||||||
| Travel, advertising and promotion | 20,227 | 17,813 | 2,414 | 14 | % | |||||||||||
| Professional fees | 9,181 | 9,072 | 109 | 1 | % | |||||||||||
| Other SG&A expenses | 12,614 | 10,966 | 1,648 | 15 | % | |||||||||||
| Segment SG&A expenses | $ | 220,555 | $ | 200,967 | $ | 19,588 | 10 | % | ||||||||
Our segment SG&A expenses increased $19.6 million, or 10%, in the first nine months of 2017 compared to the first nine months of 2016. The increase is primarily due to the Merger, including increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher bank fees attributable to our new credit facility.
Impairment loss
During the first nine months of 2017, we recognized an impairment loss of $8.9 million on certain technology assets. Comparatively, we recognized an impairment loss of $28.2 million on our EquipmentOne goodwill and customer relationships in the first nine months of 2016.
Other sevices
Our operating segments RBFS and Mascus, as well as our other non-transactional services, AAS, equipment refurbishing, and RBLS, are reported in the ‘other’ category for segmented information disclosure purposes.
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Revenues | $ | 31,167 | $ | 24,398 | $ | 6,769 | 28 | % | ||||||||
| Costs of services, excluding D&A | (2,039 | ) | (608 | ) | (1,431 | ) | 235 | % | ||||||||
| SG&A expenses | (9,732 | ) | (8,428 | ) | (1,304 | ) | 15 | % | ||||||||
| Other category profit | $ | 19,396 | $ | 15,362 | $ | 4,034 | 26 | % | ||||||||
Revenue from other services grew $4.0 million, or 26%, in the first nine months of 2017 compared to the first nine months of 2016, primarily due to RBFS, the Merger, which added $1.9 million of AAS revenue in the first nine months of 2017, and a 29% increase in Mascus segment revenue from $5.3 million to $6.9 million over the comparative period.
RBFS operating segment
Funded volume, which represents the amount of lending brokered by RBFS, increased 13% from $191.6 million in the first nine months of 2016 to $216.2 million in the first nine months of 2017. RBFS segment revenues were $11.5 million in the first nine months of 2017, a 29% increase compared to the $8.9 million in the first nine months of 2016. RBFS segment operating profit increased 31% over the same comparative period to $6.4 million from $4.9 million.
Consolidated results (continued)
Acquisition-related costs
Acquisition-related costs for the first nine months of 2017 totalled $35.2 million and consisted primarily of $32.6 million associated with the Merger. IronPlanet acquisition-related costs for the first nine months of 2017 included $9.1 million of non-recurring acquisition and finance structure advisory fees, $8.8 million of legal fees related to the regulatory approval process and closing of the transaction, $4.8 million of stock option compensation expenses resulting from accelerated vesting of options assumed as part of the Merger, $1.4 million of severance and retention costs that followed the Merger in the resulting corporate reorganization, and various integration costs.
This compares to $7.2 million of acquisition related expenses for the first nine months of 2016, which includes costs associated with the IronPlanet, Mascus, Xcira, and Petrowsky acquisitions.
Operating income
Operating income decreased $27.7 million, or 29%, to $67.4 million in the first nine months of 2017 compared to the first nine months of 2016. This decrease was primarily due to the higher acquisition-related costs, SG&A expenses, D&A expenses, and costs of services. These increases were partially offset by a lower impairment loss and higher revenues than the comparable period. Adjusted operating income (non-GAAP measure) decreased $31.7 million, or 26%, to $91.6 million in the first nine months of 2017 compared to $123.3 million in the first nine months of 2016.
Foreign exchange rates had a minimal impact on operating income in the first nine months of 2017.
Primarily for the same reasons noted above, operating income margin, which is our operating income divided by revenues, decreased 710 bps to 15.6% in the first nine months of 2017 compared to 22.7% in the first nine months of 2016. Adjusted operating income margin (non-GAAP measure) decreased 820 bps to 21.2% in the first nine months of 2017 from 29.4% in the first nine months of 2016.
Other income (expense)
Other income (expense) is comprised of the following:
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Interest income | $ | 2,459 | $ | 1,354 | $ | 1,105 | 82 | % | ||||||||
| Interest expense | (27,311 | ) | (3,357 | ) | (23,954 | ) | 714 | % | ||||||||
| Equity income (loss) | (158 | ) | 1,209 | (1,367 | ) | (113 | )% | |||||||||
| Other, net | 4,045 | 1,214 | 2,831 | 233 | % | |||||||||||
| Other income (expense) | $ | (20,965 | ) | $ | 420 | $ | (21,385 | ) | (5092 | )% | ||||||
We incurred additional indebtedness to finance the Merger. As of September 30, 2017, our debt was $826.5 million, compared to $140.6 million as of September 31, 2016. The increase in interest expense is primarily due to our higher debt balances, as well as minimal increases in short-term interest rates.
$2.5 million of the increase in ‘other, net’ in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 is due to changes in the fair value of contingent consideration associated with our Petrowsky, Kramer, and Mascus, as well as our acquisition of the non-controlling interests in RBFS.
Income tax expense and effective tax rate
We recorded an income tax expense of $8.0 million in the first nine months of 2017 compared to $29.9 million in the first nine months of 2016. Our effective tax rate was 17.2% in the first nine months of 2017 compared to 31.3% in the first nine months of 2016. The decrease in income tax expense over the comparative period was primarily the result of the lower estimated annual effective tax rate for the full 2017 year, which was caused by a greater proportion of earnings taxed in jurisdictions with lower tax rates, as well as the impact of revised estimates of the tax deductibility of stock option compensation expenses and acquisition-related costs. This decrease was partially offset by $2.3 million of expense related to an increase in uncertain tax positions. We increased our uncertain tax position in the first quarter of 2017 due to an unfavourable outcome of a tax dispute in one of our European operating jurisdictions. Income tax expense for the first nine months of 2016 also reflected the impact of a non-deductible goodwill impairment loss recorded in the third quarter of 2016.
Net income
Net income attributable to stockholders decreased $25.7 million, or 40%, in the first nine months of 2017 compared to the first nine months of 2016. This decrease was primarily due to the decrease in operating income and increase in interest expense, partially offset by a lower income tax expense over the same comparative period. Adjusted net income attributable to stockholders (non-GAAP measure) decreased 34% to $59.4 million in the first nine months of 2017 from $90.4 million in the first nine months of 2016.
For these same reasons, net income decreased $27.1 million, or 41%, in the first nine months of 2017 compared to the first nine months of 2016. Adjusted EBITDA (non-GAAP measure) decreased 15% to $132.5 million, in the first nine months of 2017 from $156.3 million in the first nine months of 2016.
Primarily for the same reasons noted above, net income margin decreased 670 bps to 8.9% in the first nine months of 2017 from 15.6% in the first nine months of 2016. Adjusted EBITDA margin (non-GAAP measure) decreased 660 bps to 30.7% in the first nine months of 2017 from 37.3% in the first nine months of 2016.
2020.
Debt at September 30, 2017the end of Q3 2020, represented 12.43.8 times net income for the 12 months ended September 30, 2017. This compares to debt at September 30, 2016, which represented 1.2 times net income for the 12 months ended September 30, 2016. The increase in this debt/net income multiplier is primarily due to a net increase in long-term debt from September 30, 2016 to September 30, 2017, combined with a decrease in net income for the 12 months ended September 30, 2017 compared to the 12 months ended September 30, 2016, as discussed above. The increase in debt is primarily due to funding for the Merger. Adjusted net debt/adjusted EBITDA8 (non-GAAP measure) was 3.2 as at and for the 12 months ended September 30, 2017, compared2020. This compares to -0.4debt at Q3 2019, which represented 5.2 times net income as at and for the 12 months ended September 30, 2016.2019. 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.
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Nine months ended September 30, 2020 | | ||||||||||||||
(in U.S $000's) |
| A&M |
| Other |
| Consolidated | | A&M |
| Other |
| Consolidated | | ||||||
Service revenue | | $ | 188,949 | | $ | 33,730 | | $ | 222,679 | | $ | 543,340 | | $ | 96,601 | | $ | 639,941 | |
Inventory sales revenue | | | 108,863 | | | — | | | 108,863 | | | 353,906 | | | — | | | 353,906 | |
Total revenue | | | 297,812 | | | 33,730 | | | 331,542 | | | 897,246 | | | 96,601 | | | 993,847 | |
Ancillary and logistical service expenses | | | — | | | 16,550 | | | 16,550 | | | — | | | 45,368 | | | 45,368 | |
Other costs of services | | | 21,733 | | | 940 | | | 22,673 | | | 69,018 | | | 3,640 | | | 72,658 | |
Cost of inventory sold | |
| 96,253 | |
| — | |
| 96,253 | |
| 320,972 | |
| — | |
| 320,972 | |
SG&A expenses | |
| 103,933 | |
| 6,253 | |
| 110,186 | |
| 290,077 | |
| 19,126 | |
| 309,203 | |
Segment profit | | | 75,893 | | | 9,987 | | | 85,880 | | $ | 217,179 | | $ | 28,467 | | $ | 245,646 | |
| | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | ||||||||||||||
(in U.S $000's) | | A&M |
| Other |
| Consolidated | | A&M |
| Other |
| Consolidated | ||||||
Service revenue | | $ | 150,093 | | $ | 28,484 | | $ | 178,577 | | $ | 494,580 | | $ | 90,975 | | $ | 585,555 |
Inventory sales revenue | | | 111,219 | | | — | | | 111,219 | | | 400,892 | | | — | | | 400,892 |
Total revenue | | | 261,312 | | | 28,484 | | | 289,796 | | | 895,472 | | | 90,975 | | | 986,447 |
Ancillary and logistical service expenses | | | — | | | 13,285 | | | 13,285 | | | — | | | 43,516 | | | 43,516 |
Other costs of services | | | 21,431 | | | 1,666 | | | 23,097 | | | 74,799 | | | 4,404 | | | 79,203 |
Cost of inventory sold | |
| 102,410 | |
| — | |
| 102,410 | |
| 372,703 | |
| — | |
| 372,703 |
SG&A expenses | |
| 88,138 | |
| 5,553 | |
| 93,691 | |
| 268,786 | |
| 17,803 | |
| 286,589 |
Segment profit | | | 49,333 | | | 7,980 | | | 57,313 | | $ | 179,184 | | $ | 25,252 | | $ | 204,436 |
Auctions and Marketplaces Segment
Results of A&M segment operations are presented below for the comparative reporting periods.
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | | |||||||||||||
| | | | | | | | % Change | | | | | | | | % Change | | | |
|
| | | | | | | 2020 over |
| | | | | | | | 2020 over |
| |
(in U.S. $000's, except percentages) | | 2020 |
| 2019 | | 2019 | | | 2020 |
| 2019 | | 2019 | | | ||||
Service revenue |
| $ | 188,949 | | $ | 150,093 | | 26 | % | | $ | 543,340 | | $ | 494,580 | | 10 | % | |
Inventory sales revenue |
| | 108,863 | | | 111,219 | | (2) | % | | | 353,906 | | | 400,892 | | (12) | % | |
Total revenue | | | 297,812 | | | 261,312 | | 14 | % | | | 897,246 | | | 895,472 | | 0 | % | |
A&M service revenue as a % of total A&M revenue | | | 63.4 | % | | 57.4 | % | 600 | bps | | | 60.6 | % | | 55.2 | % | 540 | bps | |
Inventory sales revenue as a % of total A&M revenue | | | 36.6 | % | | 42.6 | % | (600) | bps | | | 39.4 | % | | 44.8 | % | (540) | bps | |
Costs of services | | | 21,733 | | | 21,431 | | 1 | % | | | 69,018 | | | 74,799 | | (8) | % | |
Cost of inventory sold | | | 96,253 | | | 102,410 | | (6) | % | | | 320,972 | | | 372,703 | | (14) | % | |
SG&A expenses | | | 103,933 | | | 88,138 | | 18 | % | | | 290,077 | | | 268,786 | | 8 | % | |
A&M segment expenses | | $ | 221,919 | | $ | 211,979 | | 5 | % | | $ | 680,067 | | $ | 716,288 | | (5) | % | |
Cost of inventory sold as a % of A&M expenses | | | 43.4 | % | | 48.3 | % | (490) | bps | | | 47.2 | % | | 52.0 | % | (480) | bps | |
A&M segment profit | | $ | 75,893 | | $ | 49,333 | | 54 | % | | $ | 217,179 | | $ | 179,184 | | 21 | % | |
Total GTV | | | 1,321,379 | | | 1,084,241 | | 22 | % | | | 3,962,386 | | | 3,756,679 | | 5 | % | |
A&M service revenue as a % of total GTV- Rate |
| | 14.3 | % | | 13.8 | % | 50 | bps | | | 13.7 | % | | 13.2 | % | 50 | bps | |
| |
Ritchie Bros. | 34 |
Gross Transaction Value
Diluted EPSIn 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.
Diluted EPS attributableGTV 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 stockholders decreased 42%30% in Q3 2020, up from 10% in the prior year, and increased to $0.3525%, up from 8% in the first nine months of 2017 from $0.60 per share2020.
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
| | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | |||||||||||||
| | | | | | % Change | | | | | | % Change | | |||||
(in U.S. $000's, except percentages) | | 2020 | | 2019 | | 2020 over 2019 | | 2020 | | 2019 | | 2020 over 2019 | | |||||
Live on site auctions | | $ | 971,904 | | $ | 825,294 | | 18 | % | | $ | 3,062,963 | | $ | 3,058,087 | | 0 | % |
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 | | 29 | % |
Percentage of total | | | 26.4 | % | | 23.9 | % | | | | | 22.7 | % | | 18.6 | % | | |
GTV | | $ | 1,321,379 | | $ | 1,084,241 | | 22 | % | | $ | 3,962,386 | | $ | 3,756,679 | | 5 | % |
| | | | | | | | | | | | | | | | | | |
Percentage of total GTV purchased by online buyers | | | | | | | | | | | | | | | | | | |
Live on site auctions | | | 100 | % | | 58 | % | 4200 | bps | | | 86 | % | | 53 | % | 3300 | bps |
Online marketplaces including featured(1) and other(2) | | | 100 | % | | 100 | % | 0 | bps | | | 100 | % | | 100 | % | 0 | bps |
Total GTV | | | 100 | % | | 68 | % | 3200 | bps | | | 89 | % | | 62 | % | 2700 | bps |
| (1) | This represents GTV from IronPlanet’s Weekly Featured Auction, which operates under an unreserved auction model. |
| (2) | This includes GTV from Marketplace-E. |
GTV increased 22% to $1.3 billion in Q3 2020 and increased 5% to $4.0 billion for the first nine months of 2016. This decrease is2020.
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 decrease in net income attributable to stockholders, combined with an increaseUS 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 weighted average number of dilutive shares outstanding over the same comparative period. The increase in the weighted average number of dilutive shares is primarily dueInternational 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 modificationonline 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 certain share units from liability-classified2020 to equity-classifiedQ3 2020. We also had some auction calendar shifts in May 2016Canada, unrelated to the COVID-19 pandemic, where we shifted the Toronto and May 2017, as well as the assumption of IronPlanet stock options as part of the Merger. The performance share units awarded to Ravichandra Saligram, our Chief Executive Officer,Lethbridge into Q3 2020, offset by a Grand Prairie auction that will be held in 2014 (the “CEO SOG PSUs”) as part of a grant agreement dated August 11, 2014 between the Company and Mr. Saligram (the “Sign-On Grant Agreement”), were modified on May 1, 2017 from liability-classified to equity-classified. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) decreased 35% to $0.55 inQ4 2020.
For the first nine months of 20172020, 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 $0.84Live 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 2016.2020, online marketplaces GTV increased 29% for the same reasons discussed above.
| |
Ritchie Bros. | 35 |
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.
Operations Update
Headcount
Our headcount statistics, which include IronPlanet and exclude Xcira and Mascus employees, are presented below as at the end of each period:
��
| Q3 2017 | Q2 2017 | Q1 2017 | Q4 2016 | Q3 2016 | Q2 2016 | Q1 2016 | Q4 2015 | |||||||||||||||||||||||||
| Total full-time employees | 2,124 | 2,114 | 1,659 | 1,649 | 1,641 | 1,600 | 1,559 | 1,522 | ||||||||||||||||||||||||
| Regional Sales Managers | 62 | 62 | 52 | 51 | 50 | 45 | 49 | 46 | ||||||||||||||||||||||||
| Territory Managers | 372 | 379 | 301 | 301 | 304 | 304 | 296 | 296 | ||||||||||||||||||||||||
| Revenue Producers | 434 | 441 | 353 | 352 | 354 | 349 | 345 | 342 | ||||||||||||||||||||||||
Industrial Live On Site Metrics
Total headcount (excluding Xciraindustrial live on site auction metrics
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | | | ||||||||
| | | | | | % Change | | | | | | | % Change | | |
|
| 2020 |
| 2019 |
| 2020 over 2019 |
|
| 2020 |
| 2019 |
| 2020 over 2019 |
| |
Number of auctions |
| 42 |
| 46 | | (9) | % | | 123 |
| 140 | | (12) | % | |
Bidder registrations |
| 231,500 |
| 165,500 | | 40 | % | | 677,100 |
| 508,750 | | 33 | % | |
Consignors |
| 15,100 |
| 14,000 | | 8 | % | | 40,450 |
| 43,000 | | (6) | % | |
Buyers |
| 40,000 |
| 34,800 | | 15 | % | | 114,250 |
| 109,050 | | 5 | % | |
Lots |
| 115,350 |
| 98,400 | | 17 | % | | 312,450 |
| 305,150 | | 2 | % | |
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 Mascus employees)the total number of lots including agricultural lots increased by net 475 between December 31, 201617% 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, | | | |||||||
| | | | | | | | % Change | | | |
(in U.S. $000's, except percentages) |
| 2020 |
| 2019 | | 2020 over 2019 |
| | |||
GTV | | $ | 22.5 million | | $ | 20.4 million | | $ | 10 | % | |
Bidder registrations | |
| 5,090 | |
| 3,525 | | | 44 | % | |
Consignors | |
| 318 | |
| 300 | | | 6 | % | |
Lots | |
| 2,429 | |
| 2,118 | | | 15 | % | |
For the 12 months ended September 30, 2017, which included net 202020, 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 RBFS to support the growth of that business. RBFS account managers are excluded from our definition of Revenue Producers. Xcira had a total headcount of 56 full time employees at September 30, 2017, which has increased by net four since December 31, 2016. Mascus had a total headcount of 49 at September 30, 2017 and December 31, 2016.buyers.
Productivity
Productivity
The majority of our business continues to be generated by our Auctions and MarketplacesA&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 GTVrevenue-producing sales personnel. This definition is comprised of Regional Sales Managers and ultimately, our net income. Historically, we measuredTerritory Managers.
Our Sales Force Productivity as trailing 12-month GTV divided by the number of Revenue Producers at the reporting date. As a result of the timing and impact of the Merger on both GTV and the number of Revenue Producers, we updated our Sales Force Productivity measure calculations as at and for the 12-month periods ended September 30, 2017 and 2016.
Our updated Sales Force Productivity measure calculation as at and for the 12-month period ended September 30, 2017 is the sum of the following two amounts:
Under the revised calculation, our Sales Force Productivity as at and for the trailing 12-month period ended September 30, 2017 is $11.1 million per Revenue Producer.
We similarly updated the calculation of the measure over the comparative period to be GTV for the trailing 12-month period ended September 30, 2016, divided by the average number of Revenue Producers over the same 12-month period. Under the revised calculation, our Sales Force Productivity as at and for the trailing 12-month period ended September 30, 20162020 was $12.5 million. No IronPlanet GTV or Revenue Producers are included in this comparative metric.
Sales Force Productivity decreased by $1.4$13.0 million per Revenue Producer over the comparative period. We believe the decrease is duecompared to a combination of factors, including:
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Ritchie Bros. | 36 |
A&M revenue
Total A&M revenue increased 14% to $297.8 million in GTV in the third quarter of 2016 compared to $10.5Q3 2020 and remained flat at $897.2 million in the third quarter of 2017.
Industrial auction metrics
Duringfor the first nine months of 2017, we conducted 169 unreserved industrial auctions at locations2020.
A&M revenue by geographical region are presented below:
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | | |||||||||||
| | | | | | % Change | | | | | | | | % Change | | ||
(in U.S. $000's) |
| 2020 |
| 2019 | | 2020 over 2019 | | | 2020 |
| | 2019 | | 2020 over 2019 | | ||
United States | | |
|
| | | | | | |
| |
| | | | |
Service revenue |
| 121,810 |
| 95,172 | | 28 | % | | $ | 357,944 |
| $ | 308,769 | | 16 | % | |
Inventory sales revenue |
| 40,399 |
| 48,600 | | (17) | % | | | 169,543 |
| | 204,332 | | (17) | % | |
A&M revenue- United States |
| 162,209 |
| 143,772 | | 13 | % | | | 527,487 |
| | 513,101 | | 3 | % | |
Canada |
|
|
|
| |
| | | |
|
| |
| |
| | |
Service revenue |
| 40,591 |
| 33,793 | | 20 | % | | | 126,508 |
| | 119,313 | | 6 | % | |
Inventory sales revenue |
| 7,725 |
| 13,493 | | (43) | % | | | 35,046 |
| | 30,651 | | 14 | % | |
A&M revenue- Canada |
| 48,316 |
| 47,286 | | 2 | % | | | 161,554 |
| | 149,964 | | 8 | % | |
International |
|
|
|
| |
| | | |
|
| |
| |
| | |
Service revenue |
| 26,548 |
| 21,128 | | 26 | % | | | 58,888 |
| | 66,498 | | (11) | % | |
Inventory sales revenue |
| 60,739 |
| 49,126 | | 24 | % | | | 149,317 |
| | 165,909 | | (10) | % | |
A&M revenue- International |
| 87,287 |
| 70,254 | | 24 | % | | | 208,205 |
| | 232,407 | | (10) | % | |
Total |
|
|
|
| |
| | | |
|
| |
| |
| | |
Service revenue |
| 188,949 |
| 150,093 | | 26 | % | | | 543,340 |
| | 494,580 | | 10 | % | |
Inventory sales revenue |
| 108,863 |
| 111,219 | | (2) | % | | | 353,906 |
| | 400,892 | | (12) | % | |
A&M total revenue |
| 297,812 |
| 261,312 | | 14 | % | | | 897,246 |
| | 895,472 | | 0 | % | |
United States
In Q3 2020, service revenue increased 28% primarily due to an increase in North America, Europe,commission revenue driven by a higher volume on Service GTV growth, with strong execution from the Middle East, Australia, New Zealand,US strategic accounts and Asia, comparedregional sales teams, and higher rates on our guarantee contracts. Service revenue in the US also increased due to 162 duringfees 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 2016.2020, 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.
Canada
Our key industrialIn 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 metrics9 are shown below:from Q3 2020 to Q4 2020.
| Nine months ended September 30, | ||||||||||||
| % Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Bidder registrations | 404,000 | 395,500 | 2 | % | ||||||||
| Consignments | 41,950 | 39,250 | 7 | % | ||||||||
| Buyers | 100,650 | 101,000 | - | |||||||||
| Lots | 276,000 | 294,000 | (6 | )% | ||||||||
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.
We saw decreasesInternational
In Q3 2020, service revenue increased 26% primarily due to higher fees and commissions revenue driven by services GTV growth and a change in industrial auction buyersour GTV mix resulting in improved buyer fee rate performance. Inventory sales revenue increased 24% driven by large private treaty deals closed in Australia and lotsstrong 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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Ritchie Bros. | 37 |
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 20172019.
Costs of services
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 2016,2020, 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.
Cost of inventory sold
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 changesrate improvement in our auction calendar combined with the performance of the used equipment market, which experienced supply volume pressure over the comparative period. Regarding auction calendar changes, we held the largest-ever auction in Grande Prairie, Canada, in the first quarter of 2016 that generated more than $46.0 million (62.0 million Canadian dollars) of GTV, with no similar auction on the calendar inUS and Canada.
For the first nine months of 2017.2020, 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.
SG&A expenses
Although our auctions varyA&M SG&A expenses increased 18% to $103.9 million in size, our average industrial auction results on a trailing 12-month basis are described in the following table:
| 12 months ended September 30, | ||||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| GTV | $ | 15.9 million | $ | 17.5 million | $ | -1.6 million | ||||||
| Bidder registrations | 2,324 | 2,397 | (3 | )% | ||||||||
| Consignors | 234 | 234 | - | |||||||||
| Lots | 1,589 | 1,718 | (8 | )% | ||||||||
For the same reasons discussed above, we saw a decrease in the average number of lots for the 12 months ended September 30, 2017Q3 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 12 months ended September 30, 2016.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.
Online bidding at live on site auctions
Internet bidders comprised 68% of the total bidder registrations at our live on site auctions inFor the first nine months of 2017, compared2020, A&M segment SG&A expenses increased 8% to 66%$290.1 million primarily due to the same reasons noted above.
Other Services Segment
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | | | ||||||||||||
| | | | | | | | % Change | | | | | | | | | % Change | | |
(in U.S. $000's) |
| 2020 |
| 2019 | | 2020 over 2019 |
| | 2020 |
| 2019 | | 2020 over 2019 |
| | ||||
Service revenue | | $ | 33,730 | | $ | 28,484 | | 18 | % | | $ | 96,601 | | $ | 90,975 | | 6 | % | |
Ancillary and logistical service expenses | |
| 16,550 | |
| 13,285 | | 25 | % | |
| 45,368 | |
| 43,516 | | 4 | % | |
Other costs of services | |
| 940 | |
| 1,666 | | (44) | % | |
| 3,640 | |
| 4,404 | | (17) | % | |
SG&A expenses | |
| 6,253 | |
| 5,553 | | 13 | % | |
| 19,126 | |
| 17,803 | | 7 | % | |
Other services profit | | $ | 9,987 | | $ | 7,980 | | 25 | % | | $ | 28,467 | | $ | 25,252 | | 13 | % | |
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 2016.2020, 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 the level of internet bidders continuesEurope requiring logistics.
Ancillary revenue was higher due to demonstrate our ability to drive multichannel participation at our auctions.fees earned on refurbishing and transporting sellers’ equipment driven by higher GTV activity.
Website metrics10
Our IronPlanet websiteswww.ironplanet.com,www.govplanet.com, andwww.truckplanet.com, and our EquipmentOne websiteswww.equipmentone.com,www.salvagesale.com,www.salvagesale.uk.com, andwww.mexico.assetnation.com provide access to our online marketplaces.
Traffic across all our websitesRBFS 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 20172020, our funded volume increased 1% to $374.5 million, and increased 3% when excluding the impact of foreign exchange. Credit
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Ritchie Bros. | 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 2016, with the addition of IronPlanet traffic accounting for 1230 of the 1900-basis point increase.
Outstanding Share Data
We are a public company and our common shares are listed under the symbol “RBA” on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”). Financial information about our equity and share-based payments is set forth in our consolidated financial statement footnotes 19 “Equity and Dividends” and 20 “Share-based Payments” in “Part I, Item 1: Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
Share repurchase program
Our normal course issuer bid (“NCIB”) that was approved by the TSX on March 1, 2016 expired on March 2, 2017 and was not renewed. No share purchases were made pursuant2020, Other Services profit increased 13% to the NCIB, or by any other means, during the nine months ended September 30, 2017.
Liquidity and Capital Resources
Working capital
| (in U.S. $000's) | September 30, | December 31, | ||||||||||||||
| 2017 | 2016 | $ Change | % Change | |||||||||||||
| Cash and cash equivalents | $ | 224,474 | $ | 207,867 | $ | 16,607 | 8 | % | ||||||||
| Current restricted cash | $ | 89,846 | $ | 50,222 | $ | 39,624 | 79 | % | ||||||||
| Current assets | $ | 621,455 | $ | 377,998 | $ | 243,457 | 64 | % | ||||||||
| Current liabilities | 519,391 | 252,834 | 266,557 | 105 | % | |||||||||||
| Working capital | $ | 102,064 | $ | 125,164 | $ | (23,100 | ) | (18 | )% | |||||||
We believe that working capital is a more meaningful measure of our liquidity than cash alone. Our working capital decreased during the nine months ended September 30, 2017,$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 $54.6term debt, share repurchases, our net capital spending, and interest on our debt, partially offset by operating income generated during the period.
Cash flows
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||||||
| $ Change | % Change | |||||||||||||||
| 2017 | 2016 | 2017 over 2016 | 2017 over 2016 | |||||||||||||
| Cash provided by (used in): | ||||||||||||||||
| Operating activities | $ | 97,215 | $ | 161,421 | $ | (64,206 | ) | (40 | )% | |||||||
| Investing activities | (701,599 | ) | (97,316 | ) | (604,283 | ) | 621 | % | ||||||||
| Financing activities | 143,345 | (49,610 | ) | 192,955 | (389 | )% | ||||||||||
| Effect of changes in foreign currency rates | 17,270 | 6,656 | 10,614 | 159 | % | |||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (443,769 | ) | $ | 21,151 | $ | (464,920 | ) | (2198 | )% | ||||||
Operating activities
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 underwritteninventory 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
CashOur 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:
| | | | | | | | | | |
| | Nine months ended September 30, | | | ||||||
| | | | | | | | % Change | | |
(in U.S. $000's) | | 2020 |
| 2019 | | 2020 over 2019 |
| | ||
Cash provided by (used in): |
| | �� |
| |
| |
|
| |
Operating activities | | $ | 265,551 | | $ | 309,105 | | (14) | % | |
Investing activities | |
| (10,192) | |
| (20,682) | | (51) | % | |
Financing activities | |
| (91,142) | |
| (143,953) | | (37) | % | |
Effect of changes in foreign currency rates | |
| 5,826 | |
| 1,350 | | 332 | % | |
Net increase in cash, cash equivalents, and restricted cash | | $ | 170,043 | | $ | 145,820 | | 17 | % | |
Net cash provided by operating activities decreased $64.2$43.6 million or 40%, duringin the first nine months of 2017 compared to the first nine months of 2016.2020. This decrease was primarily due to a decreasenet negative impact in cash earnings, which includes a decrease in net income of $27.1 million, and a decrease of $10.7 million in non-cash charges. Changes in certain of our operating assets and liabilities, also contributed topartially offset by an increase in our net income over the declinecomparative period. We saw net negative cash flows from changes in cash flow from operations. In particular,our operating assets and liabilities primarily driven by the timing of auctions and changes in inventory used $31.7 million more cash duringlevels over the first nine monthscomparative period. At the end of 2017 compared to the first nine months2018, we saw particularly high levels of 2016. This was primarly due to an increaseinventory in inventory deals in Australia and the Canadian agriculture sectorsEurope, which turned over in the first nine months of September 30, 2017, combined with a decrease in the number of inventory packages during the first nine months of September 30, 2016. This decrease was primarily due to large inventory packages held at the end of 2015 being sold in the February 2016 Orlando auction. The remaining change in operating assets and liabilities came from a variety of smaller items.
Cash provided by operating activities decreased $31.5 million, or 22%, during the 12 months ended September 30, 2017 compared to the 12 months ended September 30, 2016, primarily due to a $46.6 million decrease in net income, changes in certain of our operating assets and liabilities, including auction proceeds payable, and a decrease in non-cash impairment losses over the same comparative period. This decrease was2019. These cash outflows were partially offset by changesa net positive movement in our trade and other receivables during the 12 months ended September 30, 2017 comparedpayables related to the 12 months ended September 30, 2016.
Investing activities
timing of employee compensation payments, as well as the timing of payments related to our GovPlanet business.
Net cash used in investing activities increased $604.3 million during the first nine months of 2017 compared to the first nine months of 2016. This increase is primarily due to the acquisition of IronPlanet for $675.9 million, net of cash acquired in the first nine months of 2017, compared to the acquisitions of RBFS non-controlling interests of $41.1 million, Mascus for $28.1 million, net of cash and cash equivalents acquired, and Petrowsky for $6.3decreased $10.5 million in the first nine months of 2016.
CAPEX intensity presents net capital spending as a percentage of revenue. We believe that comparing CAPEX intensity on a trailing 12-month basis for different financial periods provides useful information as to the amount of capital expenditure that we require to generate revenues.
| (in U.S. $ millions) | 12 months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Property, plant and equipment additions | $ | 14.4 | $ | 22.0 | (35 | )% | ||||||
| Intangible asset additions | 26.0 | 16.6 | 57 | % | ||||||||
| Proceeds on disposition of property plant and equipment | (6.9 | ) | (15.2 | ) | (55 | )% | ||||||
| Net capital spending | $ | 33.5 | $ | 23.4 | 43 | % | ||||||
| Revenues | $ | 578.5 | $ | 555.1 | 4 | % | ||||||
| CAPEX intensity | 5.8 | % | 4.2 | % | 160 | bps | ||||||
CAPEX intensity for the 12 months ended September 30, 2017 increased compared to CAPEX intensity for the 12 months ended September 30, 2016,2020. This decrease was primarily due to $10.7 million more net proceeds on disposal of property, plant and equipment over the net capital spendingcomparative 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 of 43% exceeding the revenue increase of 4% period-over-period.
Net capital spending increased $10.1 million, or 43%, during the 12 months ended September 30, 2017 compared to the 12 months ended September 30, 2016, primarily due towas partially offset by a $9.4$4.4 million increase in property, plant and equipment and intangible asset additions over the same comparative period. The increase in intangible asset additions period-over-period is primarily due to the capitalization of costs of assets under development. Significant software development projects during the 12 months ended September 30, 2017 include systems integration following the Merger and other acquisitions, along with enhanced functionality for our online marketplace sales channel. The decrease in cash provided by operating activities combined with the increase in net capital spending resulted in a decrease in operating free cash flow (“OFCF”)11 (non-GAAP measure) of $41.6 million, or 34%, from $121.5 million for the 12 months ended September 30, 2016 to $79.9 million for the 12 months ended September 30, 2017.
Financing activities
Net cash provided byused in financing activities increased $193.0decreased $52.8 million in the first nine months of 2017 compared2020. This decrease was driven by a $27.9 million increase in net proceeds from short-term debt draws, primarily to the nine months of 2016.fund inventory purchases in Australia. In the first nine months of 2017,addition, we borrowed a net $180.4raised $27.8 million more thancash from the issuance of share capital related to stock option exercises in the first nine months of 2016. We also2020 over the
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Ritchie Bros. | 39 |
comparative period in 2019. Further, we had a $36.7$17.9 million decrease in share repurchases over the same comparative period. The increase in cash provided by financing activities was partially offset by a $12.8fewer repayments of long-term debt, primarily due to $20.0 million decrease in share capital issuances and the payment of debt issue costs of $11.8 millionvoluntary term loan repayments in the first nine months of 20172019 compared to no voluntary debt repayments in the first nine months of 2016.2020. 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.
We declared and paid a regular cash dividendsdividend of $0.17$0.20 per common share for the quartersquarter ended September 30, 2016,2019, December 31, 2016,2019, and March 31, 2017, and2020. We declared a dividend of $0.22 per common share for the quarter ended June 30, 2017.2020. We have declared, but not yet paid, a dividend of $0.17$0.22 per common share for the quarter ended September 30, 2017.
Total dividend payments during the nine months ended September 30, 2017 were $54.6 million to stockholders and $40.8 thousand to non-controlling interests. This compares to total dividend payments of $52.3 million to stockholders and $3.4 million to non-controlling interests during the nine months ended September 30, 2016.2020. 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, increased 4710 bpsdecreased to 110.0%51.7% for the 12 months ended September 30, 20172020 from 62.9%60.5% for the 12 months ended September 30, 2016.2019. This increasedecrease is primarily due to the result of the decreaseincrease in net income attributable to stockholders combined with the increase in our dividends paid to stockholders over the same comparative period. Our adjusted dividend payout ratio12 (non-GAAP measure) increased 2180 bpsdecreased to 78.9%50.0% for the 12 months ended September 30, 20172020 from 57.1%60.5% for the 12 months ended September 30, 2016.2019.
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 decreased 830increased 250 bps to 5.7%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, 2017 from 14.0% during2020 compared to 8.6% for the 12 months endedperiod ending September 30, 2016. This decrease is primarily due to a $372.9 million, or a 47%, increase in average invested capital period-over-period, which was primarily2019.
Credit facilities
On August 14, 2020, we amended the result of the issuance of $500.0 million of senior unsecured notes (the “Notes”) in the fourth quarter of 2016 and the delayed draw term loans borrowed in the second quarter of 2017. Also contributing to the decrease in return on average invested capital over this comparative period was a $44.4 million, or 40%, decrease in net income attributable to stockholders. Return on invested capital (“ROIC”)13 (non-GAAP measure) decreased 750 bps to 7.9% during the 12 months ended September 30, 2017 from 15.4% during the 12 months ended September 30, 2016.
Debt and credit facilities
At September 30, 2017, our short-term debt of $8.6 million consisted of borrowings under our committed revolving credit facilities and had a weighted average annual interest rate of 2.8%. This compares to current borrowings of $23.9 million at December 31, 2016 with a weighted average annual interest rate of 2.2%.
As at September 30, 2017, we had a total of $817.9 million long-term debt with a weighted average annual interest rate of 4.6%. This compares to long-term debt of $595.7 million as at December 31, 2016 with a weighted average annual interest rate of 4.9%.
Future scheduled principal and interest payments (assuming no changes in short-term rates from current levels) over the next five years relating to our long-term debt outstanding at September 30, 2017 are as follows:
| (in U.S. $000's) | Scheduled payments by due period | |||||||||||||||||||||||
| In 2017 | In 2018 | In 2019 | In 2020 | In 2021 | Thereafter | |||||||||||||||||||
| On long-term debt: | ||||||||||||||||||||||||
| Principal | $ | 4,246 | $ | 16,985 | $ | 25,477 | $ | 33,969 | $ | 254,769 | $ | 500,000 | ||||||||||||
| Interest | 2,964 | 38,356 | 37,719 | 36,630 | 33,984 | 94,063 | ||||||||||||||||||
Syndicated credit facility
OnCredit Agreement dated October 27, 2016, we closed a five-year credit agreement (the “Credit Agreement”)totaling US$630.0 million with a syndicate of lenders including Bank of America, N.A. (“BofA”) and Royal Bank of Canada, that provides us with:
comprising:
| Multicurrency revolving facilities of up to |
| A delayed-draw term loan facility of up to |
We may useThe amendments, among other things, (i) extended the proceeds from the Multicurrency Facilities for general corporate purposes. During the second quarter of 2017, the full amount of the Delayed-Draw Facility was drawn to finance the Merger.
The Syndicated Facilities are secured by the assets of Ritchie Bros. Auctioneers Incorporated and certain of its subsidiaries in Canada and the United States. The Syndicated Facilities may become unsecured again, subject to Ritchie Bros. meeting specified credit rating or leverage ratio conditions. The Syndicated Facilities mature five years after the closingmaturity date of the Credit Agreement. The Delayed-Draw Facility is amortized in equal quarterly installments in an annual amount of 5% forFacilities from October 27, 2021 to October 27, 2023, (ii) increased the first two years after the closing of the Merger, and 10% in the third through fifth years after the closing of the Merger, with the balance payable at maturity.
Borrowings under the Credit Agreement bear floating rates of interest, which, at our option, are based on either a base rate (or Canadian prime rate for certain Canadian dollar borrowings) or LIBOR (or such customary floating rate customarily used by BofA for currencies other than U.S. dollars). In either case, an applicable margin is added to the rate. The applicable margin ranges from 0.25% to 1.50% for base rate loans and 1.25%LIBOR loans by 0.50% at each pricing tier level, (iii) increased the applicable percentage per annum used to 2.50% for LIBOR (orcalculate the equivalent of such currency) loans, depending on our leverage ratio at the time of borrowing. We must also pay quarterly in arrears a commitment fee equal to the daily amountin respect of the unused commitments under the SyndicatedRevolving Facilities multiplied by an applicable percentage per annum (which ranges from 0.25% to 0.50% depending on our leverage ratio).
We incurred debt issuance costs of $9.7 million in connection with0.10% at each pricing tier level, and (iv) increased the Credit Agreement, of which $4.8 million was allocated to the Multicurrency Facilities and $4.9 million was allocated to the Delayed-Draw Facility. As the former allocation is not related to specific draws, the costs have been capitalized as other non-current assets and are being amortized over the term of the Syndicated Facilities. For the latter allocation, the costs have been capitalized and reduce the carrying value of the delayed draw term loans to which they relate. At September 30, 2017, the unamortized deferred debt issuance costs relating to the Multicurrency Facilities and delayed draw term loans were $4.1 million and $4.4 million, respectively.
Senior unsecured notes
On December 21, 2016, we completed the offering of the Notes for an aggregate principal amount of $500.0 million. The Notes bear interest at a rate of 5.375% per annum and have a maturity date of January 15, 2025. The Notes were offered only to qualified institutional buyers in reliance on Rule 144Aavailable under the Securities Act, and outside the United States, onlyRevolving Facilities from $490.0 million to non-U.S. investors pursuant to Regulation S under the Securities Act. The Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent an effective registration statement or an applicable exemption from registration requirements or a transaction not subject to the registration requirements of the Securities Act or any state securities laws.$530.0 million.
The proceeds of the offering were used to finance the Merger. Upon the closing of the offering, the gross proceeds from the offering together with certain additional amounts including prepaid interest were deposited in to an escrow account. The funds were held in escrow until the Merger was completed on May 31, 2017.
Until the release of the proceeds in the escrow account, the Notes were secured by a first priority security interest in the escrow account. Upon the completion of the Merger, the Notes became senior unsecured obligations. The Notes are jointly and severally guaranteed on an unsecured basis, subject to certain exceptions, by each of our subsidiaries that is a borrower or guarantees indebtedness under the Credit Agreement. IronPlanet and certain of its subsidiaries were added as additional guarantors in connection with the Merger.
We incurred debt issuance costs of $13.9 million in connection with the offering of the Notes. At September 30, 2017, we had unamortized deferred debt issuance costs relating to the Notes of $13.1 million.
Other credit facilities
As at September 30, 2017, we also had $10.1 million in committed, revolving credit facilities, in certain foreign jurisdictions, which expire on May2020 and December 31, 2018.2019 were as follows:
| | | | | | | | | |
(in U.S. $000's, except percentages) |
| September 30, 2020 |
| December 31, 2019 |
| % Change |
| ||
Committed |
| |
|
| . |
|
|
| |
Term loan facility | | $ | 96,782 | | $ | 155,355 |
| (38) | % |
Revolving credit facilities | |
| 540,000 | |
| 500,000 |
| 8 | % |
Total credit facilities | | $ | 636,782 | | $ | 655,355 |
| (3) | % |
Unused | |
|
| |
|
|
|
| |
Revolving credit facilities | |
| 469,407 | |
| 489,937 |
| (4) | % |
Total credit facilities unused | | $ | 469,407 | | $ | 489,937 |
| (4) | % |
| |
Ritchie Bros. | 40 |
Debt covenants
The Credit Agreement contains certain covenants that could limit the ability of the Company and certain of its subsidiaries to, among other things and subject to certain significant exceptions: (i) incur, assume or guarantee additional indebtedness; (ii) declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for value, equity interests; (iii) make loans, advances or other investments; (iv) incur liens; (v) sell or otherwise dispose of assets; and (vi) enter into transactions with affiliates. The Credit Agreement also provides for certain events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Credit Agreement to be declared immediately due and payable.
The Notes were issued pursuant to an indenture, dated December 21, 2016, with U.S. Bank National Association, as trustee (the “Indenture”). The Indenture contains covenants that limit our ability, and the ability of certain of our subsidiaries to, among other things and subject to certain significant exceptions: (i) incur, assume or guarantee additional indebtedness; (ii) declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for value, equity interests; (iii) make any principal payment on, or redeem or repurchase, subordinated debt; (iv) make loans, advances or other investments; (v) incur liens; (vi) sell or otherwise dispose of assets; and (vii) enter into transactions with affiliates. The Indenture also provides for certain events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Notes under the applicable indenture to be declared immediately due and payable.
At inception of the Credit Agreement and the Indenture, all parties anticipated the increase in indebtedness that followed the Merger. As such, covenants pertaining to our leverage ratio provide for a six-quarter expansion of debt levels, after which the leverage ratio settles to a moderately higher tier than pre-Merger conditions.
We were in compliance with all financial and other covenants applicable to our credit facilities at September 30, 2017.2020. 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.
Historical Segmented Information
To provide additional historical context and an enhanced understanding of our business to the users of this filing, we are including the following tables, which present our historical segmented information under the new reportable segment, Auctions and Marketplaces, and the other category for periods not already included in “Part I, Item 1: Consolidated Financial Statements” of this Quarterly Report on Form 10-Q:
| Three months ended March 31, 2017 | Three months ended June 30, 2017 | |||||||||||||||||||||||
| Auctions and Marketplaces | Other | Consolidated | Auctions and Marketplaces | Other | Consolidated | |||||||||||||||||||
| Revenues | $ | 115,677 | $ | 8,822 | $ | 124,499 | $ | 54,646 | $ | 11,540 | $ | 166,186 | ||||||||||||
| Costs of services, excluding D&A | (12,587 | ) | (226 | ) | (12,813 | ) | (20,978 | ) | (613 | ) | (21,591 | ) | ||||||||||||
| SG&A expenses | (67,392 | ) | (3,183 | ) | (70,575 | ) | (71,199 | ) | (3,178 | ) | (74,377 | ) | ||||||||||||
| Impairment loss | - | - | - | (8,911 | ) | - | (8,911 | ) | ||||||||||||||||
| Segment profit | $ | 35,698 | $ | 5,413 | $ | 41,111 | $ | 53,558 | $ | 7,749 | $ | 61,307 | ||||||||||||
| Acquisition-related costs | (8,627 | ) | (22,948 | ) | ||||||||||||||||||||
| D&A expenses | (10,338 | ) | (11,872 | ) | ||||||||||||||||||||
| Gain on disposition of PPE | 721 | 308 | ||||||||||||||||||||||
| Foreign exchange gain | 730 | 93 | ||||||||||||||||||||||
| Operating income | $ | 23,597 | $ | 26,888 | ||||||||||||||||||||
| Other expense | (5,849 | ) | (5,150 | ) | ||||||||||||||||||||
| Income tax expense | (7,315 | ) | (4,025 | ) | ||||||||||||||||||||
| Net income | $ | 10,433 | $ | 17,713 | ||||||||||||||||||||
| Three months ended March 31, 2016 | Three months ended June 30, 2016 | |||||||||||||||||||||||
| Auctions and Marketplaces | Other | Consolidated | Auctions and Marketplaces | Other | Consolidated | |||||||||||||||||||
| Revenues | $ | 125,659 | $ | 6,286 | $ | 131,945 | $ | 148,458 | $ | 10,347 | $ | 158,805 | ||||||||||||
| Costs of services, excluding D&A | (15,313 | ) | - | (15,313 | ) | (19,407 | ) | (351 | ) | (19,758 | ) | |||||||||||||
| SG&A expenses | (65,706 | ) | (1,404 | ) | (67,110 | ) | (69,915 | ) | (4,077 | ) | (73,992 | ) | ||||||||||||
| Segment profit | $ | 44,640 | $ | 4,882 | $ | 49,522 | $ | 59,136 | $ | 5,919 | $ | 65,055 | ||||||||||||
| Acquisition-related costs | (1,197 | ) | (603 | ) | ||||||||||||||||||||
| D&A expenses | (10,080 | ) | (10,284 | ) | ||||||||||||||||||||
| Gain on disposition of PPE | 246 | 201 | ||||||||||||||||||||||
| Foreign exchange gain (loss) | 683 | (734 | ) | |||||||||||||||||||||
| Operating income | $ | 39,174 | $ | 53,635 | ||||||||||||||||||||
| Other income | 352 | 173 | ||||||||||||||||||||||
| Income tax expense | (9,532 | ) | (13,217 | ) | ||||||||||||||||||||
| Net income (loss) | $ | 29,994 | $ | 40,591 | ||||||||||||||||||||
| Three months ended September 31, 2016 | Three months ended December 31, 2016 | |||||||||||||||||||||||
| Auctions and Marketplaces | Other | Consolidated | Auctions and Marketplaces | Other | Consolidated | |||||||||||||||||||
| Revenues | $ | 121,111 | $ | 7,765 | $ | 128,876 | $ | 136,598 | $ | 10,171 | $ | 146,769 | ||||||||||||
| Costs of services, excluding D&A | (14,493 | ) | (257 | ) | (14,750 | ) | (16,035 | ) | (206 | ) | (16,241 | ) | ||||||||||||
| SG&A expenses | (65,346 | ) | (2,947 | ) | (68,293 | ) | (72,212 | ) | (1,922 | ) | (74,134 | ) | ||||||||||||
| Impairment loss | (28,243 | ) | - | (28,243 | ) | - | - | - | ||||||||||||||||
| Segment profit | $ | 13,029 | $ | 4,561 | $ | 17,590 | $ | 48,351 | $ | 8,043 | $ | 56,394 | ||||||||||||
| Acquisition-related costs | (5,398 | ) | (4,631 | ) | ||||||||||||||||||||
| D&A expenses | (10,196 | ) | (10,301 | ) | ||||||||||||||||||||
| Gain on disposition of PPE | 570 | 265 | ||||||||||||||||||||||
| Foreign exchange loss | (281 | ) | (1,099 | ) | ||||||||||||||||||||
| Operating income | $ | 2,285 | $ | 40,628 | ||||||||||||||||||||
| Other expense | (105 | ) | (5,648 | ) | ||||||||||||||||||||
| Income tax expense | (7,180 | ) | (7,053 | ) | ||||||||||||||||||||
| Net income (loss) | $ | (5,000 | ) | $ | 27,927 | |||||||||||||||||||
| Year ended December 31, 2016 | ||||||||||||
| Auctions and Marketplaces | Other | Consolidated | ||||||||||
| Revenues | $ | 531,826 | $ | 34,569 | $ | 566,395 | ||||||
| Costs of services, excluding D&A | (65,248 | ) | (814 | ) | (66,062 | ) | ||||||
| SG&A expenses | (273,179 | ) | (10,350 | ) | (283,529 | ) | ||||||
| Impairment loss | (28,243 | ) | - | (28,243 | ) | |||||||
| Segment profit | $ | 165,156 | $ | 23,405 | $ | 188,561 | ||||||
| Acquisition-related costs | (11,829 | ) | ||||||||||
| D&A expenses | (40,861 | ) | ||||||||||
| Gain on disposition of PPE | 1,282 | |||||||||||
| Foreign exchange loss | (1,431 | ) | ||||||||||
| Operating income | $ | 135,722 | ||||||||||
| Other expense | (5,228 | ) | ||||||||||
| Income tax expense | (36,982 | ) | ||||||||||
| Net income | $ | 93,512 | ||||||||||
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:
| ● | Recoverability of goodwill; |
| ● | Recoverability of long-lived and indefinite-lived assets; |
| ● | Recoverability of trade and other receivables; and |
| ● | Valuation of inventories. |
Aside from those discussed below, there were no material changes in ourThe following discussion of critical accounting policies judgments,and estimates and assumptions from those disclosed in our Annual Report on Form 10-K foris intended to supplement the year ended December 31, 2016, which is available on our website atwww.rbauction.com, on EDGAR atwww.sec.gov, or on SEDAR atwww.sedar.com, orsignificant accounting policies presented in the notes to our consolidated financial statements included in “Part I,II, Item 1: Consolidated8: Financial Statements”Statements and Supplementary Data” presented in this Quarterlyour Annual Report on Form 10-Q.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.
On January 1, 2017, we early adoptedIn accordance with Accounting Standards Update (“ASU”) 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, we still have the option of performingbegin with a qualitative assessment of a reporting unit to first determine whether thea quantitative impairment test is necessary. We exercise judgment in performing our qualitative assessment of whether indicators of impairment exist.
WhenIf we determine, thatafter performing an annual or interim quantitative impairment test is necessary, we now only perform one step to identify potential impairment, which is to compare 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 assumptionsassessment based on what we believe 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 to the extent the difference does not exceed the total amount of goodwill allocated to the reporting unit.
We measurequalitative factors, that the fair value of the
| |
Ritchie Bros. | 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 using a blended analysishave generated sufficient returns to recover the cost of goodwill.
A&M reporting unit
For the earnings valuation approach, which employs a discounted cash flow valuation technique, and the market valuation approach, which employs a multiple of earnings valuation technique. We believe that using a blended valuation approach compensates for the inherent risks associated with each technique if used on a stand-alone basis. In applying these valuation approaches, management is required to make significant estimates and assumptions about the timing and amount of future cash flows, revenue growth rates, and discount rates, which requires a significant amount of judgment. Accordingly, actual results may differ from those used in the goodwill impairment test.
Changes in Accounting Policies
There were no changes in our significant accounting policies during the threenine months ended September 30, 2017.2020, 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
FutureFor 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 accounting policies – recent accounting standardscircumstances indicate that the carrying amount may not yetbe 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.
| |
Ritchie Bros. | 42 |
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.
Other
In May 2014, the Financial Accounting Standards Board issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 isaddition, effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We will not early adopt ASU 2014-09, and as such, the effective date will be January 1, 2018. We have decided to adopt2020, we adopted ASU 2014-09 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 retrospectiveprospective basis.
While continuing to assess all potential impacts of The adoption of ASU 2014-09, our current analysis indicates that2018-15 on January 1, 2020 using the most significant change will beprospective transition approach did not result in the presentation of revenue from the majority of inventory, ancillary service, and RBLS contracts to gross as a principal instead of net as an agent. This presentation is expected to significantly increase the amount of revenue reported comparedmaterial impact to the current presentation, as well as add volatilityconsolidated financial statements.
For a discussion of our new and amended accounting standards refer to revenue over comparative periods. Presenting these revenues gross as a principal versus net as an agent has no impact on operating income.
The following tables illustrateNote 1 of the expected impact on our reported resultsfinancial statements, Summary of retrospectively adopting ASU 2014-09 and, thereunder, presenting the majority of inventory, ancillary service, and RBLS revenues on a gross basis:significant accounting policies.
| Nine months ended September 30, | Year ended December 31, | |||||||||||||||||||||||
| (in U.S. $000's) | 2017 | 2016 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||
| Total revenues: | ||||||||||||||||||||||||
| As reported | $ | 431,732 | $ | 419,626 | $ | 566,395 | $ | 515,875 | $ | 481,097 | $ | 467,403 | ||||||||||||
| New revenue standard | 680,989 | 832,147 | 1,126,977 | 1,080,499 | 1,239,636 | 1,089,180 | ||||||||||||||||||
| Operating income: | ||||||||||||||||||||||||
| As reported | $ | 67,416 | $ | 95,094 | $ | 135,722 | $ | 174,840 | $ | 127,927 | $ | 136,959 | ||||||||||||
| New revenue standard | 67,416 | 95,094 | 135,722 | 174,840 | 127,927 | 136,959 | ||||||||||||||||||
Revenue reported under current US GAAP increased 3% in the first nine months of 2017 compared to the first nine months of 2016. The expected impact of retrospectively adopting ASU 2014-09 would result in an 18% decrease in total revenues in the first nine months of 2017 compared to the first nine months of 2016.
Revenue under current US GAAP will be most comparable to total revenues less cost of inventory sold under ASU 2014-09. As such, when ASU 2014-09 takes effect, we will introduce a new non-GAAP financial measure that we are tentatively calling “Agency Proceeds”, which will be calculated as total revenues less cost of inventory sold and will replace revenues used in our key performance metrics.
Non-GAAP Measures
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 tables present ourtable reconciles adjusted operating income (non-GAAP measure) and adjusted operating income margin (non-GAAP measure) results for the three and nine months, respectively, ended September 30, 2017 and 2016, as well as reconcile those metrics to operating income, revenues, and operating income margin, which areis the most directly comparable GAAP measuresmeasure in or calculated from, our consolidated income statements:statements.
| (in U.S. $000's) | Three months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Operating income | $ | 16,931 | $ | 2,285 | 641 | % | ||||||
| Pre-tax adjusting item: | ||||||||||||
| Impairment loss | - | 28,243 | (100 | )% | ||||||||
| Adjusted operating income | ||||||||||||
| (non-GAAP measure) | 16,931 | 30,528 | (45 | )% | ||||||||
| Revenues | $ | 141,047 | $ | 128,876 | 9 | % | ||||||
| Operating income margin | 12.0 | % | 1.8 | % | 1020 | bps | ||||||
| Adjusted operating income margin | ||||||||||||
| (non-GAAP measure) | 12.0 | % | 23.7 | % | -1170 | bps | ||||||
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | | | ||||||||||||
| | | | | | | | % Change | | | | | | | | | % Change | | |
(in U.S. $000's, except percentages) |
| 2020 |
| 2019 | | 2020 over 2019 |
|
| 2020 |
| 2019 | | 2020 over 2019 |
| | ||||
Operating income | | $ | 67,384 | | $ | 40,160 | | 68 | % | | $ | 190,266 | | $ | 151,718 | | 25 | % | |
Pre-tax adjusting items: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Severance | |
| 4,283 | |
| — | | 100 | % | |
| 4,283 | |
| — | | 100 | % | |
Adjusted operating income* | | $ | 71,667 | | $ | 40,160 | | 78 | % | | $ | 194,549 | | $ | 151,718 | | 28 | % | |
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Operating income | $ | 67,416 | $ | 95,094 | (29 | )% | ||||||
| Pre-tax adjusting items: | ||||||||||||
| Accelerated vesting of assumed options | 4,752 | - | 100 | % | ||||||||
| Acquisition and finance structure advisory | 9,063 | - | 100 | % | ||||||||
| Severance and retention | 1,447 | - | 100 | % | ||||||||
| Impairment loss | 8,911 | 28,243 | (68 | )% | ||||||||
| Adjusted operating income | ||||||||||||
| (non-GAAP measure) | 91,589 | 123,337 | (26 | )% | ||||||||
| Revenues | $ | 431,732 | $ | 419,626 | 3 | % | ||||||
| Operating income margin | 15.6 | % | 22.7 | % | -710 | bps | ||||||
| Adjusted operating income margin | ||||||||||||
| (non-GAAP measure) | 21.2 | % | 29.4 | % | -820 | bps | ||||||
There were no adjusting items recognized in the first or third quarters of 2017. The adjusting items for the nine months ended September 30, 2017 were:
Recognized in the second quarter of 2017
| (2) |
| |
Ritchie Bros. |
43 |
The adjusting items for the three and nine months ended September 30, 2016 were:
Recognized in the third quarterTable of 2016Contents
There were no first or second quarter 2016 adjusting items.
Adjusted Net Income Attributable to Stockholders* and Diluted Adjusted EPS Attributable to Stockholders* Reconciliation
The following tables present ourWe believe that adjusted net income attributable to stockholders* provides useful information about the growth or decline of our net income attributable to stockholders (non-GAAP measure)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 (non-GAAP measure) results for the three and nine months, respectively, ended September 30, 2017 and 2016, as well as reconcile those metricsstockholders* to net income attributable to stockholders the effect of dilutive securities, the weighted average number of dilutive shares outstanding, and diluted earnings (loss) per shareEPS attributable to stockholders, which are the most directly comparable GAAP measures in our consolidated income statements:statements.
| (in U.S. $000's, except share and | Three months ended September 30, | |||||||||||
| per share data) | Change | |||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Net income (loss) attributable to stockholders | $ | 10,261 | $ | (5,137 | ) | 300 | % | |||||
| Pre-tax adjusting items: | ||||||||||||
| Impairment loss | - | 28,243 | (100 | )% | ||||||||
| Deferred income tax effect of adjusting items: | ||||||||||||
| Impairment loss | - | (1,798 | ) | (100 | )% | |||||||
| Adjusted net income attributable to stockholders (non-GAAP measure) | $ | 10,261 | $ | 21,308 | (52 | )% | ||||||
| Effect of dilutive securities | $ | - | $ | - | - | |||||||
| Weighted average number of dilutive shares outstanding | 108,178,303 | 107,525,051 | 1 | % | ||||||||
| Diluted earnings (loss) per share attributable to stockholders | $ | 0.09 | $ | (0.05 | ) | 280 | % | |||||
| Diluted adjusted EPS attributable to stockholders (non-GAAP measure) | $ | 0.09 | $ | 0.20 | (55 | )% | ||||||
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | | | ||||||||||||
(in U.S. $000's, except share and per share data, | | | | |
| | | % Change | | | | | |
| | | % Change | | |
and percentages) |
| 2020 |
| 2019 | | 2020 over 2019 |
| | 2020 |
| 2019 | | 2020 over 2019 |
| | ||||
Net income attributable to stockholders | | $ | 45,387 | | $ | 25,266 | | 80 | % | | $ | 121,239 | | $ | 97,466 | | 24 | % | |
Pre-tax adjusting items: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Severance | |
| 4,283 | |
| — | | 100 | % | |
| 4,283 | |
| — | | 100 | % | |
Current income tax effect of adjusting items: | |
| | |
|
| |
|
| |
| | |
|
| |
|
| |
Severance | |
| (1,065) | |
| — | | (100) | % | |
| (1,065) | |
| — | | (100) | % | |
Current income tax adjusting item: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Change in uncertain tax provision | |
| — | |
| — | | — | % | |
| 766 | |
| — | | 100 | % | |
Deferred tax adjusting item: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Change in uncertain tax provision | |
| — | |
| — | | — | % | |
| 5,462 | |
| — | | 100 | % | |
Adjusted net income attributable to stockholders* | | $ | 48,605 | | $ | 25,266 | | 92 | % | | $ | 130,685 | | $ | 97,466 | | 34 | % | |
Weighted average number of dilutive shares outstanding | |
| 110,369,718 | |
| 109,381,173 |
| 1 | % | |
| 110,060,712 | |
| 109,634,195 |
| 0 | % | |
| | | | | | | | | | | | | | | | | | | |
Diluted earnings per share attributable to stockholders | | $ | 0.41 | | $ | 0.23 | | 78 | % | | $ | 1.10 | | $ | 0.89 | | 24 | % | |
Diluted adjusted EPS attributable to Stockholders* | | $ | 0.44 | | $ | 0.23 | | 91 | % | | $ | 1.19 | | $ | 0.89 | | 34 | % | |
| (in U.S. $000's, except share and | Nine months ended September 30, | |||||||||||
| per share data) | Change | |||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Net income attributable to stockholders | $ | 38,273 | $ | 63,979 | (40 | )% | ||||||
| Pre-tax adjusting items: | ||||||||||||
| Accelerated vesting of assumed options | 4,752 | - | 100 | % | ||||||||
| Acquisition and finance structure advisory | 9,063 | - | 100 | % | ||||||||
| Severance and retention | 1,447 | - | 100 | % | ||||||||
| Impairment loss | 8,911 | 28,243 | (68 | )% | ||||||||
| Current income tax effect of adjusting items: | ||||||||||||
| Acquisition and finance structure advisory | (2,447 | ) | - | 100 | % | |||||||
| Severance and retention | (564 | ) | - | 100 | % | |||||||
| Deferred income tax effect of adjusting items: | ||||||||||||
| Impairment loss | (2,361 | ) | (1,798 | ) | 31 | % | ||||||
| Current income tax adjusting item: | ||||||||||||
| Change in uncertain tax provision | 2,290 | - | 100 | % | ||||||||
| Adjusted net income attributable to stockholders (non-GAAP measure) | $ | 59,364 | $ | 90,424 | (34 | )% | ||||||
| Effect of dilutive securities | $ | (50 | ) | $ | - | 100 | % | |||||
| Weighted average number of dilutive shares outstanding | 108,069,624 | 107,221,390 | 1 | % | ||||||||
| Diluted EPS attributable to stockholders | $ | 0.35 | $ | 0.60 | (42 | )% | ||||||
| Diluted adjusted EPS attributable to stockholders (non-GAAP measure) | $ | 0.55 | $ | 0.84 | (35 | )% | ||||||
There were no adjusting items recognized in the third quarter of 2017. The adjusting items for the nine months ended September 30, 2017 were:
Recognized in the second quarter of 2017
| (2) |
| (3) |
Recognized inAdjusted EBITDA*
We believe adjusted EBITDA* provides useful information about the first quartergrowth or decline of 2017
The adjusting items for the three and nine months ended September 30, 2016 were:
Recognized in the third quarter of 2016
There were no first or second quarter 2016 adjusting items.
our net income when compared between different financial periods.
The following tables present ourtable reconciles adjusted EBITDA (non-GAAP measure) and adjusted EBITDA margin (non-GAAP measure) results for the three and nine months, respectively, ended September 30, 2017 and 2016, as well as reconcile those metricsEBITDA* to net income, (loss), revenues, and net income margin, which areis the most directly comparable GAAP measures in, or calculated from, our consolidated income statements:
| (in U.S. $000's) | Three months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Net income (loss) | $ | 10,323 | $ | (5,000 | ) | 306 | % | |||||
| Add:depreciation and amortization expenses | 14,837 | 10,196 | 46 | % | ||||||||
| Less:interest income | (517 | ) | (369 | ) | 40 | % | ||||||
| Add:interest expense | 10,558 | 934 | 1030 | % | ||||||||
| Add:current income tax expense | 1,402 | 9,652 | (85 | )% | ||||||||
| Less:deferred income tax recovery | (4,760 | ) | (2,472 | ) | 93 | % | ||||||
| Pre-tax adjusting items: | ||||||||||||
| Impairment loss | - | 28,243 | (100 | )% | ||||||||
| Adjusted EBITDA (non-GAAP measure) | 31,843 | 41,184 | (23 | )% | ||||||||
| Revenues | $ | 141,047 | $ | 128,876 | 9 | % | ||||||
| Net income margin | 7.3 | % | -3.9 | % | 1120 | bps | ||||||
| Adjusted EBITDA margin (non-GAAP measure) | 22.6 | % | 32.0 | % | -940 | bps | ||||||
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | Nine months ended September 30, | | | ||||||||||||
| | | | |
| | | % Change | | | | | |
| | | % Change | | |
(in U.S. $000's, except percentages) |
| 2020 |
| 2019 | | 2020 over 2019 |
| | 2020 |
| 2019 | | 2020 over 2019 |
| | ||||
Net income | | $ | 45,490 | | $ | 25,272 | | 80 | % | | $ | 121,438 | | $ | 97,575 | | 24 | % | |
Add: depreciation and amortization expenses | |
| 18,436 | |
| 17,692 |
| 4 | % | |
| 55,586 | |
| 51,919 |
| 7 | % | |
Add: interest expense | |
| 8,737 | |
| 10,090 |
| (13) | % | |
| 26,801 | |
| 31,023 |
| (14) | % | |
Less: interest income | |
| (510) | |
| (517) |
| (1) | % | |
| (1,775) | |
| (2,435) |
| (27) | % | |
Add: income tax expense | |
| 15,437 | |
| 6,760 |
| 128 | % | |
| 48,741 | |
| 28,800 |
| 69 | % | |
Pre-tax adjusting items: | |
|
| |
|
|
|
|
| |
|
| |
|
|
|
|
| |
Severance | |
| 4,283 | |
| — |
| 100 | % | |
| 4,283 | |
| — |
| 100 | % | |
Adjusted EBITDA* | | $ | 91,873 | | $ | 59,297 | | 55 | % | | $ | 255,074 | | $ | 206,882 | | 23 | % | |
| (in U.S. $000's) | Nine months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Net income | $ | 38,469 | $ | 65,585 | (41 | )% | ||||||
| Add:depreciation and amortization expenses | 37,047 | 30,560 | 21 | % | ||||||||
| Less:interest income | (2,459 | ) | (1,354 | ) | 82 | % | ||||||
| Add:interest expense | 27,311 | 3,357 | 714 | % | ||||||||
| Add:current income tax expense | 17,565 | 35,767 | (51 | )% | ||||||||
| Add:deferred income tax recovery | (9,583 | ) | (5,838 | ) | 64 | % | ||||||
| Pre-tax adjusting items: | ||||||||||||
| Accelerated vesting of assumed options | 4,752 | - | 100 | % | ||||||||
| Acquisition and finance structure advisory | 9,063 | - | 100 | % | ||||||||
| Severance and retention | 1,447 | - | 100 | % | ||||||||
| Impairment loss | 8,911 | 28,243 | (68 | )% | ||||||||
| Adjusted EBITDA (non-GAAP measure) | 132,523 | 156,320 | (15 | )% | ||||||||
| Revenues | $ | 431,732 | $ | 419,626 | 3 | % | ||||||
| Net income margin | 8.9 | % | 15.6 | % | -670 | bps | ||||||
| Adjusted EBITDA margin (non-GAAP measure) | 30.7 | % | 37.3 | % | -660 | bps | ||||||
There were no adjusting items recognized in the first or third quarters of 2017. The adjusting items for the nine months ended September 30, 2017 were:
Recognized in the second quarter of 2017
| (2) |
| |
Ritchie Bros. |
44 |
The adjusting items for the three and nine months ended September 30, 2016 were:
Recognized in the third quarterTable of 2016Contents
There were no first or second quarter 2016 adjusting items.
Adjusted Net Debt* and Adjusted Net Debt/Adjusted EBITDA* Reconciliation
The following table presents ourWe believe that comparing adjusted net debt/adjusted EBITDA (non-GAAP measures) resultsEBITDA* 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 aswe fund liquidity. Measures of liquidity are noted under “Liquidity and Capital Resources”.
The following table reconciles that metricadjusted net debt* to debt, cash and cash equivalents,adjusted EBITDA* to net income, and debt as a multiple ofadjusted 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:statements.
| (in U.S. $ millions) | As at and for the 12 months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Short-term debt | $ | 8.6 | $ | 39.0 | (78 | )% | ||||||
| Long-term debt | 817.9 | 101.6 | 705 | % | ||||||||
| Debt | 826.5 | 140.6 | 488 | % | ||||||||
| Less:cash and cash equivalents | (224.5 | ) | (231.0 | ) | (3 | )% | ||||||
| Adjusted net debt (non-GAAP measure) | 602.0 | (90.4 | ) | 766 | % | |||||||
| Net income | $ | 66.4 | $ | 113.0 | (41 | )% | ||||||
| Add:depreciation and amortization expenses | 47.3 | 41.2 | 15 | % | ||||||||
| Less:interest income | (3.0 | ) | (1.9 | ) | 58 | % | ||||||
| Add:interest expense | 29.5 | 4.5 | 556 | % | ||||||||
| Add:current income tax expense | 22.1 | 39.4 | (44 | )% | ||||||||
| Less:deferred income tax recovery | (7.1 | ) | (6.2 | ) | 15 | % | ||||||
| Pre-tax adjusting items: | ||||||||||||
| Accelerated vesting of assumed options | 4.8 | - | 100 | % | ||||||||
| Acquisition and finance structure advisory | 9.1 | - | 100 | % | ||||||||
| Severance and retention | 1.4 | - | 100 | % | ||||||||
| Debt extinguishment costs | 6.8 | - | 100 | % | ||||||||
| Gain on sale of excess property | - | (8.4 | ) | (100 | )% | |||||||
| Impairment loss | 8.9 | 28.2 | (68 | )% | ||||||||
| Adjusted EBITDA (non-GAAP measure) | $ | 186.2 | $ | 209.8 | (11 | )% | ||||||
| Debt/net income | 12.4 | x | 1.2 | x | 933 | % | ||||||
| Adjusted net debt/adjusted EBITDA | ||||||||||||
| (non-GAAP measure) | 3.2 | x | -0.4 | x | 900 | % | ||||||
The adjusting items for the 12 months ended September 30, 2017 were:
Recognized in the second quarter of 2017
| | | | | | | | | | |
| | As at and for the 12 months ended September 30, | | | ||||||
| | | | | | | | % Change | | |
(in U.S. $millions, except percentages) | | 2020 | | 2019 | | 2020 over 2019 | | | ||
Short-term debt |
| $ | 20.3 |
| $ | 5.8 |
| 250 | % | |
Long-term debt | |
| 632.6 | |
| 689.3 | | (8) | % | |
Debt | |
| 652.9 | |
| 695.1 | | (6) | % | |
Less: Cash and cash equivalents | |
| (470.3) | |
| (309.6) | | 52 | % | |
Adjusted net debt* | |
| 182.6 | |
| 385.5 | | (53) | % | |
Net income | | $ | 173.0 | | $ | 133.0 | | 30 | % | |
Add: depreciation and amortization expenses | |
| 74.2 | |
| 69.1 | | 7 | % | |
Add: interest expense | |
| 37.1 | |
| 42.8 | | (13) | % | |
Less: interest income | |
| (3.1) | |
| (3.3) | | (6) | % | |
Add: income tax expense | |
| 61.6 | |
| 40.7 | | 51 | % | |
Pre-tax adjusting items: | |
|
| |
|
| |
|
| |
Share-based payment expense recovery | |
| (4.1) | |
| — | | (100) | % | |
Severance | |
| 4.3 | |
| — | | 100 | % | |
Adjusted EBITDA* | | $ | 343.0 | | $ | 282.3 | | 22 | % | |
Debt/net income | |
| 3.8 | x |
| 5.2 | x | (27) | % | |
Adjusted net debt*/adjusted EBITDA* | |
| 0.5 | x |
| 1.4 | x | (64) | % | |
| (1) |
| (2) |
| (3) |
| (4) |
Recognized in the fourth quarter of 2016Operating Free Cash Flow* (“OFCF”) Reconciliation
There were no adjusting items recognized in the first or third quarters of 2017.
The adjusting items for the 12 months ended September 30, 2016 were:
Recognized in the third quarter of 2016
Recognized in the fourth quarter of 2015
There were no adjusting items for the first or second quarters of 2016.
The following table presents our OFCF (non-GAAP measure) resultsWe 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 that metricOFCF* to cash provided by operating activities, and net capital spending, which areis the most directly comparable GAAP measuresmeasure in, or calculated from, our consolidated statements of cash flows:
| (in U.S. $ millions) | 12 months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Cash provided by operating activities | $ | 113.4 | $ | 144.9 | (22 | )% | ||||||
| Property, plant and equipment additions | 14.4 | 22.0 | (35 | )% | ||||||||
| Intangible asset additions | 26.0 | 16.6 | 57 | % | ||||||||
| Proceeds on disposition of property plant and equipment | (6.9 | ) | (15.2 | ) | (55 | )% | ||||||
| Net capital spending | $ | 33.5 | $ | 23.4 | 43 | % | ||||||
| OFCF (non-GAAP measure) | $ | 79.9 | $ | 121.5 | (34 | )% | ||||||
| | | | | | | | | | | |
| | 12 months ended September 30, | | | |||||||
| | | | | | | | % Change | | | |
(in U.S. $ millions, except percentages) |
| 2020 |
| 2019 | | 2020 over 2019 |
| | |||
Cash provided by operating activities | | $ | 289.2 | | $ | 356.2 | | | (19) | % | |
Property, plant and equipment additions | |
| 16.5 | |
| 10.4 | |
| 59 | % | |
Intangible asset additions | |
| 28.9 | |
| 25.1 | |
| 15 | % | |
Proceeds on disposition of property plant and equipment | |
| (16.6) | |
| (13.7) | |
| 21 | % | |
Net capital spending | | $ | 28.8 | | $ | 21.8 | | | 32 | % | |
OFCF* | | $ | 260.4 | | $ | 334.4 | | | (22) | % | |
| (1) | OFCF* is calculated by subtracting net capital spending from cash provided by operating activities. |
| |
Ritchie Bros. | 45 |
Adjusted Net Income Attributable to Stockholders* and Adjusted Dividend Payout Ratio* Reconciliation
The following table presents ourWe believe that adjusted net income attributable to stockholders* provides useful information about the growth or decline of our net income attributable to stockholders (non-GAAP measure)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 (non-GAAP measure) results on a trailing 12-month basis, and reconciles those metricsratio* to dividends paid to stockholders, 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:
| (in U.S. $ millions) | 12 months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Dividends paid to stockholders | $ | 72.7 | $ | 69.5 | 5 | % | ||||||
| Net income attributable to stockholders | $ | 66.1 | $ | 110.5 | (40 | )% | ||||||
| Pre-tax adjusting items: | ||||||||||||
| Accelerated vesting of assumed options | 4.8 | - | 100 | % | ||||||||
| Acquisition and finance structure advisory | 9.1 | - | 100 | % | ||||||||
| Severance and retention | 1.4 | - | 100 | % | ||||||||
| Debt extinguishment costs | 6.8 | - | 100 | % | ||||||||
| Gain on sale of excess property | - | (8.4 | ) | (100 | )% | |||||||
| Impairment loss | 8.9 | 28.2 | (68 | )% | ||||||||
| Current income tax effect of adjusting items: | ||||||||||||
| Acquisition and finance structure advisory | (2.4 | ) | - | 100 | % | |||||||
| Severance and retention | (0.6 | ) | - | 100 | % | |||||||
| Debt extinguishment costs | (1.8 | ) | - | 100 | % | |||||||
| Gain on sale of excess property | - | 1.1 | (100 | )% | ||||||||
| Deferred income tax effect of adjusting items: | ||||||||||||
| Impairment loss | (2.4 | ) | (1.8 | ) | 33 | % | ||||||
| Current income tax adjusting item: | �� | |||||||||||
| Change in uncertain tax provision | 2.3 | - | 100 | % | ||||||||
| Deferred tax adjusting item: | ||||||||||||
| Tax loss utilization | - | (7.9 | ) | (100 | )% | |||||||
| Adjusted net income attributable to stockholders (non-GAAP measure) | $ | 92.2 | $ | 121.8 | (24 | )% | ||||||
| Dividend payout ratio | 110.0 | % | 62.9 | % | 4710 | bps | ||||||
| Adjusted dividend payout ratio | ||||||||||||
| (non-GAAP measure) | 78.9 | % | 57.1 | % | 2180 | bps | ||||||
The adjusting items for the 12 months ended September 30, 2017 were:
Recognized in the second quarter of 2017
| | | | | | | | | | | |
| | 12 months ended September 30, | | | |||||||
| | | | |
| | | %Change | | | |
(in U.S. $millions, except percentages) |
| 2020 |
| 2019 |
| 2020 over 2019 |
| | |||
Dividends paid to stockholders | | $ | 89.4 | | $ | 80.4 | | | 11 | % | |
Net income attributable to stockholders | | $ | 172.8 | | $ | 133.0 | | | 30 | % | |
Pre-tax adjusting items: | |
|
| |
|
| |
|
|
| |
Share-based payment expense recovery | | | (4.1) | | | — | | | (100) | % | |
Severance | |
| 4.3 | |
| — | |
| 100 | % | |
Current income tax effect of adjusting items: | |
|
| |
|
| |
|
|
| |
Severance | |
| (1.1) | |
| — | |
| (100) | % | |
Deferred income tax effect of adjusting items: | |
| | | | | |
|
|
| |
Share-based payment expense recovery | | | 0.7 | | | — | | | 100 | % | |
Current income tax adjusting item: | |
|
| |
|
| |
|
|
| |
Change in uncertain tax provision | |
| 0.8 | |
| — | |
| 100 | % | |
Deferred tax adjusting item: | |
|
| |
|
| |
|
|
| |
Change in uncertain tax provisions | |
| 5.5 | |
| — | |
| 100 | % | |
Adjusted net income attributable to stockholders* | | $ | 178.9 | | $ | 133.0 | | | 35 | % | |
Dividend payout ratio | |
| 51.7 | % |
| 60.5 | % |
| (880) | bps | |
Adjusted dividend payout ratio* | |
| 50.0 | % |
| 60.5 | % |
| (1050) | bps | |
| (1) |
| (2) |
| (3) |
Recognized in the first quarter of 2017
| |
Ritchie Bros. | 46 |
Recognized in the fourth quarterTable of 2016Contents
There were no adjusting items recognized in the third quarter of 2017.
The adjusting items for the 12 months ended September 30, 2016 were:
Recognized in the third quarter of 2016
Recognized in the fourth quarter of 2015
There were no first or second quarter 2016 adjusting items.
Adjusted Net Income Attributable to Stockholders* and ROIC* Reconciliation
The following table presents ourWe believe that comparing ROIC (non-GAAP measure) results 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 reconciles that metricROIC* to net income attributable to stockholders long-term debt, stockholders’ equity, and return on average invested capital which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:
| (in U.S. $ millions) | As at and for the 12 months ended September 30, | |||||||||||
| Change | ||||||||||||
| 2017 | 2016 | 2017 over 2016 | ||||||||||
| Net income attributable to stockholders | $ | 66.1 | $ | 110.5 | (40 | )% | ||||||
| Pre-tax adjusting items: | ||||||||||||
| Accelerated vesting of assumed options | 4.8 | - | 100 | % | ||||||||
| Acquisition and finance structure advisory | 9.1 | - | 100 | % | ||||||||
| Severance and retention | 1.4 | - | 100 | % | ||||||||
| Debt extinguishment costs | 6.8 | - | 100 | % | ||||||||
| Gain on sale of excess property | - | (8.4 | ) | (100 | )% | |||||||
| Impairment loss | 8.9 | 28.2 | (68 | )% | ||||||||
| Current income tax effect of adjusting items: | ||||||||||||
| Acquisition and finance structure advisory | (2.4 | ) | - | 100 | % | |||||||
| Severance and retention | (0.6 | ) | - | 100 | % | |||||||
| Debt extinguishment costs | (1.8 | ) | - | 100 | % | |||||||
| Gain on sale of excess property | - | 1.1 | (100 | )% | ||||||||
| Deferred income tax effect of adjusting items: | ||||||||||||
| Impairment loss | (2.4 | ) | (1.8 | ) | 33 | % | ||||||
| Current income tax adjusting item: | ||||||||||||
| Change in uncertain tax provision | 2.3 | - | 100 | % | ||||||||
| Deferred tax adjusting item: | ||||||||||||
| Tax loss utilization | - | (7.9 | ) | (100 | )% | |||||||
| Adjusted net income attributable to stockholders (non-GAAP measure) | $ | 92.2 | $ | 121.8 | (24 | )% | ||||||
| Opening long-term debt | $ | 101.6 | $ | 100.6 | 1 | % | ||||||
| Ending long-term debt | 817.9 | 101.6 | 705 | % | ||||||||
| Average long-term debt | $ | 459.8 | $ | 101.1 | 355 | % | ||||||
| Opening stockholders' equity | $ | 689.6 | $ | 686.3 | - | |||||||
| Ending stockholders' equity | 714.7 | 689.6 | 4 | % | ||||||||
| Average stockholders' equity | 702.2 | 688.0 | 2 | % | ||||||||
| Average invested capital | $ | 1,162.0 | $ | 789.1 | 47 | % | ||||||
| Return on average invested capital(1) | 5.7 | % | 14.0 | % | -830 | bps | ||||||
| ROIC (non-GAAP measure)(2) | 7.9 | % | 15.4 | % | -750 | bps | ||||||
| | | | | | | | | | | |
| | As at and for the 12 months ended September 30, | | | |||||||
| | | | |
| | | | | | |
(in U.S. $millions, except percentages) |
| 2020 |
| 2019 |
| 2020 over 2019 |
| | |||
Net income attributable to stockholders | | $ | 172.8 | | $ | 133.0 | | | 30 | % | |
Pre-tax adjusting items: | |
|
| |
|
| |
|
|
| |
Share-based payment expense recovery | | | (4.1) | | | — | | | (100) | % | |
Severance | |
| 4.3 | |
| — | |
| 100 | % | |
Current income tax effect of adjusting items: | |
|
| |
|
| |
|
|
| |
Severance | |
| (1.1) | |
| — | |
| (100) | % | |
Deferred income tax effect of adjusting items: | |
|
| |
|
| |
|
|
| |
Share-based payment expense recovery | | | 0.7 | | | — | | | 0 | % | |
Current income tax adjusting item: | |
|
| |
|
| |
|
|
| |
Change in uncertain tax provision | |
| 0.8 | |
| — | |
| 100 | % | |
Deferred tax adjusting item: | |
|
| |
|
| |
|
|
| |
Change in uncertain tax provisions | |
| 5.5 | |
| — | |
| 100 | % | |
Adjusted net income attributable to stockholders* | | $ | 178.9 | | $ | 133.0 | | | 35 | % | |
Opening long-term debt | | $ | 689.3 | | $ | 751.8 | | | (8) | % | |
Ending long-term debt | |
| 632.6 | |
| 689.3 | | | (8) | % | |
Average long-term debt | | | 661.0 | | | 720.6 | | | (8) | % | |
Opening stockholders' equity | | $ | 838.2 | | $ | 815.5 | | | 3 | % | |
Ending stockholders' equity | |
| 959.5 | |
| 838.2 | | | 14 | % | |
Average stockholders' equity | |
| 898.9 | |
| 826.9 | | | 9 | % | |
Average invested capital | | $ | 1,559.9 | | $ | 1,547.5 | | | 1 | % | |
| | | | | | | | | | | |
Return on average invested capital | |
| 11.1 | % |
| 8.6 | % | | 250 | bps | |
ROIC* | |
| 11.5 | % |
| 8.6 | % | | 290 | bps | |
| (1) |
| (2) | Return on average invested capital is calculated as net income attributable to stockholders divided by average invested capital. We calculate average invested capital as the average long-term debt and average stockholders’ equity over a trailing 12-month period. |
| (3) |
| (4) | The adoption of Leases (Topic 842) requires lessees to recognize almost all leases, including operating leases, on the balance sheet through a right-of-use asset and a corresponding lease liability. The lease liability is not included in the calculation of debt. |
| |
Ritchie Bros. | 47 |
The adjustingAdjusting items forduring the 12 monthstrailing 12-months ended September 30, 20172020 were:
Recognized in the third quarter of 2020
| ● | $4.3 million ($3.2 million after tax, or $0.03 per diluted share) 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. |
Recognized in the second quarter of 2017
2020
| $ |
Recognized in the first quarter of 2017
2020
Recognized in the fourth quarter of 2016
2019
There were no adjustingAdjusting items recognized induring the third quarter of 2017.
The adjusting items for the 12 monthstrailing 12-months ended September 30, 20162019 were:
Recognized in the third quarter of 2016
2019
Recognized in the second quarter of 2019
| ● | There were no adjustment items recognized in the second quarter of 2019. |
Recognized in the first quarter of 2019
| ● | There were no adjustment items recognized in the first quarter of 2019. |
Recognized in the fourth quarter of 2015
2018
| |
Ritchie Bros. | 48 |
There were no first or second quarter 2016 adjusting items.
There were no adjustments to debt at September 30, 2017 or 2016 as there was no long-term debt held in escrow at those reporting dates.
| ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes to the Company’sour market risk during the threenine months ended September 30, 20172020 from those disclosed in the Company’sItem 7A in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, which is available on our website atwww.rbauction.com, on EDGAR atwww.sec.gov, or on SEDAR atwww.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, 2017.2020. 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 Securities and Exchange Commission’s (“SEC’s”)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 closed the acquisition of IronPlanet on May 31, 2017. As at and for the nine months ended September 30, 2017, IronPlanet’s total assets and revenues constituted 40% and 8%, respectively, of the Company’s consolidated total assets and revenues as shown on the Company’s consolidated financial statements. As the Merger occurred in the second quarter of 2017, management excluded the internal control over financial reporting of IronPlanet from the scope of its assessment of the effectiveness of the Company’s disclosure controls and procedures. This exclusion is in accordance with the general guidance issued by the Staff of the Securities and Exchange Commission that an assessment of a recently-acquired business may be omitted from the scope in the year of acquisition, if specified conditions are satisfied.
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 the Company’sour internal control over financial reporting during the quarter ended September 30, 20172020 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
| |
Ritchie Bros. | 49 |
PART II – OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company hasWe have no material legal proceedings pending, other than ordinary routine litigation incidental to the business, and management doeswe 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, 2016,2019, which is available on our website atwww.rbauction.com, on EDGAR atwww.sec.gov, or on SEDAR atwww.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.
Management anticipated that the acquisition of IronPlanet would result in a change to the Company’s risk factors. As such, during the fourth quarter of 2016, the Company’s risk factors were revised to apply to our post-Merger, combined business; particularly risk factors associated with the acquisition, financing, and integration of IronPlanet. These revised risk factors were disclosed in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016. The IronPlanet acquisition closed on May 31, 2017. ThereExcept as set out below, there were no material changes in risk factors during the three months or nine months ended September 30, 2017.2020.
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 previously disclosedof 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 Company’s Annualmacro-economic disruption continues for prolonged periods we may need to raise capital and Special Meetingcapital may not be available on acceptable terms, or at all. The impact of Shareholders (the “Meeting”) heldthe COVID-19 pandemic on May 1, 2017, the shareholders ratified, confirmedeconomic activity, and approved certain amendmentsits 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 Company’s 2013 Performance Share Unit Planextent 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 Sign-On Grant Agreement (together,terms or timeline currently contemplated, or at all.
The completion of the “2013 PSU Plan Amendment”) approved and adopted byacquisition of Rouse is subject to certain conditions, including, among other things: (a) the Board in Februaryexpiration or termination of 2017, including provisions permitting the Company to pay vested CEO SOG PSUsapplicable waiting period under the Sign-On Grant Agreement eitherHart-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 casheffect and has the effect of making the acquisition of Rouse illegal, otherwise restraining or by issuing common shares, as opposed to payment only in cash, and setting the aggregate maximum numberprohibiting consummation of the Company’s common shares reserved for issuance pursuant to the Sign-On Grant Agreement at 150,000 common shares. Immediately following the Meeting on May 1, 2017, the Company and Mr. Saligram executed and entered into the 2013 PSU Plan Amendment.
The Sign-On Grant Agreement had provided for the grant to Mr. Saligram of approximately 102,375 CEO SOG PSUs, which became eligible for vesting at a rate of 25% per year starting on the second anniversaryacquisition or causing any portion of the grant date, with the actual number of units to vestacquisition to be determined based on achievement of pre-established performance criteria as set out therein. Additional terms, conditions, privilegesrescinded following completion thereof, and restrictions under(c) the Sign-On Grant Agreement, as amended, are further described in the Company’s Schedule 14A proxy statement filed with the Securities and Exchange Commission on March 20, 2017.
The second tranche of the CEO SOG PSUs vested during the third quarter of 2017, pursuant to which Mr. Saligram was determinedshares to be entitled to a payment, based on the Company’s absolute total shareholder return14 performance over the applicable period, net of applicable taxes, of $91,000. On September 5, 2017, the Company satisfied this payment obligation by issuing to Mr. Saligram 3,211 common shares in respect of the vested CEO SOG PSUs.
The Company did not receive any proceeds from the execution and entering into the 2013 PSU Plan Amendment. The Company did not and will not receive any proceeds from the vesting of CEO SOG PSUs or the issuance of common shares as payment for vested CEO SOG PSUs under the Sign-On Grant Agreement. The CEO SOG PSUs were issued for compensatory purposes. The common shares issued as payment upon vesting of the second tranche of the CEO SOG PSUs were issued for compensatory purposes. Any common shares that will be issued as payment upon vesting of the third and fourth tranches of the CEO SOG PSUs, will also be issued for compensatory purposes.
To the extent that the execution and entering into the 2013 PSU Plan Amendment, the vesting of CEO SOG PSUs or any issuance of common shares as payment for vested CEO SOG PSUs under the Sign-On Grant Agreement constitutes a “sale” of securities, the Company relies on the exemption under Section 4(a)(2) of the Securities Act. Section 4(a)(2) generally provides an exemption from registration for transactions by an issuer not involving any public offering. Mr. Saligram is the Company’s CEO and an accredited investor as defined in Rule 501 under the Securities Act. No sales involved the use of an underwriter and no commissions were paid in connection with the saleacquisition 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 any securities.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
On November 8, 2017, theAugust 5, 2020, our Board of Directors ofauthorized a share repurchase program for the Company amended and restated the Senior Executive Restricted Share Unit Plan and the Employee Restricted Share Unit Plan (together, the “RSU Plans”, and the amendment and restatement of the RSU Plans, the “amendments”). The amendments of the RSU Plans generally clarify certain tax and other provisions of the RSU Plans and, subject to shareholder approval, permit the settlement of vested RSUs, in addition to the existing cash settlement option, by issuance or delivery pursuant to open market purchasesrepurchase of up to an aggregate$100.0 million worth of 300,000our 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 Company for both RSU Plans. The amendments do not affect any RSUs outstanding prior to the date of such amendments, and no common shares of the Company will be issued or delivered in respect of vested RSUs absent shareholder approval.three months ended September 30, 2020.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
| |
Ritchie Bros. | 51 |
ITEM 6: EXHIBITS
Exhibits
The exhibits listed in below are filed as part of this Quarterly Report on Form 10-Q and incorporated herein by reference.
| | |
Exhibit | | |
Number | Document | |
| | |
| | |
10.1 | | |
10.2 10.3 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
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 |
| | |
Ritchie Bros. | ||
52 |
SIGNATURES 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. RITCHIE BROS. AUCTIONEERS INCORPORATED Dated: November By: /s/ Ann Fandozzi Chief Executive Officer Dated: November By: /s/ Sharon R. Driscoll Sharon R. Driscoll Chief Financial Officer Ritchie Bros. 53 9, 20175, 2020Ravichandra K. SaligramAnn FandozziRavichandra K. Saligram9, 20175, 2020Sharon R. Driscoll97