| Business Combinations | 22 . Business combination s
(a)
IronPlanet acquisition
On May 31, 2017 (the “IronPlanet Acquisition Date”), the Company acquired 100% 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 paid 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 for in accordance with ASC 805, Business Combinations . The assets acquired 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.
22. Business combinations (continued)
(a) IronPlanet acquisition (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
~ Intangible assets consist of indefinite-lived trade names and trademarks , customer relationships with estimated useful lives of ranging from six to 13 years, and a technology platform with an estimated usefu l life of 7 years.
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.
22. Business combinations (continued)
(a)
IronPlanet acquisition (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 t ransactions relating to the IronPlanet a cquisition and the financing required to fund the acquisition had occurred on January 1, 2016. The se transactions include adjustments in each applicable period presented for recurring charges related to a mortization 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 that were presented as if the transactions occurred on January 1, 2016. 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 a cquisition an d 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,
Nine months ended 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.
22. Business combinations (continued)
(a) IronPlanet acquisition (continued)
Contributed revenue and net income (continued)
Three months ended
Six months ended
June 30,
June 30,
Nine months ended September 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.
(b)
Kramer acquisition
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 805 Business 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.
22. Business combinations (continued)
(b) Kramer acquisition (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.
(c)
Petrowsky acquisition
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 ca sh 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.
22. Business combinations (continued)
(c) Petrowsky acquisition (continued)
The acquisition was accounted for in accordance with ASC 805 Business Combinations . The assets acquired were recorded at their estimated fair values at the Pe trowsky Acquisition Date. G oodwill of $4,308,000 was calculated as the fair value of consideration over the estimated fair value of the net assets acquired.
Petrowsky p urchase 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.
22. Business combinations (continued)
(c) Petrowsky acquisition (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, t he 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 C ompany paid $333,000 in this regard during the three months ended September 30, 2017.
(d)
Mascus acquisition
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 wit h ASC 805, Business Combinations . The assets acquired and liabilities assumed were recorded at their estimated fair values at the Mascus Acquisit ion Date. G oodwill 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
22. Business combinations (continued)
(d) Mascus acquisition (continued)
Mascus purchase price allocation (continued)
(1)
The Company acquired 100% of Mascus and within the Mascus group of entities there were two subsidiaries that were not wholly-owned, one domiciled in the United States and one domiciled in Denmark. As such, the Company acquired non-controlling interests. The fair value of each non-controlling interest was determined using an income approach based on cash flows of the respective entities that were attributable to the non-controlling interest. On May 27, 2016, Ritchie Bros. Holdings (America) Inc. acquired the remaining issued and outstanding shares of the Mascus subsidiary domiciled in the United States for cash consideration of $226,000 .
(2)
Intangible assets consist of customer relationships with estimated useful lives of 17 years, indefinite-lived trade names, and software assets with estimated useful lives of five years.
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 c onsideration
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 c ertain 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 C ompany paid €393,000 ( $419,000 ) in this regard during the nine months ended September 30 , 2017.
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