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EX-32.2 - EXHIBIT 32.2 - RITCHIE BROS AUCTIONEERS INCtv506251_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - RITCHIE BROS AUCTIONEERS INCtv506251_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - RITCHIE BROS AUCTIONEERS INCtv506251_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - RITCHIE BROS AUCTIONEERS INCtv506251_ex31-1.htm
EX-10.2 - EXHIBIT 10.2 - RITCHIE BROS AUCTIONEERS INCtv506251_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - RITCHIE BROS AUCTIONEERS INCtv506251_ex10-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

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   N/A
(State or other jurisdiction of incorporation or organization)   (R.S. Employer Identification No.)
     
9500 Glenlyon Parkway    
Burnaby, British Columbia, Canada   V5J 0C6
(Address of Principal Executive Offices)   (Zip Code)

 

(778) 331-5500

(Registrant’s Telephone Number, including Area Code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x 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 x 

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date: 108,644,431 common shares, without par value, outstanding as of November 7, 2018.

 

 

 

 

 

 

RITCHIE BROS. AUCTIONEERS INCORPORATED

FORM 10-Q

For the quarter ended September 30, 2018

 

INDEX

 

  PART I – FINANCIAL INFORMATION  
     
ITEM 1: Consolidated Financial Statements 1
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 59
ITEM 4: Controls and Procedures 59
     
  PART II – OTHER INFORMATION  
     
ITEM 1: Legal Proceedings 60
ITEM 1A: Risk Factors 60
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds 60
ITEM 6: Exhibits 61
     
  SIGNATURES  

 

Ritchie Bros.

 

 

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, 
   2018   2017   2018   2017 
Revenues:                
Service revenues  $161,374   $145,938   $551,736   $442,066 
Revenue from inventory sales   83,972    81,463    262,318    237,375 
Total revenues   245,346    227,401    814,054    679,441 
                     
Operating expenses:                    
Costs of services   33,053    33,461    112,743    94,093 
Cost of inventory sold   74,341    72,476    231,834    207,603 
Selling, general and administrative expenses   88,323    85,335    287,052    230,287 
Acquisition-related costs   2,007    3,587    5,039    35,162 
Depreciation and amortization expenses   16,723    14,837    49,451    37,047 
Gain on disposition of property, plant and equipment   (342)   (42)   (958)   (1,071)
Impairment loss   -    -    -    8,911 
Foreign exchange loss (gain)   47    816    31    (7)
Total operating expenses   214,152    210,470    685,192    612,025 
Operating income   31,194    16,931    128,862    67,416 
                     
Interest expense   (10,473)   (10,558)   (32,720)   (27,311)
Other income, net   7,182    592    8,995    6,346 
Income before income taxes   27,903    6,965    105,137    46,451 
Income tax expense (recovery)   4,791    (3,358)   19,091    7,982 
                     
Net income  $23,112   $10,323   $86,046   $38,469 
                     
Net income (loss) attributable to:                    
Stockholders  $23,138   $10,261   $85,993   $38,273 
Non-controlling interests   (26)   62    53    196 
Net income  $23,112   $10,323   $86,046   $38,469 
                     
Earnings per share attributable to stockholders:                    
Basic  $0.21   $0.10   $0.80   $0.36 
Diluted  $0.21   $0.09   $0.79   $0.35 
                     
Weighted average number of shares outstanding:                    
Basic   108,365,427    107,120,618    107,811,391    106,993,358 
Diluted   109,887,194    108,178,303    109,133,378    108,069,624 

 

See accompanying notes to the condensed consolidated financial statements.

 

Ritchie Bros.1

 

 

Condensed Consolidated Statements of Comprehensive Income

(Expressed in thousands of United States dollars)

(Unaudited)

 

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
                 
Net income  $23,112   $10,323   $86,046   $38,469 
Other comprehensive income (loss), net of income tax:                    
Foreign currency translation adjustment   3    6,009    (7,781)   22,822 
                     
Total comprehensive income  $23,115   $16,332   $78,265   $61,291 
                     
Total comprehensive income (loss) attributable to:                    
Stockholders  $23,145   $16,256   $78,234   $61,045 
Non-controlling interests   (30)   76    31    246 
   $23,115   $16,332   $78,265   $61,291 

 

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, 
   2018   2017 
Assets          
           
Cash and cash equivalents  $228,764   $267,910 
Restricted cash   75,281    63,206 
Trade and other receivables   247,972    92,105 
Inventory   84,789    38,238 
Other current assets   40,236    27,610 
Income taxes receivable   8,589    19,418 
Total current assets   685,631    508,487 
           
Property, plant and equipment   504,738    526,581 
Equity-accounted investments   4,206    7,408 
Other non-current assets   26,549    24,146 
Intangible assets   251,422    261,094 
Goodwill   673,191    670,922 
Deferred tax assets   23,729    18,674 
Total assets  $2,169,466   $2,017,312 
           
Liabilities and Equity          
           
Auction proceeds payable  $325,985   $199,245 
Trade and other payables   179,659    164,553 
Income taxes payable   6,999    732 
Short-term debt   10,532    7,018 
Current portion of long-term debt   11,556    16,907 
Total current liabilities   534,731    388,455 
           
Long-term debt   740,222    795,985 
Other non-current liabilities   39,436    46,773 
Deferred tax liabilities   33,601    32,334 
Total liabilities   1,347,990    1,263,547 
           
Commitments          
Contingencies          
Contingently redeemable performance share units   864    9,014 
Stockholders' equity:          
Share capital:          
Common stock; no par value, unlimited shares authorized, issued and outstanding shares: 108,601,417 (December 31, 2017: 107,269,783)   179,348    138,582 
Additional paid-in capital   53,941    41,005 
Retained earnings   632,496    602,609 
Accumulated other comprehensive loss   (50,273)   (42,514)
Stockholders' equity   815,512    739,682 
Non-controlling interest   5,100    5,069 
Total stockholders' equity   820,612    744,751 
Total liabilities and equity  $2,169,466   $2,017,312 

 

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 
   shares   Amount   ("APIC")   earnings   loss   ("NCI")   equity   ("PSUs") 
Balance, December 31, 2017   107,269,783   $138,582   $41,005   $602,609   $(42,514)  $5,069   $744,751   $9,014 
Net income   -    -    -    85,993    -    53    86,046    - 
Other comprehensive loss   -    -    -    -    (7,759)   (22)   (7,781)   - 
    -    -    -    85,993    (7,759)   31    78,265    - 
Stock option exercises   1,154,541    34,876    (7,804)   -    -    -    27,072    - 
Issuance of common stock related to vesting of share units   177,093    5,890    (1,662)   (326)   -    -    3,902    (7,803)
Stock option compensation expense   -    -    6,711    -    -    -    6,711    - 
Modification of PSUs   -    -    12,365    958    -    -    13,323    (6,622)
Equity-classified PSU expense   -    -    3,153    -    -    -    3,153    5,826 
Equity-classified PSU dividend equivalents   -    -    173    (514)   -    -    (341)   341 
Change in fair value of contingently redeemable PSUs   -    -    -    (108)   -    -    (108)   108 
Cash dividends paid   -    -    -    (56,116)   -    -    (56,116)   - 
                                         
Balance, September 30, 2018   108,601,417   $179,348   $53,941   $632,496   $(50,273)  $5,100   $820,612   $864 

 

See accompanying notes to the condensed consolidated financial statements.

 

Ritchie Bros.4

 

 

Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of United States dollars)

(Unaudited)

 

 

Nine months ended September 30,  2018   2017 
Cash provided by (used in):          
Operating activities:          
Net income  $86,046   $38,469 
Adjustments for items not affecting cash:          
Depreciation and amortization expenses   49,451    37,047 
Impairment loss   -    8,911 
Stock option compensation expense   6,711    10,996 
Equity-classified PSU expense   8,978    1,871 
Deferred income tax expense (recovery)   (3,774)   (9,583)
Unrealized foreign exchange loss (gain)   501    (1,011)
Amortization of debt issuance costs   3,032    2,058 
Gain on disposition of equity investment   (4,935)   - 
Other, net   (4,636)   (2,090)
Net changes in operating assets and liabilities   (44,227)   11,849 
Net cash provided by operating activities   97,147    98,517 
Investing activities:          
Acquisition of IronPlanet, net of cash acquired   -    (675,851)
Property, plant and equipment additions   (13,394)   (8,086)
Intangible asset additions   (19,410)   (20,482)
Proceeds on disposition of property, plant and equipment   2,524    3,487 
Proceeds on disposal of equity investment   6,147    - 
Other, net   (4,674)   (667)
Net cash used in investing activities   (28,807)   (701,599)
Financing activities:          
Dividends paid to stockholders   (56,116)   (54,558)
Dividends paid to NCI   -    (41)
Issuances of share capital   27,072    7,934 
Payment of withholding taxes on issuance of shares   (3,901)   - 
Proceeds from short-term debt   6,949    6,850 
Repayment of short-term debt   (3,372)   (22,793)
Proceeds from long-term debt   -    325,000 
Repayment of long-term debt   (58,825)   (104,729)
Debt issue costs   -    (12,624)
Repayment of finance lease obligations   (2,827)   (1,565)
Other, net   (1,176)   (1,431)
Net cash provided by (used in) financing activities   (92,196)   142,043 
Effect of changes in foreign currency rates on cash, cash equivalents, and restricted cash   (3,215)   17,270 
Decrease   (27,071)   (443,769)
Beginning of period   331,116    758,089 
Cash, cash equivalents, and restricted cash, end of period  $304,045   $314,320 

 

See accompanying notes to the condensed consolidated financial statements.

 

Ritchie Bros.5

 

 

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

 

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 live unreserved auctions and online reserved and unreserved marketplaces, listing services, and private brokerage services. Ritchie Bros. Auctioneers Incorporated is a company incorporated in Canada under the Canada Business Corporations Act, whose shares are publicly traded on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”).

 

(a) Basis of preparation

 

These unaudited condensed consolidated interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). They include the accounts of Ritchie Bros. Auctioneers Incorporated and its subsidiaries from their respective dates of formation or acquisition. All significant intercompany balances and transactions have been eliminated.

 

Certain information and footnote disclosure required by US GAAP for complete annual financial statements have been omitted and, therefore, these unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, cash flows and changes in equity for the interim periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

(b) Revenue recognition

 

Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) using the full retrospective method, which included restating prior years for comparative amounts. This new accounting policy resulted in a change in the financial statement presentation only on the income statement, as described in Note 1(i) New and amended accounting standards in this Quarterly Report on Form 10-Q.

 

Revenues are comprised of:

 

·Service revenues, including the following:
i.Revenue from auction and marketplace (“A&M”) activities, including commissions earned at our live auctions, online marketplaces, and private brokerage services where we act as an agent for consignors of equipment and other assets, and various auction-related fees, including listing and buyer transaction fees; and
ii.Other services revenues, including revenues from listing services, refurbishment, logistical services, financing, appraisal fees and other ancillary service fees; and
·Revenue from inventory sales as part of A&M activities

 

The Company recognizes revenue when control of the promised goods or services is transferred to our customers, or upon completion of the performance obligation, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For live event-based auctions or online auctions, revenue is recognized when the auction sale is complete and the Company has determined that the sale proceeds are collectible. Revenue is measured at the fair value of the consideration received or receivable and is shown net of value-added tax and duties.

 

Ritchie Bros.6

 

 

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)

 

(b) Revenue recognition (continued)

 

Service revenues

 

Commissions from sales at the Company’s auctions represent the percentage earned by the Company on the gross proceeds from equipment and other assets sold at auction. The majority of the Company’s commissions are earned as a pre-negotiated fixed rate of the gross selling price. Other commissions from sales at the Company’s auctions are earned from underwritten commission contracts, when the Company guarantees a certain level of proceeds to a consignor.

 

The Company accepts equipment and other assets on consignment stimulating buyer interest through professional marketing techniques, and matches sellers (also known as consignors) to buyers through the auction or private sale process. Prior to offering an item for sale on its online marketplaces, the Company also performs inspections.

 

Following the sale of the item, the Company invoices the buyer for the purchase price of the asset, taxes, and, if applicable, the buyer transaction fee, collects payment from the buyer, and remits the proceeds to the seller, net of the seller commissions, applicable taxes, and applicable fees. Commissions are calculated as a percentage of the hammer price of the property sold at auction. Fees are also charged to sellers for listing and inspecting equipment. Other revenues 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 revenues are recognized on the date of the auction sale upon the fall of the auctioneer’s hammer.

 

Under the standard terms and conditions of its auction sales, the Company is not obligated to pay a consignor for property that has not been paid for by the buyer, provided the property has not been released to the buyer. If the buyer defaults on its payment obligation, also referred to as a collapsed sale, the sale is cancelled in the period in which the determination is made, and the property is returned to the consignor or placed in a later event-based or online auction. Historically cancelled sales have not been material.

 

Online marketplace commission revenue is reduced by a provision for disputes, which is an estimate of disputed items that are expected to be settled at a cost to the Company, related to settlements of discrepancies under the Company’s equipment condition certification program. The equipment condition certification refers to a written inspection report provided to potential buyers that reflects the condition of a specific piece of equipment offered for sale, and includes ratings, comments, and photographs of the equipment following inspection by one of the Company’s equipment inspectors. The equipment condition certification provides that a buyer may file a written dispute claim during an eligible dispute period for consideration and resolution at the sole determination of the Company if the purchased equipment is not substantially in the condition represented in the inspection report. Typically disputes under the equipment condition certification program are settled with minor repairs or additional services, such as washing or detailing the item; the estimated costs of such items or services are included in the provision for disputes.

 

Commission revenues 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.

 

Ritchie Bros.7

 

 

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)

 

(b) Revenue recognition (continued)

 

Service revenues (continued)

 

Underwritten commission contracts can take the form of guarantee contracts. Guarantee contracts typically include a pre-negotiated percentage of the guaranteed gross proceeds plus a percentage of proceeds in excess of the guaranteed amount. If actual auction proceeds are less than the guaranteed amount, commission is reduced; if proceeds are sufficiently lower, the Company can incur a loss on the sale. Losses, if any, resulting from guarantee contracts are recorded in the period in which the relevant auction is completed. If a loss relating to a guarantee contract held at the period end to be sold after the period end is known or is probable and estimable at the financial statement reporting date, the loss is accrued in the financial statements for that period. The Company’s exposure from these guarantee contracts fluctuates over time.

 

Other services revenue also includes fees for refurbishment, logistical services, financing, appraisal fees and other ancillary service fees. Fees are recognized in the period in which the service is provided to the customer

 

Revenue on inventory sales

 

Underwritten commission contracts can take the form of inventory contracts. Revenues related to inventory contracts are recognized in the period in which the sale is completed, title to the property passes to the purchaser and the Company has fulfilled any other obligations that may be relevant to the transaction. In its role as auctioneer, the Company auctions its inventory to equipment buyers through the auction process. Following the sale of the item, the Company invoices the buyer for the purchase price of the asset, taxes, and, if applicable, the buyer transaction fee, and collects payment from the buyer.

 

On the fall of the auctioneer’s hammer, the highest bidder becomes legally obligated to pay the full purchase price, which is the hammer price of the property purchased. Title to the property is transferred in exchange for the hammer price, and if applicable, the buyer transaction fee plus applicable taxes.

 

(c) Cost 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.

 

Costs of services incurred to earn online marketplace revenues in addition to the costs listed above also include inspection costs. Inspections are generally performed at the seller’s physical location. The cost of inspections includes payroll costs and related benefits for the Company’s employees that perform and manage field inspection services, the related inspection report preparation and quality assurance costs, fees paid to contractors who perform field inspections, related travel and incidental costs for the Company’s inspection service organization, and office and occupancy costs for its inspection services personnel. Costs of earning online marketplace revenues 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.

 

Costs of services incurred in earning other fee revenues include ancillary and logistical service expenses, direct labour (including commissions on sales), software maintenance fees, and materials. Costs of services exclude depreciation and amortization expenses.

 

(d) Cost of inventory sold

 

Cost of inventory sold includes the purchase price of assets sold for the Company’s own account and is determined using a specific identification basis.

 

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)

 

(e) Share-based payments

 

The Company classifies a share-based payment award as an equity or liability payment based on the substantive terms of the award and any related arrangement.

 

Equity-classified share-based payments

 

Share unit plans

 

The Company has a senior executive performance share unit (“PSU”) plan and an employee PSU plan that provides for the award of PSUs to certain senior executives and employees, respectively, of the Company. The Company has the option to settle certain share unit awards in cash or shares and expects to settle them in shares. The cost of PSUs granted is measured at the fair value of the underlying PSUs at the grant date using a Monte-Carlo simulation model. PSUs vest based on the passage of time and achievement of performance criteria.

 

The Company also has a senior executive restricted share unit (“RSU”) plan and an employee RSU plan that provides for the award of RSUs to certain senior executives and employees, respectively, of the Company. The Company has the option to settle certain share unit awards in cash or shares and expects to settle all grants on and after 2017 in shares. The cost of RSUs granted is measured using the volume weighted average price of the Company’s common shares for the twenty days prior to the grant date. RSUs vest based on the passage of time and include restrictions related to employment.

 

This fair value of awards expected to vest under these plans is expensed over the respective remaining service period of the individual awards, on an accelerated recognition basis, with the corresponding increase to APIC recorded in equity. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in earnings, such that the consolidated expense reflects the revised estimate, with a corresponding adjustment to equity. Dividend equivalents on the equity-classified PSUs and RSUs are recognized as a reduction to retained earnings over the service period.

 

In previous quarters, the RSUs and PSUs awarded under the senior executive and employee PSU plans were intended to be settled in cash in the event of death of the participant. At its August 2018 meeting, the Board of Directors resolved that, with respect to each of the RSU and PSU plans, there will be no preference or default in favour of cash settlement and, pursuant to the discretion granted under each plan, the Compensation Committee of the Board will determine whether to settle the awards in cash or in shares in the event of death of the participant. The Company intends to settle in shares. Prior to such resolution, the contingently redeemable portion representing the amount that would be redeemable based on the conditions at the date of grant, to the extent attributable to prior service, was recognized as temporary equity. As a result of the resolution, that portion has been reclassified to additional paid in capital during the quarter.

 

Stock option plans

 

The Company has three stock option compensation plans that provide for the award of stock options to selected employees, directors and officers of the Company. The cost of options granted is measured at the fair value of the underlying option at the grant date using the Black-Scholes option pricing model. The fair value of options expected to vest under these plans is expensed over the respective remaining service period of the individual awards, on an accelerated recognition basis, with the corresponding increase to APIC recorded in equity. Upon exercise, any consideration paid on exercise of the stock options and amounts fully amortized in APIC are credited to the common shares.

 

Ritchie Bros.9

 

 

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)

 

(e) Share-based payments (continued)

 

Liability-classified share-based payments

 

The Company maintains other share unit compensation plans that vest over a period of up to three years after grant. Under those plans, the Company is either required or expects to settle vested awards on a cash basis or by providing cash to acquire shares on the open market on the employee’s behalf, where the settlement amount is determined using 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 18. 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 non-current liabilities.

 

(f) Inventories

 

Inventory consists of equipment and other assets purchased for resale in an upcoming live on site auction or online marketplace event. The Company 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. The significant elements of cost include the acquisition price of the inventory and make-ready costs to prepare the inventory for sale that are not selling expenses and in-bound transportation costs. Write-downs to the carrying value of inventory are recorded in cost of inventory sold on the consolidated income statement.

 

(g) Impairment of long-lived and indefinite-lived assets

 

Long-lived assets, comprised of property, plant and equipment and intangible assets subject to amortization, are assessed for impairment whenever events or circumstances indicate that their carrying value may not be recoverable. For the purpose of impairment testing, long-lived assets are grouped and tested for recoverability at the lowest level that generates independent cash flows. An impairment loss is recognized when the carrying value of the assets or asset groups is greater than the future projected undiscounted cash flows. The impairment loss is calculated as the excess of the carrying value over the fair value of the asset or asset group. Fair value is based on valuation techniques or third-party appraisals. Significant estimates and judgments are applied in determining these cash flows and fair values.

 

Ritchie Bros.10

 

 

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)

 

(g) Impairment of long-lived and indefinite-lived assets (continued)

Indefinite-lived intangible assets are tested annually for impairment as of December 31, and between annual tests if indicators of potential impairment exist. The Company has the option of performing a qualitative assessment to first determine whether the quantitative impairment test is necessary. This involves an assessment of qualitative factors to determine the existence of events or circumstances that would indicate whether it is more likely than not that the carrying amount of the indefinite-lived intangible asset is less than its fair value. If the qualitative assessment indicates it is not more likely than not that the carrying amount is less than its fair value, a quantitative impairment test is not required. Where a quantitative impairment test is required, the procedure is to compare the indefinite-lived intangible asset’s fair value with its carrying amount. An impairment loss is recognized as the difference between the indefinite-lived intangible asset’s carrying amount and its fair value.

 

(h) Goodwill

Goodwill represents the excess of the purchase price of an acquired enterprise over the fair value assigned to the assets acquired and liabilities assumed in a business combination.

 

Goodwill is not amortized, but it is tested annually for impairment at the reporting unit level as of December 31 and between annual tests if indicators of potential impairment exist. The Company has the option of performing a qualitative assessment of a reporting unit to first determine whether the quantitative impairment test is necessary. This involves an assessment of qualitative factors to determine the existence of events or circumstances that would indicate whether it is more likely than not that the carrying amount of the reporting unit to which goodwill belongs is less than its fair value. If the qualitative assessment indicates it is not more likely than not that the reporting unit’s carrying amount is less than its fair value, a quantitative impairment test is not required.

 

If a quantitative impairment test is required, the procedure is to identify potential impairment by comparing the reporting unit’s fair value with its carrying amount, including goodwill. The reporting unit’s fair value is determined using various valuation approaches and techniques that involve assumptions based on what the Company believes a hypothetical marketplace participant would use in estimating fair value on the measurement date. An impairment loss is recognized as the difference between the reporting unit’s carrying amount and its fair value. If the difference between the reporting unit’s carrying amount and fair value is greater than the amount of goodwill allocated to the reporting unit, the impairment loss is restricted by the amount of the goodwill allocated to the reporting unit.

 

(i) New and amended accounting standards

 

(i)Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company implemented the new standard using a full retrospective method, in order to provide more useful comparative information to financial statement users.

 

The primary impact of the adoption of ASU 2014-09 is the change in the presentation of revenue from inventory, ancillary service, and logistical services contracts on a gross basis as a principal versus net as an agent. This is due to the new standard requiring an entity to determine whether the entity controls the specified good or service before transfer to the customer, with the entity being principal in these transactions. Prior to adopting ASU 2014-09, an entity evaluated indicators to determine if it was a principal or agent. As the Company determined that it controls the inventory and provision of ancillary and logistical services before transfer to its customers, the Company concluded that it was acting as a principal rather than an agent. As a result of adoption of the new accounting standard there was no impact on the timing of recognition of revenue, operating income, net income, or on the consolidated balance sheet or consolidated statement of cash flows.

 

Ritchie Bros.11

 

 

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)

 

(i) New and amended accounting standards (continued)

 

Presenting revenue from inventory sales on a gross basis and presenting ancillary and logistical services revenues on a gross basis significantly changes the face of the Company’s consolidated income statement in two primary ways:

 

1)Prior to the adoption of ASU 2014-09, all revenue from inventory sales were presented net of costs within service revenues on the income statement. With the adoption of ASU 2014-09, the Company has presented separately revenue from inventory sales and service revenue and accordingly service revenues exclude revenue from inventory sales and cost of inventory sold. Those amounts are now presented gross as separate line items on the face of the consolidated income statement; and
2)Ancillary and logistical service revenues are presented within service revenues, now on a gross basis, with the related costs of services presented separately within costs of services.

 

Impact to reported results

 

The new presentation based on ASU 2014-09 results in an increase the amount of revenue reported but there is no change in the operating income compared to the prior presentation:

 

Three months ended September 30, 2017
Consolidated income statement line item  As reported   New Revenue Standard
Adjustment
   Consolidated income statement line
item
  As Adjusted 
Revenues  $141,047   $4,891   Service revenues  $145,938 
         81,463   Revenue from inventory sales   81,463 
         86,354   Total revenues   227,401 
Costs of services, excluding D&A   (19,583)   (13,878)  Costs of services   (33,461)
         (72,476)  Cost of inventory sold   (72,476)
   $121,464   $-      $121,464 

 

Nine months ended September 30, 2017
Consolidated income statement line item  As reported   New Revenue Standard
Adjustment
   Consolidated income statement line
item
  As Adjusted 
Revenues  $431,732   $10,334   Service revenues  $442,066 
         237,375   Revenue from inventory sales   237,375 
         247,709   Total revenues   679,441 
Costs of services, excluding D&A   (53,987)   (40,106)  Costs of services   (94,093)
         (207,603)  Cost of inventory sold   (207,603)
   $377,745   $-      $377,745 

 

(ii)Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are applied retrospectively on the amendment date. The adoption of ASU 2016-15 resulted in the $1,302,000 Mascus contingent consideration paid in the second quarter of 2017 to be reclassified from operating to financing cash flows.

 

Ritchie Bros.12

 

 

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)

 

(j) Recent accounting standards not yet adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize almost all leases, including operating leases, on the balance sheet through a right-of-use asset and a corresponding lease liability. For short-term leases, defined as those with a term of 12 months or less, the lessee is permitted to make an accounting policy election not to recognize the lease assets and liabilities, and instead recognize the lease expense generally on a straight-line basis over the lease term. The accounting treatment under this election is consistent with current operating lease accounting. No extensive amendments were made to lessor accounting, but amendments of note include changes to the definition of initial direct costs and accounting for collectability uncertainties in a lease.

 

ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt the standard effective January 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an “optional transition method”. The Company can transition to the new standard by using a “modified retrospective transition”, which reflects the new guidance from the beginning of the earliest period presented in the financial statements or the “optional transition method”, which permits the Company to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. If the optional transition method is utilized, the Company’s reporting for the comparative periods presented in the financial statements in which it adopts Topic 842 will continue to be reported pursuant to Topic 840. The Company is evaluating which transition approach it intends to apply and will conclude on the transition approach in the fourth quarter of 2018.

 

The Company will utilize the package of practical expedients permitted within the new standard, which among other things, allows the Company to carryforward the historical lease classification. In addition, the Company will elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. While lease classification will remain unchanged, hindsight will result in generally longer accounting lease terms and useful lives of the corresponding leasehold improvements. The Company will elect not to recognize the lease assets and liabilities for leases with an initial term of 12 months or less and will recognize those lease payments on a straight-line basis over the lease term.

 

The Company is continuing to assess the impact of the standard and we expect total liabilities to increase with an offsetting increase to leased assets. The Company does not believe the standard will materially affect our consolidated net earnings.

 

We do not expect the standard to impact on our debt-covenant compliance under our current agreements.

 

2. Significant judgments, estimates and assumptions

 

The preparation of financial statements in conformity with US GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

 

Future differences arising between actual results and the judgments, estimates and assumptions made by the Company at the reporting date, or future changes to estimates and assumptions, could necessitate adjustments to the underlying reported amounts of assets, liabilities, revenues and expenses in future reporting periods.

 

Judgments, estimates and underlying assumptions are evaluated on an ongoing basis by management, and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstance 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, deferred income taxes, reserves for tax uncertainties, and other contingencies.

 

Ritchie Bros.13

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

3. Seasonality

 

The Company’s operations are both seasonal and event driven. Revenues tend to be the highest during the second and fourth calendar quarters. The Company generally conducts more live, on site auctions during these quarters than during the first and third calendar quarters. Late December through mid-February and mid-July through August are traditionally less active periods. Online volumes are similarly affected as supply of used equipment is lower in the third quarter as it is actively being used and not available for sale.

 

4. Segment information

 

The Company’s principal business activity is the management and disposition of used industrial equipment and other durable assets. The Company’s operations are comprised of one reportable segment and other business activities that are not reportable as follows:

 

·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”), Mascus online services, and the 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, 2018   Nine months ended September 30, 2018 
   A&M   Other   Consolidated   A&M   Other   Consolidated 
Service revenues  $134,604   $26,770   $161,374   $463,076   $88,660   $551,736 
Revenue from inventory sales   83,972    -    83,972    262,318    -    262,318 
Total revenues   218,576    26,770    245,346    725,394    88,660    814,054 
Costs of services   20,059    12,994    33,053    62,888    49,855    112,743 
Cost of inventory sold   74,341    -    74,341    231,834    -    231,834 
Selling, general and administrative expenses ("SG&A")   83,542    4,781    88,323    272,503    14,549    287,052 
Segment profit  $40,634   $8,995   $49,629   $158,169   $24,256   $182,425 
Acquisition-related costs             2,007              5,039 
Depreciation and amortization expenses ("D&A")             16,723              49,451 
Gain on disposition of property, plant and equipment ("PPE")             (342)             (958)
Foreign exchange loss             47              31 
Operating income            $31,194             $128,862 
Interest expense             (10,473)             (32,720)
Other income, net             7,182              8,995 
Income tax expense             (4,791)             (19,091)
Net income            $23,112             $86,046 

 

Ritchie Bros.14

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

4. Segment information (continued)

 

   Three months ended September 30, 2017   Nine months ended September 30, 2017 
   A&M   Other   Consolidated   A&M   Other   Consolidated 
Service revenues  $121,255   $24,683   $145,938   $370,794   $71,272   $442,066 
Revenue from inventory sales   81,463    -    81,463    237,375    -    237,375 
Total revenues   202,718    24,683    227,401    608,169    71,272    679,441 
Costs of services   18,381    15,080    33,461    51,946    42,147    94,093 
Cost of inventory sold   72,476    -    72,476    207,603    -    207,603 
SG&A expenses   81,736    3,599    85,335    219,824    10,463    230,287 
Impairment loss   -    -    -    8,911    -    8,911 
Segment profit  $30,125   $6,004   $36,129   $119,885   $18,662   $138,547 
Acquisition-related costs             3,587              35,162 
D&A expenses             14,837              37,047 
Gain on disposition of PPE             (42)             (1,071)
Foreign exchange loss (gain)             816              (7)
Operating income            $16,931             $67,416 
Interest expense             (10,558)             (27,311)
Other income, net             592              6,346 
Income tax recovery (expense)             3,358              (7,982)
Net income            $10,323             $38,469 

 

The Company‘s geographic breakdown of total revenue is as follows:

 

   United
States
   Canada   Europe   Other   Consolidated 
Total revenues for the three months ended:                         
September 30, 2018  $114,410   $52,711   $43,935   $34,290   $245,346 
September 30, 2017   107,812    51,136    29,065    39,388    227,401 
Total revenues for the nine months ended:                         
September 30, 2018   392,904    201,296    123,335    96,519    814,054 
September 30, 2017   327,838    170,994    81,930    98,679    679,441 

 

Ritchie Bros.15

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

5. Total revenues

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Service revenues:                    
Commissions  $87,548   $88,696   $313,539   $280,235 
Fees   73,826    57,242    238,197    161,831 
    161,374    145,938    551,736    442,066 
Revenue from inventory sales   83,972    81,463    262,318    237,375 
   $245,346   $227,401   $814,054   $679,441 

 

6. Operating expenses

 

Costs of services

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Ancillary and logistical service expenses  $11,682   $13,878   $46,242   $40,106 
Employee compensation expenses   10,170    10,032    30,120    24,321 
Buildings, facilities and technology expenses   1,990    1,872    7,280    5,819 
Travel, advertising and promotion expenses   5,921    5,562    20,535    17,644 
Other costs of services   3,290    2,117    8,566    6,203 
   $33,053   $33,461   $112,743   $94,093 

 

SG&A expenses

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Employee compensation expenses  $56,959    55,560   $186,951   $147,420 
Buildings, facilities and technology expenses   15,058    13,494    45,767    39,088 
Travel, advertising and promotion expenses   9,302    8,431    27,821    21,212 
Professional fees   2,983    3,381    12,638    9,705 
Other SG&A expenses   4,021    4,469    13,875    12,862 
   $88,323   $85,335   $287,052   $230,287 

 

Ritchie Bros.16

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

6. Operating expenses (continued)

 

Acquisition-related costs

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
IronPlanet:                
Other acquisition-related costs  $1,756   $2,712   $2,876   $32,591 
Other acquisitions:                    
Continuing employment costs   251    829    2,104    2,421 
Other acquisition-related costs   -    46    59    150 
   $2,007   $3,587   $5,039   $35,162 

 

Included in acquisition costs for the three months ended September 30, 2018 is $1,501,000 in severance relating to integration activities.

 

Depreciation and amortization expenses

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Depreciation expense  $7,252   $7,228   $21,460   $20,813 
Amortization expense   9,471    7,609    27,991    16,234 
   $16,723   $14,837   $49,451   $37,047 

 

Impairment loss

 

During the nine months ended September 30, 2018 the Company did not recognize an impairment loss while in the nine months ended September 30, 2017 the Company recognized an impairment loss of $8,911,000 on certain technology assets.  

 

7. Other income

 

Included in other income is a gain of $4,935,000 recognized on the disposition of one of the Company’s equity accounted for investments. The Company received net proceeds of $6,147,000 on closing and is entitled to receive up to $1,020,000 upon the satisfaction of certain escrow release conditions over a period of five years. Additionally, the Company is entitled to receive up to $1,700,000 of contingent consideration upon the achievement of certain financial targets for the period from January 1, 2019 to December 31, 2019. The Company has not recognized any contingent consideration. 

 

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.

 

Ritchie Bros.17

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

8. Income taxes (continued)

 

For the three months ended September 30, 2018, income tax expense was $4,791,000, compared to an income tax recovery of $3,358,000 for the same period in 2017. Our effective tax rate was 17% in the third quarter of 2018, compared to -48% in the third quarter of 2017. The effective tax rate increased in the third quarter of 2018 compared to the third quarter of 2017 primarily due to the estimated greater proportion of annual income subject to tax in jurisdictions with higher tax rates and the estimated annual Base Erosion Anti Avoidance Tax (“BEAT”). The comparative period reflected the impact of greater estimates of non-deductible acquisition expenses which was partially offset by adjustments for deductible stock compensation expenses.

 

For the nine months ended September 30, 2018, income tax expense was $19,091,000, compared to an income tax expense of $7,982,000 for the same period in 2017. Our effective tax rate was 18% for the nine months ended September 30, 2018, compared to 17% for the nine months ended September 30, 2017.

 

Recent Tax Legislation

 

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that impacted our three and nine months ended September 30, 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018 and (2) imposing BEAT - a tax on certain deductible payments from our U.S. subsidiary to any of its foreign-related parties.

 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. For the three months ended September 30, 2018, we have not made any adjustments to the provisional amounts recorded at December 31, 2017.  Additional work is still necessary for a more detailed analysis of our deferred tax assets and liabilities, our historical foreign earnings subject to the one-time transition tax, and potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to tax expense in the fourth quarter of 2018 when the analysis is complete.

 

9. Earnings per share attributable to stockholders

 

Basic earnings per share (“EPS”) attributable to stockholders was calculated by dividing the net income attributable to stockholders by the weighted average (“WA”) number of common shares outstanding during the period. Diluted EPS attributable to stockholders was calculated by dividing the net income attributable to stockholders by the WA number of shares of common stock outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include unvested PSUs, RSUs, and outstanding stock options. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per share 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.

 

Ritchie Bros.18

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

9. Earnings per share attributable to stockholders (continued)

 

   Three months ended   Nine months ended 
   September 30, 2018   September 30, 2018 
   Net income   WA       Net income   WA     
   attributable to   number   Per share   attributable to   number   Per share 
   stockholders   of shares   amount   stockholders   of shares   amount 
Basic  $23,138    108,365,427   $0.21   $85,993    107,811,391   $0.80 
Effect of dilutive securities:                              
Share units   -    551,313    -    -    408,006    - 
Stock options   -    970,454    -    -    913,981    (0.01)
Diluted  $23,138    109,887,194   $0.21   $85,993    109,133,378   $0.79 

 

   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 
Basic  $10,261    107,120,618   $0.10   $38,273    106,993,358   $0.36 
Effect of dilutive securities:                              
Share units   -    214,304    -    (50)   337,570    - 
Stock options   -    843,381    (0.01)   -    738,696    (0.01)
Diluted  $10,261    108,178,303   $0.09   $38,223    108,069,624   $0.35 

 

10. Supplemental cash flow information

 

Nine months ended September 30,  2018   2017 
Trade and other receivables  $(159,258)  $(139,411)
Inventory   (49,140)   (16,460)
Advances against auction contracts   2,434    601 
Prepaid expenses and deposits   (5,282)   4,498 
Income taxes receivable   10,829    (8,062)
Auction proceeds payable   130,185    186,147 
Trade and other payables   15,827    (8,149)
Income taxes payable   6,836    (3,075)
Share unit liabilities   1,204    (5,848)
Other   2,138    1,608 
Net changes in operating assets and liabilities  $(44,227)  $11,849 

 

Ritchie Bros.19

 

 

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)

 

Nine months ended September 30,  2018   2017 
Interest paid, net of interest capitalized  $36,278   $20,233 
Interest received   2,009    2,460 
Net income taxes paid   7,902    28,037 
           
Non-cash purchase of property, plant and equipment under capital lease   5,490    6,851 

 

   September 30,   December 31, 
   2018   2017 
Cash and cash equivalents  $228,764   $267,910 
Restricted cash   75,281    63,206 
Cash, cash equivalents, and restricted cash  $304,045   $331,116 

  

11. Fair value measurement

 

All assets and liabilities for which fair value is measured or disclosed in the unaudited 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.

 

      September 30, 2018   December 31, 2017 
   Category  Carrying
amount
   Fair value   Carrying
amount
   Fair value 
Fair values disclosed:                       
Cash and cash equivalents  Level 1  $228,764   $228,764   $267,910   $267,910 
Restricted cash  Level 1   75,281    75,281    63,206    63,206 
Short-term debt  Level 2   10,532    10,532    7,018    7,018 
Long-term debt                       
Senior unsecured notes  Level 1   488,683    498,750    487,339    520,000 
Term loans  Level 2   263,095    266,036    325,553    329,687 

 

The carrying value of the Company‘s cash and cash equivalents, restricted cash, trade and other receivables, advances against auction contracts, auction proceeds payable, trade and other payables, and short term debt approximate their fair values due to their short terms to maturity. The carrying value of the term loans, before deduction of deferred debt issue costs, approximates its fair value as the interest rates on the loans were short-term in nature. The fair value of the senior unsecured notes is determined by reference to a quoted market price.

 

Ritchie Bros.20

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

12. Other current assets

 

   September 30,   December 31, 
   2018   2017 
         
Advances against auction contracts  $4,872   $7,336 
Assets held for sale   10,805    584 
Prepaid expenses and deposits   24,559    19,690 
   $40,236   $27,610 

 

As at September 30, 2018, the Company’s assets held for sale consisted of one excess auction site located in Canada and two excess auction sites located in the United States. Management made the strategic decision to sell these properties to maximize the Company’s return on invested capital. The estimated sales proceeds are expected to be in excess of the current book value. The properties have been actively marketed for sale, and management expects the sales to be completed within 12 months of September 30, 2018. This land belongs to the A&M reportable segment.

 

13. Other non-current assets

 

Included in other non-current assets is a tax receivable amount of $12,504,000 (December 31, 2017: $12,851,000).

 

14. Goodwill

 

Balance, December 31, 2017  $670,922 
Additions   3,671 
Foreign exchange movement   (1,402)
Balance, September 30, 2018  $673,191 

 

Ritchie Bros.21

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

15. Debt

 

   Carrying amount 
   September 30,   December 31, 
   2018   2017 
Short-term debt  $10,532   $7,018 
           
Long-term debt:          
           
Term Loans (previously referred to as Delayed draw term loans):          
Denominated in Canadian dollars, secured, bearing interest at a weighted          
average rate of 4.015%, due in monthly installments of interest only and          
quarterly installments of principal, maturing in October 2021   173,345    185,143 
Denominated in United States dollars, secured, bearing interest at a weighted          
average rate of 4.219%, due in weekly installments of interest only and          
quarterly installments of principal, maturing in October 2021   92,690    144,544 
Less: unamortized debt issue costs   (2,940)   (4,134)
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   (11,317)   (12,661)
Total Long-term debt   751,778    812,892 
           
Total debt  $762,310   $819,910 
           
Long-term debt:          
Current portion  $11,556   $16,907 
Non-current portion   740,222    795,985 
Total long-term debt  $751,778   $812,892 

 

Short-term debt at September 30, 2018 is comprised of drawings in different currencies on the Company’s committed revolving credit facilities and have a weighted average interest rate of 2.4% (December 31, 2017: 2.7%).

 

For the three and nine months ended September 30, 2018, the Company made scheduled debt repayments of $2,270,000 and $8,825,000, respectively, on the term loans (2017: $4,154,000 and $4,154,000). For the nine months ended September 30, 2018, the Company made voluntary prepayments totalling $50,000,000 on the term loan denominated in United States dollars. Prepayments are applied against future scheduled mandatory payments. The amount available pursuant to the term loan facility was only available to finance the acquisition of IronPlanet and will not be available for other corporate purposes upon repayment of amounts borrowed under that facility.

 

On June 21, 2018, the Company reduced the amount available on the Company’s committed revolving credit facilities by $185,000,000. At September 30, 2018, the Company’s credit agreement with a syndicate of lenders, and Bank of America, N.A. as administrative agent provides the Company with:

 

·Revolving facilities of up to $490,000,000

·The term loan facility used to finance the acquisition of IronPlanet and

·At the Company’s election and subject to certain conditions, including receipt of related commitments, incremental term loan facilities and/or increases to the revolving facilities in an aggregate amount of up to $50,000,000.

 

Ritchie Bros.22

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

15. Debt (continued)

 

As at September 30, 2018, the Company had unused committed revolving credit facilities aggregating $477,007,000 of which $472,881,000 is available until October 27, 2021.

 

16. Other non-current liabilities

 

   September 30,   December 31, 
   2018   2017 
Tax payable  $21,604   $25,958 
Finance lease obligation   8,738    7,875 
Share unit liabilities   -    2,865 
Other   9,094    10,075 
   $39,436   $46,773 

 

17. Equity and dividends

 

Share capital

Preferred stock

Unlimited number of senior preferred shares, without par value, issuable in series.

Unlimited number of junior preferred shares, without par value, issuable in series.

All issued shares are fully paid. No preferred shares have been issued.

 

Dividends

Declared and paid

The Company declared and paid the following dividends during the nine months ended September 30, 2018 and 2017:

 

   Declaration date  Dividend
per share
   Record date  Total
dividends
   Payment date
Nine months ended September 30, 2018:                   
Fourth quarter 2017  January 26, 2018  $0.1700   February 16, 2018  $18,246   March 9, 2018
First quarter 2018  May 9, 2018   0.1700   May 30, 2018   18,342   June 20, 2018
Second quarter 2018  August 7, 2018   0.1800   August 29, 2018   19,528   September 19, 2018
                    
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

 

Declared and undistributed

Subsequent to September 30, 2018, the Company’s Board of Directors declared a quarterly dividend of $0.18 cents per common share, payable on December 18, 2018 to stockholders of record on November 27, 2018. This dividend payable has not been recognized as a liability in the financial statements. The payment of this dividend will not have any tax consequences for the Company.

 

Foreign currency translation reserve

Foreign currency translation adjustments include intra-entity foreign currency transactions that are of a long-term investment nature, which generated net losses of $1,072,000 and $6,256,000 for the three and nine months ended September 30, 2018 (2017: net gains of $5,838,000 and $17,322,000).

 

Ritchie Bros.23

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

18. Share-based payments

Share-based payments consist of the following compensation costs:

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Stock option compensation expense:                    
SG&A expenses  $2,066    2,920   $6,354   $6,244 
Acquisition-related costs   162    -    357    4,752 
Share unit expense (recovery):                    
Equity-classified share units   2,718    (176)   8,978    1,871 
Liability-classified share units   300    821    2,245    246 
Employee share purchase plan - employer contributions   538    468    1,630    1,350 
   $5,784   $4,033   $19,564   $14,463 

 

Share unit expense (recovery) and employer contributions to the employee share purchase plan are recognized in SG&A expenses.

 

Stock option plan

 

Stock option activity for the nine months ended September 30, 2018 is presented below:

 

           WA     
   Common   WA   remaining   Aggregate 
   shares under   exercise   contractual   intrinsic 
   option   price   life (in years)   value 
Outstanding, December 31, 2017   4,459,744   $24.29    7.5   $17,649 
Granted   914,967    32.12           
Exercised   (1,154,541)   23.45        $13,472 
Forfeited   (77,644)   27.04           
Expired   (1,302)   25.76           
Outstanding,September 30, 2018   4,141,224   $26.20    7.4   $41,122 
Exercisable, September 30, 2018   2,107,984   $24.08    6.4   $25,401 

 

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, 2018 was $7.68.

 

The significant assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2018 and 2017 are presented in the following table on a weighted average basis:

 

Nine months ended September 30,  2018   2017 
Risk free interest rate   2.7%   2.0%
Expected dividend yield   2.11%   2.14%
Expected lives of the stock options   5 years    5 years 
Expected volatility   28.1%   27.8%

 

Ritchie Bros.24

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

18. Share-based payments (continued)

 

As at September 30, 2018, the unrecognized stock-based compensation cost related to the unvested stock options was $6,485,000 which is expected to be recognized over a weighted average period of 2.1 years.

 

Share unit plans

 

Share unit activity for the nine months ended September 30, 2018 is presented below:

 

   Equity-classified awards   Liability-classified awards 
   PSUs   RSUs   PSUs   RSUs   DSUs 
       WA grant       WA grant       WA grant       WA grant        WA grant  
       date fair       date fair       date fair       date fair       date fair 
   Number   value   Number   value   Number   value   Number   value   Number   value 
                                         
Outstanding, December 31, 2017   434,248   $27.83    125,152   $26.93    259,241   $26.38    4,666   $26.42    93,487   $26.32 
Granted   235,426    35.70    90,147    32.08    -    -    66    34.70    19,448    33.36 
Transferred to equity awards on modification   257,659    31.30    -    -    (257,659)   26.38    -    -    -    - 
Vested and settled   (212,263)   33.78    -    -    -    -    (975)   27.58    (6,605)   23.16 
Forfeited   (43,071)   31.42    (5,219)   31.99    (1,582)   26.45    -    -    -    - 
Outstanding, September 30, 2018   671,999   $31.45    210,080   $29.02    -   $-    3,757   $26.27    106,330   $27.80 

 

At September 30, 2018, the unrecognized share unit expense related to equity-classified PSUs was $9,597,000 which is expected to be recognized over a weighted average period of 1.8 years. The unrecognized share unit expense related to equity-classified RSUs was $4,540,000 which is expected to be recognized over a weighted average period of 2.3 years. The unrecognized share unit expense related to liability-classified RSUs was $6,000, which is expected to be recognized over a weighted average period of 0.1 years. There is no unrecognized share unit expense related to liability-classified DSUs, as they vest immediately upon grant.

 

Senior executive and employee PSU plans

The Company grants PSUs under a senior executive PSU plan and an employee PSU plan (the “PSU Plans”). Under the PSU Plans, the number of PSUs that vest is conditional upon specified market, service, and performance vesting conditions being met. The PSU Plans allow the Company to choose whether to settle the awards in cash or in shares. With respect to settling in shares, the Company has the option to either (i) arrange for the purchase shares on the open market on the employee’s behalf based on the cash value that otherwise would be delivered, or (ii) to issue a number of shares equal to the number of units that vest.

 

On March 1, 2018, the Company modified the market and performance vesting conditions for the PSUs. Concurrently, the employee PSU plan were reclassified to equity awards, based on the Company’s settlement intentions. The weighted average fair value of the PSU awards outstanding on the modification date was $31.35. The incremental compensation recognized as a result of the vesting condition modification was $1,400,000. The share unit liability related to the employee PSUs, representing the portion of the fair value attributable to past service, was $6,701,000, which was reclassified to equity on that date. No incremental compensation was recognized as a result of the employee PSU settlement modification.

 

Ritchie Bros.25

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

18. Share-based payments (continued)

 

Senior executive and employee PSU plans (continued)

 

The fair value of the equity-classified PSUs is estimated on modification date and on the date of grant using a Monte-Carlo simulation model. The significant assumptions used to estimate the fair value of the equity-classified PSUs during the nine months ended September 30, 2018 are presented in the following table on a weighted average basis:

 

Nine months ended September 30,  2018 
Risk free interest rate   1.9%
Expected dividend yield   2.09%
Expected lives of the PSUs   3 years 
Expected volatility   31.1%
Average expected volatility of comparable companies   34.1%

 

Sign-on grant PSUs

On September 11, 2018, the Company modified the performance vesting conditions for the sign-on grant PSUs which are equity classified PSU awards recorded in temporary equity. The modification impacted the third and fourth tranches of PSUs to vest, and the actual number of units to vest will be determined by the Board of Directors of the Company based on absolute Total Shareholder Return (“TSR”) performance over the period commencing on July 1, 2017, and ending on the fourth and fifth anniversaries of the grant date. Prior to this modification, the absolute TSR performance period commenced on August 11, 2014. The weighted average fair value of the PSU awards outstanding on the modification date was $43.34. The incremental compensation recognized as a result of the vesting condition modification was $838,000.

 

The incremental compensation recognized is determined based on the change in fair value of the equity-classified sign-on grant PSUs immediately before and after the modification. Significant assumptions used to estimate the fair value of the equity-classified PSUs to determine the incremental compensation cost is as follows:

 

September 11, 2018    
Risk free interest rate   2.7%
Expected dividend yield   1.53%
Expected lives of the PSU   1 year 
Expected volatility   29.2%

 

19. Commitments

 

Commitment for inventory purchase

 

As at September 30, 2018, the Company had 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 to the extent that goods are available from the supplier over a 12 month period relating to the purchase of inventory. At September 30, 2018, the Company has purchased $27,078,000 pursuant to the initial 12 month period of this contract.

 

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.

 

Ritchie Bros.26

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

20. Contingencies (continued)

 

Guarantee contracts

 

In the normal course of business, the Company will in certain situations guarantee to a consignor a minimum level of proceeds in connection with the sale at auction of that consignor’s equipment.

 

At September 30, 2018, there were $67,010,000 of assets guaranteed under contract, of which 93% is expected to be sold prior to December 31, 2018 (December 31, 2017: $30,948,000 of which 27% is expected to be sold prior to the end of March 31, 2018 with the remainder to be sold by December 31, 2018).

 

The outstanding guarantee amounts are undiscounted and before estimated proceeds from sale at auction.

 

21. Business combinations

 

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, of which approximately $35,000,000 was placed in escrow, was 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 and placed in escrow, related to customary closing adjustments, and $333,000 was related to settlement of intercompany payable transactions. Funds placed in escrow of $36,771,000 were released in March 2018.

 

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 

 

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.

 

Ritchie Bros.27

 

 

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

21. Business combinations (continued)

 

IronPlanet acquisition (continued)

 

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 $568,566,000 was calculated as the fair value of consideration over the estimated fair value of the net assets acquired.

 

IronPlanet 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   600 
Advances against auction contracts   4,623 
Prepaid expenses and deposits   1,645 
Income taxes receivable   55 
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   15,540 
Deferred tax liabilities   25,935 
Fair value of identifiable net assets acquired   207,908 
Goodwill acquired on acquisition  $568,566 

 

~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 useful life of seven years.

 

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.

 

Ritchie Bros.28

 

 

ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Note Regarding Forward-Looking Statements

 

Forward-looking statements may appear throughout this report, including the following section “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements are typically identified by such words as “aim”, “anticipate”, “believe”, “could”, “continue”, “estimate”, “expect”, “intend”, “may”, “ongoing”, “plan”, “potential”, “predict”, “will”, “should”, “would”, “could”, “likely”, “generally”, “future”, “long-term”, or the negative of these terms, and similar expressions intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially.

 

While we have not described all potential risks related to our business and owning our common shares, the important factors discussed in “Part II, Item 1A: Risk Factors” of this Quarterly Report on Form 10-Q and in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com, are among those that we consider may affect our performance materially or could cause our actual financial and operational results to differ significantly from our expectations. Except as required by applicable securities law and regulations of relevant securities exchanges, we do not intend to update publicly any forward-looking statements, even if our expectations have been affected by new information, future events or other developments.

 

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“US GAAP”). Except for Gross Transaction Value (“GTV”)1, which is a measure of operational performance and not a measure of financial performance, liquidity, or revenue, the amounts discussed below are based on our consolidated financial statements. Unless indicated otherwise, all tabular dollar amounts, including related footnotes, presented below are expressed in thousands of United States (“U.S.”) dollars.

 

We make reference to various non-GAAP financial measures throughout this discussion and analysis. These measures do not have a standardized meaning, and are therefore unlikely to be comparable to similar measures presented by other companies.

 

Overview

 

Ritchie Bros. Auctioneers Incorporated (“Ritchie Bros.”, the “Company”, “we”, or “us”) (NYSE & TSX: RBA) is a world leader in asset management and disposition of used industrial equipment and other durable assets, selling $1.0 billion of used equipment and other assets during the third quarter of 2018. Our expertise, unprecedented global reach, market insight, and trusted portfolio of brands provide us with a unique position in the used equipment market. We primarily sell used equipment for our customers through live, unreserved auctions worldwide including in the United States, Canada, Australia, the United Arab Emirates, and the Netherlands, which are simulcast online to reach a global bidding audience.

 

 

 

1GTV represents total proceeds from all items sold at our live on site auctions and online marketplaces. GTV is not a measure of financial performance, liquidity, or revenue, and is not presented in our consolidated financial statements.

 

Ritchie Bros.29

 

 

On May 31, 2017, we acquired IronPlanet Holdings, Inc. (“IronPlanet”), a leading online marketplace for heavy equipment and other durable assets for $776.5 million (the “Acquisition”). IronPlanet’s complementary used equipment brand solutions, together with Marketplace-E, our online marketplace that supports reserved pricing, 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. Upon the consummation of the Acquisition on May 31, 2017, we formed an alliance with Caterpillar Inc. (“Caterpillar”), pursuant to a Strategic Alliance and Remarketing Agreement (the “Alliance”). Under the Alliance, we became Caterpillar's preferred global partner for live on site and online auctions for used Caterpillar equipment.

 

Through our unreserved live on site 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. Customers selling equipment through our sales channels include end-users (such as construction companies), equipment dealers, original equipment manufacturers, and other equipment owners (such as rental companies and government bodies). Our customers participate in a variety of sectors, including heavy construction, transportation, agriculture, energy, and mining.

 

Service Offerings

 

As part of our Auction and Marketplace (“A&M”) solutions, we offer our equipment seller and buyer customers multiple distinct, complementary, multi-channel brand solutions that address the range of their needs. Our global customer base has a variety of transaction options, breadth of services, and the widest selection of used equipment available to them. The tables below illustrate the various channels and brand solutions available under our A&M segment, as well as our other services.

 

A&M segment

 

Channels

 

Brand Solutions

 

Description of Offering

Live On Site Auctions     n  Live unreserved on site with live simulcast online auctions
    n  Event-based sales of used construction and heavy equipment held in the Caterpillar dealer geographies
    n  Event-based sales of used energy equipment
Online Auctions and Marketplaces     n  Online marketplace for selling and buying used equipment
    n  Online marketplace offering multiple price and timing options
    n  Online marketplace for the sale of government and military assets
    n  Online truck and trailer marketplace
Brokerage Service     n  Confidential, negotiated sales

 

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Contract options

 

As part of our A&M business, we offer sellers several contract options to meet their individual needs and sale objectives, which include:

 

·Straight commission contracts, where the consignor receives the gross proceeds from the sale less a pre-negotiated commission rate;

 

·Guarantee contracts, where the consignor receives a guaranteed minimum amount plus an additional amount if proceeds exceed a specified level; and

 

·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 refer to guarantee and inventory contracts as underwritten contracts.

 

We also provide a wide array of value-added services to make the process of selling and buying equipment convenient for our customers, including repair and refurbishment services, financial services through Ritchie Bros. Financial Services (“RBFS”), logistical services, and appraisals.

 

Seasonality

 

Our operations are both seasonal and event-driven. Total revenues and GTV tend to be the highest during the second and fourth calendar quarters. We generally conduct more live on site auctions during these quarters than during the first and third calendar quarters. Late December through mid-February and mid-July through August are traditionally less active periods. Online volumes are similarly affected as supply of used equipment is lower in the third quarter as it is actively being used and not available for sale.

 

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Performance Highlights

 

Net income attributable to stockholders of $23.1 million increased 125% compared to $10.3 million for the same quarter in 2017. Diluted earnings per share (“EPS”) attributable to stockholders increased 133% to $0.21 versus $0.09 in the third quarter of 2017, while diluted adjusted EPS attributable to stockholders2 (non-GAAP measure) increased 100% to $0.18 from $0.09 in the third quarter of 2017. Other key third quarter highlights included:

 

Consolidated results:

 

·Total revenues of $245.3 million increased 8% over the third quarter of 2017

 

·Total Company agency proceeds3 (non-GAAP measure) of $159.3 million increased 13% from $141.0 million in the third quarter of 2017

 

·Total selling, general and administrative expenses (“SG&A”) of $88.3 million increased 4% from $85.3 million in the third quarter of 2017.

 

·Cash provided by operating activities of $97.1 million for the nine-month period ended September 30, 2018

 

A&M segment results:

 

·GTV of $1.0 billion up 2% over the third quarter of 2017.

 

·Total revenues of $218.6 million increased 8% from $202.7 million in the third quarter of 2017

 

·A&M agency proceeds4 (non-GAAP measure) of $144.2 million increased 11% from $130.2 million in the third quarter of 2017

 

·A&M revenue rate5 of 21.0% and A&M agency proceeds rate6 (non-GAAP measure) of 13.9%, each improved 110 basis points (“bps”) over the third quarter of 2017

 

 

 

2Diluted adjusted EPS attributable to stockholders is a non-GAAP financial measure. We believe that comparing diluted adjusted EPS attributable to stockholders for different financial periods provides useful information about the growth or decline of our diluted EPS attributable to stockholders for the relevant financial period, and 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, severance, retention, gains/losses on sale of an equity accounted for investment, gains/losses on sale of certain property, plant and equipment, impairment losses, and certain other items, which we refer to as ‘adjusting items’. Diluted adjusted EPS attributable to stockholders is calculated by dividing adjusted net income attributable to stockholders (non-GAAP measure), net of the effect of dilutive securities, by the weighted average number of dilutive shares outstanding. Diluted adjusted EPS attributable to stockholders is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.
3Our income statement scorecard includes the non-GAAP measure performance metric, agency proceeds. Agency proceeds is also an element of the performance criteria for certain annual short-term incentive awards we grant to our employees and officers. We calculate agency proceeds by subtracting the cost of inventory sold and ancillary and logistical service expenses from total revenues.
4A&M agency proceeds is a non-GAAP financial measure that provides useful information about the performance of our A&M contracts for different financial periods. A&M agency proceeds is calculated as A&M total revenues less cost of inventory sold and is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.
5We believe A&M segment total revenues are best understood by considering their relationship to GTV. The metric we use to measure that performance is A&M revenue rate, which is calculated as A&M total revenues divided by GTV.
6A&M agency proceeds rate is a non-GAAP financial measure that provides useful information about the performance of our operations by comparing the margins we earn on our contracts for different financial periods. A&M agency proceeds rate is calculated by dividing A&M agency proceeds (non-GAAP measure) by GTV. A&M agency proceeds rate is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Results of Operations

 

Financial overview  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
           2018 over           2018 over 
(in U.S. $000's, except EPS)  2018   2017   2017   2018   2017   2017 
Service revenues  $161,374   $145,938    11%  $551,736   $442,066    25%
Revenue from inventory sales   83,972    81,463    3%   262,318    237,375    11%
Total revenues   245,346    227,401    8%   814,054    679,441    20%
Costs of services   33,053    33,461    (1)%   112,743    94,093    20%
Cost of inventory sold   74,341    72,476    3%   231,834    207,603    12%
Selling, general and administrative expenses ("SG&A")   88,323    85,335    4%   287,052    230,287    25%
Acquisition-related costs   2,007    3,587    (44)%   5,039    35,162    (86)%
Depreciation and amortization expenses   16,723    14,837    13%   49,451    37,047    33%
Gain on disposal of property, plant and equipment   (342)   (42)   714%   (958)   (1,071)   (11)%
Impairment loss   -    -    -   -    8,911    (100)%
Foreign exchange loss (gain)   47    816    (94)%   31    (7)   543%
Operating income   31,194    16,931    84%   128,862    67,416    91%
Operating income margin   12.7%   7.4%   530bps   15.8%   9.9%   590bps
Interest expense   (10,473)   (10,558)   (1)%   (32,720)   (27,311)   20%
Other income, net   7,182    592    1113%   8,995    6,346    42%
Income tax expense (recovery)   4,791    (3,358)   (243)%   19,091    7,982    139%
Net income attributable to stockholders   23,138    10,261    125%   85,993    38,273    125%
Diluted earnings per share attributable to stockholders  $0.21   $0.09    133%  $0.79   $0.35    125%
Effective tax rate   17%   -48%   6500bps   18%   17%   100bps
GTV  $1,039,427   $1,019,322    2%  $3,626,551   $3,173,050    14%
Agency proceeds (non-GAAP measure)   159,323    141,047    13%   535,978    431,732    24%

 

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Consolidated Results

 

Total revenues

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Total revenues increased $17.9 million, or 8%, primarily due to partial fee harmonization, increase in revenue from inventory sales mainly in our European operations, higher GTV volumes, and significant growth in RBFS. This was partially offset by a reduction in the year-over-year number of live on site auctions, from 86 in 2017 to 68 in 2018. Foreign exchange had a negative impact on total revenue in the third quarter of 2018.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Total revenues increased $134.6 million, or 20%, primarily due to incremental volume from the Acquisition. The first nine months of 2018 included nine full months of Acquisition volume versus four months of post-Acquisition activity in the nine months ended September 30, 2017. The increase was also due to partial fee harmonization and higher revenues from inventory sales and ancillary and logistical services. Foreign exchange had a positive impact on total revenues in the first nine months of 2018.

 

As part of our calendar optimization efforts and site closures, we reduced the number of live on site auctions from 304 in the first nine months of 2017 to 272 in the first nine months of 2018, as well as the number of sale days over the comparative period in our auction calendar.

 

Geographic analysis

 

The distribution of our revenues is determined by the location in which the sale occurred, or in the case of online sales, where the legal entity earning the revenues is incorporated. The following table presents our total revenues on a geographic basis.

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

(in U.S. $000's)  United
States
   Canada   Europe   Other   Consolidated 
Total revenues for the three months ended September 30, 2018  $114,410   $52,711   $43,935   $34,290   $245,346 
Proportion of consolidated amount   47%   21%   18%   14%   100%
                          
Total revenues for the three months ended September 30, 2017  $107,812   $51,136   $29,065   $39,388   $227,401 
Proportion of consolidated amount   48%   22%   13%   17%   100%
Change 2018 over 2017:                         
$ change  $6,598   $1,575   $14,870   $(5,098)  $17,945 
% change   6%   3%   51%   (13)%   8%

 

The $6.6 million, or 6%, increase in total revenues to $114.4 million in the United States was primarily due to partial fee harmonization, online auction performance, and strong growth in Kruse Energy Auctioneers.

 

In Canada, total revenues increased $1.6 million, or 3%, to $52.7 million primarily due to partial fee harmonization, growth of RBFS, and higher service revenues from our live on site auctions driven by sustained market recovery in our Western Canada industrial business. Our Canadian online performance also experienced significant improvement compared to the prior year. These increases were partially offset by a decrease in revenue from inventory sales.

 

The increase in total revenues in Europe of $14.9 million, or 51%, to $43.9 million was primarily due to higher revenues from inventory sales and partial fee harmonization. Revenues from inventory sales increased due to considerable underwritten inventory contracts sourced globally during the third quarter of 2018.

 

The decrease in revenues in Other regions was primarily due to cycling over a strong performance in the third quarter of 2017.

 

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Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

(in U.S. $000's)  United
States
   Canada   Europe   Other   Consolidated 
Total revenues for the nine months ended September 30, 2018  $392,904   $201,296   $123,335   $96,519   $814,054 
Proportion of consolidated amount   48%   25%   15%   12%   100%
Total revenues for the nine months ended September 30, 2017  $327,838   $170,994   $81,930   $98,679   $679,441 
Proportion of consolidated amount   48%   25%   12%   15%   100%
Change 2018 over 2017:                         
$ change  $65,066   $30,302   $41,405   $(2,160)  $134,613 
% change   20%   18%   51%   (2)%   20%

 

Our revenues in the United States increased $65.1 million, or 20%, to $392.9 million primarily due to the Acquisition and partial fee harmonization. These increases were partially offset by a decrease in revenue from inventory sales.

 

In Canada, total revenues increased $30.3 million, or 18%, to $201.3 million primarily due to partial fee harmonization, increase in revenue from inventory sales, growth of RBFS, and the Acquisition.

 

In Europe, total revenue increased $41.4 million, or 51%, to $123.3 million mainly due to higher revenue from inventory sales, the Acquisition, and partial fee harmonization.

 

Total revenues in Other region decreased $2.2 million, or 2%, to $96.5 million primarily due to lower revenues in our Australian operations, partially offset by increases from partial fee harmonization.

 

Costs of services

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Costs of services decreased $0.4 million, or 1%, primarily due to fewer live events.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Costs of services increased $18.7 million, or 20%, primarily due to the Acquisition and the incremental costs required to support the growth of our service revenues.

 

Cost of inventory sold

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Cost of inventory sold increased $1.9 million, or 3%, in line with the revenue from inventory sales growth in the quarter.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Cost of inventory sold increased $24.2 million, or 12%, primarily due to the change in our revenue from inventory sales and due to the Acquisition.

 

SG&A expenses

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

SG&A expenses increased $3.0 million, or 4%, primarily due to incremental overhead costs incurred to support GovPlanet’s non-rolling stock contract with the Defense Logistics Agency and a higher share unit expense. These increases were partially offset by the favorable impact of foreign exchange during the comparative period.

 

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Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

SG&A expenses increased $56.8 million, or 25%, primarily due to the Acquisition, continued investments in talent to support growth of our business and initiatives, share unit expense, and increased overhead costs to support GovPlanet’s non-rolling stock contract with the Defense Logistics Agency. The Acquisition drove increases in employee compensation, technology support costs, and additional advertising to promote our online marketplace sales. Also, there was a decrease in share prices in the third quarter of 2017 that resulted in a positive impact on share unit expenses in that period. Foreign exchange had a negative impact on SG&A expenses in the first nine months of 2018.

 

Acquisition-related costs

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

During the third quarter of 2018, we incurred $2.0 million acquisition-related costs, which was a decrease of $1.6 million from the third quarter of 2017. In the third quarter of 2018, we incurred $1.5 million of severance costs and accelerated share unit expenses related to the labour reductions, which were part of our cost control measures to eliminate duplicative positions and overlap in roles, planned as part of our synergy targets.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

There was a significant decrease in acquisition-related costs of $30.1 million, or 86%, primarily due to the timing of the Acquisition that closed on May 31, 2017.

 

Impairment loss

 

There were no impairment losses in the first nine months of 2018, compared to the first nine months of 2017 where we recognized an $8.9 million impairment loss on certain technology assets.

 

Operating income

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

The operating income increase of $14.3 million, or 84%, was driven by higher total service revenues mainly from partial fee harmonization and auction revenue growth. The increase was partially offset by higher SG&A expenses, depreciation and amortization expense, and cost of inventory sold. Foreign exchange had a negative impact on operating income in the third quarter of 2018. Adjusted operating income7 (non-GAAP measure) increased 93% during the third quarter of 2018 compared to the third quarter of 2017, which excluded the impact of $1.5 million of non-recurring acquisition-related costs related to severance costs, as discussed above.

 

Operating income margin, which is our operating income divided by revenues, increased 530 bps to 12.7% in the third quarter of 2018 compared to 7.4% in the third quarter of 2017 for the same reasons. Agency proceeds adjusted operating income rate8 (non-GAAP measure) was 20.5% in the third quarter of 2018 compared to 12.0% in the third quarter of 2017.

 

 

 

7Adjusted operating income is a non-GAAP measure. We use income statement and balance sheet performance scorecards to align our operations with our strategic priorities. We concentrate on a limited number of metrics to ensure focus and to facilitate quarterly performance discussions. Our income statement scorecard includes the performance metric, adjusted operating income. We believe that comparing adjusted operating income for different financial periods provides useful information about the growth or decline of operating income for the relevant financial period. We calculate adjusted operating income by eliminating adjusting items from operating income. Adjusted operating income is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.
8Our income statement scorecard includes the performance metric, agency proceeds adjusted operating income rate, which is a non-GAAP measure. We believe that comparing agency proceeds adjusted operating income rate for different financial periods provides useful information about the growth or decline of our operating income for the relevant financial period. We calculate agency proceeds adjusted operating income rate by dividing adjusted operating income (non-GAAP measure) by agency proceeds (non-GAAP measure). Agency proceeds adjusted operating income rate is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

The operating income increase of $61.4 million, or 91%, was driven by higher total revenues combined with lower acquisition-related costs, as well as an impairment loss in the prior year. Adjusted operating income (non-GAAP measure) increased 42% during the first nine months of 2018 compared to the first nine months of 2017.

 

Operating income margin increased 590 bps to 15.8% in the first nine months of 2018 compared to 9.9% in the first nine months of 2017. Agency proceeds adjusted operating income rate (non-GAAP measure) was 24.3% in the first nine months of 2018 compared to 21.2% in the first nine months of 2017.

 

Interest expense

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Interest expense of $10.5 million was consistent with the third quarter of 2017. Our overall interest expense has a favourable benefit resulting from our $50.0 million voluntary prepayment of the term loan during the first half of 2018, but was partially offset by an increase in variable short-term interest rates over the comparative period.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Interest expense increased $5.4 million, or 20%, primarily due to the additional indebtedness to finance the Acquisition and an increase in variable short-term interest over the comparative period. This was partially offset by the reduction in interest expense resulting from our $50.0 million voluntary prepayment of the term loan in the first nine months of 2018. As of September 30, 2018, our long-term debt was $751.8 million compared to $817.9 million as of September 30, 2017.

 

Other Income

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Other income was $7.2 million, up from $0.6 million in the comparative period primarily due to a $4.9 million gain on sale of an equity accounted for investment during the third quarter of 2018.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Other income was $9.0 million, compared to $6.3 million during the same comparative period, an increase of $2.7 million. Other income for the nine months ended September 30, 2018 included the gain on sale of an equity accounted for investment, while in the comparative period we recorded $2.5 million of other income related to changes in the fair value of contingent consideration associated with Petrowsky, Kramer, Mascus and RBFS acquisitions.

 

Income tax expense and effective tax rate

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

For the three months ended September 30, 2018, income tax expense was $4.8 million, compared to an income tax recovery of $3.4 million for the same period in 2017. Our effective tax rate was 17% in the third quarter of 2018, compared to -48% in the third quarter of 2017. The effective tax rate increased in the third quarter of 2018 compared to the third quarter of 2017 primarily due to the estimated greater proportion of annual income subject to tax in jurisdictions with higher tax rates and the estimated annual Base Erosion Anti Abuse Tax (“BEAT”). The comparative period reflected the impact of greater estimates of non-deductible acquisition expenses, partially offset by adjustments for deductible stock compensation expenses.

 

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Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

For the nine months ended September 30, 2018, income tax expense was $19.1 million compared to an income tax expense of $8.0 million for the same period in 2017. Our effective tax rate was 18.2% for the nine months ended September 30, 2018, compared to 17.2% for the nine months ended September 30, 2017. This increase was primarily due to an estimated greater proportion of annual income subject to tax in jurisdictions with higher tax rates, and the estimated BEAT, partially offset by a $2.1 million decrease in uncertain tax positions. The comparative period reflected greater estimates of non-deductible acquisition related expenses and a $2.5 million increase in uncertain tax positions, partially offset by adjustments for deductible stock compensation expenses.

 

On December 22, 2017, the U.S. enacted H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”). We have not completed our analysis of the effects of the enactment of the Tax Act and therefore have not made any adjustments to the provisional amounts recorded at December 31, 2017. For more details, refer to the notes to our consolidated financial statements included in “Part 1, Item 1: Consolidated Financial Statements” in this Form 10-Q.

 

Net income

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Net income attributable to stockholders increased $12.9 million, or 125%, primarily due to the increase in operating income and the $4.9 million gain on sale of an equity accounted for investment, which were partially offset by higher income tax expense. Adjusted net income attributable to stockholders9 (non-GAAP measure) increased $9.0 million, or 88%, to $19.3 million in the third quarter of 2018 from $10.3 million in the third quarter of 2017.

 

Similarly, net income increased $12.8 million, or 124% to $23.1 million in the third quarter of 2018 from $10.3 million in the third quarter of 2017. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) 10 (non-GAAP measure) increased $19.0 million, or 60%, to $50.9 million in the third quarter of 2018 from $31.8 million in the third quarter of 2017.

 

Net income margin increased 490 bps to 9.4% in the third quarter of 2018 from 4.5% in the third quarter of 2017. Agency proceeds adjusted EBITDA rate11 (non-GAAP measure) increased 930 bps to 31.9% in the third quarter of 2018 compared to 22.6% in the third quarter of 2017.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Net income attributable to stockholders increased $47.7 million, or 125%, to $86.0 in the first nine months of 2018 compared to the first nine months of 2017. This increase was primarily due to the increase in our operating income, and a $4.9 million gain on sale of an equity accounted for investment, partially offset by higher interest expense and income tax expense. Adjusted net income attributable to stockholders (non-GAAP measure) increased $22.8 million, or 38%, to $82.2 million in the first nine months of 2018 from $59.4 million in the first nine months of 2017. 

 

 

 

9Adjusted net income attributable to stockholders is a non-GAAP financial measure. We believe that comparing adjusted net income attributable to stockholders for different financial periods provides useful information about the growth or decline of our net income attributable to stockholders for the relevant financial period and eliminates the financial impact of adjusting items we do not consider to be part of our normal operating results. Adjusted net income attributable to stockholders represents net income attributable to stockholders excluding the effects of adjusting items and is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.
10Adjusted EBITDA is a non-GAAP financial measure that we believe provides useful information about the growth or decline of our net income when compared between different financial periods. Adjusted EBITDA is calculated by adding back depreciation and amortization expenses, interest expense, and current income tax expense, and subtracting interest income and deferred income tax recovery from net income excluding the pre-tax effects of adjusting items. Adjusted EBITDA is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.
11Agency proceeds adjusted EBITDA rate is a non-GAAP financial measure that we believe provides useful information about the growth or decline of our net income when compared between different financial periods. Agency proceeds adjusted EBITDA rate presents adjusted EBITDA (non-GAAP measure) as a multiple of agency proceeds (non-GAAP measure). Agency proceeds adjusted EBITDA rate is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Similarly, net income increased $47.6 million, or 124% to $86.0 million in the first nine months of 2018 from $38.5 million in the first nine months of 2017. Adjusted EBITDA (non-GAAP measure) increased $49.3 million, or 37%, to $181.9 million in the first nine months of 2018 from $132.5 million in the first nine months of 2017.

 

Net income margin increased 490 bps to 10.6% in the first nine months of 2018 from 5.7% in the first nine months of 2017. Agency proceeds adjusted EBITDA rate (non-GAAP measure) increased 320 bps to 33.9% in the first nine months of 2018 compared to 30.7% in the first nine months of 2017.

 

12 months ended September 30, 2018 compared with 12 months ended September 30, 2017

 

Debt at September 30, 2018, represented 6.2 times net income as at and for the 12 months ended September 30, 2018. This compares to debt at September 30, 2017, which represented 12.4 times net income as at and for the 12 months ended September 30, 2017. The decrease in this debt/net income multiplier was primarily due to lower debt balances at September 30, 2018 versus September 30, 2017, and a higher net income over the comparative period. The decrease in debt was primarily due to repayments of debt related to the funding for the Acquisition. Adjusted net debt/adjusted EBITDA12 (non-GAAP measure) was 2.2 times as at and for the 12 months ended September 30, 2018 compared to 3.2 times as at and for the 12 months ended September 30, 2017.

 

Diluted EPS

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Diluted EPS attributable to stockholders increased 133% to $0.21 per share in the third quarter of 2018 from $0.09 per share in the third quarter of 2017. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) increased 100% to $0.18 in the third quarter of 2018 from $0.09 in the third quarter of 2017.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Diluted EPS attributable to stockholders increased 125% to $0.79 per share in the first nine months of 2018 from $0.35 per share in the first nine months of 2017. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) increased 36% to $0.75 in the first nine months of 2018 from $0.55 in the first nine months of 2017.

 

 

 

12Adjusted net debt/adjusted EBITDA is a non-GAAP financial measure. We believe that comparing adjusted net debt/adjusted EBITDA on a trailing 12-month basis for different financial periods provides useful information about the performance of our operations as an indicator of the amount of time it would take us to settle both our short and long-term debt. We do not consider this to be a measure of our liquidity, which is our ability to settle only short-term obligations, but rather a measure of how well we fund liquidity. Measures of liquidity are discussed further below under “Liquidity and Capital Resources”. We calculate adjusted net debt/adjusted EBITDA by dividing adjusted net debt (non-GAAP measure) by adjusted EBITDA (non-GAAP measure). Adjusted net debt (non-GAAP measure) is calculated by subtracting cash and cash equivalents from short and long term debt. Adjusted net debt/adjusted EBITDA is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Segment Performance

 

Auctions and Marketplaces segment

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
  2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Service revenues  $134,604   $121,255    11%  $463,076   $370,794    25%
Revenue from inventory sales   83,972    81,463    3%   262,318    237,375    11%
Total revenues   218,576    202,718    8%   725,394    608,169    19%
Costs of services   20,059    18,381    9%   62,888    51,946    21%
Cost of inventory sold   74,341    72,476    3%   231,834    207,603    12%
SG&A expenses   83,542    81,736    2%   272,503    219,824    24%
Impairment loss   -    -    -    -    8,911    (100)%
A&M profit  $40,634   $30,125    35%  $158,169   $119,885    32%

 

Gross Transaction Value

 

We believe it is more meaningful to consider revenue in relation to GTV. GTV by channel is presented below for the three and nine months ended September 30, 2018.

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

(in U.S. $000's)  Three months ended September 30, 
   2018   2017   % Change 
  GTV   % of total   GTV(3)   % of total   2018 over 2017 
Live on site auctions  $850,484    82%  $856,522    84%   (1)%
Online marketplaces including featured (1) and other (2)   188,943    18%   162,800    16%   16%
GTV  $1,039,427    100%  $1,019,322    100%   2%

 

(1)This represents GTV from IronPlanet’s Weekly Featured Auction, which operates under an unreserved auction model.
(2)This includes GTV from Marketplace-E and, before that, EquipmentOne
(3)Prior year GTV was reclassified between live on site auctions and online marketplaces to conform with current year classification.

 

Overall, GTV increased $20.1 million, or 2%, compared to the third quarter of 2017, primarily due to a 16% increase primarily in our IronPlanet weekly featured auctions in the United States and Canada. This increase was partially offset by a 1% decrease in GTV from live on site auctions primarily due to fewer agricultural auctions compared to the third quarter of 2017.

 

The total number of industrial and agricultural lots sold at our live on site auctions increased 4% to 94,750 lots in the third quarter of 2018 compared to 91,200 lots in the third quarter of 2017, despite a reduction in the number of live on site auctions from 86 in the third quarter of 2017 to 68 in the third quarter of 2018.

 

We offer our customers the opportunity to use underwritten commission contracts to serve their disposition strategy needs, entering into such contracts where the risk/reward profile of the terms are agreeable. The volume of underwritten commission contracts decreased to 16% of our GTV in the third quarter of 2018 from 18% in the third quarter of 2017.

 

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Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

(in U.S. $000's)  Nine months ended September 30, 
   2018   2017   % Change 
  GTV   % of total   GTV(6)   % of total   2018 over 2017 
Live on site auctions  $3,025,982    83%  $2,853,097    90%   6%
Online marketplaces including featured (4) and other (5)   600,569    17%   319,953    10%   88%
GTV  $3,626,551    100%  $3,173,050    100%   14%

 

(4)This represents GTV from IronPlanet’s Weekly Featured Auction, which operates under an unreserved auction model.
(5)This includes GTV from Marketplace-E and, before that, EquipmentOne
(6)Prior year GTV was reclassified between live on site auctions and online marketplaces to conform with current year classification.

 

Overall, GTV increased $453.5 million, or 14%, primarily due to the Acquisition and improved live on site and online auction performance driven by strong price performance. We significantly increased GTV generated from online marketplaces by 88% due to the Acquisition and new compensation strategies focused on expansion of online marketplaces. Live on site auctions increased 6% primarily due to the Acquisition and strong live on site auction performance in Canada.

 

The total number of industrial and agricultural lots sold at live on site auctions decreased 2% to 299,350 lots in the first nine months of 2018 compared to 306,100 lots in the first nine months of 2017.

 

The volume of underwritten commission contracts increased to 16% compared to 15% of GTV in the first nine months of 2018 compared to the same period in 2017.

 

Total revenues

 

A&M total revenues by geographical region are presented below:

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
  2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
United States  $103,366   $97,350    6%  $356,222   $296,867    20%
Canada   45,247    45,131    -   176,271    152,450    16%
International   69,963    60,237    16%   192,901    158,852    21%
A&M total revenues  $218,576   $202,718    8%  $725,394   $608,169    19%

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

The increase in A&M total revenues of $15.9 million, or 8%, was primarily due to partial fee harmonization, as well as the following regional differences:

 

·United States: +6% increase that, in addition to the factors noted above, was also due to growth in revenue from Kruse Energy Auctioneers operations. The increase in revenues was partially offset by fewer live on site auction sales days.

 

·International: +16% increase that, in addition to the factors noted above, was also due to an increase in revenue from inventory sales primarily in Europe. The increase in the International region was partially offset by lower volume in our Australian operations.

 

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Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

The increase in A&M total revenues of $117.2 million, or 19%, was primarily due to the Acquisition, partial fee harmonization, as well as the following regional differences:

 

·United States: +20% increase was primarily due to the factors discussed above and an increase in service revenues from live on site auctions. These increases were partially offset by a decrease in revenue from inventory sales.

 

·Canada: +16% increase that, in addition to the factors noted above, was also due to an increase in service revenues from live on site auctions.

 

·International: +21% increase that, in addition to the factors noted above, was also due to an increase in revenue from inventory sales primarily in Europe.

 

Revenue rate

 

As A&M total revenues are generated from transactional asset disposition services, we believe these revenues are best understood by considering their relationship to GTV. The metric we use to measure that performance is A&M revenue rate, which is calculated as A&M total revenues divided by GTV.

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

A&M revenue rate was 21.0% and 19.9% for the three months ended September 30, 2018 and 2017, respectively. Our A&M agency proceeds (non-GAAP measure) were $144.2 million and $130.2 million, while A&M agency proceeds rate (non-GAAP measure) was 13.9% and 12.8% for the three months ended September 30, 2018 and 2017, respectively.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

A&M revenue rate was 20.0% and 19.2% for the nine months ended September 30, 2018 and 2017, respectively. Our A&M agency proceeds (non-GAAP measure) were $493.6 million and $400.6 million, for the nine months ended September 30, 2018 and 2017, respectively, while A&M agency proceeds rate (non-GAAP measure) was 13.6% and 12.6% for the nine months ended September 30, 2018 and 2017, respectively.

 

Costs of services

 

The A&M segment’s costs of services by nature are presented below:

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
  2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Employee compensation  $9,527    9,296    2%  $28,848    23,201    24%
Buildings, facilities and technology   1,787    1,669    7%   6,706    5,225    28%
Travel, advertising and promotion   5,603    5,323    5%   19,573    17,350    13%
Other costs of services   3,142    2,093    50%   7,761    6,170    26%
A&M costs of services  $20,059   $18,381    9%  $62,888   $51,946    21%

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

The increase of $1.7 million, or 9%, compared to the third quarter of 2017 was primarily due to ramp up costs related to GovPlanet’s contracts with government agencies.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

A&M costs of services increased $10.9 million, or 21%, primarily due to the Acquisition and costs associated with the inspection activities that support online marketplaces, which more customers used as our business continued to expand especially in North America. We also incurred additional cost of services to support GovPlanet’s contracts with government agencies.

 

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Cost of inventory sold

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

A&M cost of inventory sold increased $1.9 million, or 3% primarily due to an increase in the volume of inventory contracts in our European operations that occurred in the three months ended September 30, 2018.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

A&M cost of inventory sold increased $24.2 million, or 12% primarily due to an increase in the volume of inventory contracts, as well as the Acquisition.

 

SG&A expenses

 

A&M segment’s SG&A expenses, which include corporate head office support costs, are presented by nature below:

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
  2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Employee compensation  $53,330   $53,112    0%  $176,429   $140,288    26%
Buildings, facilities and technology   14,635    13,069    12%   44,385    37,877    17%
Travel, advertising and promotion   8,951    8,092    11%   26,485    20,162    31%
Professional fees   2,698    3,067    (12)%   11,685    8,888    31%
Other SG&A expenses   3,927    4,396    (11)%   13,519    12,609    7%
A&M SG&A expenses  $83,542   $81,736    2%  $272,503   $219,824    24%

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

The increase in A&M SG&A expense of $1.8 million, or 2% was primarily due an increase in overhead costs incurred to support GovPlanet’s non-rolling stock contracts with the Defense Logistics Agency. The increase in A&M SG&A expense was partially offset by a reduction in bank charges attributable to a decrease in our credit facility. Foreign exchange had a positive impact on A&M SG&A expenses in the third quarter of 2018.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

A&M SG&A expenses increased $52.7 million, or 24%. The increase was primarily due to the Acquisition, continued investments in talent to support growth of our businesses and initiatives, higher incentive compensation driven by year-over-year performance and enhanced sales compensation plans, an increase in professional fees, and overhead costs incurred to support GovPlanet’s non-rolling stock contracts with the Defense Logistics Agency.

 

Productivity

 

The majority of our business continues to be generated by our A&M segment operations. Sales Force Productivity within this segment is an operational statistic that we believe provides a gauge of the effectiveness of our Revenue Producers in increasing GTV. Revenue Producers is a term used to describe our revenue-producing sales personnel. This definition is comprised of Regional Sales Managers and Territory Managers.

 

Our Sales Force Productivity as at and for the trailing 12-month period ended September 30, 2018 was $11.3 million per Revenue Producer compared to $11.1 million per Revenue Producer for the trailing 12-month period ended September 30, 2017. We believe the increase of $0.2 million per Revenue Producer over the comparative period is evidence that our sales teams are continually progressing, as we have moved beyond the most complex stage of our integration.

 

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Sales Force Productivity as at and for the 12-month period ended September 30, 2017 was calculated as the sum of the following two amounts:

 

·GTV for the eight-months, pre-Acquisition, ended May 31, 2017, divided by the average number of Revenue Producers over the same eight month period; and

 

·GTV for the four-months following the Acquisition divided by the average number of Revenue Producers over the same four month period.

 

Industrial live on site auction metrics

 

Total industrial live on site auction metrics

 

   Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
   2018   2017   2018 over 2017   2018   2017   2018 over 2017 
Bidder registrations   123,000    126,000    (2)%   383,500    404,000    (5)%
Consignment   13,600    13,900    (2)%   39,050    41,950    (7)%
Buyers   31,400    31,100    1%   96,750    100,650    (4)%
Lots   89,000    84,000    6%   273,500    276,000    (1)%

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

During the third quarter of 2018, we conducted 45 unreserved industrial live on site auctions in North America, Europe, the Middle East, Australia, and Asia, compared to 58 during the third quarter of 2017. Despite the decrease in the number of live auctions held during the quarter, our GTV was minimally impacted as we increased the average number of lots per live industrial auction.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

For the first nine months of 2018, we conducted 130 unreserved industrial live on site auctions in North America, Europe, the Middle East, Australia, and Asia, compared to 169 during the first nine months of 2017. Over this same comparative period, we increased our industrial live on site GTV despite a decrease in the number of auctions due to an increase in average number of lots per auction.

 

Average industrial live on site auction metrics

 

   12 months ended September 30, 
           Change 
   2018   2017   2018 over 2017 
GTV  $18.8 million   $ 15.9 million   $2.9 million 
Bidder registrations   2,694    2,324    16%
Consignors   262    234    12%
Lots   1,846    1,589    16%

 

Twelve months trailing for September 30, 2018 compared with twelve months trailing for September 30, 2017

 

We saw an increase in average GTV per industrial auction for the 12 months ended September 30, 2018 compared to the 12 months ended September 30, 2017. We believe the increase was primarily driven by our site optimization strategy to achieve higher lots per auction, which was partially offset by the continued supply constraints for used equipment.

 

Online bidding

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Internet bidders comprised 77% of the total bidder registrations at our live on site auctions in the third quarter of 2018 compared to 68% in the third quarter 2017. Across all channels, 60% of total GTV was purchased by online buyers in the third quarter of 2018 compared to 57% in the third quarter of 2017. This increase in internet bidders and online buyers show that we continued to promote multi-channel participation at our auctions through the third quarter of 2018.

 

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Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Internet bidders comprised 73% of the total bidder registrations at our live on site auctions in the first nine months of 2018 compared to 68% in the first nine months of 2017. Across all channels, 58% of total GTV was purchased by online buyers in the first nine months of 2018 compared to 53% in the first nine months of 2017.

 

Website metrics

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Traffic across all our websites increased 14% in the third quarter of 2018 compared to the third quarter of 2017 primarily due to increased traffic on our IronPlanet and GovPlanet websites.

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Traffic across all our websites increased 28% in the nine months ended September 30, 2018 compared to the same period in 2017, primarily due to increased traffic on our IronPlanet websites.

 

Segment Performance

 

Other services

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
   2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Service revenues  $26,770   $24,683    8%  $88,660   $71,272    24%
Costs of services   12,994    15,080    (14)%   49,855    42,147    18%
SG&A expenses   4,781    3,599    33%   14,549    10,463    39%
Other services profit  $8,995   $6,004    50%  $24,256   $18,662    30%

 

Three months ended September 30, 2018 compared with three months ended September 30, 2017

 

Service revenues from other services grew $2.1 million, or 8%, primarily due to RBFS and Mascus performance.

 

Funded volume, which represents the amount of lending brokered by RBFS, increased 32% from $65.0 million in the third quarter of 2017 to $85.6 million in the third quarter of 2018. RBFS operating profit increased $0.8 million or 53% over the same comparative period to $2.3 million from $1.5 million.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Service revenue from other services grew $17.4 million, or 24%, primarily due to increases in ancillary and logistical services revenues, RBFS, Mascus and Asset Appraisal Services.

 

Funded volume increased 43% from $216.2 million in the first nine months of 2017 to $309.5 million in the first nine months of 2018. RBFS operating profit increased $2.7 million or 46%, over the same comparative period.

 

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Liquidity and Capital Resources

 

Working capital

 

(in U.S. $000's)  September 30,   December 31,     
   2018   2017   % Change 
             
Current assets  $685,631   $508,487    35%
Current liabilities   534,731    388,455    38%
Working capital  $150,900   $120,032    26%

 

We believe that working capital is a more meaningful measure of our liquidity than cash alone. Our working capital increased during the nine months ended September 30, 2018, primarily due to the increase in our operating income generated during the period. This increase was partially offset by $58.8 million of long-term debt repayments and the payment of $56.1 million of dividends during the nine months ended September 30, 2018

 

Cash flows

 

(in U.S. $000's)  Nine months ended September 30,   12 months ended September 30, 
           % Change           % Change 
   2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Cash provided by (used in):                              
Operating activities  $97,147   $98,517    (1)%  $146,198   $114,654    28%
Investing activities   (28,807)   (701,599)   (96)%   (38,162)   (721,145)   (95)%
Financing activities   (92,196)   142,043    (165)%   (114,976)   595,796    (119)%
Effect of changes in foreign currency rates   (3,215)   17,270    (119)%   (3,335)   10,618    (131)%
Net increase (decrease) in cash, cash equivalents, and restricted cash  $(27,071)  $(443,769)   (94)%  $(10,275)  $(77)   13244%

 

Operating activities

 

Cash provided by operating activities can fluctuate significantly from period to period due to factors such as differences in the timing, size, and number of auctions during the period, the volume of inventory purchases, the timing of the receipt of auction proceeds from buyers and payment of amounts due to consignors, as well as the location of the auction with respect to restrictions on the use of cash generated therein.

 

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

 

Net cash provided by operating activities decreased $1.4 million in the first nine months of 2018 compared to the first nine months of 2017. The decrease included $56.1 million more cash used in changes in operating assets and liabilities over the comparative period, primarily due to the timing and amount of trade receivable collections and auction proceed payable settlements, as well as an increase in our inventory. The net change in operating assets and liabilities was also impacted by cash required to early-settle certain trade and auction proceeds payable in the third quarter of 2018 compared to the third quarter of 2017 in relation to a conversion of our enterprise resource planning systems, effective October 1, 2018. Of the total inventory increase in the first nine months of 2018, $27.1 million relates to purchases under our non-rolling stock contract with the Defense Logistics Agency in the United States. These decreases in cash provided by operating activities were partially offset by a net income increase of $47.6 million in the first nine months of 2018 compared to the first nine months of 2017.

 

Twelve months ended September 30, 2018 compared with twelve months ended September 30, 2017

 

Net cash provided by operating activities for the 12 months ended September 30, 2018 was $146.2 million comprised of $122.9 million of net income and a net positive adjustment of $69.1 million for items not affecting cash, partially offset by $45.8 million of cash outflows from changes in operating assets and liabilities.

 

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Net cash provided by operating activities for the 12 months ended September 30, 2017 of $114.7 million was comprised of $66.4 million in net income and a net positive adjustment of $62.7 million for items not affecting cash, partially offset by $14.4 million of cash outflows from changes in operating assets and liabilities.

 

Investing activities

 

Net cash used in investing activities decreased $672.8 million, or 96% during the first nine months of 2018 compared to the first nine months of 2017. This decrease was primarily due to the Acquisition for $675.9 million, net of cash acquired, in the third quarter of 2017, as well as proceeds of $6.1 million on the sale of an equity accounted for investment in the third quarter of 2018.

 

CAPEX intensity presents net capital spending, which excludes acquisition investments, as a percentage of total revenues. 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.

 

CAPEX intensity for the 12 months ended September 30, 2018 increased 20 bps compared to CAPEX intensity for the 12 months of 2017, primarily due to a decrease in proceeds on disposition of property, plant and equipment over the comparative period.

 

The following table presents CAPEX intensity and agency proceeds CAPEX rate13 (non-GAAP measure) results for the trailing 12-month periods ended September 30, 2018 and 2017, as well as reconciles those metrics to property, plant and equipment additions, intangible asset additions, proceeds on disposition of property, plant and equipment, and total revenues, 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 
   2018   2017   2018 over 2017 
Property, plant and equipment additions  $16.1   $14.4    12%
Intangible asset additions   27.5    26.0    6%
Proceeds on disposition of property plant and equipment   (4.0)   (6.9)   (42)%
Net capital spending  $39.6   $33.5    18%
                
Total revenues   1,105.8    974.3    13%
Less: cost of inventory sold   (330.7)   (344.6)   (4)%
Less: ancillary and logistical service expenses   (60.3)   (51.2)   18%
Agency proceeds (non-GAAP measure)  $714.8   $578.5    24%
                
CAPEX intensity   3.6%   3.4%   20 bps
Agency proceeds CAPEX rate (non-GAAP measure)   5.5%   5.8%   -30 bps

 

 

 

13Agency proceeds CAPEX rate is a non-GAAP financial measure that we believe, when compared on a trailing 12-month basis to different financial periods provides useful information as to the amount of capital expenditure that we require to generate revenues. It is not a measure of liquidity. We calculate agency proceeds CAPEX rate by dividing net capital spending by agency proceeds (non-GAAP measure).

 

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The increase in cash provided by operating activities, partially offset by the increase in net capital spending, resulted in an increase in operating free cash flow (“OFCF”)14 (non-GAAP measure) of $25.4 million, or 31%, to $106.6 million in the 12 months ended September 30, 2018 from $81.2 million in the 12 months ended September 30, 2017.

 

Financing activities

 

Net cash used by financing activities increased $234.2 million in the first nine months of 2018 compared to the first nine months of 2017. This increase was primarily due to the financing of the Acquisition and subsequent debt repayments after it occurred in May 2017. For the nine months ended September 30, 2018, repayment of long-term debt totalled $58.8 million, of which $50.0 million were voluntary repayments. Partially offsetting these cash outflows was an increase of $19.1 million in net proceeds from the issuance of share capital driven by greater stock option exercises during the first nine months of 2018 compared to the first nine months of 2017.

 

Dividend information

 

We declared and paid a regular cash dividend of $0.17 per common share for September 30, 2017, December 31, 2017, and March 31, 2018. We declared and paid regular cash dividends of $0.18 per common share for the quarter ended June 30, 2018. Subsequent to September 30, 2018, we declared a quarterly dividend of $0.18 per common share, payable on December 19, 2018 to stockholders on record on November 28, 2018 which has not been recorded as a liability at September 30, 2018.

 

Total dividend payments paid to stockholders during the nine months ended September 30, 2018 and 2017 were $56.1 million and $54.6 million, respectively. All dividends that we pay are “eligible dividends” for Canadian income tax purposes unless indicated otherwise.

 

Our dividend payout ratio, which we calculate as dividends paid to stockholders divided by net income attributable to stockholders, decreased to 60.6% for the 12 months ended September 30, 2018 from 110.0% for the 12 months ended September 30, 2017. This decrease was primarily due to the increase in net income attributable to stockholders over the comparative period. Our adjusted dividend payout ratio15 (non-GAAP measure) decreased to 67.3% for the 12 months ended September 30, 2018 from 78.9% for the 12 months ended September 30, 2017.

 

Return on average invested capital

 

Return on average invested capital is calculated as net income attributable to stockholders divided by our average invested capital. We calculate average invested capital over a trailing 12-month period by adding the average long-term debt over that period to the average stockholders’ equity over that period.

 

Return on average invested capital increased 220 bps to 7.9% for the 12-month period ended September 30, 2018 from 5.7% for the 12-month period ended September 30, 2017. This increase was primarily due to an increase in net income attributable to stockholders and partially offset by an increase in average invested capital over the comparative period, which was driven by the Acquisition and the associated debt. Return on invested capital (“ROIC”)16 (non-GAAP measure) decreased 80 bps to 7.1% during the 12 months ended September 30, 2018 compared to 7.9% for the 12 months ended September 30, 2017.

 

 

 

14OFCF is a non-GAAP financial measure that we believe, 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 the performance metric, OFCF. OFCF is also an element of the performance criteria for certain annual short-term incentive awards we grant to certain executives. We calculate OFCF by subtracting net capital spending from cash provided by operating activities. OFCF is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.
15Adjusted dividend payout ratio is a non-GAAP financial measure. We believe that comparing the adjusted dividend payout ratio for different financial periods provides useful information about how well our net income supports our dividend payments. Adjusted dividend payout ratio is calculated by dividing dividends paid to stockholders by adjusted net income attributable to stockholders (non-GAAP measure). Adjusted dividend payout ratio is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.
16ROIC is a non-GAAP financial measure that we believe, by comparing on a trailing 12-month basis for different financial periods provides useful information about the after-tax return generated by our investments. We calculate ROIC as adjusted net income attributable to stockholders (non-GAAP measure) 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. ROIC is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Debt and credit facilities

 

At September 30, 2018, our short-term debt of $10.5 million consisted of borrowings under our committed revolving credit facilities and had a weighted average annual interest rate of 2.4%. This compares to current borrowings of $7.0 million at December 31, 2017 with a weighted average annual interest rate of 2.7%.

 

As at September 30, 2018, we had a total of $751.8 million of long-term debt with a weighted average annual interest rate of 5.0%. This compares to long-term debt of $812.9 million as at December 31, 2017 with a weighted average annual interest rate of 4.8%.

 

During the nine months ended September 30, 2018, we made voluntary prepayments totalling $50.0 million on the term loan. Prepayments are applied against future scheduled mandatory payments. The amount available pursuant to the term loan facility was only available to finance the acquisition of IronPlanet and will not be available for other corporate purposes upon repayment of amounts borrowed under that facility.

 

On June 21, 2018, we reduced the amount available on our committed revolving credit facilities by $185.0 million. At September 30, 2018, our credit agreement with a syndicate of lenders, and Bank of America, N.A. as the administrative agent, provides us with:

 

·Revolving facilities of up to $490.0 million;
·The term loan facility used to finance the acquisition of IronPlanet; and
·At our election and subject to certain conditions, including receipt of related commitments, incremental term loan facilities and/or increases to the revolving facilities in an aggregate amount of up to $50.0 million.

 

As at September 30, 2018, we also had $10.0 million in credit facilities in certain foreign jurisdictions. It included $5.0 million of a committed, revolving credit facility that expires on October 27, 2021. The remaining $5.0 million was a demand facility that has no maturity date.

 

As at September 30, 2018, we had unused committed revolving credit facilities aggregating $477.0 million, of which $472.9 million is available until October 27, 2021.

 

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, 2018 are as follows:

 

(in U.S. $000's)  Scheduled payments by due period 
   In 2018   In 2019   In 2020   In 2021   In 2022   Thereafter 
On long-term debt:                              
Principal  $2,311   $13,868   $18,490   $231,366   $-   $500,000 
Interest   2,788    37,770    37,088    34,698    26,875    67,188 

 

Debt covenants

 

We were in compliance with all financial and other covenants applicable to our credit facilities at September 30, 2018.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, financial performance, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies, Judgements, Estimates and Assumptions

 

Aside from the adoption of Topic 606, discussed below, there were no material changes in our critical accounting policies, judgements, estimates and assumptions from those disclosed in the following our Annual Report on Form 10-K for the year ended December 31, 2017, or in the notes to our consolidated financial statements included in “Part I, Item 1: Consolidated Financial Statements” in this Quarterly Report on Form 10-Q.

 

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Effective January 1, 2018, we adopted Topic 606 using the full retrospective method. The primary impact of the adoption of Topic 606 is the change in the presentation of revenue earned from inventory sales and ancillary and logistical services. These revenues are presented gross of the related expenses rather than net. There was no impact on the timing of revenues recognized, amount of operating income or net income, or on the consolidated balance sheet or consolidated statements of cash flows due to the adoption of Topic 606. Prior periods presented have been restated to conform with this new revenue standard.

 

The following table reconciles revenues as previously reported to total revenues under Topic 606:

 

   Prior to January 1,
2018
   New Revenue Standard Adjustments   On and after January 1,
2018
 
(in U.S. $000's)  Revenues as previously
reported (a)
   Cost of inventory
sold1 (b)
   Ancillary and logistical
service expenses2 (c)
   Total revenues under
the new standard
(a)+(b)+(c)=(d)
 
Quarter ended:                
December 31, 2017  $178,785   $98,895   $14,070   $291,750 
September 30, 2017   141,047    72,476    13,878    227,401 
June 30, 2017   166,186    71,726    14,701    252,613 
March 31, 2017   124,499    63,401    11,527    199,427 
Full year 2017  $610,517   $306,498   $54,176   $971,191 

 

The following table reconciles cost of services as previously reported to cost of services under Topic 606:

 

   Prior to January 1, 2018   New Revenue Standard
Adjustments
   On and after January 1, 2018 
(in U.S. $000's)  Costs of services (a)   Ancillary and logistical service
expenses2 (b)
   Costs of services under the
new standard (a) + (b) = (c)
 
Quarter ended:               
December 31, 2017  $25,026   $14,070   $39,096 
September 30, 2017   19,583    13,878    33,461 
June 30, 2017   21,591    14,701    36,292 
March 31, 2017   12,813    11,527    24,340 
Full year 2017  $79,013   $54,176   $133,189 

 

(1)These amounts were historically disclosed under the Consolidated Financial Statement note entitled "Revenue" and are now presented on the face of our consolidated income statements effective January 1, 2018. Second and third quarter of 2017 amounts were restated in the fourth quarter of 2017 to conform with current presentation of certain government contracts.

(2)Effective January 1, 2018, ancillary and logistical service expenses are now reported within costs of services under the Consolidated Financial Statement note entitled "Operating Expenses".

 

For further details on Topic 606, refer to the Annual Report on Form 10-K for the year ended December 31, 2017 and the Quarterly Report on Form 10-Q for the period ended March 31, 2018 and June 30, 2018.

 

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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.

 

The following table presents our agency proceeds (non-GAAP measure) and agency proceeds adjusted operating income rate (non-GAAP measure) results for the three and nine months ended September 30, 2018 and 2017, as well as reconciles those metrics to total revenues and operating income margin, which are the most directly comparable GAAP measures in, or calculated from, our consolidated income statements:

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
   2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Operating income  $31,194   $16,931    84%  $128,862   $67,416    91%
Pre-tax adjusting items:                              
Accelerated vesting of assumed options   -    -    -   -    4,752    (100)%
Acquisition and finance structure advisory   -    -    -   -    9,063    (100)%
Severance and retention   1,501    -    100%   1,501    1,447    4%
Impairment loss   -    -    -   -    8,911    (100)%
Adjusted operating income (non-GAAP measure)   32,695    16,931    93%   130,363    91,589    42%
                               
Total revenues   245,346    227,401    8%   814,054    679,441    20%
Less: cost of inventory sold   (74,341)   (72,476)   3%   (231,834)   (207,603)   12%
Less: ancillary and logistical service expenses   (11,682)   (13,878)   (16)%   (46,242)   (40,106)   15%
Agency proceeds (non-GAAP measure)  $159,323   $141,047    13%  $535,978   $431,732    24%
                               
Operating income margin   12.7%   7.4%   530 bps   15.8%   9.9%   590 bps
Agency proceeds adjusted operating income rate (non-GAAP measure)   20.5%   12.0%   850 bps   24.3%   21.2%   310 bps

 

(1)Please refer to page 58 for a summary of adjusting items during the trailing 12-months ended September 30, 2018 and September 30, 2017.

 

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The following table presents our adjusted net income attributable to stockholders (non-GAAP measure) and diluted adjusted EPS attributable to stockholders (non-GAAP measure) results for the three and nine months ended September 30, 2018, and 2017, as well as reconciles those metrics to net income attributable to stockholders and diluted EPS attributable to stockholders, which are the most directly comparable GAAP measures in our consolidated income statements:

 

 

(in U.S. $000's, except share and  Three months ended September 30,   Nine months ended September 30, 
per share data)          % Change           % Change 
   2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Net income attributable to stockholders  $23,138   $10,261    125%  $85,993   $38,273    125%
Pre-tax adjusting items:                              
Accelerated vesting of assumed options   -    -    -   -    4,752    (100)%
Acquisition and finance structure advisory   -    -    -   -    9,063    (100)%
Severance and retention   1,501    -    100%   1,501    1,447    4%
Gain on sale of equity accounted for investment   (4,935)   -    100%   (4,935)   -    100%
Impairment loss   -    -    -   -    8,911    (100)%
Current income tax effect of adjusting items:                              
Acquisition and finance structure advisory   -    -    -   -    (2,447)   (100)%
Severance and retention   (376)   -    100%   (376)   (564)   (33)%
Deferred income tax effect of adjusting items:                              
Impairment loss   -    -    -   -    (2,361)   (100)%
Current income tax adjusting item:                              
Change in uncertain tax provision   -    -    -   -    2,290    (100)%
Adjusted net income attributable to stockholders (non-GAAP measure)  $19,328   $10,261    88%  $82,183   $59,364    38%
Effect of dilutive securities  $-   $-    -  $-   $(50)   (100)%
Weighted average number of dilutive shares outstanding   109,887,194    108,178,303    2%   109,133,378    108,069,624    1%
                               
Diluted earnings per share attributable to stockholders  $0.21   $0.09    133%   0.79    0.35    126%
Diluted adjusted EPS attributable to stockholders (non-GAAP measure)  $0.18   $0.09    100%   0.75    0.55    36%

 

(1)Please refer to page 58 for a summary of adjusting items during the trailing 12-months ended September 30, 2018 and September 30, 2017.

 

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The following table presents our adjusted EBITDA (non-GAAP measure) and agency proceeds adjusted EBITDA rate (non-GAAP measure) results for the three and nine months ended September 30, 2018 and 2017, as well as reconciles those metrics to net income and net income margin, which are the most directly comparable GAAP measures in, or calculated from, our consolidated income statements:

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
   2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
Net income  $23,112   $10,323    124%  $86,046   $38,469    124%
Add: depreciation and amortization expenses   16,723    14,837    13%   49,451    37,047    33%
Add: interest expense   10,473    10,558    (1)%   32,720    27,311    20%
Less: interest income   (780)   (517)   51%   (2,009)   (2,459)   (18)%
Add: income tax expense   4,791    (3,358)   243%   19,091    7,982    139%
                               
Pre-tax adjusting items:                              
Accelerated vesting of assumed options   -    -    -   -    4,752    (100)%
Acquisition and finance structure advisory   -    -    -   -    9,063    (100)%
Severance and retention   1,501    -    100%   1,501    1,447    4%
Gain on sale of equity accounted for investment   (4,935)   -    100%   (4,935)   -    100%
Impairment loss   -    -    -   -    8,911    (100)%
Adjusted EBITDA (non-GAAP measure)   50,885    31,843    60%   181,865    132,523    37%
                               
Total revenues   245,346    227,401    8%   814,054    679,441    20%
Less: cost of inventory sold   (74,341)   (72,476)   3%   (231,834)   (207,603)   12%
Less: ancillary and logistical service expenses   (11,682)   (13,878)   (16)%   (46,242)   (40,106)   15%
Agency proceeds (non-GAAP measure)  $159,323   $141,047    13%  $535,978   $431,732    24%
                               
Net income margin   9.4%   4.5%   490 bps   10.6%   5.7%   490bps
Agency proceeds adjusted EBITDA rate (non-GAAP measure)   31.9%   22.6%   930bps   33.9%   30.7%   320bps

 

(1)Please refer to page 58 for a summary of adjusting items during the trailing 12-months ended September 30, 2018 and September 30, 2017.

 

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The following table presents our adjusted EBITDA (non-GAAP measure) and adjusted net debt/adjusted EBITDA (non-GAAP measure) results as at and for the 12 months ended September 30, 2018 and 2017, as well as reconciles those metrics to debt, cash and cash equivalents, net income, and debt as a multiple of net income, 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 
   2018   2017   2018 over 2017 
Short-term debt  $10.5   $8.6    22%
Long-term debt   751.8    817.9    (8)%
Debt   762.3    826.5    (8)%
Less: cash and cash equivalents   (228.8)   (224.5)   2%
Adjusted net debt (non-GAAP measure)   533.5    602.0    (11)%
                
Net income  $122.9   $66.4    85%
Add: depreciation and amortization expenses   65.1    47.3    38%
Add: interest expense   43.7    29.5    48%
Less: interest income   (2.7)   (3.0)   (10)%
Add: income tax expense   13.2    15.0    (12)%
Pre-tax adjusting items:               
Accelerated vesting of assumed options   -    4.8    (100)%
Acquisition and finance structure advisory   -    9.1    (100)%
Severance and retention   3.7    1.4    164%
Gain on sale of equity accounted for investment   (4.9)   -    100%
Impairment loss   -    8.9    (100)%
Debt extinguishment costs   -    6.8    (100)%
Adjusted EBITDA (non-GAAP measure)  $241.0   $186.2    29%
                
Debt/net income   6.2x   12.4x   (50)%
Adjusted net debt/adjusted EBITDA (non-GAAP measure)   2.2x   3.2x   (31)%

 

(1)Please refer to page 58 for a summary of adjusting items during the trailing 12-months ended September 30, 2018 and September 30, 2017.

 

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The following table presents our A&M agency proceeds (non-GAAP measure) and A&M agency proceeds rate (non-GAAP measure) results for the three and nine months ended September 30, 2018, and 2017, as well as reconciles those metrics to A&M total revenues and A&M revenue rate, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:

 

(in U.S. $000's)  Three months ended September 30,   Nine months ended September 30, 
           % Change           % Change 
   2018   2017   2018 over
2017
   2018   2017   2018 over
2017
 
A&M total revenues  $218,576   $202,718    8%  $725,394   $608,169    19%
Less: cost of inventory sold   (74,341)   (72,476)   3%   (231,834)   (207,603)   12%
A&M agency proceeds (non-GAAP measure)   144,235    130,242    11%   493,560    400,566    23%
GTV  $1,039,427   $1,019,322    2%  $3,626,551   $3,173,050    14%
A&M revenue rate   21.0%   19.9%   110bps   20.0%   19.2%   80bps
A&M agency proceeds rate (non-GAAP measure)   13.9%   12.8%   110bps   13.6%   12.6%   100bps

 

The following table presents our OFCF (non-GAAP measure) results on a trailing 12-month basis ended September 30, 2018 and 2017, as well as reconciles that metric to cash provided by operating activities and net capital spending, which are the most directly comparable GAAP measures in, or calculated from, our consolidated statements of cash flows:

 

(in U.S. $ millions)  12 months ended September 30, 
           % Change 
   2018   2017   2018 over 2017 
Cash provided by operating activities  $146.2   $114.7    27%
Property, plant and equipment additions   16.1    14.4    12%
Intangible asset additions   27.5    26.0    6%
Proceeds on disposition of property plant and equipment   (4.0)   (6.9)   (42)%
Net capital spending  $39.6   $33.5    18%
OFCF (non-GAAP measure)  $106.6   $81.2    31%

 

Our adoption of ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments effective January 1, 2018. resulted in the $1.3 million Mascus contingent consideration paid in the second quarter of 2017 to be reclassified retrospectively from operating to financing cash flows, which is reflected in the $114.7 million.

 

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The following table presents our adjusted net income attributable to stockholders (non-GAAP measure) and adjusted dividend payout ratio (non-GAAP measure) on a trailing 12-month basis ended September 30, 2018 and September 30, 2017, and reconciles those metrics to net income attributable to stockholders, and dividend payout ratio, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:

 

(in U.S. $ millions)  12 months ended September 30, 
           % Change 
   2018   2017   2018 over 2017 
Dividends paid to stockholders  $74.3   $72.7    2%
Net income attributable to stockholders  $122.7   $66.1    86%
Pre-tax adjusting items:               
Accelerated vesting of assumed options   -    4.8    (100)%
Acquisition and finance structure advisory   -    9.1    (100)%
Severance and retention   3.7    1.4    164%
Impairment loss   -    8.9    (100)%
Debt extinguishment costs   -    6.8    (100)%
Gain on sale of equity accounted for investment   (4.9)   -    100%
Current income tax effect of adjusting items:               
Acquisition and finance structure advisory   -    (2.4)   (100)%
Severance and retention   (0.6)   (0.6)   -
Debt extinguishment costs   -    (1.8)   (100)%
Deferred income tax effect of adjusting items:               
Severance and retention   (0.4)   -    100%
Impairment loss   -    (2.4)   (100)%
Current income tax adjusting item:               
Change in uncertain tax provision   -    2.3    (100)%
Deferred tax adjusting item:               
Remeasurement of deferred taxes   (10.1)   -    100%
Adjusted net income attributable to stockholders (non-GAAP measure)  $110.4   $92.2    20%
                
Dividend payout ratio   60.6%   110.0%   -4940bps
Adjusted dividend payout ratio (non-GAAP measure)   67.3%   78.9%   -1160bps

 

(1)Please refer to page 58 for a summary of adjusting items during the trailing 12-months ended September 30, 2018 and September 30, 2017.

 

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The table on the following page presents our adjusted net income attributable to stockholders (non-GAAP measure) and ROIC (non-GAAP measure) results as at and for the 12-month period ended September 30, 2018 and 2017, and reconciles those metrics 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 
   2018   2017   2018 over 2017 
Net income attributable to stockholders  $122.7   $66.1    86%
Pre-tax adjusting items:               
Accelerated vesting of assumed options   -    4.8    (100)%
Acquisition and finance structure advisory   -    9.1    (100)%
Severance and retention   3.7    1.4    164%
Impairment loss   -    8.9    (100)%
Debt extinguishment costs   -    6.8    (100)%
Gain on sale of equity accounted for investment   (4.9)   -    100%
Current income tax effect of adjusting items:               
Acquisition and finance structure advisory   -    (2.4)   (100)%
Severance and retention   (0.6)   (0.6)   -
Debt extinguishment costs   -    (1.8)   (100)%
Deferred income tax effect of adjusting items:               
Severance and retention   (0.4)   -    100%
Impairment loss   -    (2.4)   (100)%
Current income tax adjusting item:               
Change in uncertain tax provision   -    2.3    (100)%
Deferred tax adjusting item:               
Remeasurement of deferred taxes   (10.1)   -    100%
Adjusted net income attributable to stockholders (non-GAAP measure)  $110.4   $92.2    20%
                
Opening long-term debt  $817.9   $101.6    705%
Ending long-term debt   751.8    817.9    (8)%
Average long-term debt  $784.9   $459.8    71%
                
Opening stockholders' equity  $714.7   $689.6    4%
Ending stockholders' equity   815.5    714.7    14%
Average stockholders' equity   765.1    702.2    9%
         -      
Average invested capital  $1,550.0   $1,162.0    33%