RITCHIE BROS AUCTIONEERS INC filed 10-K with SEC. Read ‘s full filing at 000127956919000456.
We collectively refer to guarantee and inventory contracts as underwritten or ‘at-risk’ contracts. In 2018, our underwritten business accounted for approximately 17% of our GTV, compared to 16% in 2017 and 25% in 2016.
The global used equipment market is highly fragmented with total annual global used equipment volumes estimated at more than $300 billion. We estimate the used equipment auction segment is $25 billion. Ritchie Bros. is the largest live auction company and claims approximately 20% market share of the live auction space with its $4.96 billion in GTV volume in 2018. In addition to the auction segment, two other major segments include private sales and brokers as well as the retail segment which includes OEM’s, OEM dealers, rental companies and large strategic accounts. We compete based on breadth, brand reputation, security, technology, and global reach of our services, as well as in the variety of contracts and methods and channels of selling equipment. We also compete with private sales – often securing new business from equipment owners who had previously tried selling their equipment privately. Given the fragmentation in the auction market as well as upstream opportunities in private sales and retail, there is significant opportunity for growth.
We have incurred substantial indebtedness in connection with the Acquisition. As at December 31, 2018, we have $731.2 million of total debt outstanding, consisting of $243.6 million under a five-year credit agreement (the ‘Credit Agreement’) with a syndicate of lenders entered into on October 27, 2016, and $500.0 million aggregate principal amount of 5.375% senior unsecured notes issued December 21, 2016 (the ‘Notes’), partially reduced by $13.3 million of unamortized debt issue costs, as well as $0.9 million under our foreign credit facilities. There is $458.7 million of availability under the Credit Agreement.
Within the EU, the GDPR, which replaced the EU Directive 95/46/EC, applies to a company which processes personal data as part of its activities of one its branches established in the EU, regardless of where such data is processed, or where a company established outside the EU offers goods or services or monitors the behaviour of individuals in the EU. GDPR governs the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure and protection of personal data and other customer data. Penalties for non-compliance with the GDPR are considerable, allowing EU regulators to impose a monetary penalty equal to the greater of €100 million or 4% of a non-compliant organization’s worldwide annual turnover. Such penalties would be in addition to the rights of individuals to sue for damages in respect of any data privacy breach which causes them to suffer loss.
Our board of directors has adopted a shareholder rights plan (the ‘Rights Plan’), pursuant to which we issued one right in respect of each common share outstanding. Under the Rights Plan, following a transaction in which any person becomes an ‘acquiring person’ as defined in the Rights Plan, each right will entitle the holder to receive a number of common shares provided in the Rights Plan. The purposes of the Rights Plan are (i) to provide our board of directors time to consider value-enhancing alternatives to a take-over bid and to allow competing bids to emerge; (ii) to ensure that shareholders are provided equal treatment under a take-over bid; and (iii) to give adequate time for shareholders to properly assess a take-over bid without undue pressure. The Rights Plan can potentially impose a significant penalty on any person commencing a takeover bid that would result in the offeror becoming the beneficial owner of 20% or more of our outstanding common shares.
(ii)more than 50% of the fair market value of the common shares was derived directly or indirectly from, or from any combination of, real or immovable property situated in Canada, ‘Canadian resource properties’ (as defined in the Canadian Tax Act), ‘timber resource properties’ (within the meaning of the Canadian Tax Act), or options in respect of, interests in or civil law rights in, such properties whether or not such properties exist.
Under the Canadian Tax Act, dividends on shares paid or credited to a non-resident of Canada (or amounts paid or credited on account, or in lieu of payment of, or in satisfaction of, dividends) will be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividends (subject to reduction under the provisions of any applicable tax treaty). Under the Convention, a U.S. resident that beneficially owns the dividends will generally be subject to Canadian withholding tax at the rate of 15% of the gross amount of such dividends unless the beneficial owner is a company which owns at least 10% of the voting shares of Ritchie Bros. at that time, in which case the rate of Canadian withholding tax is generally reduced to 5%.
·Total revenues of $1.17 billion increased 20% from $971.2 million in 2017.
·Agency proceeds (non-GAAP measure) of $729.1 million increased 19% from $610.5 million in 2017.
·GTV of $4.96 billion, up 11% compared to $4.47 billion in 2017.
·A&M revenues of $1.05 billion increased 20% compared to $870.8 million in 2017.
·A&M agency proceeds (non-GAAP measure) of $672.2 million increased 19% from $564.3 million in 2017.
·A&M revenue rate of 21.1% increased 160 bps from 19.5% in 2017, and A&M agency proceeds rate (non-GAAP measure) of 13.5% increased 90 bps from 12.6% in 2017.
·Other Services revenue of $123.5 million increased 23% compared to $100.4 million in 2017.
·In 2018, used equipment availability continued to be challenged with high demand for equipment and end users holding equipment longer; driving historic high utilization rates. The demand was particularly strong within the US construction market with robust momentum throughout 2018. Despite these market headwinds, we generated GTV growth of 11%. This was led by positive year-over-year growth in live industrial auctions and strong growth in our online marketplaces. Online channels accelerated in 2018 following the acquisition of IronPlanet in 2017, setting new featured weekly online sales records in the second quarter, and again in the fourth quarter.
·Ritchie Bros. conducted 568 auctions in 2018, including 348 live, onsite Ritchie Bros. Auctioneers events and 220 IronPlanet and GovPlanet online events. As part of our strategy to fully leverage our multichannel capabilities and consolidate auctions to create larger, more significant multi-day events, we closed five live auction sites and optimized our overall auction calendar. These efforts led to fewer overall live industrial auctions, but more significant events in 2018 resulting in 65% of live industrial auctions posting year-over-year growth across major geographies including a six-day US$278-million Orlando event in February and several other record-breaking auctions.
·Online bidding continued to gain momentum in 2018, with the percentage of online buyers reaching 59% of winning bids made through an online channel.
·We generated significant growth in our Ritchie Bros. Financial Services (RBFS) solution. In 2018 RBFS’ total funded volume hit US$432 million, up 41% from 2017. RBFS increased its workforce in 2018 and invested in technology to improve efficiencies, and is expected to continue to provide strong results in 2019.
Revenue from inventory sales can fluctuate, as it changes based on whether our customers sell using a straight commission contract or an inventory contract at time of selling. Straight commission contracts will result in the commission being recognized as revenue, while revenue of inventory sales will result in the gross transaction value of the equipment sold being recorded as revenue with the related cost recognized in cost of inventory sold. As a result, a change in the revenue mix between service revenues and revenue from inventory sales can have a significant impact on revenue growth percentages. Throughout this discussion, we disclose sales of inventory revenue as a percent of total revenues to provide more information regarding our revenue mix. In each of 2018 and 2017, 36% of our total revenue was comprised of revenue from inventory sales, compared to 51% in 2016. Cost of inventory sold as a percent of operating expense can also fluctuate significantly due to changes in the revenue mix.
Revenues increased $198.8 million, or 20%, in 2018 compared to 2017 primarily due to incremental volume from the Acquisition. Fiscal 2018 included 12 full months of Acquisition volume versus seven months of post-Acquisition activity in Fiscal 2017. The increase was also due to partial fee harmonization and higher revenues from inventory sales. As part of our IronPlanet integration activities, we partially harmonized our fees between on site and online auctions. Foreign exchange had a favourable impact on total revenues in 2018 primarily due to the fluctuations of the Euro exchange rate relative to the U.S. dollar.
Revenues decreased $155.8 million, or 14%, in 2017 compared to 2016. This decrease was primarily due to lower revenues from inventory sales, partially offset by an increase in service revenues. The lower revenue from inventory sales is as a result of the fluctuations in this revenue stream as discussed above, and the growth in service revenues was due to the Acquisition. Foreign exchange had a favourable impact on total revenues in 2018 primarily due to the fluctuations of the Euro and Canadian dollar exchange rates relative to the U.S. dollar.
Costs of services increased $25.9 million, or 19%, in 2018 compared to 2017. This increase was primarily due to the Acquisition and the incremental costs required to support the growth of our service revenues.
Costs of services increased $19.9 million, or 18%, in 2017 compared to 2016. This increase is primarily due to costs associated with the growth in our inspection and appraisal activities because of the Acquisition.
Costs of inventory sold increased $67.8 million, or 22%, in 2018 compared to 2017. This increase was primarily due to the change in our revenue from inventory sales.
Costs of inventory sold decreased $206.9 million, or 40%, in 2017 compared to 2016. This increase is primarily due to the decrease in revenue from inventory sales during the same period. Revenue from inventory sales as a percent of total revenues decreased from 51% in 2016 to 36% in 2017.
SG&A expenses increased $59.4 million, or 18%, during 2018 compared to 2017. This increase is primarily due to the Acquisition, continued investments in talent to support growth of our business and initiatives, share unit expenses, 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. Of the $8.8 million increase in our share unit expenses in 2018, $3.3 million related to mark-to-market costs driven by growth in our share price over the comparative period and $2.2 million related to the incremental compensation costs from the modifications of our share unit plans. Foreign exchange had an unfavourable impact on SG&A expenses in 2018 primarily due to the fluctuations of the Euro exchange rate relative to the U.S. dollar.
SG&A expenses increased $39.7 million, or 14%, during 2017 compared to 2016. This increase is primarily due to post-Acquisition increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher commitment and other bank fees attributable to our new credit facility. This increase in SG&A expenses from 2016 to 2017 was partially offset by a decrease in share unit expense. Foreign exchange rates had an unfavourable impact on SG&A expenses in 2017.
We conduct global operations in many different currencies, with our presentation currency being the U.S. dollar. In 2018, approximately 50% of our revenues and 53% of our operating expenses were denominated in currencies other than the U.S. dollar, compared to 44% and 53%, respectively, in 2017 and 48% and 58%, respectively, in 2016.
Operating income increased $77.7 million, or 72%, in 2018 compared to 2017. This was driven by higher total revenues combined with lower acquisition-related costs, as well as an impairment loss in the prior year. Foreign exchange rates did not have a significant impact on operating income in 2018. Adjusted operating income (non-GAAP measure) increased $52.9 million, or 40%, to $186.7 million in 2018 compared to $133.8 million in 2017.
Primarily for the same reasons noted above, operating income margin, which is our operating income divided by revenues, increased 470 bps to 15.8% in 2018 compared to 11.1% in 2017. Agency proceeds adjusted operating income rate (non-GAAP measure) increased 370 bps to 25.6% in 2018 from 21.9% in 2017.
Operating income decreased $28.3 million, or 21%, in 2017 compared to 2016. This decrease was primarily due to the higher SG&A expenses, acquisition-related costs, costs of services, and D&A expenses. These increases were partially offset by the revenue increase and lower impairment loss over the same comparative period. Foreign exchange rates did not have a significant impact on operating income in 2017. Adjusted operating income (non-GAAP measure) decreased $30.2 million, or 18%, to $133.8 million in 2017 compared to $164.0 million in 2016.
Primarily for the same reasons noted above, operating income margin, which is our operating income divided by revenues, decreased 90 bps to 11.1% in 2017 compared to 12.0% in 2016. Agency proceeds adjusted operating income rate (non-GAAP measure) decreased 700 bps to 21.9% in 2017 from 28.9% in 2016.
Interest expense increased $32.7 million, or 588%, in 2017 compared to 2016. This increase was primarily due to indebtedness to finance the Acquisition.
Other income increased $3.6 million, or 44%, in 2018 compared to 2017. This was primarily due to gain on the sale of an equity accounted for investment. In 2017, other income increased $1.1 million, or 16%, compared to 2016 primarily due to gains from vehicle and yard equipment disposals in the U.S.
2018 performance We recorded an income tax expense of $31.0 million in 2018 compared to $2.0 million in 2017. Our effective tax rate was 20.3% compared to 2.7% in 2017. The increase in income tax expense over the comparative period was primarily the result of a $10.1 million deferred income tax recovery in 2017 due to the remeasurement of deferred income tax assets and liabilities arising from changes in statutory tax rates as a result of the TCJA. In addition, in 2018 there was a greater proportion of earnings taxed in jurisdictions with higher tax rates, and we were subject to the Base Erosion Anti-Abuse Tax (‘BEAT’) that was introduced by the TCJA.
We recorded an income tax expense of $2.0 million in 2017 compared to $37.0 million in 2016. Our effective tax rate was 2.7% in 2017 compared to 28.3% in 2016. The decrease in income tax expense over the comparative period was primarily the result of a greater proportion of earnings taxed in jurisdictions with lower tax rates, a $10.1 million deferred income tax recovery due to the remeasurement of deferred income tax assets and liabilities arising from changes in statutory tax rates (as noted above), and a decrease in the valuation allowance applied to deferred income tax assets. This decrease was partially offset by an increase in non-deductible expenses and $2.3 million of expense related to an increase in uncertain tax positions. We increased our uncertain tax position in the first quarter of 2017 due to an unfavourable outcome of a tax dispute in one of our European operating jurisdictions.
Net income attributable to stockholders increased $46.5 million, or 62%, in 2018 compared to 2017. This increase was primarily due to higher total revenues combined with $33.2 million less acquisition-related costs, 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 $30.0 million, or 34%, to $117.7 million in 2018 from $87.7 million in 2017.
For these same reasons, net income increased $46.2 million, or 61%, in 2018 compared to 2017. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (‘EBITDA’) (non-GAAP measure) increased $65.8 million, or 34%, to $257.3 million in 2018 from $191.5 million in 2017.
Primarily for the same reasons noted above, net income margin increased 260 bps to 10.4% in 2018 from 7.8% in 2017. Agency proceeds adjusted EBITDA rate (non-GAAP measure) increased 390 bps to 35.3% in 2018 from 31.4% in 2017.
Net income attributable to stockholders decreased $16.8 million, or 18%, in 2017 compared to 2016. This decrease was primarily due to the $26.4 million increase in acquisition-related costs and the increase in interest expense, partially offset by a lower income tax expense over the same comparative period. Adjusted net income attributable to stockholders (non-GAAP measure) decreased $35.6 million, or 29%, to $87.7 million in 2017 from $123.3 million in 2016.
For these same reasons, net income decreased $18.2 million, or 19%, in 2017 compared to 2016. Adjusted EBITDA (non-GAAP measure) decreased $18.6 million, or 9%, to $191.5 million in 2017 from $210.1 million in 2016.
Primarily for the same reasons noted above, net income margin decreased 50 bps to 7.8% in 2017 from 8.3% in 2016. Agency proceeds adjusted EBITDA rate (non-GAAP measure) decreased 570 bps to 31.4% in 2017 from 37.1% in 2016.
Diluted EPS attributable to stockholders increased 61% to $1.11 in 2018 from $0.69 in 2017. This increase is primarily due to the increase in net income attributable to stockholders, partially offset with an increase in the weighted average number of dilutive shares outstanding over the same comparative period. The increase in the weighted average number of dilutive shares is primarily due to issuance of common shares upon exercise of stock options and vesting of equity-classified share units. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) increased 33% to $1.08 in 2018 from $0.81 in 2017.
Diluted EPS attributable to stockholders decreased 19% to $0.69 in 2017 from $0.85 in 2016. This decrease is primarily due to the decrease in net income attributable to stockholders, combined with an increase in the weighted average number of dilutive shares outstanding over the same comparative period. The increase in the weighted average number of dilutive shares is primarily due to the modification of certain share units, including the CEO SOG PSUs, from liability-classified to equity-classified in May 2016 and May 2017, as well as the assumption of IronPlanet stock options as part of the Acquisition. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) decreased 30% to $0.81 in 2017 from $1.15 in 2016.
GTV increased $496.2 million, or 11%, in 2018 compared to 2017. The increase was 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 59% due to the Acquisition and new compensation strategies focused on expansion of online marketplaces. Live on site auctions increased 5% primarily due to strong live on site auction performance in Canada, and in the U.S.
The total number of industrial and agricultural lots sold at live on site auctions decreased 3% to 406,500 lots in 2018 compared to 417,600 lots in 2017, and GTV on a per-lot basis increased 6% to $9,900 in 2018 compared to $9,300 in 2017.
The volume of underwritten commission contracts increased to 17% in 2018 compared to 16% of GTV in 2017, consistent with the increase in revenue from inventory sales.
GTV increased $133.2 million, or 3%, in 2017 compared to 2016. The increase was primarily due to the Acquisition, and the resulting increase in online marketplace GTV, as well as a favourable impact of foreign exchange rates over the comparative period. The increase was partially offset by a decrease GTV from live on site auctions, which was primarily due to a decrease in the number of lots in 2017 compared to 2016.
The total number of industrial and agricultural lots decreased 5% to 417,600 in 2017 from 437,300 in 2016, and GTV on a per-lot basis decreased 3% to $9,300 in 2017 compared to $9,600 in 2016. The total number of lots sold online increased 12% to 252,500 lots in 2017 compared to 224,500 lots in 2016.
The volume of underwritten commission contracts decreased to 16% of our GTV in 2017 from 25% in 2016, primarily due to the pressure on used equipment market supply volume.
At the end of 2017, we announced the closure of five on site auction locations across North America as part of our site optimization strategy to focus on online sales and larger auctions. This resulted in 25% less number of industrial live on site auctions held in 2018 compared to 2017. Partially as a result of this strategy, there was a $6.0 million increase in average GTV per industrial auction in 2018 compared to 2017, and also a 32% increase in average lots per industrial live on site auction metrics. GTV was only minimally impacted by the closure of our auction sites.
Internet bidders comprised 75% of the total bidder registrations at our live on site auctions in 2018 compared to 69% in 2017. Across all channels, 59% of total GTV was purchased by online buyers in 2018 compared to 54% in 2017. This increase in internet bidders and online buyers show that we continued to promote multi-channel participation at our auctions throughout 2018.
Traffic across all our websites increased 27% in 2018 compared to 2017, primarily due to increased traffic on our IronPlanet websites. Similarly, traffic across all our websites increased 23% in 2017 compared to 2016, with the addition of IronPlanet traffic accounting for most of the increase.
In the A&M segment, we earn service revenues and revenue from inventory sales. Service revenues are commissions from sales at our auctions represents the percentage earned by the Company on the gross proceeds from equipment and other assets sold at auction. Revenue from inventory sales represents the gross proceeds of the sales of the equipment and other assets sold at auction that are owned by us. In each of 2018 and 2017, total revenue from inventory sales as a percent of total revenues was 40%. In 2016, the proportion of total revenues as a percent of revenue from inventory sales was 55%. Revenue from inventory sales and the related cost of inventory sold can change significantly year-over-year as it depends on whether straight commission contracts or inventory contracts are utilized at the time of selling. The change in revenue mix can cause fluctuations in our revenue growth percentages and our cost of inventory sold as a percent of segment expenses.
Revenue rate is defined as total revenue divided by GTV. For revenue from inventory sales, the amount of revenue recognized is equal to the gross transaction value and the revenue rate for this revenue stream is 100%. For our straight commission contracts, we recognize revenue based on the commission earned and the revenue rate for the service revenues represents the percentage of commission earned from the gross transaction value. Revenue rate also fluctuates based on the proportion of revenue that is comprised of revenue from inventory sales.
·United States– 22% increase was also due to increases in revenue from inventory sales.
·Canada– 14% increase was also due to an increase in service revenues from live on site auctions. There was also an increase in inventory sales during the year.
·International– 23% increase was also due to an increase in revenue from inventory sales partially driven by macroeconomic conditions in parts of Europe creating a more favourable supply environment.
A&M Revenue Rate grew to 21.1% in 2018 compared to 19.5% in 2017, due to partial fee harmonization and listing fees from our online marketplace channel.
Changes in A&M revenues in 2017 compared to 2016 were primarily due to a decrease in revenue from inventory sales in the U.S. and Canada as evident by the decrease in inventory sold GTV as a percent of total GTV from 13.0% to 8.1% in this comparative period. A&M revenue in the US was partially offset by an increase in service revenue as a result of the Acquisition. The 2016 revenue rate was 24.1% compared to 19.5% in 2017, primarily due to the larger percentage of revenue comprised of revenue from inventory sales in 2016.
A&M costs of services increased $11.7 million, or 16%, in 2018 compared to 2017 primarily due to the Acquisition, in line with higher activity 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. In particular, we significantly increased costs related to GovPlanet’s contracts with government agencies.
A&M costs of services increased $10.4 million, or 16% in 2017 compared to 2016 primarily due to the Acquisition, which drove the increase in our online marketplace GTV and revenues. The increase in online marketplace revenue resulted in an increase in the costs incurred to earn those revenues, which were primarily related to inspection activities. Other costs of services include storage and shipping costs, primarily associated with costs to move equipment off government facilities as part of our GovPlanet channel activities.
A&M costs of inventory sold increased $67.8 million, or 22%, in 2018 compared to 2017. This increase was primarily due to an increase in the volume of inventory contracts.
A&M costs of inventory sold decreased $206.9 million, or 40%, in 2017 compared to 2016, in line with the decrease in revenue from inventory sales in the comparative period.
Our A&M segment SG&A expenses increased $54.7 million, or 18%, in 2018 compared to 2017. The increase was primarily due to the Acquisition, continued investments in talent to support growth of our businesses and initiatives, share unit expenses, and operational costs incurred to support GovPlanet’s non-rolling stock contracts with the Defense Logistics Agency. The Acquisition drove increases in technology support costs, travel and advertising to support our online marketplace sales. Of the $8.8 million increase in our share unit expenses in 2018, $3.3 million related to mark-to-market costs driven by growth in our share price over the comparative period and $2.2 million related to the incremental compensation costs from the modifications of our share unit plans.
Our A&M segment SG&A expenses increased $36.6 million, or 13%, in 2017 compared to 2016. The increase is primarily due to the Acquisition, including increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher bank fees attributable to our new credit facility.
Revenue from other services grew $23.1 million, or 23%, in 2018 compared to 2017. This increase was primarily due to increases in RBFS of $7.1 million, logistical services revenues of $4.5 million, Asset Appraisal Services (‘AAS’) of $3.2 million, and Mascus of $2.1 million.
Funded volume, which represents the amount of lending brokered by RBFS, increased 41% from $306.4 million in 2017 to $431.5 million in 2018. RBFS segment revenues were $23.2 million in 2018, a 44% increase compared to $16.1 million in 2017. RBFS operating profit increased 47% over the same comparative period to $12.6 million from $8.2 million. Logistical services revenues grew primarily to support our European customers.
Revenue from other services grew $18.6 million, or 23%, in 2017 compared to 2016. This increase was primarily due to the Acquisition, which added $3.4 million of AAS revenue in 2017, RBFS, Mascus, and RB Logistics.
Funded volume, which represents the amount of lending brokered by RBFS, increased 17% from $261.4 million in 2016 to $306.4 million in 2017. RBFS segment revenues were $16.1 million in 2017, a 26% increase compared to $12.8 million in 2016. RBFS operating profit increased 28% over the same comparative period to $8.2 million from $6.4 million.
Cash provided by operating activities decreased $3.3 million, or 2%, during 2018 compared to 2017. This decrease was primarily due to changes in certain of our operating assets and liabilities, which exceed the $46.2 million increase in our net income. Changes in inventory used $68.7 million more cash during 2018 compared to 2017. $27.8 million of this increase was attributable to non-rolling stock inventory related to our GovPlanet business. The remainder of the increase was primarily due to increases in inventory held in Europe and the United States. Excluding the non-rolling stock inventory, approximately 64% of the remaining December 31, 2018 balance of inventory is expected to sell at live on site auctions during the first quarter of 2019 and another 22% by the end of the second quarter of 2019, with the remaining balance to be sold online or via Private Treaty.
Cash provided by operating activities decreased $30.0 million, or 17%, during 2017 compared to 2016. This decrease was primarily due to a decrease in cash earnings, which included decreases in net income of $18.2 million, and a decrease in non-cash charges, which included decreases in impairment losses of $19.3 million. Changes in certain of our operating assets and liabilities also contributed to the decline in cash flow from operations. Particularly, changes in inventory used $35.1 million more cash during 2017 compared to 2016. This was primarily due to large inventory packages held at the end of 2015 being sold in the February 2016 Orlando auction, combined with a large inventory package held in Canada at the end of 2017 that relates to a dispersal of oil and gas equipment, most of which was sold in March 2018.
CAPEX intensity for 2018 decreased compared to CAPEX intensity for 2017, primarily due to total revenues increasing 20% and net capital spending decreasing 6% over the comparative period. Net capital spending decreased primarily due to two excess properties sales in the fourth quarter of 2018. This decrease was partially offset by increased spending on property, plant and equipment additions primarily relating to our auction sites and two warehouse facilities housing our non-rolling stock inventory. Operating Free Cash Flow (‘OFCF’) (non-GAAP measure) decreased $1.3 million to $111.9 million for 2018 due to the decrease in cash provided by operating activities offset by lower net capital spending.
CAPEX intensity for 2017 increased compared to CAPEX intensity for 2016, primarily due to the net capital spending increase of 15% combined with the decrease in revenue of 14% over the comparative period. The net capital spending increase was primarily due to an increase in the capitalization of costs of intangible assets under development. Significant software development projects in 2017 included systems integration following the Acquisition and other acquisitions, as well as enhanced functionality for our online marketplace sales channel. The decrease in cash provided by operating activities combined with the increase in net capital spending resulted in a decrease in OFCF (non-GAAP measure) of $34.6 million, or 23%, to $113.2 million in 2017 from $147.8 million in 2016.
Our dividend payout ratio, which we calculate as dividends paid to stockholders divided by net income attributable to stockholders, decreased to 62.3% in 2018 from 97.1% in 2017. This decrease was primarily due to the increase in net income attributable to stockholders over the comparative period. Our adjusted dividend payout ratio (non-GAAP measure) decreased to 64.3% in 2018 from 83.0% in 2017.
Our dividend payout ratio in 2017 increased to 97.1% from 76.8% in 2016. This increase is primarily the result of the decrease in net income attributable to stockholders combined with the increase in our dividends paid to stockholders, year-over-year. Our adjusted dividend payout ratio (non-GAAP measure) increased to 83.0% in 2017 from 57.2% in 2016.
Return on average invested capital increased 260 bps to 7.9% in 2018 from 5.3% in 2017. This increase is primarily due to a $46.5 million, or 62%, increase in net income attributable to stockholders over the comparative period, combined with the impact of $80.0 million in voluntary debt repayments on average invested capital during 2018. Return on invested capital (‘ROIC’) (non-GAAP measure) increased 140 bps to 7.6% in 2018 from 6.2% in 2017.
Return on average invested capital decreased 350 bps to 5.3% in 2017 from 8.8% in 2016. This decrease is primarily due to a $375.7 million, or 36%, increase in average invested capital year-over-year, which was driven by the issuance of the Notes in the fourth quarter of 2016 and the delayed-draw term loans borrowed in the second quarter of 2017. Also contributing to the decrease in return on average invested capital over this comparative period was a $16.8 million, or 18%, decrease in net income attributable to stockholders. ROIC (non-GAAP measure) decreased 560 bps to 6.2% in 2017 from 11.8% in 2016.
Borrowings under the Credit Agreement bear floating rates of interest, which, at our option, are based on either a base rate (or Canadian prime rate for certain Canadian dollar borrowings) or LIBOR (or such floating rate customarily used by the syndicate for currencies other than U.S. dollars). In either case, an applicable margin is added to the rate. The applicable margin ranges from 0.25% to 1.50% for base rate loans, and 1.25% to 2.50% for LIBOR (or the equivalent of such currency) loans, depending on our leverage ratio at the time of borrowing.
At December 31, 2018, our short-term debt of $19.9 million consisted of borrowings under our committed revolving credit facilities and had a weighted average annual interest rate of 2.3%. 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 December 31, 2018, we had a total of $711.3 million long-term debt with a weighted average annual interest rate of 5.1%. 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%.
Goodwill arising from the acquisition of Mascus forms part of the reporting unit on December 31, 2018, and we performed the US GAAP goodwill impairment test. Using the cash flow methodology of the earnings approach, the fair value of the Mascus reporting unit was measured based on the present value of the cash flows that we expect the reporting unit to generate. In determining our future cash flows, we estimated an annual revenue growth rate of 8% and an operating margin ranging between 41% to 49% from 2019 to 2023. We estimated a discount rate of 12% reflecting the risk premium on this reporting unit, and a terminal growth rate of 3.5% for the period beyond five years. As the fair value of the Mascus reporting unit was greater than its carrying amount, management concluded that Mascus goodwill was not impaired at December 31, 2018.
Changes in tax rates and tax law are accounted for in the period of enactment. On December 22, 2017, new federal tax reform legislation was enacted in the U.S., resulting in significant changes from previous tax law. The TCJA reduces the federal corporate income tax rate to 21% from 35% effective January 1, 2018. ASC 740, Income Taxes, requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled, which may impact the carrying values of deferred tax assets and liabilities. The effect of a change in tax law is recorded as a discrete component of the income tax provision related to continuing operations in the period of enactment. Changes in the valuation allowance assessment due to the 2017 TCJA would also be recorded to continuing operations in the tax provision. When realization of deferred income tax assets does not meet the more-likely-than-not criterion for recognition, a valuation allowance is provided.
Liabilities for uncertain tax positions are recorded based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We also continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
We conduct operations in local currencies in countries around the world, but we use the U.S. dollar as our presentation currency. As a result, we are exposed to currency fluctuations and exchange rate risk. We cannot accurately predict the future effects of foreign currency fluctuations on our financial condition or results of operations, or quantify their effects on the macroeconomic environment. The proportion of revenues denominated in currencies other than the U.S. dollar in a given period will differ from the annual proportion for the year ended December 31, 2018, which was 50%, depending on the size and location of auctions held during the period. On annual basis, we expect fluctuations in revenues and operating expenses to largely offset and generally act as a natural hedge against exposure to fluctuations in the value of the U.S. dollar. As part of our debt management strategies, we continue to monitor our exposure to interest rate risk, and while we have not entered in to interest rate swaps to fix the interest rate on our variable rate debt, we may consider hedging specific borrowings if we deem it appropriate in the future.
During 2018, we recorded a net decrease in our foreign currency translation adjustment balance of $13.8 million, compared to a net increase of $24.6 million in 2017 and a net decrease of $10.0 million in 2016. Our foreign currency translation adjustment arises from the translation of our net assets denominated in currencies other than the U.S. dollar to the U.S. dollar for reporting purposes. Based on our exposures to foreign currency transactions as at December 31, 2018, and assuming all other variables remain constant, a 10% appreciation or depreciation of the Canadian dollar and Euro against the U.S. dollar would result in an increase/decrease of approximately $22.4 million in our consolidated comprehensive income, of which $21.7 million relates to our foreign currency translation adjustment and $0.7 million to our net income.
Our exposure to interest rate risk decreased at December 31, 2018 compared to December 31, 2017, primarily due to the repayment of $91.0 million, on the term loans, during 2018. The Notes, which represent 69% of our long-term debt, bear interest at a fixed rate of 5.375% per annum. The proportion of fixed-to-floating interest rates is expected to increase as we make the required principal repayments on our delayed draw term loans and execute on our debt management strategies. As part of our debt management strategies, we continue to monitor our exposure to interest rate risk, and while we have not adopted a long-term hedging strategy to protect against interest rate fluctuations associated with our variable rate debt, we may consider hedging specific borrowings if we deem it appropriate in the future.
The consolidated financial statements include the accounts of the Company and its wholly-owned and non-wholly owned subsidiaries in which the Company has a controlling financial interest either through voting rights or means other than voting rights. All inter-company transactions and balances have been eliminated on consolidation. Where the Company’s ownership interest in a consolidated subsidiary is less than 100%, the non-controlling interests’ share of these non-wholly owned subsidiaries is reported in the Company’s consolidated balance sheets as a separate component of equity or within temporary equity. The non-controlling interests’ share of the net income of these non-wholly owned subsidiaries is reported in the Company’s consolidated income statements as a deduction from the Company’s net earnings to arrive at net income attributable to stockholders of the Company.
Liabilities for uncertain tax positions are recorded based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, income taxes payable, and deferred taxes in the period in which the facts that give rise to a revision become known.
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of the benefit to recognize in the financial statements. The tax position is measured as the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company classifies unrecognized tax benefits that are not expected to result in the payment or receipt of cash within one year as non-current liabilities in the consolidated balance sheets.
Until July 12, 2016, the Company held a 51% interest in RBFS, an entity that provides loan origination services to enable the Company’s auction customers to obtain financing from third party lenders.
Until July 12, 2016, the Company and the non-controlling interest (‘NCI’) holders each held options pursuant to which the Company could acquire, or be required to acquire, the NCI holders’ 49% interest in RBFS. These call and put options became exercisable on April 6, 2016, and the Company had the option to elect to pay the purchase price in either cash or shares of the Company, subject to the Company obtaining all relevant security exchange and regulatory consents and approvals. As a result of the existence of the put option, the NCI was accounted for as a contingently redeemable equity instrument (the ‘contingently redeemable NCI’). The NCI could be redeemed at a purchase price to be determined through an independent appraisal process conducted in accordance with the terms of the agreement, or at a negotiated price (the ‘redemption value’).
On July 12, 2016, the Company completed its acquisition of the NCI. On that date, the Company acquired the NCI holders’ 49% interest in RBFS for total consideration of 57,900,000 Canadian dollars ($44,141,000). The purchase price consisted of cash consideration of 53,900,000 Canadian dollars ($41,092,000) and 4,000,000 Canadian dollars ($3,049,000) representing the acquisition date fair value of contingent consideration payable to the former shareholders of RBFS. The contingent payment is payable if RBFS achieves a specified annual revenue growth rate over a three-year post-acquisition period, and is calculated as a specified percentage of the accumulated earnings of RBFS after the three-year post-acquisition period. The maximum amount payable under the contingent payment arrangement is 10,000,000 Canadian dollars. The Company may pay an additional amount not exceeding 1,500,000 Canadian dollars over a three-year period based on the former NCI holders providing continued management services to RBFS.
On December 21, 2016, the Company completed the offering of $500,000,000 aggregate principal amount of 5.375% senior unsecured notes due January 15, 2025 (note 22). Upon the closing of the offering, the gross proceeds from the offering were deposited in to an escrow account. The funds were released from escrow upon the closing of the acquisition of IronPlanet (note 29).
During the year ended December 31, 2018, interest of $110,000 (2017: $110,000; 2016: $95,000) was capitalized to the cost of assets under development. These interest costs relating to qualifying assets are capitalized at a weighted average rate of 4.06% (2017: 2.97%; 2016: 3.99%).
The Company holds a 48% share interest in a group of companies detailed below (together, the ‘Cura Classis entities’), which have common ownership. The Cura Classis entities provide dedicated fleet management services in three jurisdictions to a common customer unrelated to the Company. The Company has determined the Cura Classis entities are variable interest entities and the Company is not the primary beneficiary, as it does not have the power to make any decisions that significantly affect the economic results of the Cura Classis entities. Accordingly, the Company accounts for its investments in the Cura Classis entities following the equity method.
During the year ended December 31, 2018, interest of $460,000 (2017: $281,000; 2016: $356,000) was capitalized to the cost of software under development. These interest costs relating to qualifying assets are capitalized at a weighted average rate of 4.09% (2017: 3.18%; 2016: 4.91%).
The Company may use the proceeds from the Revolving facilities for general corporate purposes. The amount available pursuant to the Terms loans was only available to finance the acquisition of IronPlanet and is not be available for other corporate purposes upon repayment of amounts borrowed under that facility. On May 31, 2017, the Company borrowed $325,000,000 under the Term loans to finance the acquisition of IronPlanet (note 29). The Term loans amortize in equal quarterly installments in an annual amount of 5% for the first two years and 10% in the third through fifth years, with the balance payable at maturity. Upon the closing of the acquisition the Credit Agreement became secured by the assets of the Company and certain of its subsidiaries in Canada and the United States. The Credit Agreement may become unsecured again, subject to the Company meeting specified credit rating or leverage ratio conditions.
On December 21, 2016, the Company completed the offering of $500,000,000 aggregate principal amount of 5.375% senior unsecured notes due January 15, 2025 (the ‘Notes’). Interest on the Notes is payable semi-annually. The proceeds from the offering were held in escrow until completion of the acquisition of IronPlanet. On May 31, 2017, the funds were released from escrow to finance the acquisition of IronPlanet. The Notes are jointly and severally guaranteed on an unsecured basis, subject to certain exceptions, by each of the Company’s subsidiaries that is a borrower or guarantees indebtedness under the Credit Agreement. IronPlanet and certain of its subsidiaries were added as additional guarantors in connection with the acquisition of IronPlanet.
Short-term debt is comprised of drawings in different currencies on the Company’s committed revolving credit facilities and have a weighted average interest rate of 2.3% (December 31, 2017: 2.7%).
The Company has an employee share purchase plan that allows all employees that have completed two months of service to contribute funds to purchase common shares at the current market value at the time of share purchase. Employees may contribute up to 4% of their salary. The Company will match between 50% and 100% of the employee‘s contributions, depending on the employee‘s length of service with the Company.
At December 31, 2018, there were $41,461,000 of assets guaranteed under contract, of which 51% is expected to be sold prior to March 31, 2019 with the remainder to be sold by May 31, 2020 (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).
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.
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