Form 6-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2005
Commission File Number: 001-13425
Ritchie Bros. Auctioneers Incorporated
6500 River Road
Richmond, BC, Canada
V6X 4G5
(604) 273 7564
(Address of principal executive offices)
indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F
Form 20-F o Form 40-F þ
indicate by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule 101(b)(1):
o
indicate by check mark if the registrant is submitting the Form 6-K in paper
as permitted by Regulation S-T Rule 101(b)(7): o
indicate by check mark whether by furnishing information contained in this Form,
the registrant is also thereby furnishing the information to the Commission pursuant to
Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes o No þ
If Yes is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements do not include all information and
footnotes required by Canadian or United States generally accepted accounting principles for a
complete set of annual financial statements. However, in the opinion of management, all
adjustments (which consist only of normal recurring adjustments) necessary for a fair presentation
of the results of operations for the relevant periods have been made. Results for the interim
periods are not necessarily indicative of the results to be expected for the year or any other
period. These financial statements should be read in conjunction with the summary of accounting
policies and the notes to the consolidated financial statements included in the Companys Annual
Report on Form 40-F for the fiscal year ended December 31, 2004, a copy of which has been filed
with the Securities and Exchange Commission. These policies have been applied on a consistent
basis.
RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Statements of Operations and Retained Earnings
(Expressed in thousands of United States dollars, except per share amounts)
(Unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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|
Auction revenues |
|
$ |
38,430 |
|
|
$ |
31,449 |
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|
$ |
152,700 |
|
|
$ |
125,115 |
|
Direct expenses |
|
|
4,487 |
|
|
|
3,005 |
|
|
|
18,563 |
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|
15,405 |
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33,943 |
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|
28,444 |
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|
134,137 |
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109,710 |
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Expenses: |
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Depreciation and amortization |
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3,198 |
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3,246 |
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10,061 |
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9,253 |
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General and administrative |
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23,859 |
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20,989 |
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68,316 |
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60,826 |
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27,057 |
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24,235 |
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78,377 |
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70,079 |
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Earnings from operations |
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6,886 |
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4,209 |
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55,760 |
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39,631 |
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Other income (expense): |
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Interest expense |
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(427 |
) |
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(695 |
) |
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(1,768 |
) |
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(2,448 |
) |
Gain (loss) on disposition of capital assets |
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68 |
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(16 |
) |
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6,570 |
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88 |
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Other |
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65 |
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234 |
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302 |
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516 |
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(294 |
) |
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(477 |
) |
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5,104 |
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(1,844 |
) |
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Earnings before income taxes |
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6,592 |
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3,732 |
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60,864 |
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37,787 |
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Income tax expense (recovery): |
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Current |
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1,779 |
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1,693 |
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21,695 |
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13,463 |
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Future |
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245 |
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229 |
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(208 |
) |
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760 |
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2,024 |
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1,922 |
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21,487 |
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14,223 |
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Net earnings |
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$ |
4,568 |
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$ |
1,810 |
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$ |
39,377 |
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$ |
23,564 |
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Net earnings per share (in accordance with
Canadian and United States GAAP) (note 5): |
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Basic |
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$ |
0.13 |
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$ |
0.05 |
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$ |
1.15 |
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$ |
0.69 |
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Diluted |
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$ |
0.13 |
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$ |
0.05 |
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$ |
1.13 |
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$ |
0.68 |
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Retained earnings, beginning of period |
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$ |
210,695 |
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$ |
177,825 |
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$ |
183,438 |
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$ |
161,183 |
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Net earnings |
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4,568 |
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1,810 |
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39,377 |
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23,564 |
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Cash dividends paid |
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(6,191 |
) |
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(3,763 |
) |
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(13,743 |
) |
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(8,875 |
) |
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Retained earnings, end of period |
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$ |
209,072 |
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$ |
175,872 |
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$ |
209,072 |
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$ |
175,872 |
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See accompanying notes to consolidated financial statements.
- 3 -
RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Balance Sheets
(Expressed in thousands of United States dollars)
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September 30, |
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December 31, |
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2005 |
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2004 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
174,994 |
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$ |
132,632 |
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Accounts receivable |
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78,840 |
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19,281 |
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Inventory |
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8,607 |
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|
13,091 |
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Advances against auction contracts |
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9,706 |
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|
968 |
|
Funds committed for debt repayment (note 4) |
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3,714 |
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1,857 |
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Prepaid expenses and deposits |
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|
4,484 |
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2,323 |
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Other assets |
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1,099 |
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|
654 |
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Future income tax asset |
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|
386 |
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|
496 |
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281,830 |
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171,302 |
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Capital assets (note 3) |
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242,352 |
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226,624 |
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Funds committed for debt repayment (note 4) |
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1,393 |
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5,108 |
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Other assets |
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1,408 |
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1,876 |
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Goodwill |
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38,400 |
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37,499 |
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$ |
565,383 |
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$ |
442,409 |
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Liabilities and Shareholders Equity
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Current liabilities: |
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Auction proceeds payable |
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$ |
151,293 |
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$ |
47,581 |
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Accounts payable and accrued liabilities |
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|
36,777 |
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|
45,334 |
|
Income taxes payable |
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|
8,550 |
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|
6,383 |
|
Current portion of long-term debt (note 4) |
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27,729 |
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35,133 |
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224,349 |
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134,431 |
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Long-term debt (note 4) |
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17,400 |
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|
10,792 |
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Other liabilities |
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|
516 |
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|
1,563 |
|
Future income tax liability |
|
|
6,104 |
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|
6,359 |
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Shareholders equity: |
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Share capital (note 5) |
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79,730 |
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|
76,445 |
|
Additional paid-in capital |
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|
8,722 |
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|
7,859 |
|
Retained earnings |
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|
209,072 |
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|
183,438 |
|
Foreign currency translation adjustment |
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|
19,490 |
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|
21,522 |
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|
317,014 |
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|
289,264 |
|
Commitments and contingencies (note 6)
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Subsequent events (notes 4 and 5(b)) |
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$ |
565,383 |
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$ |
442,409 |
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|
See accompanying notes to consolidated financial statements.
- 4 -
RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Statements of Shareholders Equity
(Expressed in thousands of United States dollars)
(Unaudited)
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Foreign Currency |
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Share |
|
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Additional Paid-In |
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Retained |
|
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Translation |
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Total Shareholders |
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Capital |
|
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Capital |
|
|
Earnings |
|
|
Adjustment |
|
|
Equity |
|
|
Balance, December 31, 2004 |
|
$ |
76,445 |
|
|
$ |
7,859 |
|
|
$ |
183,438 |
|
|
$ |
21,522 |
|
|
$ |
289,264 |
|
Exercise of stock options |
|
|
1,502 |
|
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
1,280 |
|
Stock compensation
tax adjustment |
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
126 |
|
Stock compensation expense |
|
|
|
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
418 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
13,675 |
|
|
|
|
|
|
|
13,675 |
|
Cash dividends paid |
|
|
|
|
|
|
|
|
|
|
(3,771 |
) |
|
|
|
|
|
|
(3,771 |
) |
Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,202 |
) |
|
|
(2,202 |
) |
|
Balance, March 31, 2005 |
|
|
77,947 |
|
|
|
8,181 |
|
|
|
193,342 |
|
|
|
19,320 |
|
|
|
298,790 |
|
Exercise of stock options |
|
|
1,470 |
|
|
|
(398 |
) |
|
|
|
|
|
|
|
|
|
|
1,072 |
|
Stock compensation
tax adjustment |
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
95 |
|
Stock compensation expense |
|
|
|
|
|
|
346 |
|
|
|
|
|
|
|
|
|
|
|
346 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
21,134 |
|
|
|
|
|
|
|
21,134 |
|
Cash dividends paid |
|
|
|
|
|
|
|
|
|
|
(3,781 |
) |
|
|
|
|
|
|
(3,781 |
) |
Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,178 |
) |
|
|
(4,178 |
) |
|
Balance, June 30, 2005 |
|
|
79,417 |
|
|
|
8,224 |
|
|
|
210,695 |
|
|
|
15,142 |
|
|
|
313,478 |
|
Exercise of stock options |
|
|
313 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
448 |
|
Stock compensation
tax adjustment |
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Stock compensation expense |
|
|
|
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
350 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
4,568 |
|
|
|
|
|
|
|
4,568 |
|
Cash dividends paid |
|
|
|
|
|
|
|
|
|
|
(6,191 |
) |
|
|
|
|
|
|
(6,191 |
) |
Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,348 |
|
|
|
4,348 |
|
|
Balance, September 30, 2005 |
|
$ |
79,730 |
|
|
$ |
8,722 |
|
|
$ |
209,072 |
|
|
$ |
19,490 |
|
|
$ |
317,014 |
|
|
See accompanying notes to consolidated financial statements.
- 5 -
RITCHIE BROS. AUCTIONEERS INCORPORATED
Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
(Unaudited)
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|
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|
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|
|
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|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Cash provided by (used in): |
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|
|
|
Operating activities: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
4,568 |
|
|
$ |
1,810 |
|
|
$ |
39,377 |
|
|
$ |
23,564 |
|
Items not involving cash: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,198 |
|
|
|
3,246 |
|
|
|
10,061 |
|
|
|
9,253 |
|
Stock compensation expense |
|
|
350 |
|
|
|
357 |
|
|
|
1,114 |
|
|
|
1,106 |
|
Future income taxes |
|
|
245 |
|
|
|
470 |
|
|
|
(208 |
) |
|
|
870 |
|
Net (gain) loss on disposition of capital assets |
|
|
(68 |
) |
|
|
16 |
|
|
|
(6,570 |
) |
|
|
(88 |
) |
Changes in non-cash working capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
1,789 |
|
|
|
(8,972 |
) |
|
|
(59,559 |
) |
|
|
(52,084 |
) |
Inventory |
|
|
(5,679 |
) |
|
|
(607 |
) |
|
|
4,484 |
|
|
|
(2,517 |
) |
Advances against auction contracts |
|
|
(6,704 |
) |
|
|
(9 |
) |
|
|
(8,738 |
) |
|
|
(1,893 |
) |
Prepaid expenses and deposits |
|
|
(293 |
) |
|
|
(881 |
) |
|
|
(2,161 |
) |
|
|
(375 |
) |
Income taxes payable |
|
|
(7,507 |
) |
|
|
(4,650 |
) |
|
|
2,401 |
|
|
|
(3,121 |
) |
Auction proceeds payable |
|
|
(26,597 |
) |
|
|
(7,704 |
) |
|
|
103,712 |
|
|
|
97,133 |
|
Accounts payable and accrued liabilities |
|
|
(5,552 |
) |
|
|
(1,840 |
) |
|
|
(10,236 |
) |
|
|
(5,712 |
) |
Other |
|
|
(538 |
) |
|
|
(1,570 |
) |
|
|
1,912 |
|
|
|
(427 |
) |
|
|
|
|
(42,788 |
) |
|
|
(20,334 |
) |
|
|
75,589 |
|
|
|
65,709 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,171 |
) |
Capital asset additions |
|
|
(10,729 |
) |
|
|
(5,703 |
) |
|
|
(29,879 |
) |
|
|
(15,263 |
) |
Proceeds on disposition of capital assets |
|
|
377 |
|
|
|
495 |
|
|
|
9,135 |
|
|
|
1,410 |
|
Decrease (increase) in other assets |
|
|
124 |
|
|
|
(2,124 |
) |
|
|
448 |
|
|
|
(2,122 |
) |
|
|
|
|
(10,228 |
) |
|
|
(7,332 |
) |
|
|
(20,296 |
) |
|
|
(17,146 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of share capital |
|
|
448 |
|
|
|
161 |
|
|
|
2,800 |
|
|
|
3,030 |
|
Dividends on common shares |
|
|
(6,191 |
) |
|
|
(3,763 |
) |
|
|
(13,743 |
) |
|
|
(8,875 |
) |
Issuance of long-term debt |
|
|
12,266 |
|
|
|
|
|
|
|
16,016 |
|
|
|
|
|
Repayment of long-term debt |
|
|
(12,323 |
) |
|
|
(51 |
) |
|
|
(17,190 |
) |
|
|
(6,832 |
) |
Increase (decrease) in other liabilities |
|
|
|
|
|
|
(1,011 |
) |
|
|
23 |
|
|
|
(983 |
) |
Increase in short-term debt |
|
|
|
|
|
|
3,276 |
|
|
|
|
|
|
|
3,276 |
|
Decrease (increase) in funds committed for debt repayment |
|
|
|
|
|
|
|
|
|
|
1,858 |
|
|
|
(3,715 |
) |
|
|
|
|
(5,800 |
) |
|
|
(1,388 |
) |
|
|
(10,236 |
) |
|
|
(14,099 |
) |
Effect of foreign currency rates on cash and cash equivalents |
|
|
1,589 |
|
|
|
2,182 |
|
|
|
(2,695 |
) |
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(57,227 |
) |
|
|
(26,872 |
) |
|
|
42,362 |
|
|
|
34,915 |
|
Cash and cash equivalents, beginning of period |
|
|
232,221 |
|
|
|
180,796 |
|
|
|
132,632 |
|
|
|
119,009 |
|
|
Cash and cash equivalents, end of period |
|
$ |
174,994 |
|
|
$ |
153,924 |
|
|
$ |
174,994 |
|
|
$ |
153,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
525 |
|
|
$ |
780 |
|
|
$ |
1,412 |
|
|
$ |
2,316 |
|
Income taxes paid |
|
$ |
8,924 |
|
|
$ |
5,571 |
|
|
$ |
18,980 |
|
|
$ |
16,475 |
|
|
See accompanying notes to consolidated financial statements.
- 6 -
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per
share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005
and 2004 is unaudited)
1. |
|
Significant accounting policies: |
|
(a) |
|
Basis of presentation: |
|
|
|
|
These unaudited consolidated financial statements present the financial position, results of
operations, changes in shareholders equity and cash flows of Ritchie Bros. Auctioneers
Incorporated (the Company) and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. |
|
|
|
|
These consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP) applicable to interim financial information
and are based on accounting principles and practices consistent with those used in the
preparation of the annual consolidated financial statements. These consolidated financial
statements are not materially different from those that would be presented in accordance with
United States GAAP. The interim consolidated financial statements should be read in
conjunction with the December 31, 2004 audited consolidated financial statements. |
|
(b) |
|
Revenue recognition: |
|
|
|
|
Auction revenues are comprised mostly of auction commissions, which are earned by the Company
acting as an agent for consignors of equipment, but also include net profits on the sale of
inventory, incidental interest income, Internet and proxy purchase fees, and handling fees on
the sale of certain lots. All revenue is recognized when the auction sale is complete and the
Company has determined that the auction proceeds are collectible. |
|
|
|
|
Auction commissions represent the percentage earned by the Company on the gross proceeds from
equipment sold at auction. The majority of auction commissions is earned as a pre-negotiated
fixed rate of the gross selling price. Other commissions are earned when the Company
guarantees a certain level of proceeds to a consignor. This type of commission includes 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
to be sold after a period end is known at the financial statement reporting date, the loss is
accrued in the financial statements for that period. The Companys exposure from these
guarantee contracts fluctuates over time (see note 6). |
- 7 -
RITCHIE BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per
share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005
and 2004 is unaudited)
1. |
|
Significant accounting policies (continued): |
|
(b) |
|
Revenue recognition (continued): |
|
|
|
|
Auction revenues also include net profit on the sale of inventory items. In some cases,
incidental to its regular commission business, the Company temporarily acquires title to items
for a short time prior to a particular auction sale. The auction revenue recorded is the net
gain or loss on the sale of the items. |
|
|
(c) |
|
Comparative figures: |
|
|
|
|
Certain comparative figures have been reclassified to conform with the presentation adopted in
the current period. |
2. |
|
Seasonality of operations: |
|
|
|
The Companys operations are both seasonal and event driven. Auction revenues tend to be highest
during the second and fourth calendar quarters. The Company generally conducts more auctions
during these quarters than during the first and third calendar quarters. Mid-December through
mid-February and July through August are traditionally less active periods. |
|
|
|
In addition, the Companys revenue is dependent upon the timing of such events as fleet upgrades
and realignments, contractor retirements, and the completion of major projects, among other
things. These events are not predictable and are usually unrelated to fiscal quarters, making
quarter-to-quarter comparability difficult. |
- 8 -
RITCHIE
BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005 and 2004 is unaudited)
3. Capital assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
September 30, 2005 |
|
Cost |
|
|
depreciation |
|
|
value |
|
|
Buildings |
|
$ |
120,214 |
|
|
$ |
20,088 |
|
|
$ |
100,126 |
|
Land and improvements |
|
|
113,568 |
|
|
|
4,369 |
|
|
|
109,199 |
|
Land and buildings under development |
|
|
12,005 |
|
|
|
|
|
|
|
12,005 |
|
Automotive equipment |
|
|
12,509 |
|
|
|
4,499 |
|
|
|
8,010 |
|
Yard equipment |
|
|
10,176 |
|
|
|
5,307 |
|
|
|
4,869 |
|
Office equipment |
|
|
6,512 |
|
|
|
4,092 |
|
|
|
2,420 |
|
Computer equipment |
|
|
5,748 |
|
|
|
3,401 |
|
|
|
2,347 |
|
Computer software |
|
|
11,859 |
|
|
|
10,706 |
|
|
|
1,153 |
|
Leasehold improvements |
|
|
3,506 |
|
|
|
1,283 |
|
|
|
2,223 |
|
|
|
|
|
$ |
296,097 |
|
|
$ |
53,745 |
|
|
$ |
242,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
December 31, 2004 |
|
Cost |
|
|
depreciation |
|
|
value |
|
|
Buildings |
|
$ |
113,742 |
|
|
$ |
18,588 |
|
|
$ |
95,154 |
|
Land and improvements |
|
|
100,154 |
|
|
|
4,125 |
|
|
|
96,029 |
|
Land and buildings under development |
|
|
13,538 |
|
|
|
|
|
|
|
13,538 |
|
Automotive equipment |
|
|
11,389 |
|
|
|
4,272 |
|
|
|
7,117 |
|
Yard equipment |
|
|
9,540 |
|
|
|
4,685 |
|
|
|
4,855 |
|
Office equipment |
|
|
6,169 |
|
|
|
3,799 |
|
|
|
2,370 |
|
Computer equipment |
|
|
5,784 |
|
|
|
2,940 |
|
|
|
2,844 |
|
Computer software |
|
|
11,114 |
|
|
|
8,766 |
|
|
|
2,348 |
|
Leasehold improvements |
|
|
3,321 |
|
|
|
952 |
|
|
|
2,369 |
|
|
|
|
|
$ |
274,751 |
|
|
$ |
48,127 |
|
|
$ |
226,624 |
|
|
During the nine months ended September 30, 2005, the Company capitalized interest of $299,000
(nine months ended September 30, 2004 $184,000) to the cost of land and buildings under
development.
-9-
RITCHIE
BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005 and 2004 is unaudited)
4. Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
Term loans, unsecured, bearing interest between 5.95%
and 7.15%, due in minimum annual installments of $2.9
million ($0.75 million towards principal, $1.4 million
towards a sinking fund), with final payments occurring
in 2005 and 2006. |
|
$ |
12,250 |
|
|
$ |
17,000 |
|
|
|
|
|
|
|
|
|
|
Term loan, denominated in Canadian dollars, secured by
a general security agreement, bearing interest at
4.429%, due in monthly installments of interest only,
with the full amount of the principal due in 2010. |
|
|
12,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving loans, unsecured, bearing interest at 4.465%
(2004 between 3.165% and 3.175%), due in monthly
installments of interest only, with the full amount of
the principal due in 2005. |
|
|
19,250 |
|
|
|
15,500 |
|
|
|
|
|
|
|
|
|
|
Term loan, denominated in Australian dollars, secured
by deeds of trust on specific property, bearing
interest between the Australian prime rate and 6.5%,
due in quarterly installments of AUD75,000, plus
interest, with final payment occurring in 2008. |
|
|
725 |
|
|
|
920 |
|
|
|
|
|
|
|
|
|
|
Revolving loans, denominated in Canadian dollars,
unsecured, bearing interest at the Canadian Prime Rate
plus 0.25%, due in monthly installments of interest
only. The loans were repaid in full in 2005. |
|
|
|
|
|
|
12,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,129 |
|
|
|
45,925 |
|
Current portion |
|
|
(27,729 |
) |
|
|
(35,133 |
) |
|
Non-current portion |
|
$ |
17,400 |
|
|
$ |
10,792 |
|
|
Subsequent to the quarter end, the Company signed a commitment letter to replace certain of the
term loans and revolving loans outstanding at September 30, 2005 with a new five-year term
loan. This loan will be unsecured and will be due in quarterly installments of interest only,
with the full amount of the principal due in 2010. If this arrangement is completed as
contemplated, all of the funds committed for debt repayment in the balance sheet at September
30, 2005 will become cash and cash equivalents and available for general purposes in the fourth
quarter of 2005.
-10-
RITCHIE
BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005 and 2004 is unaudited)
5. Share capital:
(a) Shares issued:
Common shares issued and outstanding are as follows:
|
|
|
|
|
Issued and outstanding, December 31, 2004 |
|
|
34,262,300 |
|
Issued for cash, pursuant to stock options exercised |
|
|
152,600 |
|
|
|
|
|
|
|
Issued and outstanding, September 30, 2005 |
|
|
34,414,900 |
|
|
The Companys common shares were split on a two-for-one basis on May 4, 2004. All share, per
share and stock option information in the consolidated financial statements gives effect to the
stock split on a retroactive basis.
(b) Stock option plan:
Stock option activity for the nine months ended September 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Common Shares Under |
|
|
Weighted Average Exercise |
|
|
|
Option |
|
|
Price |
|
|
Outstanding, December 31, 2004 |
|
|
808,998 |
|
|
$ |
18.38 |
|
Granted |
|
|
201,800 |
|
|
|
32.41 |
|
Exercised |
|
|
(152,600 |
) |
|
|
18.35 |
|
Expired |
|
|
(13,600 |
) |
|
|
32.41 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2005 |
|
|
844,598 |
|
|
$ |
21.51 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2005 |
|
|
648,398 |
|
|
$ |
18.46 |
|
|
The options outstanding at September 30, 2005 expire on dates ranging to February 23, 2015.
The following is a summary of stock options outstanding and exercisable at September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of |
|
Number |
|
|
Remaining |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Exercise Prices |
|
Outstanding |
|
|
Life (years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
|
$11.675 -
$13.050 |
|
|
185,400 |
|
|
|
5.8 |
|
|
$ |
12.33 |
|
|
|
177,400 |
|
|
$ |
12.33 |
|
$13.344 -
$15.525 |
|
|
232,998 |
|
|
|
6.4 |
|
|
|
14.93 |
|
|
|
232,998 |
|
|
|
14.93 |
|
$26.460 -
$32.410 |
|
|
426,200 |
|
|
|
8.8 |
|
|
|
29.09 |
|
|
|
238,000 |
|
|
|
26.47 |
|
|
|
|
|
844,598 |
|
|
|
|
|
|
|
|
|
|
|
648,398 |
|
|
|
|
|
|
-11-
RITCHIE
BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005 and 2004 is unaudited)
5. Share capital (continued):
Subsequent to September 30, 2005, the Company granted stock options to purchase a total of
12,000 of its common shares, with an exercise price of $42.69 per share and an expiry date of
October 6, 2015.
(c) Stock-based compensation:
The Company uses the fair value based method to account for employee stock-based compensation
awards. During the nine-month period ended September 30, 2005, the Company recognized
compensation cost of $1,114,000 (2004 $1,106,000) in respect of options granted in 2005 and
2004 under its stock option plan.
For the purposes described above, the fair value of the stock option grants was estimated on
the date of the grant using the Black-Scholes option pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Risk free interest rate |
|
|
3.7 |
% |
|
|
3.0 |
% |
Dividend yield |
|
|
1.39 |
% |
|
|
1.15 |
% |
Expected lives |
|
5 years |
|
5 years |
Volatility |
|
|
20.0 |
% |
|
|
19.6 |
% |
|
The weighted average grant date fair value of options granted during the period ended September
30, 2005 was $6.83 per option (2004 $5.34). The fair value method requires that this amount
be amortized over the relevant vesting periods of the underlying options.
-12-
RITCHIE
BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005 and 2004 is unaudited)
5. Share capital (continued):
(d) Net earnings per share:
The computations for basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 |
|
|
Nine months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Per share |
|
|
|
|
|
|
|
|
|
|
Per share |
|
|
|
Net earnings |
|
|
Shares |
|
|
amount |
|
Net earnings |
|
Shares |
|
amount |
|
|
Basic net earnings per share |
|
$ |
4,568 |
|
|
|
34,396,648 |
|
|
$ |
0.13 |
|
|
$ |
39,377 |
|
|
|
34,348,880 |
|
|
$ |
1.15 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
406,212 |
|
|
|
|
|
|
|
|
|
|
|
359,720 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share |
|
$ |
4,568 |
|
|
|
34,802,860 |
|
|
$ |
0.13 |
|
|
$ |
39,377 |
|
|
|
34,708,600 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2004 |
|
|
Nine months ended September 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Per share |
|
|
|
|
|
|
|
|
|
|
Per share |
|
|
|
Net earnings |
|
|
Shares |
|
|
amount |
|
Net earnings |
|
Shares |
|
amount |
|
|
Basic net earnings per share |
|
$ |
1,810 |
|
|
|
34,208,349 |
|
|
$ |
0.05 |
|
|
$ |
23,564 |
|
|
|
34,131,097 |
|
|
$ |
0.69 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
318,861 |
|
|
|
|
|
|
|
|
|
|
|
344,368 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share |
|
$ |
1,810 |
|
|
|
34,527,210 |
|
|
$ |
0.05 |
|
|
$ |
23,564 |
|
|
|
34,475,465 |
|
|
$ |
0.68 |
|
|
6. Commitments and contingencies:
The Company is subject to legal and other claims that arise in the ordinary course of its
business. The Company does not believe that the results of these claims will have a material
effect on its financial position or results of operations.
In the normal course of its 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
consignors equipment. At September 30, 2005, outstanding guarantees under contract for
industrial equipment to be sold prior to December 17, 2005 totaled $25,187,000 (December 31,
2004 $6,202,000) (undiscounted and before estimated proceeds from sale at auction). The
Company also had guarantees under contract totaling $12,809,000 relating to agricultural
auctions to be held prior to April 30, 2006 (December 31, 2004 $14,726,000). No liability
has been recorded with respect to these guarantee contracts.
7. Transactions with related parties:
During the period ended September 30, 2005, the Company paid $751,000 to a company controlled
by the Chairman of the Companys Board of Directors (nine months
ended September 30, 2004
$758,000). The costs were incurred pursuant to agreements, approved by the Companys Board of Directors, by which the related company agrees to provide
meeting rooms, accommodations, meals and recreational activities at its facilities on
-13-
RITCHIE
BROS. AUCTIONEERS INCORPORATED
Notes to Consolidated Financial Statements
Nine months ended September 30, 2005 and 2004
(Tabular dollar amounts expressed in thousands of United States dollars, except share and per share amounts)
(Information as at September 30, 2005 and for the nine-month periods ended September 30, 2005 and 2004 is unaudited)
7. Transactions with related parties (continued):
Stuart Island in British Columbia, Canada, for certain of the Companys customers and guests.
The agreements set forth the fees and costs per excursion, which are based on market prices for
similar types of facilities and excursions. The Company believes that the terms of the
agreements were at least as favorable as could have been obtained from a third party. The
Company has entered into similar agreements with the related party in the past and intends to
do so in the future.
8. United States generally accepted accounting principles:
The consolidated financial statements are prepared in accordance with generally accepted
accounting principles (GAAP) in Canada which differ, in certain respects, from accounting
practices generally accepted in the United States and from requirements promulgated by the
Securities and Exchange Commission. However, for the nine months ended September 30, 2005 and
2004, net earnings in accordance with Canadian GAAP were not significantly different from net
earnings had they been presented in accordance with United States GAAP.
US GAAP requires the preparation of a statement of comprehensive income. Comprehensive income
is defined as the change in equity of a business enterprise during the period from transactions
and other events and circumstances from non-owner sources. The statement of comprehensive
income reconciles the reported net earnings to the comprehensive income amount as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
September 30, 2004 |
|
|
Net earnings
in accordance with Canadian and United States GAAP |
|
$ |
39,377 |
|
|
$ |
23,564 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(2,032 |
) |
|
|
1,406 |
|
|
Comprehensive income in accordance with
United States GAAP |
|
$ |
37,345 |
|
|
$ |
24,970 |
|
|
Accumulated other comprehensive income, which under US GAAP is presented as a separate
component of shareholders equity, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Foreign currency translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
$ |
21,522 |
|
|
$ |
12,727 |
|
Change during the period |
|
|
(2,032 |
) |
|
|
1,406 |
|
|
Balance, September 30 |
|
$ |
19,490 |
|
|
$ |
14,133 |
|
|
-14-
ITEM
2. Managements Discussion and Analysis of Financial Condition And Results of Operations
Overview
The following discussion summarizes significant factors affecting the consolidated operating
results and financial condition of Ritchie Bros. Auctioneers Incorporated (Ritchie Bros., the
Company, we or us) for the three- and nine-month periods ended September 30, 2005 compared to
the three- and nine-month periods ended September 30, 2004. This discussion should be read in
conjunction with our consolidated financial statements and notes thereto for the quarter ended
September 30, 2005, and with the disclosures below regarding forward-looking statements and risk
factors. You should also consider our audited consolidated financial statements and notes thereto
and our Managements Discussion and Analysis of Financial Condition and Results of Operations for
the year ended December 31, 2004, which are included in our 2004 Annual Report on Form 40-F.
The date of this discussion is as of October 27, 2005. Additional information relating to our
company, including our Annual Information Form, is available by accessing the SEDAR website at
www.sedar.com. None of the information on the SEDAR website is incorporated by reference into this
document by this or any other reference.
We prepare our consolidated financial statements in accordance with generally accepted accounting
principles in Canada, or Canadian GAAP. There are no material measurement differences between
those financial statements and the financial position and results of operations that would be
reported under generally accepted accounting principles in the United States, or U.S. GAAP.
Amounts discussed below are based on our consolidated financial statements prepared in accordance
with Canadian GAAP and are presented in United States dollars. Unless indicated otherwise, all
dollar amounts discussed below in tables and related footnotes are expressed in thousands of
dollars, except per share amounts.
Ritchie Bros. is the worlds largest auctioneer of industrial equipment. Our world headquarters
are located in Richmond, British Columbia, Canada, and at September 30, 2005 we operated from
approximately 110 locations, including 30 auction sites, in 25 countries around the world. We
sell, through unreserved public auctions, a broad range of industrial assets, including equipment
used in the construction, transportation, mining, forestry, petroleum, material handling, marine
and agricultural industries.
We operate mainly in the auction segment of the global industrial equipment marketplace. Our
primary target markets within the global industrial equipment market are the used truck and
equipment sectors, which are large and fragmented. The world market for used trucks and equipment
continues to grow, primarily as a result of the increasing, cumulative supply of these assets,
which is driven by the ongoing production of new trucks and equipment. Analysts estimate that
approximately $100 billion of the type of assets we sell changes hands each year; we estimate that
our share of this market is less than 2%.
In recent periods, an average of approximately 75% of the buyers at our auctions have been end
users of equipment (or retail buyers), such as contractors, with the remainder being primarily
truck and equipment dealers and brokers (or wholesale buyers). Consignors to our auctions
represent a broad mix of equipment owners, the majority being end users of equipment. Consignment
volume at our auctions is affected by a number of factors, including regular fleet upgrades and
reconfigurations, financial pressure, retirements, and inventory reductions, as well as by the
timing of the completion of major construction and other projects.
We compete directly for potential purchasers of industrial assets with other auction companies.
Our indirect competitors include truck and equipment manufacturers, distributors and dealers that
sell new or used industrial assets, and equipment rental companies. When sourcing equipment to
sell at our auctions, we compete with other auction companies, truck and equipment dealers and
brokers, and equipment owners that have traditionally disposed of equipment through private sales.
Private sales between owners of industrial assets are still the dominant type of transaction in the
used truck and equipment markets.
-15-
We believe that we have several key strengths that will enable us to continue to attract increasing
numbers of consignors and bidders to our auctions. Our principal strengths are our reputation for
conducting only unreserved auctions and our highly publicized commitment to fair dealing. Other
important strengths include our size, the international scope of our operations, our extensive
network of auction sites, our marketing skills, our internet tools and our in-depth experience in
the marketplace.
Strict adherence to the unreserved auction process is one of our founding principles and, we
believe, one of our most significant competitive advantages. When we say unreserved we mean that
there are no minimum prices for anything sold at a Ritchie Bros. auction each item sells to the
highest bidder on sale day, regardless of the price. In addition, consignors (or their agents) are
not allowed to bid on or buy back or in any way influence the selling price of their equipment. We
have maintained our commitment to the unreserved auction process since our first industrial auction
in 1963 because we believe that an unreserved auction is a fair auction.
We attract a broad base of bidders from around the world to our auctions. Our worldwide marketing
efforts help to attract bidders, and they are willing to travel long distances because of our
reputation for conducting fair auctions. These multinational bidding audiences provide a global
marketplace that allows our auctions to transcend local market conditions. Evidence of this is the
fact that in recent periods, an average of over 50% of the trucks and equipment sold at our
auctions has left the region of the sale.
We believe that our ability to consistently draw large numbers of local and international bidders
to our auctions, most of whom are end users of industrial assets rather than resellers, is
appealing to sellers of used trucks and equipment and helps us to attract consigned equipment to
our auctions. Higher consignment volumes attract more bidders, which in turn attract greater
consignments, and so on. During the first nine months of 2005, we had nearly 151,000 bidder
registrations at our industrial auctions, compared to about 143,000 in the nine-month period ended
September 30, 2004. We received more than 20,000 industrial asset consignments in the first nine
months of 2005, compared to approximately 17,000 in the equivalent period in 2004. A consignment
is typically comprised of multiple lots.
One of our primary goals is to continue to grow our gross auction sales, which is the total
proceeds from all items sold at our auctions. Our strategies for accomplishing this objective
include, among others, continued development of markets and regions in which we already operate and
expansion into new and emerging markets and regions. We intend to continue to look for ways to
capitalize on our competitive advantages outlined above. Where there is an opportunity for us to
bring some or all of these factors into play and assist an owner in realizing the best possible
return on the sale of his assets, we will pursue that opportunity.
We are also using the internet to increase our level of service and to extend further the
geographic reach of our auctions and the multinational character of our bidding audiences.
Approximately 20% of the bidders at our auctions in recent quarters participated over the internet.
In addition, we continue to develop and upgrade our technical and physical infrastructure,
including adding and upgrading auction sites, as well as our recruiting and training programs, in
order to improve the productivity of our sales force and to enhance the service we provide to our
customers.
During the first nine months of 2005, we conducted 104 unreserved industrial auctions at locations
in North America, Europe, the Middle East, Australia and Asia. We also held 84 unreserved
agricultural auctions in the first nine months of 2005. The average industrial auction in the
first nine months of 2005 had gross auction sales of $13.8 million, compared to $11.9 million in
the first nine months of 2004 and $12.0 million for the full year in 2004. Approximately 60% of
our auction revenues was earned from operations in the United States (first nine months of 2004
62%), 20% was earned in Canada (first nine months of 2004 20%) and the remaining 20% was earned
from operations in countries other than the United States and Canada (primarily Europe, the Middle
East and Australia) (first nine months of 2004 18%). We had 661 full-time employees at September
30, 2005, including 211 sales representatives.
We are a public company and our common shares are listed under the symbol RBA on the New York
Stock Exchange and the Toronto Stock Exchange (the TSX). At October 27, 2005 we had 34,414,900
16
common shares issued and outstanding and stock options outstanding to purchase a total of 856,598
common shares. On May 4, 2004, our issued and outstanding common shares were split on a
two-for-one basis. All share and per share amounts in this document reflect the stock split on a
retroactive basis.
Sources of Revenue and Revenue Recognition
An important indicator of our operating performance is gross auction sales. Gross auction sales is
not a measure of revenue and is not presented in our consolidated financial statements; however, we
believe that gross auction sales provides an important comparative assessment of our relative
operating performance between periods. Auction revenues, which are reported as the top line of our
Statement of Operations, and certain other Statement of Operations line items, are best understood
by considering their relationship to gross auction sales.
Auction revenues are comprised of auction commissions earned from consignors through straight
commission and guarantee contracts, net profits on the sale of inventory items, incidental interest
income, handling fees on the sale of certain lots, and the fees applicable to purchases made
through our internet and proxy bidding systems. All revenue is recognized when the auction sale is
complete and we have determined that the auction proceeds are collectible.
Straight commissions are our most common type of auction revenues and are generated by us when we
act as agent for consignors and earn a pre-negotiated, fixed commission rate on the gross sales
price of the consigned equipment at auction. In recent periods, this type of sale has generally
represented approximately 75% of our gross auction sales volume on an annual basis.
In certain other cases, we guarantee minimum sales proceeds to the consignor and earn a commission
based on the actual results of the auction, including a pre-negotiated percentage of any sales
proceeds in excess of the guaranteed amount. The equipment is still sold on an unreserved basis,
and if the actual auction proceeds are less than the guaranteed amount, our commission is reduced.
If proceeds are sufficiently lower, we can incur a loss on the sale. We factor in a higher rate of
commission on these sales to compensate for the increased risk we assume.
Our exposure from guarantee contracts fluctuates over time, but industrial auction guarantees are
generally outstanding for less than 45 days. Agricultural auction guarantees are generally
outstanding for a longer period of time, because many of the contracts are signed in the fall of
one year for auctions to be held in the spring of the next year. The combined exposure at any time
from all outstanding guarantees also fluctuates from period to period but is usually less than $30
million. Losses, if any, resulting from guarantee contracts are recorded in the period in which
the relevant auction is completed, unless the loss is incurred after the period end but before the
financial reporting date, in which case the loss is accrued in the financial statements for the
period end. In recent periods, guarantee contracts have generally represented approximately 15% of
gross auction sales on an annual basis.
Auction revenues also include the net profit or loss on the sale of inventory in cases where we
acquire ownership of equipment for a short time prior to an auction sale. When purchased, this
equipment is assigned to a specific auction and sold at that auction in the same manner as
consigned equipment. During the period that we retain ownership, the cost of the equipment is
recorded as inventory on our balance sheet. The net gain or loss on the sale is recorded as
auction revenues. In recent periods, sales of inventory have generally represented approximately
10% of gross auction sales on an annual basis.
The choice by consignors between straight commission, guarantee, or outright purchase arrangements
depends on many factors, including the consignors risk tolerance and sale objectives. As a
result, the mix of contracts in a particular quarter or year is not necessarily indicative of our
future performance, and we do not have a target for the relative mix of contracts in any particular
period. The composition of our auction revenues and our auction revenue rate (i.e. auction
revenues as a percentage of gross auction sales) depend on the mix and performance of contracts
entered into with consignors in any particular period and fluctuate from period to period. Our
auction revenue rate performance is presented below.
17
Prior to 2002, our long-term expected average auction revenue rate was approximately 8.80%. With
the introduction of a handling fee in 2002 and proxy and internet purchase fees in 2003, our
long-term expected average auction revenue rate increased to approximately 9.30%. At the end of
the second quarter of 2003, we determined that we were achieving a sustainably higher average
auction revenue rate and we increased our long-term expected average auction revenue rate to 9.50%.
At the end of 2003 we increased our expected average auction revenue rate to be in the range of
9.50% to 10.00%, and we reaffirmed this expectation at the end of 2004. We achieved an auction
revenue rate of 10.16% for the nine months ended September 30, 2005 and we continue to expect that
our average auction revenue rate for the remainder of 2005 will be in the range of 9.50% to 10.00%.
The largest contributor to the variability in our auction revenue rate is the performance of our
underwritten business (i.e. our guarantee and inventory contracts). In a period when our
underwritten business performs better than average, our auction revenue rate typically exceeds the
expected average rate. Conversely, if our underwritten business performs below average, our
auction revenue rate will typically be below the expected average rate. This variability can be
more pronounced in the first and third calendar quarters because of the seasonality of our business
(see below).
Our gross auction sales and auction revenues are influenced by the seasonal nature of the auction
business, which is determined mainly by the seasonal nature of the construction and natural
resources industries. Our gross auction sales and auction revenues tend to be highest during the
second and fourth calendar quarters, during which time we generally conduct more business than in
the first and third calendar quarters.
Our gross auction sales and auction revenues are also affected on a period-to-period basis by the
timing of major auctions. In newer markets where we are developing operations, the number and size
of auctions and, as a result, the level of gross auction sales and auction revenues, are likely to
vary more dramatically from period-to-period than in our established markets where the number, size
and frequency of our auctions are more consistent. In addition, economies of scale are achieved as
our operations in a region evolve from conducting intermittent auctions, establishing a regional
auction unit, and ultimately to developing a permanent auction site. Economies of scale are also
achieved when our auctions increase in size, as has occurred in recent quarters.
Because of these seasonal and period-to-period variations, we believe that our gross auction sales
and auction revenues are best compared on an annual basis, rather than on a quarterly basis.
18
Developments in 2005
Highlights of the nine-month period ended September 30, 2005 included:
|
|
|
We held the largest auction in our history, at our permanent auction site in Orlando,
Florida, with gross auction sales of $79 million. |
|
|
|
|
We broke regional auction sales records in Denver, Colorado; Chicago, Illinois; and
Atlanta, Georgia. We also held our largest-ever Canadian auction, at our permanent
auction site in Edmonton, Alberta. |
|
|
|
|
We held our first auction at our new permanent auction site in Sacramento, California. |
|
|
|
|
We purchased approximately 125 acres of land in Houston, Texas for consideration of
$8.5 million on which we intend to construct a new permanent auction site, which will
replace our existing facility in Houston. |
|
|
|
|
We purchased approximately 160 acres of land in Denver, Colorado for consideration of
$3.5 million on which we intend to build a new permanent auction site, which will replace
our existing facility in Denver. |
|
|
|
|
We purchased approximately 62 acres of land in Saskatoon, Saskatchewan for
consideration of $0.3 million, and we intend to construct a modest auction facility
intended primarily for agricultural auctions. |
|
|
|
|
We entered into a three-year lease for a property in Livorno, Italy, which became a new
regional auction unit. |
|
|
|
|
We commenced construction on a new permanent auction site in Nashville, Tennessee. |
|
|
|
|
We completed the sale of property that was not being used in our operations in Fort
Worth, Texas, for proceeds of $6.0 million and a gain of $5.5 million, and in Prince
George, British Columbia, for proceeds of $1.3 million and a gain of $0.9 million. |
|
|
|
|
We appointed our first sales representatives in Poland and Switzerland. |
|
|
|
|
We continued to progress with our strategic initiative, which we call Mission 2007, or
M07, with the goal of developing more efficient, consistent and scalable business
processes to support our growth objectives. |
|
|
|
|
Our Board of Directors approved a ten-year program to upgrade our information systems
as part of our M07 strategic initiative. The first step of the program is the
implementation of an enterprise resource planning system. |
|
|
|
|
Our Board of Directors appointed David D. Nicholson to the position of Senior
Vice-President, South Central and South America Divisions, and Guylain Turgeon to the
position of Senior Vice-President and Managing Director, European Operations. |
|
|
|
|
Roger Rummel, a Senior Vice-President and long-time member of our management team,
retired effective March 31, 2005. |
19
Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates since our
Managements Discussion and Analysis of Financial Condition and Results of Operations as at and for
the year ended December 31, 2004, which is included in our 2004 Annual Report on Form 40-F.
Overall Performance
During the first nine months of 2005 we achieved auction revenues of $152.7 million and net
earnings of $39.4 million, or $1.13 per diluted common share. Net earnings for the period would
have been $35.3 million, or $1.02 per diluted share, excluding total after-tax gains of $4.1
million ($6.4 million before tax) recorded on the sale of excess properties in Texas and British
Columbia. We have highlighted these gains because we do not believe that sales of properties are
part of our normal operations. For the nine months ended September 30, 2004 we had auction
revenues of $125.1 million and net earnings of $23.6 million, or $0.68 per diluted common share.
Earnings increased mainly as a result of higher gross auction sales in 2005, offset in part by
higher operating costs and income tax expense. At the end of the third quarter of 2005 we had
working capital of $57.5 million, compared to $36.9 million at the end of 2004.
Results of Operations
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
We conduct operations around the world in a number of different currencies, but our reporting
currency is the United States dollar. In the first nine months of 2005, approximately 35% of our
revenues and approximately 40% of our operating costs were denominated in currencies other than the
United States dollar, which is consistent with the rates we expect to experience on a full year
basis, and is roughly consistent with the relative proportions in recent periods. The proportion
of revenues denominated in currencies other than the United States dollar in a given period will
differ from the annual proportion depending on the size and location of auctions held during the
period.
The main currencies other than the United States dollar in which our revenues and operating costs
are denominated are the Canadian dollar and the Euro. In recent periods there have been
significant fluctuations in the value of some of these currencies relative to the United States
dollar. These fluctuations affect our reported auction revenues and operating expenses when
non-United States dollar amounts are converted into United States dollars for financial statement
reporting purposes. However, in recent periods, the effect on reported auction revenues and
operating expenses in our annual consolidated financial statements has largely offset, making the
impact of currency fluctuations on our annual net earnings essentially neutral.
United States Dollar Exchange Rate Comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
% Change |
|
|
2004 |
|
|
|
|
|
|
|
in U.S. $ |
|
|
|
|
|
|
Average value of one U.S. dollar: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar |
|
$ |
1.2241 |
|
|
|
-8 |
% |
|
$ |
1.3282 |
|
Euro |
|
|
0.7928 |
|
|
|
-3 |
% |
|
|
0.8157 |
|
20
Auction Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Auction revenues |
|
$ |
152,700 |
|
|
$ |
125,115 |
|
|
|
22 |
% |
|
|
|
Gross auction sales |
|
$ |
1,502,976 |
|
|
$ |
1,239,606 |
|
|
|
21 |
% |
|
Auction revenue rate |
|
|
10.16 |
% |
|
|
10.09 |
% |
|
|
|
|
The increase in auction revenues in 2005 compared to the equivalent period in the prior year was
primarily attributable to higher gross auction sales. Gross auction sales in the first nine months
of 2005 increased in the United States, Canada and Europe compared to the nine months ended
September 30, 2004. Our agricultural division generated gross auction sales of $65.6 million for
the nine months ended September 30, 2005, which compares to $35.0 million for the corresponding
period in 2004. Our guarantee and inventory contracts represented 22% of our total gross auction
sales in the first nine months of 2005, which is in a similar range to the levels experienced in
prior periods.
Our auction revenue rate of 10.16% for the nine months ended September 30, 2005 was slightly higher
than our expected range of 9.50% to 10.00%, and similar to the rate we experienced in the
comparable period in 2004. We expect that our auction revenue rate for the remainder of 2005 will
be within the range of 9.50% to 10.00%. Past experience has shown that our auction revenue rate is
difficult to estimate precisely, and therefore, the actual auction revenue rate for 2005 or in
future periods could be above or below this range.
A small change in our auction revenue rate can have a material impact on our auction revenues and
therefore, our net earnings. For example, a 10 basis point (0.1%) increase or decrease in our
auction revenue rate in the first nine months of 2005 would have impacted auction revenues by
approximately $1.5 million, of which approximately $1.0 million or $0.03 per diluted share would
have flowed through to net earnings in our statement of operations, assuming no other changes.
This factor is important to consider when evaluating our current and past performance, as well as
when judging our future prospects.
Direct Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Direct expenses |
|
$ |
18,563 |
|
|
$ |
15,405 |
|
|
|
20 |
% |
Direct expenses as a percentage of
gross auction sales |
|
|
1.24 |
% |
|
|
1.24 |
% |
|
|
|
|
Direct expenses are the costs we incur directly as a result of holding an auction. Direct expenses
include the costs of hiring personnel to assist in conducting the auction, advertising specifically
related to the auction, travel costs for employees to attend and work at the auction, security
hired to safeguard equipment at the auction site and rental expenses for temporary auction sites.
At each quarter end, we make estimates of direct expenses incurred with respect to auctions
completed near the end of the period. In the subsequent quarter, these accruals are adjusted, to
the extent necessary, to reflect actual costs incurred.
Direct expenses as a percentage of gross auction sales, or the direct expense rate, fluctuate based
on the size and location of auctions held each period. As the average size of auctions increases,
the direct expense rate generally decreases. Moreover, auctions held at permanent auction sites
tend to have lower direct expense rates than auctions held at offsite locations, primarily as a
result of the economies of scale and other efficiencies typically achieved at permanent auction
sites. Although our direct expense rate in the first nine months of 2005 was lower than our
expected rate of 1.30% of gross auction sales, mainly as a result of several large auctions held
during the period, we continue to expect that our direct expense rate for the remainder of 2005
will be in the range of 1.30%.
21
Depreciation
and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Depreciation expense |
|
$ |
10,061 |
|
|
$ |
9,253 |
|
|
|
9 |
% |
Depreciation is calculated on either a straight line or a declining balance basis on capital assets
employed in our business, including buildings, computer hardware and software, automobiles and yard
equipment. Depreciation expense increased primarily as a result of the depreciation of new auction
facilities constructed over the past few years and charges related to capitalized software
development costs and computer infrastructure upgrades.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
General and administrative expenses |
|
$ |
68,316 |
|
|
$ |
60,826 |
|
|
|
12 |
% |
General and administrative expenses, or G&A, include costs such as labour (salaries, wages,
performance bonuses and benefits), non-auction related travel, information technology, repairs and
maintenance, telecommunications and utilities, professional fees, advertising, insurance, and lease
and rental expenses. The increase in G&A is attributable to a number of factors, including
currency fluctuations and costs incurred to grow our business (such as labour, advertising and
marketing, and travel costs). Future levels of G&A will continue to be affected by the expansion
of infrastructure and workforce necessary to support our growth plans, as well as other factors
including fluctuations in foreign exchange rates.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Interest expense |
|
$ |
1,768 |
|
|
$ |
2,448 |
|
|
|
-28 |
% |
Interest expense is comprised mainly of interest and bank charges paid on long term and revolving
debt and operating credit lines. Interest expense decreased in the first nine months of 2005
compared to the prior year because of lower average debt balances and lower average interest rates
applicable to that debt.
Gain on Disposition of Capital Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Gain on disposition of capital assets |
|
$ |
6,570 |
|
|
$ |
88 |
|
|
|
|
|
The gain on disposition of capital assets in the first nine months of 2005 includes a $5.5 million
gain recorded on the sale of excess land in Fort Worth, Texas, and a gain of $0.9 million recorded
on the sale of surplus property in Prince George, British Columbia. Neither of these properties
was being used in our operations.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Income taxes |
|
$ |
21,487 |
|
|
$ |
14,223 |
|
|
|
51 |
% |
Effective income tax rate |
|
|
35.3 |
% |
|
|
37.6 |
% |
|
|
|
|
22
Income taxes have been computed based on rates of tax that apply in each of the tax jurisdictions
in which we earned our income. The effective tax rate for the nine-months ended September 30, 2005
was lower than the rate we experienced in the equivalent period in 2004 partly as a result of a
$0.9 million non-recurring charge to the income tax provision in 2004 relating to realized foreign
exchange gains recorded at the subsidiary level in connection with certain term debt that came due
in 2004. Income tax rates in future periods will fluctuate depending upon the impact of unusual
items and the level of earnings in the different tax jurisdictions in which we earn our income.
Absent any unusual items, we expect our tax rate for the remainder of the year to be in the range
of 36%.
Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Net earnings |
|
$ |
39,377 |
|
|
$ |
23,564 |
|
|
|
67 |
% |
Net earnings per share basic |
|
|
1.15 |
|
|
|
0.69 |
|
|
|
67 |
% |
Net earnings per share diluted |
|
|
1.13 |
|
|
|
0.68 |
|
|
|
66 |
% |
Excluding the impact of total gains of $6.4 million ($4.1 million, or $0.11 per diluted share,
after tax) recorded on the sale of excess properties, which we do not consider part of our normal
operations, our net earnings for the first nine months of 2005 would have been $35.3 million, or
$1.03 and $1.02 per basic and diluted share respectively. Earnings increased in the first nine
months of 2005 compared to the nine months ended September 30, 2004 mainly as a result of higher
gross auction sales, partially offset by increased G&A and income tax expenses.
Quarter Ended September 30, 2005 Compared to Quarter Ended September 30, 2004
United States Dollar Exchange Rate Comparison
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2005 |
|
|
% Change in U.S. $ |
|
|
2004 |
|
|
Average value of one U.S. dollar: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar |
|
$ |
1.2015 |
|
|
|
-8 |
% |
|
$ |
1.3072 |
|
Euro |
|
|
0.8206 |
|
|
|
|
|
|
|
0.8176 |
Auction Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Auction revenues |
|
$ |
38,430 |
|
|
$ |
31,449 |
|
|
|
22 |
% |
|
|
|
Gross auction sales |
|
$ |
364,005 |
|
|
$ |
307,188 |
|
|
|
18 |
% |
|
Auction revenue rate |
|
|
10.56 |
% |
|
|
10.24 |
% |
|
|
|
|
The increase in auction revenues in the third quarter of 2005 compared to the equivalent period in
2004 was attributable to higher gross auction sales and a higher auction revenue rate applicable to
those sales. Our operations in the United States and Canada were primarily responsible for the
increase in gross auction sales in the third quarter of 2005 compared to the quarter ended
September 30, 2004. Our underwritten business represented 20% of our total gross auction sales in
the third quarter of 2005, which is in a similar range to the relative proportions experienced in
prior periods.
23
Direct Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Direct expenses |
|
$ |
4,487 |
|
|
$ |
3,005 |
|
|
|
49 |
% |
Direct expenses as a percentage of
gross auction sales |
|
|
1.23 |
% |
|
|
0.98 |
% |
|
|
|
|
During interim periods, we make certain estimates of direct expenses incurred with respect to
auctions completed near the quarter end. In the subsequent quarter, these accruals are adjusted,
to the extent necessary, to reflect actual costs incurred. During the third quarter of 2004, this
process resulted in a reduction in direct expenses to reflect the recovery of previously recorded
estimated costs. This reduction contributed to the higher direct expense rate in the third quarter
of 2005 compared to 2004.
Depreciation
and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Depreciation expense |
|
$ |
3,198 |
|
|
$ |
3,246 |
|
|
|
-2 |
% |
Depreciation expense in the third quarter of 2005 is roughly consistent with the depreciation
recorded in the quarter ended September 30, 2004.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
General and administrative expenses |
|
$ |
23,859 |
|
|
$ |
20,989 |
|
|
|
14 |
% |
The increase in general and administrative expenses was generally consistent with the growth in our
business. As a result, we experienced increases in costs such as labour, advertising and travel
expenses.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Income taxes |
|
$ |
2,024 |
|
|
$ |
1,922 |
|
|
|
5 |
% |
Effective income tax rate |
|
|
30.7 |
% |
|
|
51.5 |
% |
|
|
|
|
The effective tax rate for the quarter ended September 30, 2005 was lower than the rate we
experienced in the third quarter of 2004 as a result of a $0.9 million non-recurring charge to the
income tax provision in 2004 relating to realized foreign exchange gains recorded at the subsidiary
level in connection with term debt that came due in 2004. Absent this non-recurring charge, our
income tax rate for the quarter ended September 30, 2004 would have been 27.7%. Income tax rates
in future periods will fluctuate depending upon the impact of unusual items and the level of
earnings in the different tax jurisdictions in which we earn our income.
Net Earnings
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
2005 |
|
|
2004 |
|
|
Net earnings |
|
$ |
4,568 |
|
|
$ |
1,810 |
|
Net earnings per share basic |
|
|
0.13 |
|
|
|
0.05 |
|
Net earnings per share diluted |
|
|
0.13 |
|
|
|
0.05 |
|
24
Earnings increased in the third quarter of 2005 compared to the equivalent quarter in 2004 mainly
as a result of higher gross auction sales in 2005 and a higher auction revenue rate applicable to
those sales, partially offset by higher G&A and direct expenses. In addition, net earnings in 2004
were reduced by the $0.9 million non-recurring income tax expense mentioned above.
Summary of Quarterly Results
The following tables present our unaudited consolidated quarterly results of operations for each of
our last eight quarters. This data has been derived from our unaudited consolidated financial
statements, which were prepared on the same basis as our annual audited consolidated financial
statements and, in our opinion, include all normal recurring adjustments necessary for the fair
presentation of such information. These unaudited quarterly results should be read in conjunction
with our audited consolidated financial statements for the years ended December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2005 |
|
|
Q2 2005 |
|
|
Q1 2005 |
|
|
Q4 2004 |
|
|
Gross auction sales (1) |
|
$ |
364,005 |
|
|
$ |
682,711 |
|
|
$ |
456,260 |
|
|
$ |
549,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction revenues |
|
$ |
38,430 |
|
|
$ |
65,692 |
|
|
$ |
48,578 |
|
|
$ |
57,142 |
|
Net earnings |
|
|
4,568 |
|
|
|
21,134 |
(2) |
|
|
13,675 |
(3) |
|
|
11,335 |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic |
|
$ |
0.13 |
|
|
$ |
0.62 |
(2) |
|
$ |
0.40 |
(3) |
|
$ |
0.34 |
(4) |
Net earnings per share diluted |
|
|
0.13 |
|
|
|
0.61 |
(2) |
|
|
0.40 |
(3) |
|
|
0.33 |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2004 |
|
|
Q2 2004 |
|
|
Q1 2004 |
|
|
Q4 2003 |
|
|
Gross auction sales (1) |
|
$ |
307,188 |
|
|
$ |
553,776 |
|
|
$ |
378,642 |
|
|
$ |
477,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction revenues |
|
$ |
31,449 |
|
|
$ |
55,996 |
|
|
$ |
37,670 |
|
|
$ |
47,719 |
|
Net earnings |
|
|
1,810 |
(4) |
|
|
15,164 |
|
|
|
6,590 |
|
|
|
12,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic |
|
$ |
0.05 |
(4) |
|
$ |
0.44 |
|
|
$ |
0.19 |
|
|
$ |
0.37 |
|
Net earnings per share diluted |
|
|
0.05 |
(4) |
|
|
0.44 |
|
|
|
0.19 |
|
|
|
0.36 |
|
|
|
|
(1) |
|
Gross auction sales represents the total proceeds from all items sold at our auctions.
Gross auction sales is not a measure of revenue and is not presented in our consolidated
financial statements. See further discussion above under Sources of Revenue and Revenue
Recognition. |
|
(2) |
|
Net earnings in the second quarter of 2005 include a gain of $938 recorded on the sale of
excess property ($769 after tax). Excluding this gain, which we do not consider part of our
normal operations, net earnings would have been $20,365, or $0.59 per share basic and
diluted. |
|
(3) |
|
Net earnings in the first quarter of 2005 include a gain of $5,493 recorded on the sale
of redundant property ($3,296 after tax). Excluding this gain, which we do not consider
part of our normal operations, net earnings would have been $10,379, or $0.30 per share
basic and diluted. |
|
(4) |
|
Net earnings in the third and fourth quarters of 2004 include income taxes of $888 and
$1,218, respectively, recorded in connection with realized foreign exchange gains at the
subsidiary level on certain term debt that came due in the second half of 2004. Excluding
these non-recurring charges, net earnings would have been $2,698, or $0.08 per share basic
and diluted, for the third quarter and $12,553, or $0.37 per basic share and $0.36 per
diluted share, for the fourth quarter. |
25
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Working capital |
|
$ |
57,481 |
|
|
$ |
36,871 |
|
|
|
56 |
% |
Our cash position can fluctuate significantly from period to period, largely as a result of
differences between the timing, size and number of auctions, the timing of the receipt of auction
sale proceeds from buyers, and the timing of the payment of net amounts due to consignors. We
usually collect auction proceeds from buyers within seven days of an auction and generally pay out
auction proceeds to consignors approximately 21 days following an auction. If auctions are
conducted near a period end, we may hold cash in respect of those auctions that will not be paid to
consignors until after the period end. Accordingly, we believe that working capital, including
cash, is a more meaningful measure of our liquidity than cash alone.
Working capital at September 30, 2005 includes (as a liability) the current portion of our
long-term debt. As certain of these current amounts are refinanced with long-term facilities, our
reported working capital will increase. In our opinion, our working capital balance at September
30, 2005 exceeds the amount we need to satisfy our present operating requirements. Except as
disclosed in this document, the economic and industry factors affecting our financial condition are
substantially unchanged since December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
75,589 |
|
|
$ |
65,709 |
|
|
|
15 |
% |
Investing activities |
|
|
(20,296 |
) |
|
|
(17,146 |
) |
|
|
-18 |
% |
Financing activities |
|
|
(10,236 |
) |
|
|
(14,099 |
) |
|
|
27 |
% |
Capital asset additions were $10.7 million for the quarter ended September 30, 2005 and $29.9
million for the first nine months of 2005, which compared to additions of $5.7 million and $15.3
million, respectively, in the equivalent periods in 2004. Our capital expenditures in 2005
included the following:
|
|
|
Construction of our new permanent auction sites in Sacramento, California and
Nashville, Tennessee; |
|
|
|
|
Acquisition of approximately 125 acres of land in Houston, Texas for cash consideration
of $8.5 million; and |
|
|
|
|
Acquisition of approximately 160 acres of land in Denver, Colorado for cash
consideration of $3.5 million. |
|
|
|
|
Acquisition of approximately 62 acres of land in Saskatoon, Saskatchewan for cash
consideration of $0.3 million. |
We intend to build new permanent auction sites on the new properties in Houston and Denver, to
replace our existing permanent auction sites in those locations. We intend to develop the property
in Saskatoon by constructing a modest auction facility intended mainly for agricultural auctions.
Exchange rate changes relating to capital assets held in currencies other than the United States
dollar resulted in a decrease of $1.1 million in the capital assets reported on our consolidated
balance sheet as of September 30, 2005, compared to a $1.2 million increase in the first nine
months of 2004.
We intend to add additional or replace existing auction sites in selected locations around the
world as appropriate opportunities arise, though actual expenditure levels in future periods will
depend on our ability to identify, acquire and develop suitable sites. We expect to add or replace
at least one or two auction sites per year, and possibly up to four sites per year starting in
2007. We expect that total capital expenditures,
26
including maintenance capital expenditures, will be in the range of $35 million for 2005, although
we may exceed this range if we are able to accelerate our auction site development activities.
This expected level of capital expenditures for 2005 is an increase over our previously stated
expectation of approximately $25 million for the year, mainly because we have been able to increase
the pace of our auction site expansion program.
Over the next five years, we expect to increase our annual capital expenditures to approximately
$50 million per year, as we take steps to accelerate the expansion of our network of auction sites.
Additional expenditures will also be required to achieve our Mission 2007 strategic initiatives,
depending on the scope of our required system improvements. Future capital expenditures will be
funded primarily from working capital or draws on available credit facilities.
We paid regular cash dividends of $0.11 per share during each of the quarters ended June 30, 2005
and March 31, 2005. The total dividend payments were approximately $3.8 million per quarter.
During the quarter ended September 30, 2005 we increased our quarterly cash dividend to $0.18 per
share, and the total dividend payment was approximately $6.2 million.
Our debt and available credit facilities at September 30, 2005 and December 31, 2004 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
% Change |
|
|
Long-term debt (including current
portion of long-term debt) |
|
$ |
45,129 |
|
|
$ |
45,925 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities total available: |
|
$ |
150,712 |
|
|
$ |
159,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facilities total unused: |
|
$ |
105,583 |
|
|
$ |
113,998 |
|
|
|
|
|
We have established credit facilities with financial institutions in the United States, Canada, The
Netherlands, and Australia. We had no floating rate long-term debt at September 30, 2005.
However, certain of our debt at September 30, 2005 consisted of revolving loans drawn on credit
facilities, most of which were recorded in current liabilities in our financial statements. At
September 30, 2005, we were in compliance with all of the financial covenants applicable to our
long-term debt.
During the quarter ended September 30, 2005 we replaced a $12.2 million revolving loan that came
due with a five-year non-revolving term loan with a fixed interest rate of 4.429%. This term loan
is repayable in monthly payments of interest only, with the full amount of the principal due in
2010.
Subsequent to September 30, 2005, we executed a commitment letter with a bank to replace certain
term loans and revolving loans outstanding at September 30, 2005 with a five-year fixed-rate term
loan. This term loan will be repayable in quarterly payments of interest only, with the full
amount of the principal due in 2010. As part of this financing, we also expect to put in place new
arrangements that will increase the credit facilities available to us by $10 million. As a result
of these debt renegotiations, if this arrangement is completed, the funds committed for debt repayment totaling $5.1 million recorded
on our balance sheet at September 30, 2005 will become cash and cash equivalents and available for
general purposes during the fourth quarter of 2005.
Transactions with Related Parties
During the period ended September 30, 2005, we paid $751,000 to a company controlled by David E.
Ritchie, the Chairman of our Board of Directors. The costs were incurred pursuant to agreements,
approved by our Board, by which the related company agrees to provide meeting rooms,
accommodations, meals and recreational activities at its facilities on Stuart Island in British
Columbia, Canada, for certain of
27
our customers and guests. The agreements set forth the fees and costs per excursion, which are
based on market prices for similar types of facilities and excursions. We believe that the terms
of the agreements are at least as favorable as we could have obtained from a third party. We have
entered into similar agreements with the related party in the past and intend to do so in the
future.
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, results of operations, liquidity, capital expenditures or capital resources.
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to currency fluctuations and exchange rate risk on all operations conducted in
currencies other than the United States dollar, which is our reporting currency. We cannot
accurately predict the future effects of foreign currency fluctuations on our financial condition
or results of operations. For the nine-month period ended September 30, 2005, approximately 35% of
our revenues were earned in currencies other than the United States dollar and approximately 40% of
our operating costs were denominated in currencies other than the United States dollar. We expect
that the effect of foreign currency fluctuations on our net earnings in 2005 will be essentially
neutral. We have not hedged against foreign currency rate fluctuations associated with our
operations denominated in currencies other than the United States dollar.
During the nine months ended September 30, 2005 we recorded a decrease in our foreign currency
translation adjustment balance of $2.0 million, compared to a $1.4 million increase in the
equivalent period in 2004. Our foreign currency translation adjustment arises from the translation
of our net assets denominated in currencies other than the United States dollar into our reporting
currency. Decreases in this balance arose primarily from the strengthening of non-United States
currencies against the United States dollar.
Forward-Looking Statements
This Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. These statements are based on
current expectations and estimates about our business, and include, among others, statements
relating to:
|
|
|
the performance of our business; |
|
|
|
|
the growth of our operations; |
|
|
|
|
the expansion of the geographic markets and the market segments in which we conduct
auctions, including the world market for used trucks and equipment; |
|
|
|
|
increases in the number of consignors and bidders participating in our auctions; |
|
|
|
|
the average size of our auctions; |
|
|
|
|
our key strengths; |
|
|
|
|
our ability to consistently draw significant numbers of local and international bidders
to our auctions; |
|
|
|
|
the anticipated improvement, acquisition and development by us of auction sites; |
|
|
|
|
our gross auction sales, auction revenues and auction revenue rates, including expected
auction revenue rates and the sustainability of those rates, and the seasonality of gross
auction sales and auction revenues; |
|
|
|
|
our direct expense rates and depreciation expenses; |
28
|
|
|
the effect on our general and administrative expenses of expanded infrastructure and
workforce and growth of our business; |
|
|
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the sufficiency of our working capital balance to meet our financial needs; |
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our future capital expenditures; |
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our income tax rates in future periods; |
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the proportion of our revenues and operating costs denominated in currencies other than
the U.S. dollar and the effect of currency exchange fluctuations on our results of
operations; |
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our Mission 2007 strategic initiative, including its effect on our results of
operations and capital expenditures; |
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our program to upgrade our information systems, including its effect on our results of
operations and capital expenditures; and |
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the renegotiation and extension of existing indebtedness and the availability of
financing on terms acceptable to us in the future. |
In some cases, you can identify forward-looking statements by terms such as anticipate,
believe, could, continue, estimate, expect, intend, may, might, ongoing, plan,
potential, predict, project, should, will, would, or the negative of these terms, and
similar expressions intended to identify forward-looking statements. Our forward-looking
statements are not guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. While we have not described all potential risks related
to our business and owning our common shares, the important factors listed under Risk Factors are
among those that may affect our performance and could cause our actual financial and operational
results to differ significantly from our predictions. We do not intend to update publicly any
forward-looking statements, even if our predictions have been affected by new information, future
events or other developments. You should consider our forward-looking statements in light of the
following risk factors and other relevant factors.
Risk Factors
Our business is subject to a number of risks and uncertainties, and our past performance is no
guarantee of future performance. Some of the more important risks we face are outlined below and
should be considered by holders of our common shares. The risks and uncertainties described below
are not the only risks and uncertainties we face. Additional risks and uncertainties not currently
known to us or that we currently deem immaterial also may impair our business operations. If any
of the following risks actually occur, our business, results of operations and financial condition
would suffer.
Our guarantee and outright purchase contracts and advances to consignors may result in us incurring
losses.
Approximately 75% of our business is conducted on a straight commission basis. In certain
situations we will either offer to:
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guarantee a minimum level of sale proceeds to the consignor, regardless of the ultimate
selling price of the consignment at the auction; or |
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purchase the equipment outright from the consignor for sale in a particular auction. |
If auction proceeds are less than the guaranteed amount, our commission will be reduced or, if
sufficiently lower, we will incur a loss. If auction proceeds are less than the purchase price we
paid for equipment that we take into inventory temporarily, we will incur a loss. Because all of
our auctions are unreserved, there is no way for us to protect against these types of losses by
bidding on or acquiring any of the items at the auction. In recent periods, guarantee and
inventory contracts have generally represented approximately 25% of our annual gross auction sales.
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Occasionally we advance to consignors a portion of the estimated auction proceeds prior to the
auction. We generally make these advances only after taking possession of the assets to be
auctioned and upon receipt of a security interest in the assets to secure the obligation. If we
were unable to auction the assets or if auction proceeds were less than amounts advanced, we could
incur a loss.
Our guarantees of clear title on the assets sold at our auctions may result in us incurring losses.
Where title registries are commercially available, we guarantee that each item purchased at our
auctions is free of liens and other encumbrances, up to the purchase price paid by the buyer.
While we exert considerable effort ensuring that all liens have been identified and, if necessary,
discharged prior to the auction, we occasionally do not properly identify or discharge liens and
have had to make payments to the relevant lienholders or purchasers. We will incur a loss if we
are unable to recover sufficient funds from the consignors to offset these payments; aggregate
losses from these payments could be material.
We may have difficulties sustaining and managing our growth.
One of the main elements of our strategy is to continue to grow our business, primarily by
increasing earnings from operations in markets in which we already operate and by expanding into
new geographic markets and into market segments in which we have not had a significant presence in
the past. We may not be successful in growing our business or in managing this growth. For us to
be successful in growing our business, we need to accomplish a number of objectives, including:
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recruiting and retaining suitable sales personnel; |
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identifying and developing new geographic markets and market segments; |
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identifying and acquiring, on terms favorable to us, suitable land on which to build
new auction facilities and, potentially, businesses that might be appropriate acquisition
targets; |
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successfully managing expansion; |
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obtaining necessary financing; |
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receiving necessary authorizations and approvals from governments for proposed
development or expansion; |
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successfully integrating new facilities and acquired businesses into our existing
operations; |
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achieving acceptance of the auction process in general by potential consignors, bidders
and buyers; |
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establishing and maintaining favorable relationships with consignors, bidders and
buyers in new markets and market segments, and maintaining these relationships in our
existing markets; |
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capitalizing on changes in the supply of and demand for industrial assets, in our
existing and in new markets; and |
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designing and implementing business processes that are able to support profitable
growth. |
We may need to hire additional employees to manage any growth that we achieve. In addition, growth
may increase the geographic scope of our operations and increase demands on both our operating and
financial systems. These factors will increase our operating complexity and the level of
responsibility of existing and new management personnel. It may be difficult for us to attract and
retain qualified managers and employees, and our existing operating and financial systems and
controls may not be adequate to support our growth. We may not be able to improve our systems and
controls as a result of increased costs, technological challenges, or lack of qualified employees.
Our past results and growth may not be indicative of our future prospects or our ability to expand
into new markets, many of which may have different competitive conditions and demographic
characteristics than our existing markets.
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Our business would be harmed if there were decreases in the supply of, demand for, or market values
of industrial assets, primarily used industrial equipment.
Our auction revenues could be reduced if there was significant erosion in the supply of, demand
for, or market values of used trucks and equipment, which would impact our financial condition and
results of operations. We have no control over any of the factors that affect the supply of, and
demand for, used trucks and equipment, and the circumstances that cause market values for used
trucks and equipment to fluctuate are beyond our control. In addition, price competition and
availability of new trucks and equipment directly affect the supply of, demand for, and market
value of used trucks and equipment.
Legal and other claims may result in us incurring losses.
We are subject to legal and other claims that arise in the ordinary course of our business. While
the results of these claims have not historically had a material effect on our financial condition
or results of operations, we may not be able to defend ourselves adequately against these claims in
the future and we may incur a loss. Aggregate losses from these claims could be material.
Our operating results are subject to quarterly variations.
Historically, our revenues and operating results have fluctuated from quarter to quarter. We
expect to continue to experience these fluctuations as a result of the following factors, among
others:
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the size, timing and frequency of our auctions; |
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the seasonal nature of the auction business in general, with peak activity typically
occurring in the second and fourth calendar quarters, mainly as a result of the seasonal
nature of the construction and natural resources industries; |
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the performance of our underwritten business (guarantee and outright purchase contracts); |
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general economic conditions in our markets; and |
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the timing of acquisitions and development of auction facilities and related costs. |
In addition, we usually incur substantial costs when entering new markets, and the profitability of
operations at new locations is uncertain as a result of the increased variability in the number and
size of auctions at new sites. These and other factors may cause our future results to fall short
of investor expectations or not to compare favorably to our past results.
We are exposed to foreign exchange rate fluctuations and political and economic instability as a
result of our substantial international operations, which could harm our results of operations.
We conduct business on a global basis and intend to continue to expand our presence in
international markets. Fluctuating currency exchange rates, acts of terrorism or war, and changing
social, economic and political conditions and regulations may affect in a negative manner our
business in international markets and our related operating results. Currency exchange rate
fluctuations between the different countries in which we conduct our operations impact the
purchasing power of buyers, the motivation of consignors, asset values and asset flows between
various countries, including those in which we do not have operations. These factors and other
global economic conditions may harm our business and our operating results.
Although we report our financial results in United States dollars, a significant portion of our
auction revenues are generated at auctions held outside the United States, mostly in currencies
other than the United States dollar. Currency exchange rate changes against the United States
dollar, particularly for the Canadian dollar and the Euro, could affect our presented results in
our financial statements and cause our earnings to fluctuate.
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Our revenues and profitability could be reduced as a result of competition in our core markets.
The used truck and equipment sectors of the global industrial equipment market, and the auction
segment of those markets, are highly fragmented. We compete directly for potential purchasers of
industrial equipment with other auction companies. Our indirect competitors include equipment
manufacturers, distributors and dealers that sell new or used equipment, and equipment rental
companies. When sourcing equipment to sell at our auctions, we compete with other auction
companies, equipment dealers and brokers, and equipment owners that have traditionally disposed of
equipment in private sales.
Our direct competitors are primarily regional auction companies. Some of our indirect competitors
have significantly greater financial and marketing resources and name recognition than we do. New
competitors with greater financial and other resources may enter the industrial equipment auction
market in the future. Additionally, existing or future competitors may succeed in entering and
establishing successful operations in new geographic markets prior to our entry into those markets.
They may also compete against us through internet-based services. If existing or future
competitors seek to gain or retain market share by reducing commission rates, we may also be
required to reduce commission rates, which may reduce our revenue and harm our operating results
and financial condition.
We depend on the services of a number of key personnel, and our business could be harmed if we lost
one or more of them. We also have a new CEO effective November 1, 2004.
The future growth and performance of our business will depend to a significant extent on the
efforts and abilities of our executive officers and senior managers. Our business could be harmed
if we lost the services of one or more of these individuals. We do not maintain key man insurance
on the lives of any of our executive officers. Our future success largely depends on our ability
to attract, develop and retain skilled employees in all areas of our business. Peter J. Blake, our
former Senior Vice-President and Chief Financial Officer, became CEO effective November 1, 2004,
replacing David E. Ritchie, one of the founders of our company. Although Mr. Blake has been
employed by Ritchie Bros. for over 14 years, he does not have the same depth of experience as Mr.
Ritchie and has not previously been in a CEO role.
Our results may not improve on a long term basis as a result of our internet-related initiatives,
which are also subject to technological obsolescence and potential service interruptions; in
addition, we may not be able to compete with technologies implemented by our competitors.
We have invested significant resources in the development of our internet platform, including our
rbauctionBid-Live internet bidding service. However, our internet technologies may not result in
any material long-term improvement in our results of operations or financial condition and may
require further significant investment to help avoid obsolescence. We may also not be able to
continue to adapt our business to internet commerce and we may not be able to compete effectively
against internet auction services offered by our competitors.
The success of our rbauctionBid-Live service and other services that we offer over the internet,
including equipment-searching capabilities and historical price information, will continue to
depend largely on further development and maintenance of our infrastructure and the internet in
general. Our ability to offer online services depends on the performance of the internet, as well
as some of our internal hardware and software systems. Viruses, worms and other similar
programs, which have in the past caused periodic outages and other internet access delays, may in
the future interfere with the performance of the internet and some of our internal systems. These
outages and delays could reduce the level of service we are able to offer over the internet. We
could lose customers and our reputation could be harmed if we were unable to provide services over
the internet at an acceptable level of performance or reliability.
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The availability and performance of our internal technology infrastructure is critical to our
business.
The satisfactory performance, reliability and availability of our website, processing systems and
network infrastructure are important to our reputation and our business. We will need to continue
to expand and upgrade our technology, transaction processing systems and network infrastructure
both to meet increased usage of our rbauctionBid-Live service and other services offered on our
website and to implement new features and functions. Our business and results of operations could
be harmed if we were unable to expand and upgrade in a timely manner our systems and infrastructure
to accommodate any increases in the use of our internet services, or if we were to lose access to
or the functionality of our internet systems for any reasons.
We use both internally developed and licensed systems for transaction processing and accounting,
including billings and collections processing. We may need to improve these systems in order to
accommodate growth in our business. Any inability to upgrade our technology, transaction
processing systems or network infrastructure to accommodate increased transaction volumes could
harm our business and interfere with our ability to expand our business.
We have embarked on a program to upgrade our information systems, including implementing an
enterprise resource planning system. Our business and results of operations could be harmed if our
program is not successful or if our enterprise resource planning system implementation is not
successful.
We do not currently have a formal disaster recovery plan. If we were subject to a serious security
breach or a threat to business continuity, it could materially damage our business, results of
operations and financial condition.
Our business is subject to risks relating to our ability to safeguard the security and privacy
of our customers confidential information.
We maintain proprietary databases containing confidential personal information regarding our
customers and the results of our auctions, and we must safeguard the security and privacy of this
information. Despite our efforts to protect this information, we face the risk of inadvertent
disclosure of this sensitive information or an intentional breach of our security measures.
Security breaches could damage our reputation and expose us to a risk of loss or litigation and
possible liability. We may be required to make significant expenditures to protect against
security breaches or to alleviate problems caused by any breaches. Our insurance policies may not
be adequate to reimburse us for losses caused by security breaches.
Our operations are subject to substantial environmental and other regulations, which may
significantly increase our expenses or limit our operations and ability to expand.
A variety of federal, provincial, state and local laws, rules and regulations apply to our
business. These relate to, among other things, the auction business, imports and exports of
equipment, worker safety, privacy of customer information, and the use, storage, discharge and
disposal of environmentally sensitive materials. Failure to comply with applicable laws, rules and
regulations could result in substantial liability to us, suspension or cessation of some or all of
our operations, restrictions on our ability to expand at present locations or into new locations,
requirements for the acquisition of additional equipment or other significant expenses or
restrictions.
The development or expansion of auction sites depends upon receipt of required licenses, permits
and other governmental authorizations. Our inability to obtain these required items could harm our
business. Additionally, changes or concessions required by regulatory authorities could result in
significant delays in, or prevent completion of, this development or expansion.
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Under some laws regulating the use, storage, discharge and disposal of environmentally sensitive
materials, an owner or lessee of real estate may be liable for the costs of removal or remediation
of hazardous or toxic substances located on or in, or emanating from, the real estate, and related
costs of investigation and property damage. These laws often impose liability without regard to
whether the owner or lessee knew of, or was responsible for, the presence of the hazardous or toxic
substances. Environmental contamination may exist at our owned or leased auction sites from prior
activities at these locations or from neighboring properties. In addition, auction sites that we
acquire or lease in the future may be contaminated, and future use of or conditions on any of our
properties or sites could result in contamination. The costs related to environmental
contamination of any of the properties we own or lease could harm our financial condition and
results of operations.
There are restrictions in the United States and Europe that may affect the ability of equipment
owners to transport certain equipment between specified jurisdictions. One example of these
restrictions is environmental certification requirements in the United States, which prevent
non-certified equipment from being entered into commerce in the United States. If these
restrictions were to materially inhibit the ability of customers to ship equipment to or from our
auction sites, they could reduce our gross auction sales and harm our business.
International bidders and consignors could be deterred from participating in our auctions if
governmental bodies impose additional export or import regulations or additional duties, taxes or
other charges on exports or imports. Reduced participation by international bidders and consignors
could reduce our gross auction sales and harm our business, financial condition and results of
operations.
Our insurance may be insufficient to cover losses that may occur as a result of our operations.
We maintain property and general liability insurance. This insurance may not remain available to
us at commercially reasonable rates, and the amount of our coverage may not be adequate to cover
all liability that we may incur. Our auctions generally involve the operation of large equipment
close to a large number of people, and an accident could damage our facilities or injure auction
attendees. Any major accident could harm our reputation and our business. In addition, if we were
held liable for amounts exceeding the limits of our insurance coverage or for claims outside the
scope of our coverage, the resulting costs could harm our results of operations and financial
condition.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Ritchie Bros. Auctioneers Incorporated |
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(Registrant) |
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Date: October 31, 2005
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By:
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/s/
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Robert S. Armstrong |
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Robert S. Armstrong, |
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Corporate Secretary |
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