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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 month of March 2006
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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)
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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 Form 40-F X
----- -----
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): __
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): __
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 No X
----- -----
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-___________
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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.
RITCHIE BROS. AUCTIONEERS INCORPORATED
(Registrant)
Date: March 14, 2006 By: /s/ ROBERT S. ARMSTRONG
------------------------------------
Robert S. Armstrong,
Corporate Secretary
Local Supply
Meets Global Demand
(RITCHIE BROS. LOGO)
AUCTIONEERS
ANNUAL REPORT 2005
Twenty-Five Year Summary
GROSS AUCTION SALES In Billions Of US Dollars
[BAR CHART]
BUYERS In Thousands
[BAR CHART]
CONSIGNORS In Thousands
[BAR CHART]
In 2005, Ritchie Bros. Auctioneers conducted 153 unreserved industrial auctions
and 99 unreserved agricultural auctions through our international network of
auction sites.
We sell a wide range of construction, transportation, mining, forestry,
petroleum, material handling, marine and agricultural assets. All items in every
Ritchie Bros. auction are sold on auction day to the highest bidder without
minimum bids or reserve prices.
CONTENTS
To our Fellow Shareholders 2
Ritchie Bros. Auctioneers: A Local Company 6
Why Buyers Choose Ritchie Bros. 15
Why Sellers Choose Ritchie Bros. 20
2005: A Record Breaking Year 24
2006 and Beyond 26
The Ritchie Bros. Auction Process 32
Financial Information 33
Supplemental Quarterly Data 55
Selected Financial and Operating Data 56
Board of Directors 57
Shareholder Information 58
In this annual report, all dollar amounts are stated in United States dollars
unless a different currency is indicated.
Gross Auction Sales (GAS) represent the aggregate selling price of all lots sold
at an auction or auctions.
Auction Revenues are primarily comprised of the commissions earned on straight
commission and gross guarantee contracts, plus the net profit on the sale of
lots purchased and sold by the Company as principal.
Forward-looking statements: The discussion in this Annual Report includes
forward-looking statements, which involve risks and uncertainties as to possible
future outcomes. Readers should refer to the discussion concerning
forward-looking statements and risk factors included in our Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2005, which is included at the back of this Annual
Report.
(GRAPHIC)
RITCHIE BROS. AUCTIONEERS: "USING UNRESERVED AUCTIONS TO CREATE A GLOBAL
MARKETPLACE FOR OUR CUSTOMERS."
FORT WORTH, TEXAS USA
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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To our Fellow Shareholders
It's fun to be a member of the management team at Ritchie Bros. Yes, there are
tough decisions for us to make and our team has the awesome responsibility of
running a company with over 670 employees in 25 countries and gross auction
sales of more than $2.0 billion. But we manage to have fun every day thanks to
our focus on the simple notion of value. Our unreserved auctions create real
value for our customers. And with more and more equipment owners choosing to buy
and sell at our auctions, we are enjoying tremendous momentum. If we weren't
adding value, the numbers of buyers and sellers participating in our auctions
would be moving in a different direction. So we keep it simple, focus on the
basics of customer service, and make sure that every day we look for new ways to
add value.
We've been growing at a very rapid pace over the past few years -- a faster pace
than we had expected -- and our biggest challenge has been maintaining our
small-company culture. Ever since our first industrial auction in June 1963
($660,000 in equipment sold for Premier Construction Company in Radium, BC), we
have been committed to providing the very best customer service and building
long-lasting customer relationships based on trust and integrity. That was hard
enough to do when the entire company consisted of just three brothers.
Maintaining our culture as we continuously add people to the team and expand
into new markets around the world is a definite challenge. Good thing this is a
simple business. And to keep it that way, as a management team, we remain
focused on two very simple objectives:
1. MAINTAIN OUR CULTURE
2. GROW OUR EARNINGS
Our view is that if we don't achieve the first objective, we won't have a chance
of achieving the second. Our core values are listed on this page and they give
you a sense of what we are about and why we believe that we have a very unique
culture. We view ourselves as a small local company that happens to operate
around the world and happens to sell more used trucks and equipment than anybody
else. Said another way -- we are a local company in your market, and in his, and
her market, and their markets too. Being local lets us develop strong customer
relationships and provide an outstanding level of service. Being global allows
us to deliver an international marketplace to our customers, wherever they are.
Our commitment to these core values enabled us to exceed our expectations and
increase our sales by almost 17% in 2005, even though most equipment markets
were extremely tight. Particularly in North America, which is our largest
market, contractors were busy and equipment manufacturers had a tough time
keeping up with demand.
(PHOTO OF DAVE RITCHIE)
(PHOTO OF PETER BLAKE)
DAVE RITCHIE PRESENTS PETER BLAKE WITH HIS 15-YEAR PIN.
CORE VALUES
1. WE DO WHAT IS RIGHT.
2. WE MAINTAIN THE HIGHEST LEVEL OF BUSINESS INTEGRITY.
3. WE BUILD AND MAINTAIN STRONG AND ENDURING CUSTOMER RELATIONSHIPS.
4. WE NEVER LOSE TRACK OF THE BASICS.
5. WE FACE OUR ISSUES IMMEDIATELY AND ARE SOLUTION ORIENTED.
6. WE HAVE A HUNGER AND PASSION FOR THE DEAL.
7. WE ARE NIMBLE AND OPPORTUNISTIC.
8. WE HAVE FUN.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
2
Such an environment should by most accounts be more difficult for Ritchie Bros.
(if contractors are busy and don't have equipment to sell, our volumes should go
down); however, we set volume records in many regions and worked with more
customers than ever before. This leads us to conclude that our growth came from
an increase in market share - while we found that fewer people were selling
equipment, those who were selling were, not surprisingly, looking for access to
the international retail marketplace.
From an investor's perspective, Ritchie Bros. has been delivering solid returns
by way of both increased share value and healthy dividends. We are fortunate
that our business model generates strong cash flows for our shareholders. Our
first priority is to reinvest these funds in the business where intelligent
investment opportunities exist. To the extent we generate more cash than these
potential opportunities and our general operations require, our plan is to
return the excess funds to our shareholders. We have been paying a quarterly
dividend since 2003 and we raised the quarterly amount by 64% (to $0.18 per
share) during 2005. This is on top of an average capital expenditure budget of
$50 million per year for the next 5 years, which is designed to support our
expansion strategies and fuel the future growth of our company. Our dividend and
capital expenditure programs reflect our confidence in the future growth of our
business.
Going forward, we will continue to follow essentially the same growth strategy
that has brought us to this point. We intend to expand into related asset
categories, add to our international network of auction sites, take advantage of
technology to improve our level of customer service, and recruit, develop and
retain the very best people. On top of this, we are aggressively pursuing our
"M07" initiative to develop efficient, effective and scalable processes to
enable us to achieve our growth objectives. You can read more about M07 later in
this Annual Report, but suffice to say that M07 is our response to the question:
"Selling $2 billion is great, but will you guys be able to double or triple your
volume if you keep doing things the same way?"
With all this growth, it's no wonder that we're having fun. But none of this
would be possible without the incredible dedication and effort put forward by
every member of the Ritchie Bros. team. We share a set of common goals and
values, regardless of where we work. We are proud to be your local auctioneer
(with global reach). We also have the privilege of working with a wonderful
group of customers; and we enjoy the support of a very loyal group of fellow
shareholders. Thanks to all of you.
/s/ David E. Ritchie /s/ Peter J. Blake
------------------------------------- ----------------------------------------
David E. Ritchie Peter J. Blake
CHAIRMAN CHIEF EXECUTIVE OFFICER
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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(GRAPHIC)
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
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(GRAPHIC)
Orlando, Florida USA
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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RITCHIE BROS. AUCTIONEERS:
A LOCAL COMPANY
In various markets around the world, we have become accustomed to being asked by
customers if our head office is in their city.
(MAPS WITH DIRECTIONS)
It's a testament to the fact that when we build an auction site, we fully
integrate into the local community. Most of our team members are hired locally,
our regional customer base of buyers and sellers numbers in the thousands, and
we service these local customers year-round. Our auction sites typically hold
three to six unreserved auctions each year, meaning we become an important
participant in the local economy.
Yet, while we often appear to be simply a local operation, we are in fact a
multinational company. Our global operations are headquartered in Vancouver,
British Columbia, and we have 31 auction sites around the world. We have offices
in 25 countries and in 2005 we held unreserved auctions in 11 countries around
the globe. When we hold an auction, regardless of which local market we are in,
we are able to create a global marketplace for our customers.
HOW A SMALL "LOCAL" COMPANY BECAME A WORLD LEADER
Dedication to our founding principles, including our commitment to the
unreserved auction process, has led to our steady growth over more than 40
years. What started as a small, locally owned family business in the town of
Kelowna, British Columbia, is now a public company with a team of over 670
employees and annual gross auction sales in excess of $2 billion.
Ritchie Bros. has been able to evolve from that small, local company into a
global leader by continuing to operate with a regional focus. Our guiding
principles include treating our customers fairly and operating to the highest
standards of business ethics. This was the case when Ken, John and Dave Ritchie
started the business, and it has not changed over the past 40 years. Sticking to
our principles and
Buyer: CONSTRUCTORA URBANA (CUSA)
1995 FORD LN8000 WATER TRUCK
$33,000
"DUE TO THE AMOUNT OF PROJECTS THAT OUR COMPANY GOT AWARDED IN THE PAST MONTHS,
WE WERE REQUIRED TO INCREASE OUR WATER TANKER FLEET. WE TRIED TO LOCATE NEW
EQUIPMENT, BUT THE DELIVERY DATES FROM SUPPLIERS DID NOT MEET OUR REQUIREMENTS.
AT THIS POINT WE CONTACTED RITCHIE BROS. TO GET DATES FOR COMING AUCTIONS WHERE
GOOD QUALITY TRUCKS WERE GOING TO BE SOLD. WE WERE LUCKY TO FIND VERY NICE
TRUCKS AT AN AUCTION IN PHOENIX, ARIZONA SO WE ATTENDED THE AUCTION AND GOT OUR
PROBLEM SOLVED. WE WERE ABLE TO GET QUALITY WATER TANKERS IN TWO WEEKS INSTEAD
OF 90 DAYS."
ROGELIO ALEMAN
OWNER AND PRESIDENT
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
6
(GRAPHIC)
Dubai, United Arab Emirates
Byemoor, Alberta Canada
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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(GRAPHIC)
Sacramento, California USA Dubai, United Arab Emirates
focusing on customer service has allowed us to grow consistently over the years,
with the result that we now sell more used trucks and equipment than any other
organization in the world.
We operate in the massive and highly fragmented used industrial equipment
market. Even though we are the largest participant, our market share is probably
less than 2%. As our business has matured, we have remained focused on steadily
increasing our share of this global market. Our strategy is simple - grow our
gross auction sales by developing strong local relationships with our customers
and by offering those customers the best-run unreserved auctions in the world.
OUR CUSTOMERS CAN COUNT ON OUR AUCTION SCHEDULE TO MEET THEIR NEEDS
Part of our success can be attributed to the fact that once we establish a
permanent auction site, the local market can typically count on a regular
auction schedule. Whether they have an entire fleet of equipment to sell or just
one or two items, equipment sellers know that the local Ritchie Bros. auction
site will be holding an unreserved auction soon. They know they can easily add
their items to our next auction and their items will be marketed to the world.
And equipment buyers can count on our regularly scheduled auctions too. Most of
our interested buyers are end-users, meaning they need equipment now for a job
they are
THE RITCHIE BROS. CUSTOMER
MOST NEW CUSTOMERS START THEIR RELATIONSHIP WITH RITCHIE BROS. BY ATTENDING AND
BIDDING AT AN AUCTION CLOSE TO WHERE THEY LIVE. OUR EXPERIENCE HAS SHOWN THAT
ONCE CUSTOMERS BECOME BUYERS AT OUR AUCTIONS AND REALIZE THE VALUE OF THE
SERVICE WE OFFER, THEY OFTEN START TRAVELING TO OTHER RITCHIE BROS. AUCTIONS AND
EVENTUALLY BECOME CONSIGNORS SO THEY TOO CAN ACCESS THE VERY GLOBAL MARKET THAT
THEY HAVE HELPED US CREATE. A LARGE NUMBER OF OUR CUSTOMERS ARE BOTH BUYERS AND
SELLERS AT OUR AUCTIONS - THEY DON'T VIEW OUR AUCTIONS AS "THE PLACE TO BUY" OR
"THE PLACE TO SELL," THEY SEE OUR AUCTIONS AS AN EFFICIENT MARKETPLACE FOR BOTH
BUYING AND SELLING.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
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rbauctionBid-Live Interface
(GRAPHICS)
about to start. They know that they can attend one of our auctions, be the high
bidder, and put their equipment to work the very next day. There is no waiting
when it comes to buying at a Ritchie Bros. unreserved auction.
LOCAL SUPPLY MEETS GLOBAL DEMAND
We hold over 150 unreserved industrial auctions each year and interested bidders
attend from around the world. A typical Ritchie Bros. unreserved industrial
auction in 2005 included over 1,300 lots from more than 180 different
consignors. An average of almost 1,400 bidders participated in each of our
industrial auctions in 2005 and the geographic diversity of these bidders is
reflected in the fact that over 50 percent of gross auction sales in 2005 went
to buyers from outside the region in which the auction was held. In addition,
approximately 80 percent of our buyers were end users such as contractors (as
compared to resellers). This international crowd of end user buyers creates a
global marketplace where sellers are able to transcend local market conditions
and receive the global market price for their equipment. It's an international
retail marketplace. There's no other place like it.
THE INTERNET: BROADENING THE REACH OF THE GLOBAL MARKETPLACE
The rbauctionBid-Live service allows our customers to watch our auctions over
the internet from anywhere in the world and permits qualified customers to
participate - live and in real time - in our unreserved auctions. This system
has proven to be a significant competitive advantage for Ritchie Bros. Not only
has it increased the size, diversity and multi-national character of our bidding
audiences, the rbauctionBid-Live system has also allowed our customers to
participate in more than one auction at a time, all from the comfort of their
office or home. This live internet bidding has enabled us to create an
environment where internet bidders and live bidders compete against each other
on a level playing field. This is the best of both worlds for bidders and
consignors. Internet bidders now regularly represent over 20 percent of the
registered bidders at our auctions and in 2005 they were buyer or runner-up
bidder on over 20 percent of all lots offered online.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
9
Management Advisory Committee
(PHOTO OF BOB ARMSTRONG)
Bob Armstrong
Vice President Finance,
Chief Financial Officer,
Corporate Secretary
(PHOTO OF MIKE BATTISTEL)
Mike Battistel
Vice President
Information Technology,
Chief Information Officer
(PHOTO OF PETER BLAKE)
Peter Blake
Chief Executive Officer
(PHOTO OF SCOTT FORKE)
Scott Forke
Vice President
Central Division, USA
(PHOTO OF CURT HINKELMAN)
Curt Hinkelman
Vice President
Great Lakes Division, USA
(PHOTO OF ROB MACKAY)
Rob Mackay
President --
United States, Asia
and Australia
(PHOTO OF NICK NICHOLSON)
Nick Nicholson
Senior Vice President
South Central USA,
Mexico and South
America Divisions
(PHOTO OF VIC POSPIECH)
Vic Pospiech
Vice President
Administration
& Human Resources
(PHOTO OF DENIS PREVOST)
Denis Prevost
Vice President
National Accounts
THE INTERNET IS MORE THAN JUST A CONVENIENCE FOR BIDDERS
The impact of the internet on our business goes beyond live bidding. Two
additional areas are worth noting:
Firstly, the internet has created transparency in the used equipment market. It
has all but eliminated the information disadvantage that some participants had
in years past. Equipment owners are now much better informed about equipment
values and availability thanks to the information freely and easily accessible
on the internet. This trend towards transparency continues to benefit Ritchie
Bros. Our business is very simple: we provide a marketplace for buyers and
sellers to transact business. As the market has become increasingly transparent,
transactions have naturally migrated to the most efficient marketplace, with
the result that more and more equipment owners have been choosing our auctions.
Secondly, the marketing power of the rbauction.com web site - with over 75,000
unique visitors each week during busy auction periods - has enabled our auctions
to increase in size significantly in the weeks leading up to the auction. We
still produce auction brochures about three weeks prior to each auction and mail
them out to potential buyers, but those brochures no longer contain a complete
list of auction items. As potential consignors take note of the depth and
selection of trucks and equipment already consigned, an increasing number are
adding their equipment to the auction so as not to miss out on the opportunity,
knowing that they will receive ample marketing exposure on the rbauction.com web
site. As a result, we are still busy consigning equipment after the brochure has
been printed and mailed. The auction brochure used to be the main marketing tool
for an auction; however, it now also serves as encouragement for prospective
bidders to visit the rbauction.com web site for a current list of consigned
items.
OUR LOCAL TEAMS ARE A KEY PART OF THE SUCCESS STORY
While we continue to put considerable energy into the development of industry
leading systems and processes, the real strength of our business is our team of
over 670 employees around the world. Included in this number are over 200 sales
representatives - our Territory and Regional Managers.
The members of our sales team, supported by the office and yard staff at our
auction sites, are critical to our success - they represent the
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
10
(PHOTO OF MIKE RITCHIE)
Mike Ritchie
Vice President
Western Canada Division
(PHOTO OF DEAN SIDDLE)
Dean Siddle
Vice President
Senior Valuation Analyst
(PHOTO OF STEVE SIMPSON)
Steve Simpson
Vice President
Southwest Division, USA
(PHOTO OF KEVIN TINK)
Kevin Tink
Vice President
Agricultural Division
(PHOTO OF CLAY TIPPETT)
Clay Tippett
Vice President Marketing,
Customer Relations
& Real Estate Division
(PHOTO OF SYLVAIN TOUCHETTE)
Sylvain Touchette
Vice President
Eastern Canada Division
(PHOTO OF GUYLAIN TURGEON)
Guylain Turgeon
Senior Vice President
Managing Director
European Operations
(PHOTO OF RANDY WALL)
Randy Wall
President --
Canada, Europe
and Middle East
(PHOTO OF ROB WHITSIT)
Rob Whitsit
Senior Vice President
Southeast and
Northeast Divisions, USA
(MAPS WITH DIRECTIONS)
frontline in our ongoing drive to develop and maintain strong relationships with
our customers. Many of our salespeople come to us with an equipment background,
having worked for an equipment or truck dealership, rental company or
contractor. They then apprentice with an experienced member of our team before
taking on their own territory. It can take 24 months or longer for a new
Territory Manager to reach the level of productivity that we expect. The ongoing
training and development of our team, combined with a commitment to recruiting
the right people, remains a critical growth strategy for Ritchie Bros.
Leading this team is a management group with extensive auction industry
experience. Dave Ritchie remains our Chairman; however, he handed the CEO title
to Peter Blake in 2004. Peter has been with the Company for 15 years. Working
closely with Peter are Randy Wall (17 years), our President for Canada, Europe
and the Middle East, and Rob Mackay (20 years), our President for the United
States, Asia and Australia. The depth of experience of these three, and of the
other members of our management team, helps us to maintain our unique corporate
culture.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
11
Unreserved
One thing that our buyers and sellers appreciate about our auctions is that they
are truly unreserved. At Ritchie Bros., "unreserved" means that THERE ARE NO
MINIMUM PRICES -- EVERYTHING SELLS TO THE HIGHEST BIDDER ON SALE DAY REGARDLESS
OF PRICE. WE DO NOT ALLOW CONSIGNORS OR THEIR AGENTS TO BUY-BACK, BID-IN OR IN
ANY WAY ARTIFICIALLY MANIPULATE THE PRICE OF ASSETS SOLD IN OUR AUCTIONS.
"Unreserved" is one of our most significant competitive advantages. We maintain
a steadfast commitment to this standard because we believe that auctions should
be open and transparent, and because our customers deserve to be treated fairly.
In our view, the only auction that lives up to this standard is a truly
unreserved auction.
(GRAPHIC)
Jacksonville, Florida USA
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
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(GRAPHIC)
Orlando, Florida USA
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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(GRAPHIC)
Orlando, Florida USA
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
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WHY BUYERS CHOOSE
RITCHIE BROS.
There are many places a buyer can go to acquire equipment, yet an increasing
number are choosing to buy equipment at our unreserved auctions.
These are some of the reasons why:
- Our auctions provide a LEVEL PLAYING FIELD and a transparent market. While
some auctioneers openly permit consignors to bid on their own items, or
will bid on the equipment themselves to artificially support prices, we
strictly prohibit consignors from bidding on their own equipment, either
directly or through agents. And Ritchie Bros. does not bid on any of the
equipment in our auctions. Our commitment to these principles ensures that
every Ritchie Bros. auction is an open and fair market. In addition,
bidders at our auctions compete on an equal basis, regardless of their
economic strength or negotiating power.
- Our DEDICATED SEARCH AND TITLE DEPARTMENTS work to resolve ownership issues
before the equipment is sold. We commit considerable resources to
identifying and coordinating the release of liens. If we can't deliver
clear title, the buyer receives a full refund.
- We provide a COMPREHENSIVE SELECTION. Our auctions could be compared to a
supermarket. We have everything an interested buyer might need, all at one
location. And all of the items sell on sale day. Once the auctioneer says
"SOLD" the negotiations are over. The buyer simply pays Ritchie Bros. and
takes possession of the equipment. An equipment buyer can inspect and
purchase in one day what might have taken weeks if the equipment were being
offered for sale by a number of vendors in various regions or by an
auctioneer that didn't provide a central marshalling point for equipment.
This efficient one-stop shopping approach addresses the needs of our
customers, most of whom are contractors who want to minimize the time spent
away from their job sites.
- The equipment is displayed and sold in CONVENIENT LOCATIONS. We make it
easy for bidders to inspect, test and compare the trucks and equipment in
our auctions by organizing our auction yards so that customers can compare
similar items and determine the condition and value of the equipment before
placing any bids. The market for used income-producing assets is very
different from the market for commodities and collectibles. As a result,
marshalling the equipment at our auction yards and allowing our customers
to "kick the tires" are very valuable features of a Ritchie Bros. auction.
In addition, most of our auction sites are located close to airports, major
highways and services such as hotels and restaurants, making it as easy as
possible for bidders from outside the region to participate.
THE LOCAL RELATIONSHIP
Our business is built on relationships, and our relationships with our local
customers are paramount. An equipment owner can't do business with us if he
doesn't know us; and he won't do business with us if he doesn't like and trust
us. By focusing on customer relationships and by maintaining our commitment to
doing what's right, we are able to earn the trust of more and more equipment
owners around the world. They are seeing first-hand that we have both global
reach and local knowledge.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
15
(GRAPHIC)
Orlando, Florida USA
- You can bid FROM YOUR OFFICE. Customers who are able to satisfy themselves
as to the condition and value of a particular piece of equipment, but can't
be at the auction site on sale day, can still participate in one of two
ways:
- Our internet bidding service, rbauctionBid-Live, allows qualified
bidders to hear the auctioneer, follow the bid and ask numbers and see
the item being sold - all live and in real-time over the internet.
Bidding is as easy as clicking the bid button, which continuously
updates to reflect the auctioneer's current asking price. We sold over
$270 million worth of trucks and equipment to internet buyers in 2005.
- Proxy bids from qualified bidders can be submitted in advance of the
auction via our web site, via fax or by calling the auction site
directly. Customers placing proxy bids specify the maximum price they
are willing to pay for the lots in which they are interested. Proxy
bids are introduced into the auction process just as they would have
been if the bidders had attended the auction in person. The auctioneer
ensures that proxy bidders never pay more than they would have if they
had been at the sale site to place their own bids on auction day.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
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(GRAPHIC)
MOERDIJK, THE NETHERLANDS
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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Local Supply Meets Global Demand
Using Texas as an example
(MAPS WITH DIRECTIONS)
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
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(MAPS WITH DIRECTIONS)
GLOBAL DISTRIBUTION OF TRUCKS AND EQUIPMENT FROM RITCHIE BROS. AUCTIONS
CONDUCTED IN TEXAS, USA IN 2005
Total Bidders: 21,546
Total Buyers: 6,884
Total Sales: $253,520,358
41.5% of the bidders were from outside the state of Texas and purchased 58.4% of
the equipment.
29.3% of the bidders were internet bidders and purchased 19.5% of the equipment.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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WHY SELLERS CHOOSE
RITCHIE BROS.
Consignors choose Ritchie Bros. because they realize that we can get them higher
net proceeds on the sale of their assets than they would be able to achieve by
selling through another channel.
In a market that is estimated to have in the range of $100 billion in
transactions annually, private sales between equipment owners and sales
involving equipment dealers and brokers still account for most of the business.
However, the equipment market has become more sophisticated in recent years, and
an increasing number of sellers are moving away from these less efficient
channels as they look for access to the global retail marketplace. They have
concluded that the traditional channels aren't able to get them the best
possible price and they have turned to Ritchie Bros. Auctioneers.
These are some of the main reasons:
- We deliver A GLOBAL MARKETPLACE THAT TRANSCENDS LOCAL MARKET CONDITIONS. We
typically mail approximately 50,000 full-color brochures for each of our
industrial auctions to a strategic selection of customers from our
proprietary database of over 400,000 potential bidders in more than 200
countries. Sellers feel confident knowing that an international crowd will
participate in the auction, allowing them to achieve fair market value for
their items regardless of local market conditions. And the wide range of
inventory at our auctions facilitates cross-industry buying. On average,
over half of our sales go to buyers from outside the region in which the
auction is held.
- We have a WORLDWIDE NETWORK OF FULL-SERVICE AUCTION FACILITIES. With
regularly scheduled auctions at 31 auction sites worldwide, plus numerous
off-site sales, sellers are able to put their equipment in Ritchie Bros.
auctions around the globe. In addition, consignors operating in more than
one market enjoy the convenience of dealing with one company yet still
being able to bring their items to any one of our conveniently located
auction sites when it's time to sell.
- We structure the AUCTION CONTRACT to suit the seller's needs. Whether they
have a few items or an entire fleet, we are flexible and will work with the
seller to tailor an agreement that meets their specific requirements.
- We provide INTERNATIONAL MARKETING EXPERTISE. With every auction, we
produce full-color auction brochures, web site listings and trade journal
advertising. We make sure that potential buyers are aware of the sale.
- We ENHANCE THE RESALE VALUE of our consignors' equipment. We offer
recommendations to our customers - based on over 40 years of experience -
to help them get the best dollar on auction day.
CASE STUDY: CitiCapital is among the top commercial finance companies in the
world and is a member of Citigroup, the global financial services company. They
recently developed a custom technology solution being deployed at our North
American auction sites that makes it easy for buyers to finance their auction
purchases. In addition, following an extensive analysis of the returns they were
achieving on the sale of trucks and equipment through various channels,
CitiCapital entered into an exclusive arrangement with us in 2004 under which
they outsourced the remarketing of virtually all of their end of lease and
repossessed transportation and construction assets in North America to Ritchie
Bros.
"CitiCapital now enjoys consistency in process, unparalleled marketing exposure,
and strong collateral expertise thanks to our relationship with Ritchie Bros. --
all of which have contributed to strong financial performance in the remarketing
of our assets." -- MR. JEREMY THOMASON, Vice President, CitiCapital
(CITI CAPITAL(SM) LOGO)
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
20
Selected equipment sales from the complete dipersal for KENDAL PIPELINE AND
OILFIELD
"After 26 years in the oilfield industry, I decided to retire, and we chose
Ritchie Bros. for our complete dispersal. They worked with us three months prior
to the sale, took care of us during the sale, and continued to work with us
after the sale. All along, they made sure they were always answering my
questions and dealing with my concerns. The service they gave me was absolutely
phenomenal and in the end, it was the largest Canadian auction conducted by
Ritchie Bros. in company history. Buyers traveled to our sale from all over the
United States and even Australia. The Ritchie Bros. choice was the right
choice."
(MAPS WITH DIRECTIONS)
WHAT DRIVES THE SUPPLY OF EQUIPMENT TO OUR AUCTIONS?
Analysts estimate that there is approximately $1 trillion worth of used
equipment of the type we sell in circulation worldwide, and that approximately
$100 billion of that changes hands each year. Because the opportunity available
to us is so large, we are able to grow our business in good times and in bad,
regardless of what is happening in the broader economy.
Economic uncertainty typically fuels the supply of used equipment. So do fleet
realignments, financial pressure, mergers and acquisitions, inventory
reductions, lease returns, project completions and even retirements. As long as
a few of these factors are at work somewhere in the world, Ritchie Bros. has
customers to call on. Said another way, any economic, political or other factor
that leads to a desire or need for people to buy or sell equipment creates work
for Ritchie Bros.
Because the used equipment market is so large and because there are so many
different drivers influencing owners' decisions to sell, our business volume and
our ability to grow are not directly tied to economic cycles.
This includes making available the services of our environmentally- certified
refurbishing facilities. Our experience has shown us that spending a little
money to refurbish an item often enables us to achieve higher returns for our
equipment sellers. In the end, both buyer and seller are happy.
- We are a RELIABLE BUSINESS PARTNER. Ritchie Bros. is listed on both the New
York Stock Exchange and the Toronto Stock Exchange, has a strong balance
sheet and a history of over 40 years in the industrial auction business.
Our customers are always treated fairly and they know we have the financial
strength to live up to our commitments.
- We make the process HASSLEFREE. We take care of all the details, including
any cleaning, refurbishing or painting required to prepare the equipment
for auction. We store the equipment before the sale and until it is removed
by the new owner. We also handle questions from interested bidders, we take
care of the marketing and title searches, and set up the auction yard so
bidders can inspect, test and compare equipment. We handle all the
collections, coordinate necessary sales taxes and pay out the net proceeds.
We take care of the entire auction process so that our consignors can
concentrate on their business.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
21
Evolution of an auction site
Our business in new geographic markets tends to evolve in a consistent manner,
regardless of the location. Whether we are taking our first steps into New
Delhi, Beijing, Sacramento, or Chicago (pictured here) we typically follow the
same basic pattern:
1. Get to know customers from a new region when they travel to our auctions.
2. Send a Territory Manager into the new region to assess the market
opportunity.
3. Open a sales office in the new region to introduce ourselves to potential
customers.
4. Help consignors in the new region to sell equipment at our closest auction
sites.
5. Conduct an auction at a temporary location in the new region.
6. After a number of successful sales have been held in the region, open a
regional auction unit, often on leased land with modest auction and
administrative facilities and minimal capital invested.
7. After a high rate of success and many auction sales at a regional auction
unit, establish a permanent auction site - our term for a full-service
auction facility on land owned by Ritchie Bros.
(GRAPHIC)
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
22
(GRAPHIC)
Chicago, Illinois USA
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
23
2005:
A RECORD BREAKING YEAR
Our auction yards around the world all contributed to making 2005 a successful
year for Ritchie Bros. and our customers. For the first time ever, our Company
generated gross auction sales of over $2 billion.
It was a record-breaking year in many different ways for our Company. Our
European team held their 100th auction. We held our highest grossing Canadian
auction to-date (CAD$47 million) in Grande Prairie, Alberta in November. We also
held our largest ever auction week in North America during December 12-16, with
auctions that grossed a total of US$111 million.
This past year we also held our 500th rbauctionBid-Live event. Internet bidders
now account for 20% or more of the total registered bidders that attend our
auctions. Over 38,000 customers from 137 countries are now approved to bid using
the rbauctionBid-Live service.
One of the most exciting records broken in 2005 was the largest grossing auction
ever held by Ritchie Bros. Auctioneers. At our Orlando, Florida auction in
February 2005, more than 4,600 interested bidders from over 62 countries and all
50 American states competed for nearly 3,600 equipment items and trucks. Gross
auction sales exceeded US$79 million.
Thanks to strong support from local consignors, many of our other auction sites
also held their largest ever auctions in 2005: Phoenix, Arizona; Sacramento,
California; Denver, Colorado; Atlanta, Georgia; Chicago, Illinois; North East,
Maryland; Edmonton, Alberta; Grande Prairie, Alberta; Montreal, Quebec;
Vancouver, British Columbia; and Melbourne, Australia. These records are a
direct result of the momentum generated by our unreserved auctions. They are
also evidence of the increasing average size of our auctions, a trend that has
been particularly evident over the past three years.
On top of the tremendous growth in our auction business, we also grew
geographically in 2005. We opened our newest auction facility in Sacramento,
California and held our largest auction ever in the western United States at
that new facility in December. We also started constructing a new permanent
auction site in Nashville, Tennessee, which will be hosting its first auction in
March 2006. In addition, we opened a regional auction unit in Livorno, Italy,
further expanding our network of European auction sites.
Our Average Industrial Auction
2005 2004 2003 2002 2001 2000
------ ------ ------ ------ ------ ------
GROSS AUCTION SALES $ 13.2 $ 11.9 $ 10.8 $ 9.8 $ 10.0 $ 10.2
(IN MILLIONS OF DOLLARS)
REGISTERED BIDDERS 1,398 1,378 1,266 1,106 1,080 1,010
LOTS 1,331 1,215 1,161 1,070 1,061 1,051
CONSIGNORS 182 169 164 148 149 150
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
24
(GRAPHIC)
Chicago, Illinois USA
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
25
2006 AND BEYOND
Our business continues to grow and develop and we expect further changes and
developments in the coming years.
We will continue to introduce our auctions to new regions and to pursue
different asset categories. Although we will continue to grow and expand, we
will always remain focused on customer service and we will continue to do what
we do best - using unreserved auctions to create a global marketplace for our
customers.
The growing number of consignors and bidders choosing Ritchie Bros. points to
the increasing popularity of our auctions. While we have an extensive customer
base, introducing our services to farmers and truck and equipment owners who
don't yet know us, and to industries and regions where we are only scratching
the surface, remains a critical growth strategy for Ritchie Bros. At the same
time, we must remain flexible and responsive to the needs of each customer. We
understand that our customers choose Ritchie Bros. not because we are the
largest industrial auctioneer in the world, but because we offer the best local
service. We meet their local needs with our global solutions.
We intend to concentrate on the following areas in the coming years:
EXPANDING INTO NEW GEOGRAPHIC MARKETS
Over the next several years, we expect that most of our sales growth will come
from the United States and Europe and we plan to concentrate our investments and
expansion efforts in these markets. However, we have recently been working with
customers and opening offices in markets such as China and India. As these and
other new markets evolve, we expect to increase our activity levels, moving
beyond the pioneering stage and eventually holding local auctions. But for now,
we do not need to count on these emerging markets to fuel our growth.
EXPANDING INTO RELATED ASSET CATEGORIES
We will continue to look for growth both within and outside our traditional
markets -- wherever we can see opportunities to create value for customers. In
January 2006, we joined forces with Dennis Biliske Auctioneers, an agricultural
auction company based in North Dakota. Integrating the Biliske operation into
ours will enable us to develop our business in the U.S. agricultural equipment
and land markets and will quickly allow us to bring our service to new customers
in North Dakota, Minnesota and surrounding regions. We held our first Ritchie
Bros. unreserved auction at the Buxton, North Dakota facility in February 2006
and plan to hold many more throughout the year. That first sale signaled the
launch of our expansion into the United States agricultural market. During 2006,
we also expect to continue expanding our presence in the
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
26
(GRAPHIC)
Chicago, Illinois USA
Vancouver, British Columbia Canada
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
27
(GRAPHIC)
Moerdijk, The Netherlands Chicago, Illinois USA
over-the-road truck and trailer market and the marine sector. In addition, we
enjoyed some early success selling industrial real estate in Canada and the
United States in 2005, and we have now dedicated a team to this sector with the
objective of increasing the sales of real estate at our auctions in the coming
years.
EXPANDING OUR INTERNATIONAL NETWORK OF AUCTION SITES
Since 1997 we have made significant investments in our network of auction sites
- adding new sites and upgrading several existing ones. In 2005, we opened our
Sacramento, California auction facility and commenced construction in Nashville,
Tennessee, where we will be hosting the first auction in our new permanent
auction site in March 2006.
Also during 2006, we will be constructing sites in Denver, Colorado and Houston,
Texas to replace our existing sites in those markets, both of which are at
capacity. We intend to add or expand permanent auction sites and regional
auction units over the coming years as suitable opportunities are identified,
generally at the average rate of two per year, with a near-term focus on the
United States and Europe. All of our new sites include environmentally-certified
refurbishing facilities so we can help our consignors get their equipment ready
for the auction.
BUILDING OUR CUSTOMER SERVICE TEAM
Our future growth depends on the quality of our customer relationships and our
ability to deliver superior customer service in local markets around the world.
As a result, it is critical that we continue to recruit, train and develop the
best people. The Ritchie Bros. team has grown from 500 to over 670 full-time
employees during the past five years as we have expanded into new markets around
the world, and we expect similar growth as we move forward. Maintaining our
unique corporate culture as we grow is a very high priority, so we will continue
to add employees at a measured pace, knowing that a controlled growth rate will
allow us to maintain our high level of customer service.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
28
(GRAPHIC)
Los Angeles, California USA
Risk Management
Three-quarters of our business is relatively risk-free because it is conducted
on a straight commission basis. We were at-risk on approximately one-quarter of
our business in 2005, which is in line with our typical business mix. In these
situations we underwrote the contracts, by either providing a guarantee of
minimum sale proceeds or buying the assets outright.
We mitigate our risk when entering into underwritten contracts by building a
risk premium into our commission rate and by following a rigorous appraisal
process that draws on our extensive field experience and our proprietary
database of equipment sales prices. We also use our knowledge of major equipment
deals around the world to form a view of the pipeline of equipment coming to
market and to anticipate any potential supply/demand imbalances. We are the
largest participant in the global used truck and equipment markets, so we have a
unique view of what's happening in these markets. Further mitigating the risk is
our limited exposure to changes in equipment values - the time from signing a
contract to the date of the auction is typically only 30 to 45 days, and truck
and equipment prices tend not to be as volatile as prices in stock and commodity
markets.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
29
(GRAPHIC)
Singapore
Improving our business processes
(RB M07 LOGO)
OUR FOUNDATION FOR GROWTH
We are very proud of the quality of our auctions and of the sophisticated
marketing and information technology operations that we have developed. Yet we
are continually refining the way we do things and are always looking for better
ways to help our customers. In 2004, we embarked on a study of all our business
operations with the goal of designing and implementing more efficient,
consistent and scalable processes that will accommodate the growth we are
expecting in the years ahead. We labeled the project M07, short for Mission
2007, and our goal is to complete the main components of this initiative by the
end of 2007. The first large-scale M07 initiative is the implementation of an
Oracle enterprise resource planning system. We are implementing Oracle in stages
starting in 2006. Once that foundational step has been taken, we will be
deploying several custom-built applications (labeled rbOS, the Ritchie Bros.
Operations System) that will handle the more unique aspects of our business. In
addition, throughout 2006, 2007 and future years, we will be launching
non-technology initiatives to further improve the efficiency, consistency and
scalability of our operations. Examples include new training programs, new
incentive compensation initiatives, new auction site policies and procedures,
new reporting structures and more. All of these M07 initiatives are designed to
position Ritchie Bros. for future growth.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
30
(GRAPHIC)
San Manuel, Arizona USA
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
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THE RITCHIE BROS. AUCTION PROCESS
STEP 1 GETTING TO KNOW THE OWNER AND HIS EQUIPMENT
The auction process begins when an equipment owner meets with one of our
Territory Managers. We get to know the owner's needs and, if necessary, we
appraise his equipment. The people participating in the appraisal review
photographs of and detailed condition notes about the equipment; a typical
appraisal team includes people from the local area as well as appraisers
working out of our head office and, if necessary, people with specialized
expertise. After their individual appraisals are complete, members of the
appraisal team compare results and conclude on a final appraised value for
the fleet.
STEP 2 DRAFTING THE AUCTION CONTRACT
Next, we meet with the owner and work out the details of the auction
contract. Straight commission contracts are the most common. Depending on
the circumstances, we may offer the consignor alternatives such as a
guarantee of minimum sales proceeds or an outright purchase contract. In
some cases, we offer cash advances and other options. We draft a contract
tailored to the consignor's individual needs and requirements.
STEP 3 GETTING THE EQUIPMENT READY FOR THE AUCTION
Once the equipment arrives at the auction site, we coordinate any cleaning,
refurbishing, repair work or painting that the consignor requires in order
to get the equipment ready for auction. When we see an opportunity to add
value in excess of the costs of refurbishing, we'll recommend doing the
work.
STEP 4 MARKETING THE EQUIPMENT TO THE WORLD
We market the equipment by sending out an average of 50,000 full-color
auction brochures to a targeted selection of customers from our extensive
database. In addition, every piece of equipment is posted on our high
traffic web site at rbauction.com. Our auctions are also advertised through
trade journals and general media, and we promote them at all intervening
Ritchie Bros. auctions, ensuring that the equipment is exposed to the
widest possible audience of potential buyers.
STEP 5 SEARCHING THE EQUIPMENT FOR LIENS
To ensure that our customers can bid with confidence, we guarantee to give
the buyer a full refund if we aren't able to deliver clear title. Our
search department identifies and arranges for the release of all liens and
encumbrances so buyers are assured of acquiring good and marketable title
to items purchased at our auctions.
STEP 6 SETTING UP THE AUCTION YARD
The equipment is sorted and displayed in logical groupings so prospective
buyers can easily inspect, test and compare similar pieces. We have
knowledgeable staff on hand to answer bidders' questions. We also arrange
for caterers, finance company representatives, customs brokers,
transportation companies and other service providers to be present on the
site.
STEP 7 AUCTION DAY
On auction day, our auctioneers, ringmen, yard staff, internet services
team and customer service staff conduct what we believe are the best-run
auctions in the world. Our auctions are efficient, exciting and completely
unreserved.
STEP 8 TAKING CARE OF BUSINESS
After the auction is finished, we collect the proceeds from the buyers,
including all relevant sales taxes (which we administer and remit to proper
authorities), coordinate the release of the equipment to its new owners and
disburse the proceeds, along with detailed settlement statements, to the
consignors.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
32
Financial Information
PAGE
----
MANAGEMENT'S DISCUSSION AND ANALYSIS 33
INDEPENDENT AUDITORS' REPORT 44
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations 44
Consolidated Balance Sheets 45
Consolidated Statements of Shareholders' Equity 45
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 47
Management's 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
year ended December 31, 2005 compared to the year ended December 31, 2004. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this document, and with the
disclosures below regarding forward-looking statements and risk factors. The
date of this discussion is as of February 17, 2006. 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 are
expressed in thousands of dollars, except per share amounts.
Ritchie Bros. is the world's largest auctioneer of industrial equipment. Our
world headquarters are located in Richmond, British Columbia, Canada, and at the
date of this discussion, we operated from more than 110 locations, including 31
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 intend to use unreserved
auctions to create and deliver a global marketplace.
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 used trucks and equipment, which
is driven by the ongoing production of new trucks and equipment. Analysts
estimate that approximately $100 billion of the type of equipment we sell
changes hands each year; our share of this market is roughly 2%.
In 2005, more than 80% of the buyers at our auctions were end users of equipment
(retail buyers), such as contractors, with the remainder being primarily truck
and equipment dealers and brokers (wholesale buyers). This is roughly consistent
with the relative proportions in recent periods. 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.
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 or reserve prices on
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 own 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 or participate online 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 equipment sold at any particular auction leaves the region of the sale.
We believe that our ability to consistently draw significant 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 year ended December 31, 2005, we had nearly
214,000 bidder registrations at our industrial auctions, compared to
approximately 202,000 in 2004. We received nearly 28,000 industrial asset
consignments in 2005, compared to almost 25,000 in 2004. A consignment is
typically comprised of multiple lots.
Our principle goals are to grow our earnings per share at a manageable pace and
to maintain the Ritchie Bros. culture. One of our primary strategies for
increasing our earnings is 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.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
33
We also intend to continue adding to our network of auction sites, as well as
upgrading existing auction sites. This part of our strategy is discussed in more
detail below.
Attracting and retaining the best people is another aspect of our strategy, and
this is an important part of our goal of maintaining our corporate culture. In
addition, we are continuing to develop our training programs and to implement
tools to increase the productivity of our sales force and to enhance the service
we provide to our customers.
In 2004 we launched a 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. We are rethinking all of our
business processes and systems, and this initiative has become an important
component of our growth strategy. We expect that improvements we anticipate as a
result of this initiative will provide a platform for growth well into the
future, and will allow us to increase our earnings without an equivalent
increase in our headcount or administrative expenses. We started implementing
new systems and processes in 2005, including an Oracle enterprise resource
planning, or ERP, system. The first stage of the Oracle implementation is
expected to be complete in 2006, with the remaining stages to be substantially
complete in 2007.
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 2005
participated over the internet.
During 2005, we conducted 153 unreserved industrial auctions at locations in
North America, Europe, the Middle East, Australia and Asia. We also held 99
unreserved agricultural auctions during the year, primarily in Canada. Although
our auctions vary in size, the average industrial auction in 2005 had gross
auction sales of $13.2 million, compared to approximately $12.0 million in 2004.
Approximately 57% of our auction revenues was earned from operations in the
United States (2004 - 57%), 23% was earned in Canada (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) (2004 -
23%). We had 675 full-time employees at December 31, 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
February 17, 2006 we had 34,437,400 common shares issued and outstanding and
stock options outstanding to purchase a total of 834,089 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 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 sold on an unreserved basis in the same manner as other
consignments, 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 outstanding for less than 45 days in most cases.
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 $35 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 consignor's 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 in the table below.
Quarterly Auction Revenue Rate -- 5 Year History
[LINE GRAPH]
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
34
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 2005 and we believe that our sustainable average auction revenue rate
continues to 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. The variability
can be more pronounced in the first and third calendar quarters because of the
seasonality of our business.
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 increase 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 periods.
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.
RECENT DEVELOPMENTS
In January 2006 we completed the acquisition of the business and assets of
Dennis Biliske Auctioneers, a North Dakota-based auctioneer of agricultural
equipment and real estate. The acquisition is designed to expand our
agricultural operations and establish our presence in the agricultural equipment
and land markets in the United States. Included in the acquisition of the
business was a 25-acre permanent agricultural auction facility in Buxton, North
Dakota. Dennis Biliske, the founder and President of the acquired business, will
lead our agricultural auction operations in North Dakota and surrounding states.
We believe that the addition of the Biliske business will provide an initial
platform for us to increase our agricultural equipment and real estate sales in
the large and very fragmented U.S. market. Despite the operational benefits of
the transaction, the financial terms are not considered to be material relative
to our consolidated operations.
DEVELOPMENTS IN 2005
Highlights of the year ended December 31, 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; Sacramento, California; Phoenix, Arizona; Atlanta, Georgia; North
East, Maryland; Vancouver, B.C.; Edmonton, Alberta; Montreal, Quebec; and
Melbourne, Australia. We also held our largest-ever Canadian auction, at
our permanent auction site in Grande Prairie, Alberta.
- We held our 100th European industrial auction.
- We held our first auction at our new permanent auction site in Sacramento,
California.
- We commenced construction on a new permanent auction site in Nashville,
Tennessee.
- We purchased approximately 125 acres of land in Houston, Texas for
consideration of $8.5 million and commenced construction on 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 $0.4 million, and we intend to construct a modest auction
facility intended primarily for agricultural equipment auctions.
- We entered into a three-year lease for a property in Livorno, Italy, which
became a new regional auction unit.
- 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 pre-tax gain of
$5.5 million, and in Prince George, British Columbia, for proceeds of $1.3
million and a pre-tax gain of $0.9 million.
- We appointed our first sales representatives in Poland, Finland and
Switzerland.
- Our Board of Directors appointed Randy J. Wall to the position of President
- Canada, Europe and Middle East. Mr. Wall was previously President and
Chief Operating Officer. Robert K. Mackay was appointed to the position of
President - United States, Asia and Australia, having previously been
Executive Vice-President.
- Our Board of Directors appointed David D. Nicholson to the position of
Senior Vice-President, South Central, Mexico 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements in conformity with Canadian
GAAP, we must make decisions that impact the reported amounts and related
disclosures. Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. In reaching such decisions, we apply judgments based on our
understanding and analysis of the relevant circumstances and historical
experience. On an ongoing basis, we evaluate these judgments and estimates,
including consideration of uncertainties relating to revenue recognition
criteria, recoverability of capital assets, goodwill and future income tax
assets, and the assessment of possible contingent assets or liabilities that
should be recognized or disclosed in our consolidated financial statements.
Actual amounts could differ materially from those estimated by us at the time
our consolidated financial statements are prepared.
The following discussion of critical accounting policies and estimates is
intended to supplement the significant accounting policies presented as note 1
to our consolidated financial statements. Note 1 summarizes the accounting
policies and methods used in the preparation of our consolidated financial
statements. The policies and the estimates discussed below are included here
because they require more significant judgments and estimates in the preparation
and presentation of our consolidated financial statements than other policies
and estimates.
ACCOUNTING FOR INCOME TAXES
We record income taxes relating to our business in each of the jurisdictions in
which we operate. We estimate our actual current tax exposure and the temporary
differences resulting from differing treatment of items for tax and book
accounting purposes. These differences result in future income tax assets and
liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our future income tax assets will be recovered
from future taxable income. If recovery of these future tax assets is considered
unlikely, we must establish a valuation allowance. To the extent we either
establish or increase a valuation allowance in a period, we must include an
expense within the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our measurement of future tax assets and liabilities, and any
valuation allowance recorded against our net future tax assets. If actual
results differ from these estimates or we adjust these estimates in future
periods, we may need to establish a valuation allowance that could materially
impact the presentation of our financial position and results of operations.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
35
VALUATION OF GOODWILL
We assess the possible impairment of goodwill in accordance with standards
issued by the Canadian Institute of Chartered Accountants in Canada (known as
the CICA) and the Financial Accounting Standards Board in the United States. The
standards stipulate that reporting entities test the carrying value of goodwill
for impairment annually at the reporting unit level using a two-step impairment
test; if events or changes in circumstances indicate that the asset might be
impaired, the test is conducted more frequently.
In the first step of the impairment test, the net book value of each reporting
unit is compared with its fair value. We operate as a single reporting unit,
which is the consolidated public company. As a result, we are able to refer to
the stock market for a third party indicator of our company's fair value. As
long as the fair value of the reporting unit exceeds its net book value,
goodwill is considered not to be impaired and the subsequent step of the
impairment test is unnecessary. Changes in the market value of our common shares
may impact our assessment as to whether goodwill has been impaired. These
changes may result from changes in our business plans or other factors,
including those that are outside our control. We perform the goodwill test each
year as at September 30, or more frequently if events or changes in
circumstances indicate that goodwill might be impaired. We performed the test as
at September 30, 2005 and determined that no impairment had occurred.
RECENT ACCOUNTING PRONOUNCEMENTS
During 2005, the Canadian Institute of Chartered Accountants (the CICA) issued
new accounting standards for financial instruments comprising Section 3855,
"Financial Instruments - Recognition and Measurement", Section 3865, "Hedges",
and Section 1530, "Comprehensive Income". There are also a number of significant
consequential amendments to other Sections. Financial instruments include
accounts receivable and payable, loans, investments and derivative contracts.
Application of Section 3865 is optional unless an entity chooses to apply hedge
accounting. These standards are effective January 2007. We have not completed
our evaluation of the impact on our consolidated financial statements of the
implementation of these standards.
DISCLOSURE CONTROLS AND PROCEDURES
Based on current securities legislation in Canada, our Chief Executive Officer
and Chief Financial Officer are required to certify that they have assessed the
effectiveness of our disclosure controls and procedures as at December 31, 2005.
We performed an evaluation under the supervision and with participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as at December 31, 2005. Based on that
evaluation, we concluded that our disclosure controls and procedures were
effective as of December 31, 2005.
OVERALL PERFORMANCE
For the year ended December 31, 2005 we recorded auction revenues of $212.6
million and net earnings of $53.6 million, or $1.54 per diluted common share.
Net earnings for the year would have been $49.5 million, or $1.43 per diluted
share, had 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 been
excluded. We have highlighted these gains because we do not believe that sales
of properties are part of our normal recurring operations. For the year ended
December 31, 2004, we had auction revenues of $182.3 million and net earnings of
$34.9 million, or $1.01 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 expenses. We ended the year with working capital of $84.1
million, compared to $36.9 million at the end of 2004.
SELECTED ANNUAL INFORMATION
The following selected consolidated financial information as at December 31,
2005, 2004 and 2003 and for each of the years in the three-year period ended
December 31, 2005 has been derived from our audited consolidated financial
statements. This data should be read together with those financial statements
and the risk factors described below.
Our consolidated financial statements are prepared in United States dollars in
accordance with Canadian GAAP. These principles conform in all material respects
with U.S. GAAP, except as disclosed in note 9 of our consolidated financial
statements for the year ended December 31, 2005. All dollar amounts in the
following table are in thousands of United States dollars, except per share
data.
Year Ended December 31, 2005 2004 2003
----------------------- --------- -------- --------
STATEMENT OF OPERATIONS DATA:
Auction revenues (1) $ 212,633 $182,257 $161,542
Direct expenses (27,035) (23,472) (22,099)
--------- -------- --------
185,598 158,785 139,443
Operating expenses (2) (107,842) (98,375) (83,038)
Other income (expenses) (3) 4,758 (2,164) (3,712)
--------- -------- --------
Earnings before income taxes 82,514 58,246 52,693
Income taxes (4) 28,934 23,347 16,099
--------- -------- --------
Net earnings $ 53,580 $ 34,899 $ 36,594
========= ======== ========
Net earnings per share -- basic $ 1.56 $ 1.02 $ 1.08
Net earnings per share -- diluted 1.54 1.01 1.07
Cash dividends declared per share (5) $ 0.58 $ 0.37 $ 0.15
BALANCE SHEET DATA (PERIOD END):
Working capital (including cash) $ 84,108 $ 36,871 $ 35,700
Capital assets 250,645 226,624 210,416
Total assets 500,896 443,100 413,362
Long-term liabilities 50,364 19,405 34,613
(1) Auction revenues are comprised of commissions earned from consignors
through straight commission and guarantee contracts, the net profit on the
sale of inventory items, fees charged to buyers and incidental interest
income.
(2) Operating expenses include depreciation and amortization and general and
administrative expenses.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
36
(3) Other income and expenses include total gains recorded on the sale of
excess properties in Texas and British Columbia of $6.4 million ($4.1
million after tax) which we do not consider part of our recurring
operations.
(4) Income taxes in 2004 include taxes of $2.1 million recorded in connection
with realized foreign exchange gains at the subsidiary level relating to
certain term debt that came due in 2004. We do not consider these foreign
exchange gains part of our recurring operations.
(5) In addition to the cash dividends declared and paid in 2005, we declared a
cash dividend of $0.18 per common share on January 27, 2006 relating to the
quarter ended December 31, 2005, which is not included in this amount.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
We conduct operations around the world in a number of different currencies, but
our reporting currency is the United States dollar. In 2005, approximately 40%
of our revenues and approximately 45% of our operating costs were denominated in
currencies other than the United States dollar, which is roughly consistent with
the relative proportions in recent periods.
UNITED STATES DOLLAR EXCHANGE RATE COMPARISON
Years ended December 31, 2005 % Change 2004 % Change 2003
------------------------ ------- -------- ------- -------- -------
Value of one U.S. dollar:
Year-end exchange rate:
Canadian dollar $1.1628 -3.1% $1.1995 -7.5% $1.2965
Euro E0.8446 14.6% E0.7371 -7.1% E0.7938
Average exchange rate:
Canadian dollar $1.2114 -6.9% $1.3013 -7.1% $1.4010
Euro E0.8049 -- E0.8048 -9.1% E0.8853
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 the
Canadian dollar 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 the currency fluctuation on our annual
net earnings essentially neutral.
AUCTION REVENUES
Years ended December 31, 2005 2004 % Change
------------------------ ---------- ---------- --------
Auction revenues - United States (1) $ 121,253 $ 104,618 16%
Auction revenues - Canada (1) 48,824 36,258 35%
Auction revenues - Europe (1) 26,609 26,988 -1%
Auction revenues - Other (1) 15,947 14,393 11%
---------- ---------- ---
Total auction revenues $ 212,633 $ 182,257 17%
========== ========== ===
Gross auction sales $2,092,841 $1,789,402 17%
Auction revenue rate 10.16% 10.19%
(1) Information by geographic segment is based on auction location.
The increase in auction revenues in 2005 was primarily attributable to higher
gross auction sales in the United States and Canada compared to the year ended
December 31, 2004. Our agricultural division generated gross auction sales of
$76.4 million in 2005 compared to $45.2 million in 2004. Our guarantee and
inventory contracts represented 24% of our total gross auction sales in 2005,
which is in a similar range to the levels experienced in prior years (23% in
2004 and 26% in 2003).
Our auction revenue rate was 10.16% for 2005, which was marginally higher than
our expected range of 9.50% to 10.00%, and relatively consistent with the rate
we achieved in 2004. We continue to believe that our sustainable average auction
revenue rate will be in the range of 9.50% to 10.00%. Our past experience has
shown that the auction revenue rate is difficult to estimate precisely. As a
result, our actual auction revenue rate in future periods may be above or below
our expected range.
Our auction revenues and our net earnings are influenced to a great extent by
small changes in our auction revenue rate. For example, a 10 basis point (0.1%)
increase or decrease in our auction revenue rate would have impacted auction
revenues by approximately $2.1 million in 2005, of which approximately $1.4
million or $0.04 per 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 future prospects.
DIRECT EXPENSES
Years ended December 31, 2005 2004 % Change
------------------------ ------- ------- --------
Direct expenses $27,035 $23,472 15%
Direct expenses as a percentage of
gross auction sales 1.29% 1.31%
Direct expenses are the costs we incur when we conduct an auction. Direct
expenses include the costs of hiring temporary personnel to work at 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.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
37
Our direct expense rate, which represents direct expenses as a percentage of
gross auction sales, fluctuates from period to period based on the size and
location of the auctions we hold during a particular period. The direct expense
rate generally decreases as the average size of our auctions increases. In
addition, we usually experience lower direct expense rates for auctions held at
permanent auction sites compared to auctions held at offsite locations, mainly
as a result of the economies of scale and other efficiencies that we typically
experience at permanent auction sites.
Our direct expense rate in 2005 was roughly consistent with the rate that we
experienced in 2004, and is in line with our long-term expectation of a direct
expense rate of approximately 1.30%.
DEPRECIATION AND AMORTIZATION EXPENSE
Years ended December 31, 2005 2004 % Change
------------------------ ------- ------- --------
Depreciation
and amortization expense $13,172 $12,708 4%
Depreciation is calculated on either a straight line or a declining balance
basis on capital assets deployed in our business, including buildings, computer
hardware and software, automobiles and yard equipment. Depreciation and
amortization in 2005 was roughly consistent with our 2004 experience. Our
depreciation in future periods is expected to increase in line with our on-going
capital expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES
Years ended December 31, 2005 2004 % Change
------------------------ ------- ------- --------
General and administrative expenses $94,670 $85,667 10%
G&A as a percentage
of gross auction sales 4.52% 4.79%
The major categories of general and administrative expenses, or G&A, in 2005
were as follows:
- labour (salaries, wages, bonuses and benefits);
- non-auction related travel;
- telecommunications and utilities;
- information technology;
- repairs and maintenance;
- professional fees;
- insurance; and
- leases and rentals.
Although the absolute dollar value of our G&A increased in 2005, mainly as a
result of a number of factors, including the currency fluctuation and higher
costs associated with the significant growth of our business in recent periods,
G&A as a percentage of gross auction sales in 2005 was less than in 2004. The
improvement in this ratio is important because it demonstrates the leverage in
our business - our gross auction sales can increase without an equivalent
increase in operating expenses. During 2005 we experienced growth in many
aspects of our business, including headcount, facilities, and infrastructure,
and this growth resulted in increases in related G&A categories.
Although we expect G&A as a percentage of gross auction sales to decrease in the
future, as a result of the leverage inherent in our business model, our G&A will
continue to be affected by the expansion of our infrastructure and workforce
necessary to support our growth objectives, as well as other factors including
fluctuations in foreign exchange rates. In particular, we anticipate that our
G&A will increase in 2006 as a result of new compensation related expenses that
will be incurred in connection with changes to our compensation programs for our
employees and also because of new expenditures relating to certain M07
initiatives. We estimate that the combined incremental effect on G&A of both of
these new expenditures will be in the range of $3 million to $4 million for the
year.
INTEREST EXPENSE
Years ended December 31, 2005 2004 % Change
------------------------ ------ ------ --------
Interest expense $2,224 $3,217 (31%)
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 2005 compared to the prior year because of lower average interest
rates applicable to our debt.
GAIN ON DISPOSITION OF CAPITAL ASSETS
Years ended December 31, 2005 2004 % Change
------------------------ ------ ---- --------
Gain on disposition of capital assets $6,565 $229 --
The gain on disposition of capital assets in 2005 includes a $5.5 million gain
recorded on the sale of excess land in Forth 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. No such
gains were recorded in 2004.
INCOME TAXES
Years ended December 31, 2005 2004 % Change
------------------------ ------- ------- --------
Income taxes $28,934 $23,347 24%
Effective income tax rate 35.1% 40.1%
Income taxes have been calculated using the tax rates in effect in each of the
tax jurisdictions in which we earn our income. The effective tax rate for the
year ended December 31, 2005 was lower than the rate we experienced in 2004 as a
result of differences in earnings within the various tax jurisdictions in which
we earn our income. In addition, in 2004 we realized foreign exchange gains at
the subsidiary level on certain term debt that came due during the year and that
resulted in an increase of $2.1 million in our income tax provision for 2004.
Absent this component, our income tax rate for 2004 would have been 36.5%.
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
Years ended December 31, 2005 2004 % Change
------------------------ ------- ------- --------
Net earnings before income taxes $82,514 $58,246 42%
Net earnings 53,580 34,899 54%
Net earnings per share - basic 1.56 1.02 53%
Net earnings per share - diluted 1.54 1.01 53%
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 recurring operations, our net earnings for 2005 would
have been $49.5 million, or $1.43 per diluted share. Earnings increased in 2005
compared to 2004 mainly as a result of higher gross auction sales, partially
offset by increased G&A and income tax expenses.
SUMMARY OF FOURTH QUARTER RESULTS
We earned auction revenues of $59.9 million and net earnings of $14.2 million,
or $0.41 per basic and diluted share, during the fourth quarter of 2005, which
compares to auction revenues of $57.1 million and net earnings of $11.3 million,
or $0.34 per basic share and $0.33 per diluted share, in the fourth quarter of
2004. The fourth quarter is typically one of our stronger quarters, because of
the seasonality of our business, as discussed above. Our gross auction sales
were $589.9 million for the quarter ended December 31, 2005, which is an
increase of 7% compared to the same period in 2004. The growth in our gross
auction sales in the fourth quarter of 2005 compared to the equivalent period in
2004 was attributable mainly to increased sales in Canada and the United States.
Our auction revenue rate decreased to 10.16% in the fourth quarter of 2005 from
10.39% in the comparable period in 2004, mainly as a result of the performance
of our underwritten business. Our underwritten business experienced an unusually
high auction revenue rate in the last quarter of 2004 compared to our expected
rate.
We experienced a 25% increase in our earnings in the fourth quarter of 2005
compared to the equivalent period in the prior year because higher auction
revenues in 2005 were only partially offset by increased operating costs. Income
taxes decreased in the fourth quarter of 2005 compared to the equivalent period
in the prior year because of the non-recurring tax charges that we recorded in
2004.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
38
We repaid long-term debt of $31.6 million during the fourth quarter of 2005, and
replaced it with a five-year term loan in the amount of $30.0 million. Capital
asset additions were $12.9 million for the quarter, compared to $8.2 million in
the comparable period in 2004. Our capital expenditures in the fourth quarter of
2005 related primarily to construction of our new permanent auction site in
Nashville, Tennessee, completion of the acquisition of our new property in
Houston, Texas and improvements to our existing auction site in Orlando,
Florida. Exchange rate changes relating to capital assets held in currencies
other than the United States dollar resulted in a further decrease in our
reported capital assets on our consolidated balance sheet of $0.7 million in the
fourth quarter of 2005 compared to an increase of $6.2 million in the equivalent
period in 2004.
SUMMARY OF QUARTERLY RESULTS
The following tables present our unaudited consolidated quarterly results of
operations for each of our last eight fiscal 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 year ended December 31, 2005. All dollar amounts in
the following tables and related footnotes are stated in thousands of United
States dollars, except per share data.
Q4 2005 Q3 2005 Q2 2005 Q1 2005
-------- -------- -------- --------
Gross auction sales (1) $589,865 $364,005 $682,711 $456,260
-------- -------- -------- --------
Auction revenues $ 59,933 $ 38,430 $ 65,692 $ 48,578
Net earnings 14,203 4,568 21,134(2) 13,675(3)
Net earnings per share -- basic $ 0.41 $ 0.13 $ 0.62(2) $ 0.40(3)
Net earnings per share -- diluted 0.41 0.13 0.61(2) 0.40(3)
Q4 2004 Q3 2004 Q2 2004 Q1 2004
-------- -------- -------- --------
Gross auction sales (1) $549,796 $307,188 $553,776 $378,642
-------- -------- -------- --------
Auction revenues $ 57,142 $ 31,449 $ 55,996 $ 37,670
Net earnings 11,335(4) 1,810(4) 15,164 6,590
Net earnings per share -- basic $ 0.34(4) $ 0.05(4) $ 0.44 $ 0.19
Net earnings per share -- diluted 0.33(4) 0.05(4) 0.44 0.19
(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, net
earnings would have been $20,365, or $0.59 per basic and diluted share.
(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, net earnings would have been $10,379, or $0.30 per basic and
diluted share.
(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 basic and diluted share,
for the third quarter and $12,553, or $0.37 per basic share and $0.36 per
diluted share, for the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
December 31, 2005 2004 % Change
------------ ------- ------- --------
Working capital $84,108 $36,871 128%
Our cash position can fluctuate significantly from period to period, largely as
a result of differences in the timing, size and number of auctions, the timing
of the receipt of auction proceeds from buyers, and the timing of the payment of
net amounts due to consignors. We generally collect auction proceeds from buyers
within seven days of the auction and 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. In our opinion, our working capital balance at December 31, 2005 exceeded
the amount we need to satisfy our present operating requirements.
As discussed in more detail below, we refinanced the majority of our term and
revolving debt in 2005. Approximately $35 million of this debt was recorded as
current portion of long-term debt in our 2004 financial statements. In our 2005
financial statements, the new debt of $42.9 million is recorded in long-term
debt, and this is part of the reason for the increase in our working capital.
CONTRACTUAL OBLIGATIONS
Payments Due by Year Total In 2006 In 2007 and 2008 In 2009 and 2010 After 2010
-------------------- ------- ------- ---------------- ---------------- ----------
Long-term debt obligations $43,542 $ 220 $ 422 $12,900 $30,000
Operating leases obligations 2,577 1,234 1,101 242 --
Other long-term obligations 516 -- 516 -- --
------- ------ ------ ------- -------
Total contractual obligations $46,635 $1,454 $2,039 $13,142 $30,000
======= ====== ====== ======= =======
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
39
Our long-term debt in the table above is comprised mainly of term loans put in
place in 2005 with original terms to maturity of five years. Our operating
leases related primarily to land on which we operate regional auction units.
These properties are located in the United States, Australia, Singapore, Mexico,
Italy, Canada and the United Arab Emirates.
In the normal course of our business, we will sometimes guarantee to a consignor
a minimum level of proceeds in connection with the sale at auction of that
consignor's equipment. Our total exposure at December 31, 2005 from these
guarantee contracts was $29.0 million (compared to $20.9 million at December 31,
2004), which will be offset by the proceeds that we receive from the sale at
auction of the related equipment. We do not record any liability in our
financial statements in respect of these guarantee contracts, and they are not
reflected in the contractual obligations table above.
CASH FLOWS
December 31, 2005 2004 % Change
------------ -------- -------- --------
Cash provided by (used in):
Operations $ 85,071 $ 58,656 45%
Investing (32,207) (24,555) (31%)
Financing (13,137) (24,622) 47%
Capital asset additions were $42.7 million for 2005 compared to $23.5 million 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 commencement of construction on our new
permanent auction site on that property;
- 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 $0.4 million; and
- Improvements to our existing auction sites in various locations, including
Orlando, Florida and Atlanta, Georgia.
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.
Our cost of constructing a permanent auction site has typically been in the
range of $10 million to $20 million in recent periods. 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 $1.8
million in the capital assets reported on our consolidated balance sheet as at
December 31, 2005, compared to a $7.4 million increase in 2004.
We intend to expand our network of auction sites by building facilities in
selected locations around the world as appropriate opportunities arise, either
to replace existing auction facilities or to establish new sites. Our actual
expenditure levels in future periods will depend largely on our ability to
identify, acquire and develop suitable auction sites. We intend to add or
replace an average of two auction sites per year, and possibly up to four sites
per year starting in 2007.
Over the next five years, we intend to increase our average 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 M07 strategic initiatives,
depending on the scope of our required system improvements, primarily for
software, hardware and related systems. Future capital expenditures will be
funded primarily from working capital or draws on available credit facilities.
We paid regular quarterly cash dividends totaling $0.58 per share in 2005, for
total dividend payments of $19.9 million, compared to total dividend payments of
$12.6 million in 2004. On January 27, 2006, our Board of Directors declared a
quarterly cash dividend of $0.18 per common share relating to the quarter ended
December 31, 2005. The dividend will be payable on March 17, 2006 to
shareholders of record on February 24, 2006 in the amount of approximately $6.2
million.
DEBT
December 31, 2005 2004 % Change
------------ ------- ------- --------
Long-term debt (including current portion of long-term debt) $43,542 $45,925 (5%)
During the year ended December 31, 2005 we refinanced term and revolving debt in
the amount of $43.8 million. The refinancing consisted of two five-year term
loans in the principal amounts of $12.9 million and $30.0 million, due in
periodic payments of interest only, with the full amount of the principal due in
2010 and 2011, respectively. The interest rate applicable to these term loans is
set for five years at 4.429% and 5.61%, respectively. At December 31, 2005, we
were in compliance with all of the financial covenants applicable to our
long-term debt.
In addition to our long-term debt, we have available revolving credit facilities
as follows:
December 31, 2005 2004
------------ -------- --------
Revolving credit facilities - total available: $118,200 $129,499
Revolving credit facilities - total unused: $118,200 $113,999
Our credit facilities are with financial institutions in the United States,
Canada, The Netherlands, The UK and Australia. We had no floating rate debt at
December 31, 2005.
Future scheduled interest expenses over the next five years under our existing
term debt are as follows:
In 2006 In 2007 In 2008 In 2009 In 2010
------- ------- ------- ------- -------
Interest expense on long-term debt $2,294 $2,277 $2,261 $2,254 $1,992
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
40
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Although we cannot accurately anticipate the future effect of inflation on our
financial condition or results of operations, inflation historically has not
had a material impact on our operations.
Because we conduct operations in local currencies in countries around the world,
yet have the United States dollar as our reporting currency, we are exposed to
currency fluctuations and exchange rate risk on all operations conducted in
currencies other than the United States dollar. We cannot accurately predict the
future effects of foreign currency fluctuations on our financial condition or
results of operations. For the year ended December 31, 2005, approximately 40%
of our revenues were earned in currencies other than the United States dollar
and approximately 45% of our operating costs were denominated in currencies
other than the United States dollar. We have not hedged against foreign currency
rate fluctuations associated with our operations denominated in currencies
other than the United States dollar.
During the year ended December 31, 2005 we recorded a decrease in our foreign
currency translation adjustment balance of $2.2 million, compared to an increase
of $8.8 million 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
arise primarily from the weakening of non-United States currencies against the
United States dollar. During 2005, the Euro weakened against the United States
dollar and the impact of this decline on our balance sheet was only partially
mitigated by the strengthening of the Canadian dollar.
TRANSACTIONS WITH RELATED PARTIES
During 2005 we paid approximately $0.8 million to D.E.R. Resorts Ltd. (or
Resorts), a company controlled by David E. Ritchie, the Chairman of our Board of
Directors and our former Chief Executive Officer. The costs were incurred
pursuant to agreements, approved by our Board of Directors, by which Resorts
agreed to provide meeting rooms, accommodations, meals and recreational
activities at its facilities on Stuart Island in British Columbia, Canada, for
certain of our customers and guests. The agreements set forth the fees and costs
per excursion, which were based on market prices for similar types of facilities
and excursions. We believe that the terms of the agreements were at least as
favorable to us as we could have obtained from a third party. We have entered
into similar agreements with Resorts 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.
FORWARD-LOOKING STATEMENTS
This Management's 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:
- our future performance;
- growth of our operations;
- expansion of the geographic markets and market segments in which we conduct
auctions, including the world market for used industrial equipment market;
- increases in the number of consignors and bidders participating in our
auctions and the average size of our auctions;
- our key strengths;
- our ability to draw consistently 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, depreciation expenses and income tax rates;
- the effect on our general and administrative expenses and operating
leverage of expanded infrastructure and workforce, our M07 initiative and
growth of our business;
- our future capital expenditures;
- our M07 strategic initiative, the timing of its implementation and its
effect on our business, results of operations and capital expenditures;
- our internet initiatives and the level of participation in our auctions by
internet bidders;
- the proportion of our revenues and operating costs denominated in
currencies other than the U.S. dollar or the effect of any currency
exchange fluctuations on our results of operations; and
- financing available to us and the sufficiency of our working capital to
meet our financial needs.
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 these 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 our performance in future periods. Some of the
more important risks that we face are outlined below and holders of our common
shares should consider these risks. 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:
- guarantee a minimum level of sale proceeds to the consignor, regardless of
the ultimate selling price of the consignment at the auction; or
- 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.
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.
WE MAY NEED TO MAKE PAYMENTS TO BUYERS IF WE ARE NOT ABLE TO DELIVER CLEAR TITLE
ON THE ASSETS SOLD AT OUR AUCTIONS, WHICH MAY RESULT IN US INCURRING LOSSES.
Where title registries are commercially available, we guarantee to our buyers
that each item purchased at our auctions is free of liens and other
encumbrances, up to the purchase price paid. If we are unable to deliver clear
title, we provide the buyer with a full refund. While we exercise considerable
effort ensuring that all liens have been identified and, if necessary,
discharged prior to the auction, we
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
41
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. As part of this
strategy, we may from time to time acquire additional assets or businesses from
third parties. We may not be successful in growing our business or in managing
this growth. For us to grow our business successfully, we need to accomplish a
number of objectives, including:
- recruiting and retaining suitable sales personnel;
- identifying and developing new geographic markets and market segments;
- identifying and acquiring, on terms favourable to us, suitable land on
which to build new auction facilities and, potentially, businesses that
might be appropriate acquisition targets;
- successfully managing expansion;
- obtaining necessary financing;
- receiving necessary authorizations and approvals from governments for
proposed development or expansion;
- successfully integrating new facilities and acquired businesses into our
existing operations;
- achieving acceptance of the auction process in general by potential
consignors, bidders and buyers;
- establishing and maintaining favourable relationships with consignors,
bidders and buyers in new markets and market segments, and maintaining
these relationships in our existing markets;
- capitalizing on changes in the supply of and demand for industrial assets,
in our existing and in new markets; and
- designing and implementing business processes that are able to support
profitable growth.
We will 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.
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 industrial equipment, which
would affect 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
industrial equipment, and the circumstances that cause market values for
industrial equipment to fluctuate are beyond our control. In addition, price
competition and availability of industrial equipment directly affect the supply
of, demand for, and market value of used industrial equipment.
WE MAY INCUR LOSSES AS A RESULT OF LEGAL AND OTHER CLAIMS.
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 losses. 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:
- the size, timing and frequency of our auctions;
- 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;
- the performance of our underwritten business (guarantee and outright
purchase contracts);
- general economic conditions in our markets; and
- 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 favourably 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, including income tax 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 the presentation of our
results in our financial statements and cause our earnings to fluctuate.
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.
The growth and performance of our business in the future 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.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
42
OUR INTERNET-RELATED INITIATIVES, WHICH ARE SUBJECT TO TECHNOLOGICAL
OBSOLESCENCE AND POTENTIAL SERVICE INTERRUPTIONS, MAY NOT CONTRIBUTE TO IMPROVED
OPERATING RESULTS OVER THE LONG-TERM; 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. We use and
rely on intellectual property owned by third parties which are licensed to us in
providing our rbauctionBid-Live service. 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 our ability to use
suitable intellectual property licensed from third parties, 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.
THE AVAILABILITY AND PERFORMANCE OF OUR INTERNAL TECHNOLOGY INFRASTRUCTURE, AS
WELL AS THE IMPLEMENTATION OF AN ORACLE ENTERPRISE RESOURCE PLANNING SYSTEM, ARE
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 reason.
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 redesign our business processes and to upgrade
our information systems, including implementing an Oracle enterprise resource
planning system. Our business and results of operations could be harmed if our
Oracle implementation, which is expected to happen in phases starting in 2006,
is not successful. In addition, any difficulties with our Oracle implementation
could have an adverse effect on our operations and also our ability to evaluate
the effectiveness of our internal control over financial reporting, which would
negatively affect our internal control reporting in accordance with the
provisions of Section 404 of the Sarbanes-Oxley Act.
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.
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 neighbouring 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.
WE MAY NOT CONTINUE TO PAY REGULAR CASH DIVIDENDS.
We declared and paid quarterly cash dividends of $0.18 per outstanding common
share relating to the third and fourth fiscal quarters of 2005 and $0.11 per
share in connection with the first and second quarters of 2005. Any decision to
declare and pay dividends in the future will be made at the discretion of our
Board of Directors, after taking into account our operating results, financial
condition, cash requirements, financing agreement restrictions and other factors
our Board may deem relevant. We may be unable or may elect not to continue to
declare and pay dividends, even if necessary financial conditions are met and
sufficient cash is available for distribution.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
43
Independent Auditors' Report to the Shareholders
We have audited the consolidated balance sheets of Ritchie Bros. Auctioneers
Incorporated (the "Company") as at December 31, 2005 and 2004 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2005
and 2004 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2005 in accordance with
Canadian generally accepted accounting principles.
(KPMG LLP)
Chartered Accountants
Vancouver, Canada
February 10, 2006
Consolidated Statements of Operations
(Expressed in thousands of United States dollars, except share and per share
amounts)
Years ended December 31, 2005 2004 2003
------------------------ ----------- ----------- -----------
Auction revenues $ 212,633 $ 182,257 $ 161,542
Direct expenses 27,035 23,472 22,099
----------- ----------- -----------
185,598 158,785 139,443
Expenses:
Depreciation and amortization 13,172 12,708 11,773
General and administrative 94,670 85,667 71,265
----------- ----------- -----------
107,842 98,375 83,038
----------- ----------- -----------
Earnings from operations 77,756 60,410 56,405
Other income (expenses):
Interest expense (2,224) (3,217) (4,772)
Gain on disposition of capital assets 6,565 229 17
Other 417 824 1,043
----------- ----------- -----------
4,758 (2,164) (3,712)
----------- ----------- -----------
Earnings before income taxes 82,514 58,246 52,693
Income tax expense (note 6):
Current 28,704 22,251 14,738
Future 230 1,096 1,361
----------- ----------- -----------
28,934 23,347 16,099
----------- ----------- -----------
Net Earnings $ 53,580 $ 34,899 $ 36,594
=========== =========== ===========
Net earnings per share (notes 1(l) and 4(e)):
Basic $ 1.56 $ 1.02 $ 1.08
Diluted 1.54 1.01 1.07
=========== =========== ===========
Weighted average number of shares outstanding 34,366,311 34,160,678 33,795,978
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
/s/ G. EDWARD MOUL /s/ PETER J. BLAKE
------------------------------------ ----------------------------------------
G. EDWARD MOUL PETER J. BLAKE
Director Director and Chief Executive Officer
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
44
Consolidated Balance Sheets
(Expressed in thousands of United States dollars)
December 31, 2005 2004
------------ -------- --------
ASSETS
Current assets:
Cash and cash equivalents $169,249 $132,632
Accounts receivable 25,447 19,281
Inventory 9,991 13,091
Advances against auction contracts 255 968
Prepaid expenses and deposits 2,726 2,323
Other assets 1,188 654
Funds committed for debt repayment (note 3) -- 1,857
Future income tax asset (note 6) 601 496
-------- --------
209,457 171,302
Capital assets (note 2) 250,645 226,624
Funds committed for debt repayment (note 3) -- 5,108
Other assets 1,537 1,876
Goodwill 38,397 37,499
Future income tax asset (note 6) 860 691
-------- --------
$500,896 $443,100
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Auction proceeds payable $ 62,392 $ 47,581
Accounts payable and accrued liabilities 50,969 45,334
Income taxes payable 11,308 6,383
Current portion of long-term debt (note 3) 220 35,133
Future income tax liability (note 6) 460 --
-------- --------
125,349 134,431
Long-term debt (note 3) 43,322 10,792
Other liabilities 516 1,563
Future income tax liability (note 6) 6,526 7,050
-------- --------
175,713 153,836
Shareholders' equity:
Share capital (note 4) 79,844 76,445
Additional paid-in capital 8,929 7,859
Retained earnings 217,080 183,438
Foreign currency translation adjustment 19,330 21,522
-------- --------
325,183 289,264
-------- --------
$500,896 $443,100
======== ========
Commitments and contingencies (note 7)
Subsequent events (note 4(c))
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
(Expressed in thousands of United States dollars)
Foreign
Additional currency Total
Share paid-in Retained translation Shareholders'
capital capital earnings adjustment equity
------- ---------- -------- ----------- -------------
Balance, December 31, 2002 $69,499 $4,646 $129,682 $(4,453) $199,374
Exercise of stock options 3,295 -- -- -- 3,295
Stock compensation tax adjustment -- 382 -- -- 382
Stock compensation expense -- 1,047 -- -- 1,047
Net earnings -- -- 36,594 -- 36,594
Cash dividends paid -- -- (5,093) -- (5,093)
Foreign currency translation adjustment -- -- -- 17,180 17,180
------- ------ -------- ------- --------
Balance, December 31, 2003 72,794 6,075 161,183 12,727 252,779
Exercise of stock options 3,651 -- -- -- 3,651
Stock compensation tax adjustment -- 317 -- -- 317
Stock compensation expense -- 1,467 -- -- 1,467
Net earnings -- -- 34,899 -- 34,899
Cash dividends paid -- -- (12,644) -- (12,644)
Foreign currency translation adjustment -- -- -- 8,795 8,795
------- ------ -------- ------- --------
Balance, December 31, 2004 76,445 7,859 183,438 21,522 289,264
Exercise of stock options 3,399 (485) -- -- 2,914
Stock compensation tax adjustment -- 87 -- -- 87
Stock compensation expense -- 1,468 -- -- 1,468
Net earnings -- -- 53,580 -- 53,580
Cash dividends paid -- -- (19,938) -- (19,938)
Foreign currency translation adjustment -- -- -- (2,192) (2,192)
------- ------ -------- ------- --------
Balance, December 31, 2005 $79,844 $8,929 $217,080 $19,330 $325,183
======= ====== ======== ======= ========
See accompanying notes to consolidated financial statements.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
45
Consolidated Statements of Cash Flows
(Expressed in thousands of United States dollars)
Years ended December 31, 2005 2004 2003
------------------------ -------- -------- --------
Cash provided by (used in):
Operating activities:
Net earnings $ 53,580 $ 34,899 $ 36,594
Items not involving cash:
Depreciation and amortization 13,172 12,708 11,773
Stock compensation expense 1,468 1,467 1,047
Future income taxes 230 1,329 1,361
Net gain on disposition of capital assets (6,565) (229) (17)
Changes in non-cash working capital:
Accounts receivable (6,166) (2,217) (3,364)
Inventory 3,100 (3,511) (2,357)
Advances against auction contracts 713 (858) 69
Prepaid expenses and deposits (403) 230 (493)
Income taxes payable 5,012 3,504 3,578
Income taxes recoverable -- -- 2,485
Auction proceeds payable 14,811 3,395 26,826
Accounts payable and accrued liabilities 3,956 10,184 1,606
Other 2,163 (2,245) (1,276)
-------- -------- --------
85,071 58,656 77,832
-------- -------- --------
Investing activities:
Acquisition of business -- (1,265) --
Capital asset additions (42,737) (23,448) (16,273)
Proceeds on disposition of capital assets 9,929 2,151 5,368
Decrease (increase) in other assets 601 (1,993) (116)
-------- -------- --------
(32,207) (24,555) (11,021)
-------- -------- --------
Financing activities:
Issuance of share capital 2,914 3,651 3,295
Dividends on common shares (19,938) (12,644) (5,093)
Issuance of long-term debt 46,016 32,500 --
Repayment of long-term debt (48,746) (58,459) (3,747)
Increase (decrease) in other liabilities 23 (812) (383)
Decrease in short term debt -- -- (2,758)
Decrease (increase) in funds committed for debt repayment 6,965 11,142 (5,107)
Other (371) -- --
-------- -------- --------
(13,137) (24,622) (13,793)
-------- -------- --------
Effect of changes in foreign currency rates on cash and cash
equivalents (3,110) 4,144 3,769
-------- -------- --------
Increase in cash and cash equivalents 36,617 13,623 56,787
Cash and cash equivalents, beginning of year 132,632 119,009 62,222
-------- -------- --------
Cash and cash equivalents, end of year $169,249 $132,632 $119,009
======== ======== ========
Supplemental information:
Interest paid $ 2,217 $ 3,092 $ 4,675
Income taxes paid $ 22,696 $ 18,831 $ 8,675
======== ======== ========
See accompanying notes to consolidated financial statements.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
46
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United States dollars, except
share and per share amounts)
Years ended December 31, 2005, 2004 and 2003
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These consolidated financial statements present the financial
position, results of operations and changes in shareholders' equity
and cash flows of Ritchie Bros. Auctioneers Incorporated (the
"Company"), a company amalgamated in December 1997 under the Canada
Business Corporations Act, and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
The consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles
in Canada which, except as disclosed in note 9, also comply, in all
material respects, with generally accepted accounting principles in
the United States.
(b) Cash and cash equivalents:
Cash equivalents consist of highly liquid investments having an
original term to maturity of three months or less when acquired.
(c) Inventory:
Inventory is primarily represented by goods held for auction and has
been valued at the lower of cost, determined by the specific
identification method, and net realizable value.
(d) Capital assets:
All capital assets are stated at cost and include capitalized interest
on property under development. Depreciation is provided to charge the
cost of the assets to operations over their estimated useful lives
based on their usage as follows:
Asset Basis Rate/term
----- ----------------- ---------------
Buildings straight-line 30 years
Improvements declining balance 10%
Automotive equipment declining balance 30%
Yard equipment declining balance 20-30%
Office equipment declining balance 20%
Computer equipment straight-line 3 years
Computer software straight-line 3 years
Leasehold improvements straight-line Terms of leases
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. In such situations, long-lived assets
are considered impaired when undiscounted estimated future cash flows
resulting from the use of the asset and its eventual disposition are
less than the asset's carrying amount.
Legal obligations to retire tangible long-lived assets and assets
under operating leases are recorded at the fair value in the period in
which they are incurred, if a reasonable estimate of fair value can be
made, with a corresponding increase in asset value. The liability is
accreted to face value over the life of the asset. The Company does
not have any significant asset retirement obligations.
(e) Goodwill:
Goodwill represents non-identifiable intangible assets acquired on
business combinations. Goodwill is not amortized and is tested for
impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The
impairment test compares the carrying amount of the goodwill against
its implied fair value. To the extent that the carrying amount of
goodwill exceeds its fair value, an impairment loss is charged against
earnings.
(f) 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 Company's exposure fluctuates over
time (see note 7(b)).
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.
(g) Income taxes:
Income taxes are accounted for using the asset and liability method,
whereby future taxes are recognized for the tax consequences of
temporary differences by applying substantively enacted or enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of
existing assets and liabilities. The effect on future taxes of a
change in tax rates is recognized in earnings in the period in which
the new tax rate is substantively enacted. Future tax benefits, such
as non-capital loss carry forwards, are recognized to the extent that
realization of such benefits is considered more likely than not.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
47
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United States dollars, except
share and per share amounts)
Years ended December 31, 2005, 2004 and 2003
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(h) Foreign currency translation:
The Company's reporting currency is the United States dollar. The
functional currency for each of the Company's operation is usually the
currency of the country of residency; in some cases it is the United
States dollar. Each of the Company's foreign operations is considered
to be self-sustaining. Accordingly, the financial statements of the
Company's operations that are not located in the United States have
been translated into United States dollars using the exchange rate at
the end of each reporting period for asset and liability amounts and
the average exchange rate for each reporting period for amounts
included in the determination of earnings. Any gains or losses from
the translation of asset and liability amounts have been included in
the foreign currency translation adjustment account, which is included
as a separate component of shareholders' equity. Monetary assets and
liabilities recorded in foreign currencies are translated into the
appropriate functional currency at the rate of exchange in effect at
the balance sheet date. Foreign currency denominated transactions are
translated into the appropriate functional currency at the exchange
rate in effect on the date of the transaction. Any exchange gains and
losses on these transactions, which are not considered to be
significant, are included in the determination of earnings.
(i) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Significant financial
statement items requiring the use of estimates include the
determination of useful lives for depreciation, the valuation of
goodwill and capital assets, and the estimation of the utilization of
future income tax asset balances. Actual results could differ from
such estimates and assumptions.
(j) Financial instruments:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, income taxes
payable, auction proceeds payable and accounts payable and accrued
liabilities, approximate their fair value due to their short terms to
maturity. Based on borrowing rates currently available to the Company
for loans with similar terms, the carrying value of its long-term debt
approximates fair value.
(k) Credit risk:
The Company is not exposed to any significant credit risk because it
does not extend credit to buyers at its auctions. In addition, items
purchased at the Company's auctions are not normally released to the
buyers until they are paid for in full.
(l) Net earnings per share:
Net earnings per share has been calculated based on the weighted
average number of common shares outstanding. Diluted net earnings per
share has been calculated after giving effect to outstanding dilutive
options calculated by the treasury stock method (note 4(e)).
(m) Stock-based compensation:
The Company has a stock-based compensation plan, which is described in
note 4(c) and (d). The Company uses the fair value based method to
account for employee stock-based compensation. Under the fair value
based method, compensation cost attributable to options granted to
employees and directors is measured at the fair value of the
underlying option at the grant date using the Black-Scholes option
pricing model. Compensation expense is recognized on a straight-line
basis over the vesting period of the underlying option. Any
consideration paid by employees on exercise of stock options or
purchase of stock is credited to share capital. If stock or stock
options are repurchased from employees, the excess of the
consideration paid over the carrying amount of the stock or stock
option cancelled is charged to retained earnings. No compensation cost
is recognized for options that employees forfeit if they fail to
satisfy the service requirement for vesting.
(n) Comparative figures:
Certain comparative figures have been reclassified to conform with
the presentation adopted in the current year.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
48
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United States dollars, except
share and per share amounts)
Years ended December 31, 2005, 2004 and 2003
2. CAPITAL ASSETS:
Accumulated Net book
2005 Cost depreciation value
---- -------- ------------ --------
Buildings $120,010 $21,184 $ 98,826
Land and improvements 114,493 4,566 109,927
Land and buildings under development 20,374 -- 20,374
Automotive equipment 12,449 4,490 7,959
Yard equipment 10,334 5,440 4,894
Office equipment 6,604 4,226 2,378
Computer equipment 5,731 3,658 2,073
Computer software 12,977 10,850 2,127
Leasehold improvements 3,521 1,434 2,087
-------- ------- --------
$306,493 $55,848 $250,645
======== ======= ========
Accumulated Net book
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 year, interest of $553,000 (2004 - $297,000) was capitalized to the
cost of land and buildings under development.
3. LONG-TERM DEBT:
2005 2004
------- --------
Term loan, unsecured, bearing interest at 5.61%, due in
quarterly installments of interest only, with full
amount of the principal due in 2011. $30,000 $ --
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. 12,900 --
Term loan, denominated in Australian dollars, secured by
deeds of trust on specific property, bearing interest
between the prime rate and 6.5%, due in quarterly
installments of AUD75,000, plus interest, with final
payment occurring in 2008. 642 920
Term loans, unsecured, bearing interest between 5.95% and
7.91%, due in minimum annual installments of $2.9 million
($1.0 million towards principal, $1.9 million towards a
sinking fund), with final payments occurring in 2005 and
2006. The loans were repaid in full in 2005. -- 17,000
Revolving loans, denominated in Canadian dollars, unsecured,
bearing interest at prime rate plus 0.25%, due in monthly
installments of interest only, with the full amount of the
principal due in 2005. The loans were repaid in full in 2005. -- 12,505
Revolving loans, unsecured, bearing interest between 3.165%
and 3.175%, due in monthly installments of interest only,
with the full amount of the principal due in 2005. The loans
were repaid in full in 2005. -- 15,500
------- --------
43,542 45,925
Current portion (220) (35,133)
------- --------
Non-current portion $43,322 $ 10,792
======= ========
Funds committed for debt repayment -- (6,965)
------- --------
$43,322 $ 3,827
======= ========
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
49
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United States dollars, except
share and per share amounts)
Years ended December 31, 2005, 2004 and 2003
3. LONG-TERM DEBT (CONTINUED):
As at December 31, 2005, principal repayments for the next five years are
as follows:
2006 $ 220
2007 220
2008 202
2009 --
2010 12,900
Thereafter 30,000
-------
$43,542
=======
4. SHARE CAPITAL:
(a) Authorized:
Unlimited number of common shares, without par value.
Unlimited number of senior preferred shares, without par value,
issuable in series.
Unlimited number of junior preferred shares, without par value,
issuable in series.
(b) Issued:
No preferred shares have been issued.
Common shares issued and outstanding are as follows:
Issued and outstanding, December 31, 2002 33,618,664
Issued for cash, pursuant to stock options exercised 348,980
----------
Issued and outstanding, December 31, 2003 33,967,644
Issued for cash, pursuant to stock options exercised 294,656
----------
Issued and outstanding, December 31, 2004 34,262,300
Issued for cash, pursuant to stock options exercised 161,600
----------
Issued and outstanding, December 31, 2005 34,423,900
==========
During 2004, the Company's common shares were split on a two-for-one
basis. All share, per share and stock option information in the
consolidated financial statements gives effect to the stock split on a
retroactive basis.
(c) Stock option plan:
The Company has a stock option plan that provides for the award of
stock options to selected employees, directors and officers of the
Company and to other persons approved by the Board of Directors. Stock
options are granted at the fair market value of the Company's common
shares at the grant date, with various vesting periods and a term not
exceeding 10 years. At December 31, 2005, there were 1,125,834 (2004 -
1,326,034) shares authorized and still available for grants of
options under the stock option plan.
Stock option activity for 2005, 2004 and 2003 is presented below:
Common shares Weighted average
under option exercise price
------------- ----------------
Outstanding, December 31, 2002 855,634 $11.06
Granted 308,800 15.53
Exercised (348,980) 9.45
Expired (2,000) 15.53
-------- ------
Outstanding, December 31, 2003 813,454 13.32
Granted 292,000 26.47
Exercised (294,656) 12.39
Expired (1,800) 26.46
-------- ------
Outstanding, December 31, 2004 808,998 18.38
Granted 213,800 32.98
Exercised (161,600) 18.03
Expired (13,600) 32.41
-------- ------
Outstanding, December 31, 2005 847,598 $21.90
======== ======
Exercisable, December 31, 2005 643,398 $18.50
======== ======
The options outstanding at December 31, 2005 expire on dates ranging
to October 6, 2015.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
50
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United States dollars, except
share and per share amounts)
Years ended December 31, 2005, 2004 and 2003
4. SHARE CAPITAL (CONTINUED):
The following is a summary of stock options outstanding and exercisable at
December 31, 2005:
Options Outstanding
----------------------------------- Options Exercisable
Weighted average ------------------------------
Range of Number remaining life Weighted average Number Weighted average
exercise prices outstanding (years) exercise price exercisable exercise price
--------------- ----------- ---------------- ---------------- ----------- ----------------
$ 11.675 -- $ 13.050 181,400 5.6 $12.35 177,400 $12.34
$ 13.344 -- $ 15.525 227,998 6.2 14.97 227,998 14.97
$ 26.460 -- $ 28.170 238,000 8.1 26.47 238,000 26.47
$ 31.540 -- $ 42.690 200,200 9.1 33.02 -- --
------- -------
847,598 643,398
======= =======
Subsequent to December 31, 2005, the Company granted options to
purchase a total of 205,950 of its common shares to certain employees
of the Company. The options have an exercise price of $44.09 and an
expiry date of January 24, 2016.
(d) Stock-based compensation:
During 2005, the Company recognized compensation cost of $1,468,000
(2004 - $1,467,000; 2003 - $1,047,000) in respect of options granted
under its stock option plan. This amount was calculated in accordance
with the fair value method of accounting.
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 2003
------- ------- -------
Risk free interest rate 3.7% 3.0% 3.1%
Expected dividend yield 1.41% 1.15% 0%
Expected lives of options 5 years 5 years 5 years
Expected volatility 20.1% 19.6% 18.3%
The weighted average grant date fair value of options granted during
the year ended December 31, 2005 was $6.98 per option (2004 - $5.34;
2003 - $3.67). The fair value method requires that this amount be
amortized over the relevant vesting periods of the underlying options.
(e) Net earnings per share:
Year ended December 31, 2005 Net earnings Shares Per share amount
---------------------------- ------------ ---------- ----------------
Basic net earnings per share $53,580 34,366,311 $ 1.56
Effect of dilutive securities:
Stock options -- 365,629 (0.02)
------- ---------- ------
Diluted net earnings per share $53,580 34,731,940 $ 1.54
======= ========== ======
Year ended December 31, 2004 Net earnings Shares Per share amount
---------------------------- ------------ ---------- ----------------
Basic net earnings per share $34,899 34,160,678 $ 1.02
Effect of dilutive securities:
Stock options -- 338,544 (0.01)
------- ---------- ------
Diluted net earnings per share $34,899 34,499,222 $ 1.01
======= ========== ======
Year ended December 31, 2003 Net earnings Shares Per share amount
---------------------------- ------------ ---------- ----------------
Basic net earnings per share $36,594 33,795,978 $ 1.08
Effect of dilutive securities:
Stock options -- 341,574 (0.01)
------- ---------- ------
Diluted net earnings per share $36,594 34,137,552 $ 1.07
======= ========== ======
For the year ended December 31, 2005, stock options to purchase 12,000
common shares were outstanding but were excluded from the calculation
of diluted earnings per share as they were anti-dilutive.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
51
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United States dollars, except
share and per share amounts)
Years ended December 31, 2005, 2004 and 2003
5. SEGMENTED INFORMATION:
The Company's principal business activity is the sale of consignment and
self-owned equipment at auctions. This business represents a single
reportable segment.
The Company determines its activities by geographic segment based on the
location of its auctions. Summarized information by geographic segment is
as follows:
United
States Canada Europe Other Combined
-------- ------- ------- ------- --------
Year ended December 31, 2005:
Auction revenues $121,253 $48,824 $26,609 $15,947 $212,633
Capital assets and goodwill 173,709 79,849 22,638 12,846 289,042
Year ended December 31, 2004:
Auction revenues $104,618 $36,258 $26,988 $14,393 $182,257
Capital assets and goodwill 145,208 78,354 26,048 14,513 264,123
Year ended December 31, 2003:
Auction revenues $ 92,273 $30,752 $21,262 $17,255 $161,542
Capital assets and goodwill 136,624 72,277 24,086 13,061 246,048
6. INCOME TAXES:
Income tax expense differs from that determined by applying the United
States statutory tax rates to the Company's result of operations as
follows:
2005 2004 2003
------- ------- -------
Statutory federal and state tax rate in the United States 40% 40% 40%
======= ======= =======
Expected income tax expense $33,006 $23,298 $21,077
Differences:
Earnings taxed in lower rate jurisdictions (4,303) (3,014) (4,806)
Realized foreign exchange gain -- 2,106 --
Other 231 957 (172)
------- ------- -------
Actual income tax expense $28,934 $23,347 $16,099
======= ======= =======
Temporary differences that give rise to future income taxes are as follows:
2005 2004
------- -------
Future income tax asset:
Working capital $ 601 $ 496
Capital assets 260 189
Stock-based compensation 381 277
Unused tax losses 1,352 1,326
Other 130 69
------- -------
2,724 2,357
Valuation allowance (168) (168)
------- -------
Total future income tax asset 2,556 2,189
Current future income tax asset 601 496
------- -------
Non-current future income tax asset 1,955 1,693
------- -------
Future income tax liability:
Capital assets (3,034) (3,263)
Goodwill (4,530) (3,555)
Other (517) (1,234)
------- -------
Total future income tax liability (8,081) (8,052)
Current future income tax liability (460) --
------- -------
Non-current future income tax liability (7,621) (8,052)
------- -------
Net future income taxes $(5,525) $(5,863)
======= =======
Presented on balance sheet as:
Future income tax asset - current $ 601 $ 496
Future income tax asset - non-current 860 691
Future income tax liability - current (460) --
Future income tax liability - non-current (6,526) (7,050)
------- -------
$(5,525) $(5,863)
======= =======
As at December 31, 2005, the Company has net operating and capital loss
carryforwards of approximately $4,480,000 available to reduce future
taxable income, of which $627,000 expire through 2015, and $3,853,000
remain indefinitely.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
52
Notes to Consolidated Financial Statements
(Tabular dollar amounts expressed in thousands of United States dollars, except
share and per share amounts)
Years ended December 31, 2005, 2004 and 2003
7. COMMITMENTS AND CONTINGENCIES:
(a) Operating leases:
The Company is party to certain operating leases relating to auction
sites and offices located in the United Arab Emirates, Mexico, United
States, Canada, Australia, China, Italy and Singapore. The future
minimum lease payments as at December 31, 2005 are approximately as
follows:
2006 $1,234
2007 616
2008 485
2009 242
2010 --
Thereafter --
Total rent expenses in respect of these leases for the year ended
December 31, 2005 was $1,574,000 (2004 - $1,406,000; 2003 -
$1,304,000).
(b) 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 the Company's
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 consignor's equipment. At
December 31, 2005, outstanding guarantees under contract for
industrial equipment to be sold prior to April 26, 2006 totaled
$10,277,000 (December 31, 2004 - $6,202,000) (undiscounted and before
estimated proceeds from sale at auction). The Company also had
guarantees under contract totaling $18,704,000 relating to
agricultural auctions to be held prior to June 21, 2006 (December 31,
2004 - $14,726,000). No liability has been recorded with respect to
these contracts.
8. TRANSACTIONS WITH RELATED PARTIES:
During the year ended December 31, 2005, the Company paid $751,000 (2004 -
$758,000; 2003 - $597,000) to a company controlled by the Chairman of the
Company's Board of Directors. The costs were incurred pursuant to
agreements, approved by the Company's Board of Directors, 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 the Company's 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.
9. 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 years ended December 31, 2005, 2004
and 2003, net earnings in accordance with Canadian GAAP were not
significantly different from net earnings had they been presented in
accordance with United States GAAP.
United States 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:
2005 2004 2003
------- ------- -------
Net earnings in accordance with Canadian and
United States GAAP $53,580 $34,899 $36,594
Other comprehensive income (loss):
Foreign currency translation adjustment (2,192) 8,795 17,180
------- ------- -------
Comprehensive income in accordance with United States GAAP $51,388 $43,694 $53,774
======= ======= =======
Accumulated other comprehensive income (loss), which under United States
GAAP is presented as a separate component of shareholder's equity is
comprised of the following:
2005 2004 2003
------- ------- -------
Foreign currency translation adjustment:
Balance, beginning of year $21,522 $12,727 $(4,453)
Change during the year (2,192) 8,795 17,180
------- ------- -------
Balance, end of year $19,330 $21,522 $12,727
======= ======= =======
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
53
Supplemental Quarterly Data
(Unaudited; tabular dollar amounts expressed in thousands of United States
dollars, except per share data)
Gross Net Earnings Per Share Closing
Auction Auction ---------------------- Stock
2005 Sales Revenues Net Earnings Basic Diluted Price
---- ---------- -------- ------------ ----- ------- -------
1st quarter $ 456,260 $ 48,578 $13,675(1) $0.40(1) $0.40(1) $31.60
2nd quarter 682,711 65,692 21,134(1) 0.62(1) 0.61(1) 38.55
3rd quarter 364,005 38,430 4,568 0.13 0.13 43.99
4th quarter 589,865 59,933 14,203 0.41 0.41 42.25
---------- -------- ------- ----- -----
$2,092,841 $212,633 $53,580(1)(3) $1.56(1) $1.54(1)
========== ======== ======= ===== =====
Gross Net Earnings Per Share(7) Closing
Auction Auction ------------------------- Stock
2004 Sales Revenues Net Earnings Basic Diluted Price (7)
---- ---------- -------- ------------ ----- ------- ---------
1st quarter $ 378,642 $ 37,670 $ 6,590 $0.19 $0.19 $28.10
2nd quarter 553,776 55,996 15,164 0.44 0.44 29.11
3rd quarter 307,188 31,449 1,810(2) 0.05(2) 0.05(2) 30.65
4th quarter 549,796 57,142 11,335(2) 0.34(2) 0.33(2) 33.06
---------- -------- ------- ----- -----
$1,789,402 $182,257 $34,899(2)(3) $1.02(2) $1.01(2)
========== ======== ======= ===== =====
Gross Net Earnings Per Share(7) Closing
Auction Auction ------------------------- Stock
2003 Sales Revenues Net Earnings Basic Diluted Price (7)
---- ---------- -------- ------------ ----- ------- ---------
1st quarter $ 341,475 $ 36,381 $ 8,575 $0.25 $0.25 $15.86
2nd quarter 462,979 47,657 12,881 0.38 0.38 19.26
3rd quarter 277,832 29,785 2,721 0.08 0.08 20.73
4th quarter 477,107 47,719 12,417 0.37 0.36 26.55
---------- -------- ------- ----- -----
$1,559,393 $161,542 $36,594(3) $1.08 $1.07
========== ======== ======= ===== =====
Gross Net Earnings Per Share(7) Closing
Auction Auction ------------------------- Stock
2002 Sales Revenues Net Earnings Basic Diluted Price (7)
---- ---------- -------- ------------ ----- ------- ---------
1st quarter $ 293,208 $ 29,317 $ 5,363 $0.16 $0.16 $13.58
2nd quarter 414,056 38,864 10,775(4) 0.32(4) 0.32(4) 15.61
3rd quarter 208,071 20,991 1,111 0.03 0.03 14.90
4th quarter 460,871 44,380 11,122 0.33 0.33 16.18
---------- -------- ------- ----- -----
$1,376,206 $133,552 $28,371(5) $0.84 $0.84
========== ======== ======= ===== =====
Gross Net Earnings Per Share(7) Closing
Auction Auction ------------------------- Stock
2001 Sales Revenues Net Earnings Basic Diluted Price (7)
---- ---------- -------- ------------ ------ ------- ---------
1st quarter $ 289,724 $ 25,445 $ 3,062 $ 0.09 $ 0.09 $11.75
2nd quarter 373,990 35,025 6,351(6) 0.19(6) 0.19(6) 13.75
3rd quarter 179,294 16,851 (955) (0.03) (0.03) 12.43
4th quarter 447,889 39,670 11,596 0.35 0.34 12.44
---------- -------- ------- ------ ------
$1,290,897 $116,991 $20,054(5)(6) $ 0.60(6) $ 0.59(6)
========== ======== ======= ====== ======
(1) Net earnings in the first and second quarters of 2005 include gains of $5.5
million ($3.3 million after tax) and $0.9 million ($0.8 million after tax),
respectively, recorded on the sale of excess properties. Excluding the
impact of these gains, net earnings for the first and second quarters of
2005 would have been $10.4 million ($0.30 per share, basic and diluted) and
$20.4 million ($0.59 per share, basic and diluted), respectively. Net
earnings for the full year in 2005 would have been $49.5 million ($1.44 per
basic share and $1.43 per diluted share).
(2) Excluding the impact of $2.1 million in income taxes in connection with
realized foreign exchange gains at the subsidiary level relating to certain
term debt that came due in 2004, net earnings for the third quarter of 2004
would have been $2.7 million ($0.08 per share, basic and diluted), net
earnings for the fourth quarter of 2004 would have been $12.6 million
($0.37 per basic share and $0.36 per diluted share) and net earnings for
the full year in 2004 would have been $37.0 million ($1.08 per basic share
and $1.07 per diluted share).
(3) The Company recorded stock-based compensation expense of $1.5 million in
2005, $1.5 million in 2004 and $1.0 million in 2003 relating to the
prospective adoption of the new stock-based compensation accounting policy
on January 1, 2003.
(4) Net earnings for the second quarter of 2002 include non-recurring income of
$0.8 million or $0.02 per share, basic and diluted.
(5) The Company stopped amortizing goodwill effective January 1, 2002 in
accordance with new accounting pronouncements. The amortization expense in
2001 was $1.7 million.
(6) Excluding the impact of $2.0 million in withholding taxes paid on an
intercompany dividend in the second quarter of 2001, net earnings for the
quarter would have been $8.4 million ($0.25 per share, basic and diluted)
and net earnings for the full year would have been $22.1 million ($0.66 per
basic share, $0.65 per diluted share).
(7) The Company's common shares split on a two-for-one basis on May 4, 2004.
All per share amounts in this table have been adjusted on a retroactive
basis to reflect the stock split. As well, the closing stock prices
presented in this table have been adjusted for ease of comparison.
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
54
Selected Financial and Operating Data
(Tabular dollar amounts expressed in thousands of United States dollars, except
per share and operating data)
Years ended December 31, 2005 2004 2003 2002 2001
------------------------ ---------- ---------- ---------- ---------- ----------
GROSS AUCTION SALES (UNAUDITED) $2,092,841 $1,789,402 $1,559,393 $1,376,206 $1,290,897
========== ========== ========== ========== ==========
STATEMENT OF OPERATIONS DATA:
Auction revenues $ 212,633 $ 182,257 $ 161,542 $ 133,552 $ 116,991
Direct expenses (27,035) (23,472) (22,099) (19,684) (18,861)
---------- ---------- ---------- ---------- ----------
185,598 158,785 139,443 113,868 98,130
Depreciation and amortization (13,172) (12,708) (11,773) (9,208)(2) (9,076)(2)
General and administrative (94,670)(1) (85,667)(1) (71,265)(1) (63,786) (56,517)
---------- ---------- ---------- ---------- ----------
Earnings from operations 77,756 60,410 56,405 40,874 32,537
Interest expense (2,224) (3,217) (4,772) (4,302) (4,024)
Gain on disposition of capital assets 6,565 229 17 1,758 721
Other income 417 824 1,043 697 688
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 82,514 58,246 52,693 39,027 29,922
Income taxes (28,934) (23,347)(3) (16,099) (10,656) (9,868)(3)
---------- ---------- ---------- ---------- ----------
Net earnings $ 53,580 $ 34,899 $ 36,594 $ 28,371 $ 20,054
========== ========== ========== ========== ==========
Net earnings per share-diluted(4) $ 1.54 $ 1.01 $ 1.07 $ 0.84 $ 0.59
========== ========== ========== ========== ==========
BALANCE SHEET DATA (END OF YEAR):
Working capital (including cash) $ 84,108 $ 36,871 $ 35,700 $ 25,443 $ 19,279
Total assets 500,896 443,100 413,362 329,136 275,543
Long-term debt 43,322 10,792 27,350 62,612 61,217
Total shareholders' equity 325,183 289,264 252,779 199,374 165,933
SELECTED OPERATING DATA (UNAUDITED):
Auction revenues as percentage
of gross auction sales 10.16% 10.19% 10.36% 9.70% 9.06%
Number of consignors at industrial auctions 27,912 24,868 23,480 20,919 19,196
Number of bidders at industrial auctions 213,896 202,571 181,039 156,010 139,339
Number of buyers at industrial auctions 62,832 58,858 55,946 50,126 46,647
Number of permanent
auction sites (end of year) 23 22 22 22 21
(1) General and administrative expenses in 2003 include stock-based
compensation expense of $1.0 million relating to the prospective adoption
of the fair value method of accounting for stock-based compensation
effective January 1, 2003. Stock-based compensation expense in both 2005
and 2004 was $1.5 million.
(2) The Company stopped amortizing goodwill effective January 1, 2002 in
accordance with new accounting pronouncements. The amortization expense in
2001 was $1.7 million.
(3) 2004 income tax expense includes $2.1 million relating to realized foreign
exchange gains at the subsidiary level on certain term debt that came due
in 2004, which is not expected to recur in future periods. 2001 income tax
expense includes a charge of $2.0 million for withholding taxes paid on an
intercompany dividend.
(4) The Company's common shares split on a two-for-one basis on May 4, 2004.
All per share amounts in this table have been adjusted on a retroactive
basis to reflect the stock split.
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
55
Board of Directors
Overseeing the overall direction of our Company is our Board of Directors. We
have always been proud of our corporate governance and have a majority of
independent directors on our Board. We adhere to a strict Code of Business
Conduct and Ethics, which applies to all employees, officers and directors. The
Code, together with other governance materials, including our Report on
Corporate Governance, is available on the rbauction.com web site.
(PHOTO OF PETER J. BLAKE)
(PHOTO OF BEVERLEY A. BRISCOE)
(PHOTO OF C. RUSSELL CMOLIK)
(PHOTO OF CHARLES E. CROFT)
(PHOTO OF ERIC PATEL)
(PHOTO OF G. EDWARD MOUL)
(PHOTO OF ROBERT W. MURDOCH)
(PHOTO OF DAVID E. RITCHIE)
CHAIRMAN
2005 ANNUAL REPORT | RITCHIE BROS. AUCTIONEERS
56
Shareholder Information
Address
Ritchie Bros. Auctioneers Incorporated
6500 River Road
Richmond, BC
Canada, V6X 4G5
Telephone: 604.273.7564
Canada (toll-free) 1.800.663.1739
USA (toll-free) 1.800.663.8457
Facsimile: 604.273.6873
Website: www.rbauction.com
Board of Directors
David E. Ritchie Chairman
Peter J. Blake Director & Chief Executive Officer
C. Russell Cmolik Director
Charles E. Croft Director
G. Edward Moul Director
Eric Patel Director
Beverley A. Briscoe Director
Robert W. Murdoch Director
Mr. Moul serves as Lead Independent Director. Shareholders wishing to speak to
the Lead Independent Director should call 604.233.6153 or send an email to
leaddirector@rbauction.com.
Mr. Moul does not intend to stand for re-election at the Company's Annual
Meeting of Shareholders on April 13, 2006. It is anticipated that Mr. Croft will
be appointed Lead Independent Director immediately following the Annual Meeting,
subject to him being re-elected to the board at the meeting.
Management Advisory Committee
Peter J. Blake* Chief Executive Officer
Robert S. Armstrong VP - Finance & Chief Financial Officer;
Corporate Secretary
C. Michael Battistel VP - Information Technology; Chief Information Officer
Scott L. Forke VP - Central Division, USA
Curt C. Hinkelman VP - Great Lakes Division, USA
Robert K. Mackay* President - United States, Asia and Australia
David D. Nicholson* Senior VP - South Central USA, Mexico
and South America Divisions
Victor E. Pospiech VP - Administration & Human Resources
C. Denis Prevost VP - National Accounts
Michael G. Ritchie VP - Western Canada Division
J. Dean Siddle VP - Senior Valuation Analyst
Steven C. Simpson VP - Southwest Division, USA
Kevin R. Tink VP - Agricultural Division
R. Clay Tippett VP - Marketing, Customer Relations & Real Estate Division
Sylvain M. Touchette VP - Eastern Canada Division
Guylain Turgeon* Senior VP -- Managing Director European Operations
Randall J. Wall* President -- Canada, Europe and Middle East
Robert K. Whitsit * Senior VP - Southeast and Northeast
Divisions, USA
* Member of Executive Council
Corporate Governance
Corporate governance information, including the Company's Report on
Corporate Governance, which is included in the Company's Information
Circular, is available on the Company's website at www.rbauction.com.
Investor Relations
Securities analysts, portfolio managers, investors and representatives of
financial institutions seeking financial and operating information may contact:
Investor Relations Department
Ritchie Bros. Auctioneers
6500 River Road
Richmond, BC
Canada, V6X 4G5
Telephone: 604.273.7564
Canada (toll-free) 1.800.663.1739
USA (toll-free) 1.800.663.8457
Facsimile: 604.273.2405
Email: ir@rbauction.com
Copies of the Company's fillings with the U.S. Securities & Exchange Commission
and with Canadian securities commissions are available to shareholders and other
interested parties on request or can be accessed directly on the internet at
www.rbauction.com.
Annual General Meeting
The Annual General Meeting of the Company's shareholders will be held at 11am on
Thursday April 13, 2006 at the Best Western Richmond Hotel, 7551 Westminster
Highway, Richmond, BC V6X 1A3.
Stock Exchanges
Ritchie Bros. Auctioneers Incorporated is listed on the New York Stock Exchange
and the Toronto Stock Exchange and on both exchanges, trades under the symbol
"RBA".
Transfer Agent
Communications concerning transfer requirements, address changes and lost
certificates should be directed to:
Computershare Trust Company of Canada
510 Burrard Street
2nd Floor
Vancouver, British Columbia
Canada V6C 3B9
Telephone: 604.661.0226
Canada and USA (toll-free): 1.800.564.6253
Facsimile: 604.661.9401
Facsimile (toll-free): 1.800.249.7775
Email: kimwong@computershare.com
Self-service www.computershare.com
Co-agent in the United States:
Computershare Trust Company of New York
New York, NY
Auditors
KPMG LLP
Vancouver, Canada
RITCHIE BROS. AUCTIONEERS | 2005 ANNUAL REPORT
57
AUCTION SITES
(MAPS WITH DIRECTIONS)
CANADA
VANCOUVER, BC (1)
Tel +1.604.580.0166 Fax +1.604.0580.1245
PRINCE GEORGE, BC (2)
Tel +1.250.963.8491 Fax +1.250.963.8135
GRANDE PRAIRIE, AB (3)
Tel +1.780.538.1100 Fax +1.780.539.7230
EDMONTON, AB (4)
Tel +1.780.955.2486 Fax +1.780.955.2662
TORONTO, ON (5)
Tel +1.905.857.2422 Fax +1.905.857.5195
MONTREAL, QC (6)
Tel +1.450.464.2888 Fax +1.450.464.4460
TRURO, NS (7)
Tel +1.902.895.3700 Fax +1.902.662.2272
USA
OLYMPIA, WA (8)
Tel +1.360.956.1500 Fax +1.360.956.1508
SACRAMENTO, CA (9)
Tel +1.530.724.3900 Fax +1.530.724.3270
LOS ANGELES, CA (10)
Tel +1.951.940.9441 Fax +1.951.940.9442
PHOENIX, AZ (11)
Tel +1.602.269.5631 Fax +1.602.269.5674
ALBUQUERQUE, NM (12)
Tel +1.505.836.0738 Fax +1.505.839.2070
DENVER, CO (13)
Tel +1.303.659.3962 Fax +1.303.659.2902
FORT WORTH, TX (14)
Tel +1.817.237.6544 Fax +1.817.238.9898
HOUSTON, TX (15)
Tel +1.713.455.5200 Fax +1.713.455.5270
KANSAS CITY, MO (16)
Tel +1.816.318.9159 Fax +1.816.318.9124
BUXTON, ND (17)
Tel +1.701.847.2388 Fax +1.701.847.3065
MINNEAPOLIS, MN (18)
Tel +1.952.469.1700 Fax +1.952.469.1732
CHICAGO, IL (19)
Tel +1.815.941.6400 Fax +1.815.942.8053
NASHVILLE, TN (20)
Tel +1.615.453.4549 Fax +1.615.453.4550
ATLANTA, GA (21)
Tel +1.770.304.3355 Fax +1.770.304.3366
STATESVILLE, NC (22)
Tel +1.704.873.6633 Fax +1.704.873.3394
ORLANDO, FL (23)
Tel +1.863.420.9919 Fax +1.863.420.2447
NORTH EAST, MD (24)
Tel +1.410.287.4330 Fax +1.410.287.4332
MEXICO
TOLUCA (25)
Tel +52.72.22.1129.22 Fax +52.72.22.1129.40
SOUTH EAST ASIA
SINGAPORE (26)
Tel +65.6477.9222 Fax +65.6477.9233
EUROPE
MOERDIJK, THE NETHERLANDS (27)
Tel +31.168.39.22.00 Fax +31.168.39.22.50
LIVIRNO, ITALY (28)
Tel +39.0523.241.094 Fax +39.0523.943.808
SAGUNTO, SPAIN (29)
Tel +34.962.69.85.00 Fax +34.962.67.35.65
MIDDLE EAST
DUBAI, UAE (30)
Tel +971.4.883.8398 Fax +971.4.883.8495
AUSTRALIA
GOLD COAST, QLD (31)
Tel +61.7.3382.4444 Fax +61.7.3382.4433
MELBOURNE, VIC (32)
Tel +61.3.9369.7322 Fax +61.3.9369.7344
(RITCHIE BROS. LOGO)
Auctioneers
Ritchie Bros. Auctioneers
6500 River Road
Richmond, BC
Canada V6X 4G5
Tel: 604.273.7564
Fax: 604.273.6873
www.rbauction.com