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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 2007
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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
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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, 2007 By: /s/ ROBERT S. ARMSTRONG
--------------------------
Robert S. Armstrong,
Corporate Secretary
Ritchie Bros. Auctioneers ANNUAL REPORT 2006
(RB RITCHIE BROS. LOGO)
Auctioneers
(PICTURE)
(PICTURE)
IN 2006, RITCHIE BROS. AUCTIONEERS CONDUCTED 177 UNRESERVED INDUSTRIAL AUCTIONS,
141 UNRESERVED AGRICULTURAL AUCTIONS AND ONE UNRESERVED REAL ESTATE AUCTION.
WE CURRENTLY HAVE OVER 110 OFFICES IN 27 COUNTRIES, INCLUDING 34 AUCTION SITES.
WE SELL A WIDE RANGE OF CONSTRUCTION, TRANSPORTATION, AGRICULTURAL, MINING,
FORESTRY, PETROLEUM, MATERIAL HANDLING, MARINE AND REAL ESTATE ASSETS. ALL ITEMS
IN EVERY RITCHIE BROS. AUCTION ARE SOLD ON AUCTION DAY TO THE HIGHEST BIDDER
WITHOUT MINIMUM BIDS OR RESERVE PRICES.
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. GAS is not a measure of revenue presented in our
Statements of Operations.
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, 2006, which is included in the Financial Information
section of this Annual Report.
GROSS AUCTION SALES in billions of US dollars
(GRAPH)
BUYERS in thousands
(GRAPH)
CONSIGNORS in thousands
(GRAPH)
CONTENTS
To our Fellow Shareholders 2
Creating a Global Marketplace 9
Why Buyers Choose Ritchie Bros. 17
Why Sellers Choose Ritchie Bros. 21
2006: Another Record Year 26
M07 -- Improving our Business Processes 28
The Future of Ritchie Bros. 31
Financial Information 35
Supplemental Quarterly Data 59
Selected Financial and Operating Data 60
Board of Directors 61
Shareholder Information 62
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 1
RITCHIE BROS. AUCTIONEERS:
THE PAST, PRESENT AND FUTURE OF ORANGE
For over 40 years, Ritchie Bros. has been proudly displaying orange...orange
flags, orange vests, orange jackets, orange lot stickers, orange signs and more.
At first glance, it may seem like just a corporate color; but to the members of
our team, orange embodies our history and our culture.
The Company started out small, as a family business in the town of Kelowna,
British Columbia. Brothers Ken, John and Dave Ritchie founded the business,
based on the principles of treating customers fairly and operating to the
highest standards of business ethics. Those core values have not changed since
the brothers held their first industrial auction in June 1963. A dedication to
these basic principles and our commitment to the unreserved auction process have
contributed to our growth over more than 40 years. Today we are a public company
with annual gross auction sales in excess of $2.7 billion.
And we're continually evolving and breaking new ground. During 2006, we held
unreserved auctions in 13 countries around the globe, including our first
auctions in France and Portugal.
The Ritchie Bros. team includes over 800 full-time and another 1,000 part-time
employees. Together, we helped 32,000 consignors sell 240,000 lots in 2006. And
we welcomed over 241,000 bidders from all over the world to our auctions.
By using unreserved auctions to create a global marketplace for our customers,
Ritchie Bros. has become the largest industrial auctioneer in the world. We
attribute our growth and success to the founding principles established by Ken,
John and Dave. By their actions, the brothers defined what it means to be
orange.
(THINK ORANGE LOGO)
(PICTURE)
2 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
TO OUR FELLOW SHAREHOLDERS:
THE "THINK ORANGE" THEME OF THIS ANNUAL REPORT IS MORE THAN A REFERENCE TO OUR
CORPORATE COLOR; IT IS A REFERENCE TO OUR CORPORATE CULTURE. As Ritchie Bros.
employees, we often describe ourselves as having orange blood or having been
dipped in orange ink. Our orange culture is one that stresses teamwork and a
dedication to providing the best possible customer service. It emphasizes
integrity and fairness -- we do what is right. We work hard, we work together
and we have fun. To us, "Thinking Orange" means remembering the basics and
keeping it simple. This culture drives our growth and makes Ritchie Bros. a
great place to work -- it is worth preserving and cultivating.
Our culture and our commitment to the unreserved auction process have helped us
become the world's largest industrial auction company. An ever-increasing number
of equipment owners are choosing to buy and sell at our unreserved auctions --
they want access to the global marketplace and that's what a Ritchie Bros.
auction delivers. Our gross auction sales in 2006 exceeded $2.7 billion, a
colossal 30% increase over the prior year, which was particularly impressive as
it followed growth in 2004 and 2005 of 15% and 17%, respectively. This growth
speaks volumes about the momentum we are currently enjoying. Our auctions match
local supply with global demand -- a model that has proven to be very powerful
in today's transparent market for used equipment.
Industry analysts believe that the world-wide value of used equipment
transactions (of the types we have traditionally sold) is in the range of $100
billion per year. We sell more used trucks and equipment than anyone else in the
world and yet, using these industry estimates, our market share is less than 3%
of this highly fragmented market. Using our most mature market as a benchmark,
we see significant growth opportunity for our Company. We have been operating in
Canada for over 40 years and now enjoy sales in excess of $500 million per year.
The United States and European Union economies are each roughly ten times the
size of the Canadian economy. This suggests that our auction sales in the US and
the EU could each be in the range of $5 billion if we were to achieve the level
of market penetration in those markets that we have earned in Canada. This puts
Ritchie Bros. in the very luxurious position of being able to achieve many years
of growth by concentrating our efforts on the US and EU markets, rather than
being dependant on the developing markets for our growth. However, our "Think
Orange" culture drives us to also plant the seeds for our next wave of growth,
which is why we have people on the ground in India, China, Japan and Eastern
Europe and hope to start holding auctions in many of these markets in the coming
years.
While we clearly have significant growth potential, we are mindful that
preserving and cultivating our culture is more manageable when we grow at a less
aggressive pace than we have experienced in recent periods. Ours is a unique
business and it takes relatively more time for us to train new members of our
team. Because our most effective training is done one-on-one, we prefer to limit
the number of new hires we bring on at any one time, especially when adding new
members to our sales force. It comes back to our culture. Our preference is to
pursue sustainable growth with a consistently high level of customer service
rather than shooting for aggressive growth and running the risk of watering down
the customer service that differentiates us so clearly from our competitors.
Our growth strategies are detailed later in this Annual Report but are worth
outlining here. To achieve our targeted sales growth, we are moving forward
simultaneously on three different fronts. These three components of our strategy
work in concert and our growth can't be attributed to one dimension more than
another.
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 3
BEING ORANGE --
RITCHIE BROS. 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.
THE RITCHIE BROS. GROWTH STRATEGY INVOLVES SIMULTANEOUS EXPANSION IN THREE
AREAS:
1. OUR INFRASTRUCTURE
2. OUR SALES TEAM
3. THE QUANTITY AND RANGE OF ASSETS WE SELL
By infrastructure, we are referring to the behind-the-scenes members of our
team, our international network of auction sites and the business processes and
systems that we use to conduct our auctions. We plan to add an average of two or
three auction sites to our network each year and our M07 initiatives are helping
us develop business processes that are efficient, consistent and scalable. We
are also adding yard, customer service and administrative people to our team --
all in an effort to lay the foundation for future growth. This infrastructure
doesn't drive our growth; however, it does provide the capacity for us to grow.
Recruiting and training new members for our sales team has a direct impact on
our growth. As noted above, we prefer to grow our sales force less quickly than
other companies. Ours is very much a relationship business and our Territory
Managers are the main point of contact with our customers -- they are
responsible for explaining a value-added concept that is new to many equipment
owners. We are always on the look-out for bright, hard-working, positive
attitude people (with orange blood) who we think will thrive at Ritchie Bros. We
understand there is a war for talent out there so we're committed to providing
our people with a great workplace and opportunities to become future leaders of
our global team.
The final dimension of our strategy is our push to increase our market share in
our core markets of construction, transportation and agricultural equipment, and
also to sell more assets in categories that are complementary to these core
markets. Examples include mining, forestry, industrial marine, real estate and
other categories that fit well with our business. Our infrastructure provides
the foundation, our sales team develops and maintains relationships with our
customers, and we target an ever-increasing volume and range of assets -- three
components of a single strategy.
The backdrop to our strategic plan is the global market for used equipment. The
supply of used equipment has been very tight in recent years thanks to the
strong economy -- when equipment is working, it isn't being sold. However, if
there was to be a material slowdown, it could arguably be very good for Ritchie
Bros. We have demonstrated our ability to grow our business at all points in the
economic cycle. In most recent periods, even when the market has been tight, we
believe we have been able to grow our business by increasing our market share. A
softening economy would likely bring more equipment to market and help us
maintain the momentum of recent years. In our experience, as the supply of used
equipment increases, resale values
(PICTURE)
4 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
MANAGEMENT ADVISORY COMMITTEE
(PHOTO OF BOB ARMSTRONG) (PHOTO OF MIKE BATTISTEL) (PHOTO OF PETER BLAKE) (PHOTO OF SCOTT FORKE) (PHOTO OF CURT HINKELMAN)
Bob Armstrong Mike Battistel Peter Blake Scott Forke Curt Hinkelman
VICE PRESIDENT VICE PRESIDENT, CHIEF EXECUTIVE OFFICER VICE PRESIDENT VICE PRESIDENT
FINANCE, INFORMATION 16 years with CENTRAL DIVISION,USA GREAT LAKES DIVISION, USA
CHIEF FINANCIAL TECHNOLOGY, Ritchie Bros. 26 years with 10 years with
OFFICER, CHIEF INFORMATION Ritchie Bros.* Ritchie Bros.
CORPORATE SECRETARY OFFICER
10 years with 2 years with
Ritchie Bros. Ritchie Bros.
(PHOTO OF ROB MACKAY) (PHOTO OF NICK NICHOLSON) (PHOTO OF VIC POSPIECH) (PHOTO OF DENIS PREVOST)
Rob Mackay Nick Nicholson Vic Pospiech Denis Prevost
PRESIDENT - SENIOR VICE PRESIDENT VICE PRESIDENT, VICE PRESIDENT
UNITED STATES, ASIA SOUTH CENTRAL USA, ADMINISTRATION NATIONAL ACCOUNTS
AND AUSTRALIA MEXICO AND SOUTH & HUMAN RESOURCES 18 years with
22 years with AMERICA DIVISIONS 6 years with Ritchie Bros.
Ritchie Bros. 18 years with Ritchie Bros.
Ritchie Bros.
(PHOTO OF DEAN SIDDLE) (PHOTO OF STEVE SIMPSON) (PHOTO OF KEVIN TINK)
Dean Siddle Steve Simpson Kevin Tink
VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT
SENIOR VALUATION SOUTHWEST DIVISION, AGRICULTURAL AND
ANALYST USA WESTERN CANADA
12 YEARS WITH 17 YEARS WITH DIVISIONS
RITCHIE BROS. RITCHIE BROS. 21 YEARS WITH
RITCHIE BROS.*
(PHOTO OF CLAY TIPPETT) (PHOTO OF SYLVAIN TOUCHETTE) (PHOTO OF GUYLAIN TURGEON) (PHOTO OF RANDY WALL) (PHOTO OF ROB WHITSIT)
Clay Tippett Sylvain Touchette Guylain Turgeon Randy Wall Rob Whitsit
VICE PRESIDENT VICE PRESIDENT SENIOR VICE PRESIDENT PRESIDENT - SENIOR VICE PRESIDENT
MARKETING, EASTERN CANADA DIVISION MANAGING DIRECTOR CANADA, EUROPE SOUTHEAST AND
CUSTOMER RELATIONS 25 years with EUROPEAN OPERATIONS AND MIDDLE EAST NORTHEAST DIVISIONS,
& REAL ESTATE DIVISION Ritchie Bros. 18 years with 19 years with USA
20 years with Ritchie Bros. Ritchie Bros. 29 years with
Ritchie Bros. Ritchie Bros.*
* Includes years with predecessor auction company acquired by Ritchie Bros.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 5
do not decline as one might expect. During periods of uncertainty, many
equipment owners shift their buying preferences from new equipment to good
quality used equipment, which has the effect of increasing the demand for the
equipment at our auctions. All that said, while we will pursue the business and
deliver value to as many customers as we possibly can, we do not reasonably
expect to maintain the sales growth rates of the past three years. Our focus
continues to be on building long-term relationships with our customers that
provide enduring value for both them and us.
Our Board of Directors continues to provide good guidance to the Company and
they are firmly behind our plan to reinvest our cash flow in the business to the
extent that we have quality investment opportunities. After capital expenditures
have been funded, it continues to be our plan to return any excess funds to our
shareholders. To date this has been done via quarterly dividends. Even with
plans to spend between $50 and $100 million on capital projects during each of
the next several years, we are still comfortably able to pay meaningful
dividends. In 2006, we paid out $26.9 million, or 47% of our after-tax earnings,
as dividends.
During 2006, Dave Ritchie stepped down as the Chairman of our Board and a
Director of the Company he founded over 40 years ago with brothers Ken and John.
Dave has been appointed to the honorary position of Chairman Emeritus and we
know full well that he will never be far from our auctions or our customers. In
fact, he has made it very clear to us that as long as his name is on the door,
he'll be keeping a close eye on us. Dave has been a mentor to every member of
our management team and we are honoured to be handed the reins of the Company he
built. On behalf of all Ritchie Bros. employees and customers, we want to thank
Dave for his vision, dedication, friendship and leadership. Ritchie Bros. has
certainly evolved from the little auction company that started out of necessity
in a furniture store in the 1950s, but our core values are unchanged. And by
sticking to these basics, we believe we'll be able to continue to grow our
Company and realize the full potential of Dave's vision.
Dave taught us what it means to "Think Orange" and his legacy is the current
team of employees, all 800+ of them, who walk the talk every day. It was a
challenging year for our employees as we managed unprecedented growth, and we
could not have accomplished such amazing results without the dedicated men and
women we work with. We thank them all for their commitment to providing the best
possible customer service, even under pressure. We wouldn't be in business if we
didn't create value for our customers and we believe that our team created a lot
of value this year. Thanks are also due to our shareholders for their confidence
and ongoing support; and most importantly -- a big thanks to our customers,
whose participation in our auctions in ever-increasing numbers lets us know that
we are on the right track.
/s/ Charles E. Croft
----------------------------------------
Charles E. Croft
Chairman
/s/ Peter J. Blake
----------------------------------------
Peter J. Blake
Chief Executive Officer
6 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Orlando, Florida USA
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 7
(PICTURE)
8 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Nashville, Tennessee USA
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 9
"The fact that we provide a global marketplace at our auctions is very important
to sellers of equipment. The more people that attend the sales, the more
exposure their equipment gets."
(PHOTO OF DENISE LARRABURE)
DENISE LARRABURE Coordinator, Training & Development -- Vancouver, BC
CREATING A GLOBAL MARKETPLACE
RITCHIE BROS. HOLDS HUNDREDS OF UNRESERVED AUCTIONS EACH YEAR WITH INTERESTED
BIDDERS PARTICIPATING FROM AROUND THE WORLD.
A typical Ritchie Bros. unreserved industrial auction in 2006 generated gross
auction sales of more than $14 million, and included more than 1,350 lots from
approximately 180 consignors. Over 1,360 bidders from around the world
participated in a typical Ritchie Bros. industrial auction in 2006.
Approximately 75 percent came in person to the auction site, while 25 percent
participated over the internet or by proxy bid. The geographic diversity of
these bidders is reflected in the fact that over 50 percent of gross auction
sales in 2006 went to buyers from outside the region in which the auction was
held. In addition, more than 80 percent of our buyers were end users such as
contractors (as compared to resellers). This international crowd of end user
buyers allows us to deliver a global marketplace where sellers are able to
transcend local market conditions and receive the global market price for their
equipment.
THE USED EQUIPMENT MARKET
The market for used industrial equipment is massive and highly fragmented.
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. Even though we are the largest
participant, our market share is probably less than three percent.
Most of the equipment changes hands outside the auction channel. We estimate
that less than 10 percent is sold at auction. The majority is traded through
brokers or dealers or is sold on a private treaty basis, where an equipment
owner sells his excess fleet by himself by putting a "for sale" sign on the
equipment and possibly placing ads on the internet
(PICTURE)
10 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Los Angeles, California USA
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 11
"We truly are a full-service auction company, working hard to make things easier
for our customers. From sending out auction brochures, advertising on the
internet, refurbishing the equipment and setting up the sale, we take care of
every detail."
(PHOTO OF RAUL CASTANO)
Raul Castano Territory Manager -- Spain
(PICTURE)
and in some trade publications, then dealing directly with any interested party
who calls. These owners who have traditionally marketed their equipment on their
own represent the largest growth opportunity for Ritchie Bros. Once we introduce
these owners to our unreserved auctions and they realize that we are able to
expose their equipment to a far broader audience than they could ever reach by
themselves, our value proposition becomes persuasive. Our ability to match local
supply with global demand is a very compelling alternative to the inefficient
but traditional alternative.
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 an
opportunity for Ritchie Bros.
Because the used equipment market is so large and because there are so many
different factors influencing owners' decisions to sell, our business volume and
our ability to grow are not directly tied to economic cycles. Our growth is
dependent on our ability to develop and implement appropriate strategies and
thereby attract customers who would traditionally use less efficient channels.
However, there is a seasonal aspect to our business, with busier auction periods
being in the spring and fall. January, July and August have traditionally been
quiet months in our industry.
As our business has matured over the years, we have remained focused on steadily
increasing our share of the global equipment market. Our approach is simple --
grow our gross auction sales by hiring the best employees, developing strong
local relationships with our customers and offering those customers the best-run
unreserved auctions in the world.
There is a trend in our industry that is worth noting, because it is helping us
to increase our market share. The proliferation of information available on the
internet has dramatically increased the transparency of the equipment
after-market. No longer are buyers and sellers placed at a relative advantage or
disadvantage by their access (or lack of access) to information. Today, buyers
and sellers have ample and equal access to historic selling prices and
information about current inventories for sale. When it comes time to buy or
sell in this now transparent marketplace, equipment owners are turning, in ever
increasing numbers, to the most efficient channel -- a Ritchie Bros. unreserved
auction.
12 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
"Customers can come to the auction ahead of time to inspect the equipment. If
they are interested in a certain piece of equipment, we will help them get all
the information they need about that item."
(PHOTO OF JENNIFER MARIN QUINTANA)
Jennifer Marin Quintana Customer Service Manager -- Mexico
THE RITCHIE BROS. CUSTOMER
During 2006, we had 241,000 bidders participating in our auction sales and
32,000 consignments of equipment to our auctions. As we continue to grow as a
company and hold auctions in new locations, we are showing more and more people
what a Ritchie Bros. auction is all about. Each year we introduce thousands of
new customers to unreserved auctions.
(PICTURE)
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. In the last five years, over 35 percent of our
consignors were also buyers at our auctions -- these customers don't view our
auctions as either "the place to buy" or "the place to sell," they see our
auctions as an efficient marketplace for both buying and selling. We work with
large, multinational companies as well as small, family-run businesses. We work
with both end users of equipment and dealers. Everyone is treated the same at a
Ritchie Bros. auction -- we pride ourselves on our ability to deliver a level
playing field.
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 will see a regular auction schedule. Whether they have an
entire fleet of equipment to buy or sell -- or just one or two items -- our
customers know that their local Ritchie Bros. auction site will be holding an
unreserved auction soon. Sellers know they can easily add their items to our
next auction and that their equipment will be marketed to the world. Buyers know
they can attend one of our auctions, be the high bidder, and put their equipment
to work the very next day. Our goal is to provide a service that creates value
for our customers. The fact that an ever-increasing number of truck and
equipment owners are choosing to switch from their traditional methods of buying
and selling and are now participating in our unreserved auctions tells us that
we are creating value.
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 13
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. A typical appraisal team includes people from
the local area as well as one or more of our valuation specialists and,
if necessary, people with specialized expertise in the particular
equipment field.
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 preferences.
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 rbauction.com web site. 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 organized 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 CONDUCTING THE AUCTION
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.
14 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
AUCTION SUPPORT OFFICES
(PICTURE)
Vancouver, British Columbia Canada
Corporate Head Office
(PICTURE)
Lincoln, Nebraska USA
US Head Office
(PICTURE)
Moerdijk, The Netherlands
European Head Office
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 15
"I AM PROUD TO BE PART OF THE TEAM RESPONSIBLE FOR OUR CUSTOMERS' SATISFACTION
WHEN THEY ARE BUYING OR SELLING THEIR EQUIPMENT AT OUR AUCTIONS."
(PHOTO OF SABINE SCHIERHUBER)
SABINE SCHIERHUBER Sales Assistant/Secretary -- Austria
WHAT IS 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 at our auctions.
Our commitment to the unreserved auction process is one of our most significant
competitive advantages. We stick 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. Every employee in our company feels strongly about
the unreserved auction process. It's the only way for us to run our business and
is one of the essential aspects of "Thinking Orange."
(PICTURE)
16 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Edmonton, Alberta Canada
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 17
"Unreserved auctions allow everyone the opportunity to bid knowing they have a
fair chance to purchase a particular piece of machinery. There is no
disadvantage if you're representing yourself versus someone who is working for a
worldwide company."
(PHOTO OF KALLEE CRIGHTON)
Kallee Crighton Receptionist -- Brisbane, Australia
WHY BUYERS CHOOSE RITCHIE BROS.
THERE ARE A NUMBER OF PLACES A BUYER CAN GO TO ACQUIRE EQUIPMENT, YET AN
INCREASING NUMBER ARE CHOOSING TO BUY EQUIPMENT AT OUR UNRESERVED AUCTIONS. WHY?
- LEVEL PLAYING FIELD. Every Ritchie Bros. auction is open and transparent.
While some auctioneers permit consignors to bid on their own items, or will
bid on the equipment themselves in order to affect prices, we strictly
prohibit all forms of artificial price manipulation. Consignors are not
allowed to bid on their own equipment, either directly or through agents,
and we take a zero-tolerance approach when enforcing this policy. Our
commitment to this principle ensures that every Ritchie Bros. auction is
open and fair and that bidders are able to compete on an equal basis,
regardless of their economic strength or negotiating power.
- LIEN-FREE EQUIPMENT. 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
so that bidders can be confident that the equipment they are buying is
lien-free. If we can't deliver clear title, the buyer receives a full
refund.
- COMPREHENSIVE SELECTION. Our auctions look like an industrial equipment
supermarket: we offer an extremely broad range of assets, all at one
location. And the process of buying is simple and straightforward -- 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 was 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 wanting to
minimize the time spent away from their job sites.
(PICTURE)
18 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Stockholm, Saskatchewan Canada
(PICTURE)
(PHOTO OF TEX MAHLER)
TEX MAHLER -- ENVIRONMENT, HEALTH & SAFETY MANAGER, SHOWS HIS TRUE COLORS AT A
RECENT ORANGE DAY IN OUR VANCOUVER OFFICE.
- THE ABILITY TO INSPECT, TEST AND COMPARE. We make it easy for bidders to
inspect, test and compare the trucks and equipment in our auctions by
organizing our yards so that customers can efficiently view similar items
and determine the condition and value of the equipment before placing any
bids. We encourage customers to inspect the equipment ahead of time and do
their homework, since everything is sold "as is, where is." The market for
used income-producing assets is very different from the market for
commodities and collectibles. 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 strategically located close to airports, major highways and services
such as hotels and restaurants, making it easy for bidders from outside the
region to participate.
- AN EASY REGISTRATION PROCESS. All our auctions are organized in the same
fashion, no matter where in the world they are taking place, making it easy
for our customers to register and participate. Ritchie Bros. auctions are
open to the public and registration is free. It's a very open and
transparent way of doing business.
- NO BUYER'S PREMIUMS. Other than the small fees for buyers who use our
rbauctionBid-Live internet bidding service and a handling fee charged on
the sale of low value lots, Ritchie Bros. does not charge a buyer's
premium. At our auctions, the price you bid is the price you pay.
- INTERNET BIDDING. 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 place a proxy bid or, better yet, participate
online using rbauctionBid-Live. It 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.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 19
"Sometimes people cannot attend our auctions in person so our internet bidding
is a great option for them. They can stay in their office and bid live and in
real time on their computer."
(PHOTO OF VANESSA LANSING)
Vanessa Lansing Customer Service Manager -- Las Vegas, NV
ORANGE ONLINE: RBAUCTIONBID-LIVE
(PICTURE)
Since 2002, we have been offering the rbauctionBid-Live internet service to our
customers around the world, allowing qualified bidders to participate over the
internet, live and in real time, in our unreserved auctions. During 2006, more
than 9,600 customers from 76 countries purchased over $440 million worth of
trucks, equipment and real estate using rbauctionBid-Live. This is an increase
of more than 57 percent over 2005 and shows how popular the service has become.
More than 57,000 customers from 150 countries have now registered and received
approval to use rbauctionBid-Live.
While internet bidders represented approximately 24 percent of the total
registered bidders at Ritchie Bros. industrial auctions in 2006, the majority of
our customers still like to come to our auctions in person. The
rbauctionBid-Live service has enabled us to expand our bidding audiences by
creating 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. In 2006, internet bidders were the buyer or runner-up
bidder on 24 percent of the items offered online at our auctions. Since
launching the service in 2002, we have sold over $1 billion online.
One of the main reasons we have had such success with rbauctionBid-Live is that
our customers know they can trust us to treat them fairly. When an internet
bidder hears the auctioneer say, "I have $100,000; internet you'll need to be
$110,000," they know that he does in fact have a bid of $100,000. And when the
crowd at the auction site hears the auctioneer say, "now I have $110,00 on the
internet," they know that he does.
20 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Orlando, Florida USA
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 21
"We sell in hours what our customers have sometimes taken generations to build.
With that in mind, we always take the utmost pride in what we do and work as
hard as we can for a successful auction day."
(PHOTO OF JAMIE FRASER)
Jamie Fraser Sale Site Coordinator -- Prince George, BC
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. HOW DO WE DO THAT?
- A GLOBAL MARKETPLACE. Sellers feel confident knowing that an international
crowd will participate in the auction. Our consignors are able to expose
their assets to a much broader audience than they could otherwise reach,
enabling them to achieve fair market value for their items regardless of
local market conditions. On average, over half of our sales go to buyers
from outside the region in which the auction is held.
- A WORLDWIDE AUCTION NETWORK. With regularly scheduled auctions at 34
auction sites worldwide, plus numerous off-site sales, sellers are able to
put their equipment in Ritchie Bros. auctions around the globe at a time
and location that is convenient for them. In addition, consignors operating
in more than one market enjoy the convenience of dealing with one company
for all of their equipment disposition needs. Many customers have national
contracts with us, allowing them to take full advantage of our network of
auction sites.
- FLEXIBILITY. 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 provide a service that meets their specific
requirements.
- BROAD EXPOSURE. We provide the international marketing expertise needed to
sell our consignors' equipment to the world. With every industrial auction,
we produce approximately 50,000 full-color auction brochures to be mailed
to a strategic selection of customers from our proprietary database of over
400,000 potential bidders in more than 200 countries. We produce web site
listings, trade journal advertising and often create radio commercials and
press releases to make sure that potential buyers around the world and
across various industries are aware of the sale. Exposing the equipment to
the largest possible audience allows us to deliver the best possible
prices.
(PICTURE)
22 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Singapore
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 23
RBAUCTION.COM
(PICTURE)
The Ritchie Bros. web site has become a valuable source of information for
equipment owners around the world. They can see the current market value of
trucks, equipment and real estate based on the results of past Ritchie Bros.
auctions. They can also search for equipment in our upcoming auctions around the
world. And they can use rbauctionView and rbauctionBid-Live during our auctions.
During busy auction periods in 2006, more than 113,000 visitors per week used
rbauction.com, where they conducted an average of more than 490,000 equipment
searches, and more than 37,000 look-ups of past auction results.
(PICTURE)
- REFURBISHING EXPERTISE. With over 40 years of experience, we are able to
offer refurbishing recommendations to our customers to enhance the resale
value of our consignor's equipment and help them get the best dollar on
auction day. And if refurbishing work is to be done, we have
environmentally-certified refurbishing facilities at our permanent auction
sites around the world and can take care of it for the consignor.
- PEACE OF MIND. We make the entire process hassle-free for the seller. We
take care of all the details, including storing the equipment in our secure
yards before the sale. We handle questions from interested bidders, we take
care of the marketing and the title searches, and we 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 day-to-day operations.
- 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.
- ACCESS TO END USERS. More than 80 percent of the buyers at our auctions are
end users, as compared to wholesale buyers or resellers. The fact that most
of the buyers are end users means that higher prices can be achieved. These
bidders need the equipment; in many cases they want to purchase it today,
and put it to work tomorrow.
- RBAUCTION.COM EXPOSURE. With over 113,000 unique visitors each week during
busy auction periods in 2006, rbauction.com is one of the highest traffic
web sites in the equipment world and provides unparalleled exposure for our
consignors' equipment. The brochures we distribute prior to our auctions
are typically printed about three weeks prior to the auction. However,
thanks to the advertising value of a listing on rbauction.com, consignors
know that post-brochure consignments will still receive broad exposure to
potential bidders all over the world. In fact, it is not unusual for an
auction to double in size between the date the brochure is printed and the
date of the auction.
(PICTURE)
24 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
"Our facilities are at the top of their class. The theaters, catering, refurb,
sales offices and the grounds they sit on have to be the best. They help
complete the Ritchie Bros. selling and buying experience."
(PHOTO OF BLAINE MUSKOPF)
Blaine Muskopf Sale Site Coordinator -- Kansas City, Missouri
(PICTURE)
Phoenix, Arizona USA
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 25
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, Nashville or Phoenix (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, BUY LAND, CONSTRUCT FULL-SERVICE AUCTION, ADMINISTRATION AND
REFURBISHING FACILITIES, AND ESTABLISH A PERMANENT AUCTION SITE.
(PICTURE)
26 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
2006: ANOTHER RECORD YEAR
SALES OF TRANSPORTATION EQUIPMENT
(GRAPH)
SALES OF AGRICULTURAL LAND AND EQUIPMENT
(GRAPH)
THE IMPACT OF THINKING ORANGE WAS VERY EVIDENT IN 2006. OUR COMPANY GENERATED
GROSS AUCTION SALES OF OVER $2.7 BILLION, 30 PERCENT HIGHER THAN THE PREVIOUS
YEAR.
It was a record-breaking year in a number of ways. We held the most auctions
ever (more than 300 industrial, agricultural and real estate auctions). We
registered just under a quarter of a million bidders (up 13 percent over 2005).
We held the Company's largest auction ever in Orlando, Florida in February 2006,
with gross auction sales of $113 million. More than 5,125 registered bidders
from 56 countries and all 50 U.S. states registered to bid on over 5,000 truck
and equipment items at the five-day auction. Eighty-one percent of purchases
went to buyers from outside the state of Florida; twenty-five percent went to
buyers from outside the United States.
We also held the Company's largest-ever Canadian auction in Edmonton, Alberta in
October 2006, generating gross auction sales of CA$52 million.
Because an ever-increasing number of equipment owners chose to sell their
equipment in our auctions, record-breaking auctions were held at many Ritchie
Bros. locations, including: Lakeville, MN; North East, MD; Atlanta, GA;
Sacramento, CA; Perris, CA; Phoenix, AZ; Houston, TX; Montreal, QC; Prince
George, BC; Surrey, BC; Sagunto, Spain; Livorno, Italy; Melbourne, Australia;
and Toluca, Mexico.
We entered new markets, with our first-ever auctions in Portugal and France, and
our first-ever auction focused primarily on real estate (held in Minnesota). We
also appointed sales representatives responsible for Russia and Romania and now
have offices in 27 countries.
In 2006, we also broke records for online bidding. More than 9,600 customers
from 76 countries purchased over $440 million worth of trucks, equipment and
real estate this year using rbauctionBid-Live. This is an increase of more than
57 percent over last year's online gross auction sales. Internet bidders were
either winner or runner-up bidder on 24 percent of the items offered online in
our 2006 auction sales. Our cumulative online sales now exceed $1 billion.
We also expanded our network of permanent auction sites. We held our first sales
at our Buxton, North Dakota and Saskatoon, Saskatchewan agricultural auction
facilities. And we opened our newest industrial auction facility in Nashville,
Tennessee. We also started building a replacement facility in Denver, Colorado
(due to open in April 2007), a new auction facility in Columbus, Ohio (also due
to open in April 2007) and a replacement facility in Houston, Texas (scheduled
to open in 2008).
COMING OUT OF RETIREMENT to catch bids at a 2006 auction in Kelowna, BC were
Russ Cmolik, John Wild, Marv Chantler, Dick Bartel, Mike Ritchie, Marty Pope and
Don Chalmers.
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 27
Ratliff City, Oklahoma USA
(PICTURE)
28 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
IMPROVING OUR BUSINESS PROCESSES
(RB M07 LOGO)
OUR FOUNDATION FOR GROWTH
IN 2004, WE CONDUCTED A CORPORATE STRATEGY REVIEW AND CONCLUDED THAT WE NEEDED
TO REFINE OUR OPERATING PROCEDURES AND MAKE OURSELVES MORE PRODUCTIVE. WE
ESTABLISHED THE GOAL OF DESIGNING AND IMPLEMENTING MORE EFFICIENT, CONSISTENT
AND SCALABLE PROCESSES SO WE COULD ACHIEVE OUR GROWTH OBJECTIVES.
We labeled the project M07, with the first large-scale initiative being the
implementation, in 2006, of several components of an Oracle enterprise resource
planning system. We are now in the process of developing several custom-built
applications (labeled rbOS, the Ritchie Bros. Operations System) to handle the
more unique aspects of our business. In 2006, we continued to roll out upgrades
to our auction site management system. And we launched improved auction
scheduling and reporting procedures that enable information and best practices
to be shared efficiently right across the company, allowing us to improve and
enhance our auction services at a quicker pace.
In addition, we launched and will continue to launch non-technology initiatives
to further improve the efficiency, consistency and scalability of our
operations. Examples of this include new training programs, new incentive
compensation initiatives, new auction site policies and procedures, and new
reporting structures.
Our auction operations have become more efficient as we've created some new
field roles with responsibility for the non-sales side of our business, enabling
our sales team to spend more time with our customers. As we grow, we need to be
continually on the watch for ways to improve efficiency. We made great progress
in 2006 and look forward to rolling out further improvements in the years ahead.
M07 has become a way of doing business for us. We look at what we do with a keen
eye on continuous improvement and making our business processes as efficient,
consistent and scalable as possible. We sold $2.7 billion worth of equipment in
2006, but our sights are set much higher than that.
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 29
M07 INITIATIVE TO IMPROVE CUSTOMER SERVICE: THE VIRTUAL RAMP
We pride ourselves on maintaining a consistent auction process regardless of
where we are holding our auctions. Traditionally we start by selling the mobile
equipment parade-style - it rolls over an elevated ramp in front of a seated
crowd. Following the ramp portion of the auction, we move into the equipment
yard. The auctioneer works from a sound truck and the bidding audience walks
with him as he sells the stationary equipment. For obvious reasons, the
stationary part of the auction can be uncomfortable for our customers during
Dubai summers and Edmonton winters. We wanted to address this to ensure that
weather would not be a limitation on our growth.
Our solution is the Virtual Ramp. Now, at an increasing number of Ritchie Bros.
auction sites, when the ramp portion of the auction is complete, we close the
doors on the auction theater, lower a screen, display pictures and descriptions
of the stationary lots, and carry on with the auction. The bidders never need to
leave the comfort of the heated or air-conditioned theater.
As we refine and enhance our V-Ramp service, we intend to deploy it throughout
our network of auction sites.
(PICTURE)
30 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Phoenix, Arizona USA
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 31
THE FUTURE OF RITCHIE BROS.
OUR BUSINESS CONTINUES TO GROW AND DEVELOP AND WE EXPECT FURTHER CHANGES IN THE
COMING YEARS -- IT'S PART OF BEING ORANGE: WE ARE HARD-WIRED FOR CHANGE.
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. We are also committed to maintaining the unique Ritchie Bros.
culture, always continuing to "Think Orange."
The number of consignors and bidders choosing Ritchie Bros. continues to grow.
While we have an extensive customer base, we must continue to introduce our
services to truck and equipment owners and farmers who don't yet know us, as
well as to industries and regions where we currently only scratch the surface.
At the same time, we know we must remain flexible and responsive to the needs of
our customers. 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 value and service.
We intend to concentrate on the following areas in the coming years:
OUR INFRASTRUCTURE
(PICTURE)
Over the next several years, we expect that most of our sales growth will come
from the United States and western Europe and we plan to concentrate our
investments and expansion efforts in these markets.
At the same time, we will be working with customers and opening more offices in
developing markets in Asia, the Middle East, South America and Eastern Europe.
As these and other new markets evolve, we expect to increase our activity
levels, moving beyond the pioneering stage and eventually holding local
auctions. While we are not counting on these emerging markets to fuel our growth
over the next five years, we are planting the seeds and laying the foundation
for future growth.
(PICTURE)
32 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
(PICTURE)
Since 1997, we have made significant investments in our network of auction sites
-- adding new sites and upgrading several existing ones.
We intend to add or expand permanent auction sites over the coming years as
suitable opportunities are identified, generally at the average rate of two or
three per year, with a near-term focus on the United States and Europe.
During 2007, we will be opening a replacement site in Denver, Colorado and a new
site in Columbus, Ohio. We also hope to acquire land in several other locations
so that site development work can begin. In 2008, we expect to open a
replacement site in Houston, Texas.
OUR SALES TEAM
(PICTURE)
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.
Our Territory Managers are the main point of contact with our customers and it
is critical that we continue to recruit, train and develop the best people for
our sales force. Of course, all of our employees play a role in the service we
provide to our customers. The Ritchie Bros. team has grown from 600 to over 800
full-time employees during the past two years as we have expanded into new
markets around the world and increased our sales volumes. Maintaining our
corporate culture as we grow is a very high priority, so our plan is to add
employees at a measured pace, knowing that a controlled growth rate will allow
us to maintain our high level of customer service.
THE QUANTITY AND RANGE OF ASSETS WE SELL
We will continue to look for growth both within and outside our traditional
markets -- wherever we can see opportunities to create value for customers.
During 2006, we continued to expand our agricultural auction division, holding a
record number of unreserved agricultural auctions in Canada, as well as our
first unreserved agricultural auctions in the United States. We also continued
to expand our presence in the over-the-road truck and trailer market and the
industrial marine sector. In addition, we enjoyed early success selling real
estate in North America. These are all asset categories that interest our
customers, make good use of our existing infrastructure and fit readily into our
unreserved auction model.
Asset categories that make sense for Ritchie Bros. are ones that match up well
with our value proposition. In general, if an asset category appeals to our
customer base, and can be sold efficiently using our existing systems and
infrastructure, then it's a good fit.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 33
"It's rewarding when hard work leads to happy customers."
(PHOTO OF SIMON WALLAN)
Simon Wallan Divisional Manager, Agricultural Auction Division-- Grande Prairie,
AB
(PICTURE)
MANAGING RISK
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 2006, WHICH IS IN LINE WITH OUR TYPICAL BUSINESS MIX IN RECENT
PERIODS. IN THESE SITUATIONS WE UNDERWROTE THE AUCTION CONTRACTS TO MEET THE
SPECIFIC NEEDS OF OUR CUSTOMERS, 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.
34 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Moerdijk, The Netherlands
(PICTURE)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 35
FINANCIAL INFORMATION
PAGE
----
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
AUDITORS' REPORTS 48
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations 49
Consolidated Balance Sheets 50
Consolidated Statements of Shareholders' Equity 50
Consolidated Statements of Cash Flows 51
Notes to Consolidated Financial Statements 52
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, 2006 compared to the year ended December 31, 2005. This
discussion should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2006 and notes thereto, and with the
disclosures below regarding forward-looking statements and risk factors. The
date of this discussion is as of February 21, 2007. 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 tabular and related footnote dollar
amounts presented 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 as of
the date of this discussion, we operated from over 110 locations, including 33
auction sites, in more than 25 countries around the world. We sell, through
unreserved public auctions, a broad range of industrial assets, including
equipment, trucks and other assets used in the construction, transportation,
mining, forestry, petroleum, material handling, marine, real estate and
agricultural industries. Our mission is to use unreserved auctions to create a
global marketplace for our customers.
We operate mainly in the auction segment of the global industrial equipment
marketplace. Our primary target markets within that marketplace 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 less that 3%. Our secondary target markets
include agricultural and industrial real estate, which are related and
complimentary markets to our primary markets.
In 2006, 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 of buyers in recent periods. Consignors to our
auctions represent a broad mix of equipment owners, the majority being end users
of equipment. Consignment volumes at our auctions are 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 sellers that have traditionally disposed of equipment
through private sales.
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 widely recognized commitment to fair dealing. Other important strengths
include our size, the international scope of our operations, our extensive
network of auction sites, our large customer base, 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 maintain this commitment to the
unreserved auction process 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 in part 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, which we believe is a significant competitive advantage. Evidence of
this is the fact that in recent periods an average of over 50% of the equipment
sold at any particular auction has left 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 more
consignments, and so on. During the year ended December 31, 2006, we had more
than 241,000 bidder registrations at our industrial auctions, compared to
approximately 214,000 in 2005. We received more than 32,000 industrial asset
consignments in 2006, compared to almost 28,000 in 2005. 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 are the total
proceeds from all items sold at our auctions. Our strategies for accomplishing
this objective include, among others, continued development of market sectors
and regions in which we already operate and expansion into new and emerging
market sectors 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 to
realize the best possible return on the sale of his assets, we will pursue that
opportunity.
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.
36 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Attracting and retaining the best people is another component 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 M07, with the goal of
developing more efficient, consistent and scalable business processes to support
our growth objectives. We have reviewed all of our business processes and
systems, and this continuous improvement initiative has become an important
component of our growth strategy. We expect that the results of this initiative
will provide a platform for efficient growth and will allow us to increase our
revenues without an equivalent increase in our administrative expenses. Since
launching M07, we have implemented new systems and processes, including several
modules of an enterprise resource planning (or ERP) system, and anticipate that
continuous improvement projects will be an important part of our strategy well
into the future. We completed the first stages of our ERP implementation in the
third quarter of 2006. Additional M07 projects are scheduled to be completed in
2007 and future years.
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. Over 20% of the bidders at our auctions in 2006
participated over the internet.
The majority of our industrial auctions are held at our permanent auction sites,
where we own the land and facilities, or at regional auction units, where we
lease the land. We also hold off-site auctions at temporary locations, often on
land owned by one of the main consignors to the particular auction. Most of our
agricultural auctions are off-site auctions that take place on the consignor's
farm. During 2006, 91% of our gross auction sales was attributable to auctions
held at our permanent auction sites and regional auction units (2005 -- 90%).
During 2006, we conducted 177 unreserved industrial auctions at locations in
North America, Europe, the Middle East, Australia and Asia (2005 -- 153
auctions). We also held 141 unreserved agricultural auctions during the year,
primarily in Canada and the United States (2005 -- 99), and one real estate
auction. Although our auctions vary in size, the average industrial auction in
2006 had gross auction sales of $14.6 million, compared to approximately $13.2
million in 2005. Approximately 60% of our auction revenues was earned from
operations in the United States (2005 -- 57%), 21% was earned in Canada (2005 --
23%) and the remaining 19% was earned from operations in countries other than
the United States and Canada (primarily Europe, the Middle East and Australia)
(2005 -- 20%). We had 821 full-time employees at December 31, 2006, including
245 sales representatives, compared to 675 and 211, respectively, at the end of
2005.
We are a public company and our common shares are listed under the symbol "RBA"
on the New York and Toronto Stock Exchanges. On February 21, 2007 we had
34,679,700 common shares issued and outstanding and stock options outstanding to
purchase a total of 797,748 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
Gross auction sales is an important measure we use in comparing and assessing
our operating performance. It is not a measure of revenue presented in our
consolidated financial statements, but we believe that 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 on an annual basis.
In some situations, 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 consigned equipment is sold on an unreserved basis in the same
manner as other consignments. If the actual auction proceeds are less than the
guaranteed amount, our commission is reduced, and 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 financial exposure from guarantee contracts fluctuates over time, but
industrial auction guarantees are usually outstanding for less than 45 days.
Agricultural auction guarantees are generally outstanding for a longer period of
time, because many of the contracts are signed in the fall of one year for
auctions to be held in the spring of the next year.
The combined exposure at any time from all outstanding guarantee contracts can
fluctuate significantly from period to period, but the quarter-end balance
averaged approximately $57 million in 2006. 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. Following our purchase of the equipment, we assign it to a
specific auction and sell it 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. We generally refer to our guarantee and outright purchase business as our
underwritten or at-risk business.
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. In addition, we do not have a target for the
relative mix of contracts. As a result, the relative mix of contracts in a
particular quarter or year fluctuates and is not necessarily indicative of the
mix in future periods. The composition of our auction revenues and our auction
revenue rate (i.e. auction revenues as a percentage of gross auction sales) are
affected by the mix and performance of contracts entered into with consignors in
the 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
(PERFORMANCE GRAPH)
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 37
Prior to 2002, our long-term expected average annual 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 annual
auction revenue rate increased to approximately 9.30%. In 2003 we determined
that we were achieving a sustainably higher average auction revenue rate and we
increased our long-term expected average annual auction revenue rate to 9.50%.
At the end of 2003 we increased our expected rate to be in the range of 9.50% to
10.00%, and our expectation has remained in this range since then. We achieved
an auction revenue rate of 9.59% for 2006 and we believe that our sustainable
average annual 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, rather than the amount, of our underwritten business. 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.
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 2007 we announced that we had selected Accruit LLC as our exclusive
provider of Like-Kind Exchange (or LKE) services to our customers in the United
States. The purpose of the relationship with Accruit is to provide a
straightforward and cost effective method for qualified customers in the United
States to take advantage of the tax deferral provided under the Internal Revenue
Code Section 1031 LKE rules. We do not consider this arrangement to be material
to our ongoing operations, though it is an additional service offering for our
American customers.
In February 2007 we signed a letter of intent to acquire the auction business
and assets of Clarke Auctioneers Ltd., a Rouleau, Saskatchewan-based auctioneer
of agricultural equipment. This acquisition is intended to expand our presence
in the agricultural equipment and real estate markets in Saskatchewan, Canada.
Darren and Jordan Clarke, auctioneers and principals of Clarke Auctioneers, are
expected to join Ritchie Bros.' agricultural team in Saskatchewan on or about
March 15, 2007. Terms of the transaction will not be disclosed because we do not
consider them to be material relative to our consolidated operations. One of the
acquired assets is an approximately 20-acre auction site in Rouleau, which will
be our 34th permanent auction site.
DEVELOPMENTS IN 2006
Highlights of the year ended December 31, 2006 included:
- We held the largest auction in our history, at our permanent auction site
in Orlando, Florida, with gross auction sales of $113 million.
- We broke regional gross auction sales records in Atlanta, Georgia; North
East, Maryland; Houston, Texas; Minneapolis, Minnesota; Toledo, Ohio;
Phoenix, Arizona; Sacramento, California; Los Angeles, California;
Edmonton, Alberta; and Prince George, British Columbia. Our Edmonton
auction in October 2006 was our largest auction held in Canada in our
history. In Saskatchewan, we held our largest ever single-owner farm
auction.
- In the third quarter of 2006, our cumulative gross auction sales
attributable to internet buyers using our rbauctionBid-Live online bidding
system, which we implemented in 2002, surpassed the $1 billion mark.
- We conducted our first ever auctions in France and Portugal.
- We appointed our first sales representatives responsible for Russia and for
Romania.
- We held our first auctions at our new permanent auction sites in Nashville,
Tennessee and Saskatoon, Saskatchewan.
- We completed the purchase of approximately 140 acres of land near Columbus,
Ohio, on which we are building a new permanent auction site.
- We completed our acquisition of the business and assets of Dennis Biliske
Auctioneers, a North Dakota-based auctioneer of agricultural equipment and
real estate. This added to our network a permanent auction site in Buxton,
North Dakota.
- We completed the first phase of our ERP implementation, which included
accounting and human resources modules.
- Two new independent directors, Robert W. Murdoch and Edward B. Pitoniak,
joined our Board of Directors. Mr. Murdoch has extensive experience in the
construction industry, having retired from the position of President and
CEO of Lafarge Corporation. He is currently a director of several public
companies and a member of the international advisory board of Lafarge S.A.
Mr. Pitoniak is currently President and CEO of Canadian Hotel Income
Properties Real Estate Investment Trust, and brings to our Board a proven
track record in marketing, brand management and product development, along
with strong people development skills. Mr. Pitoniak was appointed to our
Audit Committee and Mr. Murdoch was appointed to our Compensation
Committee.
- G. Edward Moul retired from his position as a director and Chair of the
Audit Committee of our Board of Directors. In April 2006, the Board
appointed Beverley A. Briscoe to the position of Chair of the Audit
Committee and Charles E. Croft to the position of Lead Director and
Vice-Chairman of the Board.
- David E. Ritchie, one of our founders, retired from our Board of Directors
and resigned as Chairman of the Board effective November 30, 2006. In
recognition of his pivotal role in the development and success of our
company, Mr. Ritchie has been appointed the honourary Chairman Emeritus of
the Company. Mr. Ritchie is no longer a director of the Company and he does
not receive any compensation for this honourary role.
- Our Board appointed Mr. Croft to replace Mr. Ritchie as Chairman of the
Board effective November 30, 2006. Because Mr. Croft is an independent
director, our Board no longer has a Lead Director. However, any shareholder
wishing to contact Mr. Croft may do so by phoning the Lead Director phone
number or sending an email to the Lead Director email address, both of
which are specified in our Information Circular dated February 21, 2007.
OVERALL PERFORMANCE
For the year ended December 31, 2006 we recorded auction revenues of $261.0
million and net earnings of $57.2 million, or $1.64 per diluted common share.
Net earnings for 2006 would have been $56.2 million, or $1.61 per diluted share,
if we excluded the $1.0 million after-tax ($1.6 million before tax) net effect
of a gain recorded on the sale of excess property in Florida and a write-down of
land held for resale in Texas. This performance compares to auction revenues of
$212.6 million and net earnings of $49.5 million, or $1.43 per diluted common
share, for the year ended December 31, 2005, excluding the effect of after-tax
gains of $4.1 million ($6.4 million before tax) recorded on the sale of excess
property in Texas and British Columbia. Our financial statement net earnings for
2005 were $53.6 million, or $1.56 per basic share and $1.54 per diluted share.
Excluding the impact of gains and losses on the disposition of capital assets in
both periods, our net earnings increased by 14% in 2006. We have highlighted the
impact of these items because we do not believe that the sale of excess property
is part of our normal operations. Earnings increased mainly as a result of
higher gross auction sales in 2006, offset in part by a lower auction revenue
rate and higher operating costs. We ended 2006 with working capital of $94.4
million, compared to $84.1 million at the end of 2005.
SELECTED ANNUAL INFORMATION
The following selected consolidated financial information as at December 31,
2006, 2005 and 2004 and for each of the years in the three-year period ended
December 31, 2006 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, 2006.
38 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Year Ended December 31, 2006 2005 2004
----------------------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Auction revenues (1) $ 261,040 $ 212,633 $ 182,257
Direct expenses (36,976) (27,035) (23,472)
--------- --------- ---------
224,064 185,598 158,785
Operating expenses (2) (133,182) (107,842) (98,375)
Other income (expenses) (3) 1,184 4,758 (2,164)
--------- --------- ---------
Earnings before income taxes 92,066 82,514 58,246
Income taxes (4) 34,848 28,934 23,347
--------- --------- ---------
Net earnings $ 57,218 $ 53,580 $ 34,899
========= ========= =========
Net earnings per share -- basic $ 1.66 $ 1.56 $ 1.02
Net earnings per share -- diluted 1.64 1.54 1.01
Cash dividends declared per share (5) $ 0.78 $ 0.58 $ 0.37
BALANCE SHEET DATA (PERIOD END):
Working capital (including cash) $ 94,369 $ 84,108 $ 36,871
Capital assets 285,091 250,645 226,624
Total assets 554,227 496,396 438,522
Long-term liabilities 51,892 50,364 19,405
(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.
(3) Other income and expenses in 2006 included the $1.6 million ($1.0 million
or $0.03 per diluted share, after tax) net effect of a gain recorded on the
sale of excess property in Florida and a write-down of land held for resale
in Texas; and in 2005 included gains recorded on the sale of excess
property in Texas and British Columbia of $6.4 million ($4.1 million, or
$0.11 per diluted share, after tax). We have highlighted these amounts
because we do not consider gains of the sale of property to be part of our
normal operations.
(4) Income taxes in 2004 included 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 normal operations.
(5) In addition to the cash dividends declared and paid in 2006, we declared a
cash dividend of $0.21 per common share on January 24, 2007 relating to the
quarter ended December 31, 2006, which is not included in this amount.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
We conduct operations around the world in a number of different currencies, but
our reporting currency is the United States dollar. In 2006, 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, 2006 % Change 2005 % Change 2004
------------------------ ------- -------- ------- -------- -------
Value of one U.S. dollar:
Year-end exchange rate:
Canadian dollar $1.1660 -0.3% $1.1628 -3.1% $1.1995
Euro E0.7575 -10.3% E0.8446 14.6% E0.7371
Average exchange rate:
Canadian dollar $1.1344 -6.4% $1.2114 -6.9% $1.3013
Euro E0.7969 -1.0% E0.8049 -- E0.8048
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 and Euro 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, 2006 2005 % Change
------------------------ ---------- ---------- --------
Auction revenues -- United States (1) $ 157,236 $ 121,253 30%
Auction revenues -- Canada (1) 54,862 48,824 12%
Auction revenues -- Europe (1) 29,024 26,609 9%
Auction revenues -- Other (1) 19,918 15,947 25%
---------- ---------- ---
Total auction revenues $ 261,040 $ 212,633 23%
========== ========== ===
Gross auction sales $2,721,023 $2,092,841 30%
Auction revenue rate 9.59% 10.16%
(1) Information by geographic segment is based on auction location.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 39
Our auction revenues increased in 2006 primarily because we achieved higher
gross auction sales in the United States and Canada compared to 2005. Our
agricultural division generated gross auction sales of $130.2 million in 2006
compared to $76.4 million in 2005. Our guarantee and inventory contracts
represented 26% of our total gross auction sales in 2006, which is in a similar
range to the levels experienced in prior years (24% in 2005 and 23% in 2004).
Our auction revenue rate was 9.59% for 2006, which was within our expected range
of 9.50% to 10.00%. The 2006 auction revenue rate was lower than the rate we
achieved in 2005 mainly as a result of the above-average performance of our
underwritten business in 2005. 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 $2.7 million in 2006, of which approximately $1.8
million or $0.05 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, 2006 2005 % Change
------------------------ ------- ------- --------
Direct expenses $36,976 $27,035 37%
Direct expenses as a percentage
of Gross auction sales 1.36% 1.29%
Direct expenses are the costs we incur specifically to conduct an auction.
Direct expenses include the costs of hiring temporary personnel to work at the
auction, advertising directly 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.
Our direct expense rate, which represents direct expenses as a percentage of
gross auction sales, fluctuates from period to period based in part 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 our 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 experience over the last
two years in this regard is as follows:
Years ended December 31, 2006 2005 % Change
------------------------ ------- ------- --------
Average gross auction sales:
Industrial auctions $14,637 $13,179 11%
Agricultural auctions 924 772 20%
Percentage of gross auction sales at permanent
auction sites and regional auction units:
Industrial auctions 91% 90%
Agricultural auctions 22% 8%
Several factors contributed to the increase in the direct expense rate in 2006
compared to 2005: we held several offsite sales in 2006 that required higher
than average direct expenses; our agricultural sales in 2006 made up a larger
proportion of our total gross auction sales than in the prior year; and we
incurred higher marketing and advertising expenses in 2006 to attract real
estate bidders to our auctions. Our long-term expectation is for a direct
expense rate of approximately 1.30% of gross auction sales.
DEPRECIATION AND AMORTIZATION EXPENSE
Years ended December 31, 2006 2005 % Change
------------------------ ------- ------- --------
Depreciation and amortization expense $15,017 $13,172 14%
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 increased in
2006 partly as a result of depreciation relating to the capitalization of ERP
software during the period, and the construction of new auction facilities. We
expect our depreciation in future periods to increase in line with our on-going
capital expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES
Years ended December 31, 2006 2005 % Change
------------------------ ------- ------- --------
General and administrative expenses $118,165 $94,670 25%
G&A as a percentage of gross auction
sales 4.34% 4.52%
The major categories of general and administrative expenses, or G&A, in order of
magnitude in 2006 were as follows:
- personnel (salaries, wages, bonuses and benefits) -- 60% of total G&A;
- information technology and telecommunications;
- legal and related costs, audit and other professional fees;
- non-auction related travel;
- repairs and maintenance;
- utilities;
- leases and rentals;
- office supplies;
- insurance; and
- property taxes.
Our infrastructure and workforce have continued to grow in order to support our
growth objectives, and this, combined with other factors including fluctuations
in foreign exchange rates, enhanced compensation programs, costs associated with
our ERP implementation, and costs related to our Sarbanes-Oxley Section 404
compliance efforts, has resulted in an increase in our G&A. In 2006, our gross
auction sales grew at a faster rate than originally anticipated and this growth
necessitated adding people to our workforce, which increased 22% during the
year. Personnel costs are the largest component of our G&A. We expect that
ongoing growth in our business will continue to influence future levels of G&A.
G&A in 2006 also included $2.3 million of legal and related costs in excess of
our otherwise expected level of these expenses.
Although the absolute dollar value of our G&A increased in 2006, G&A as a
percentage of gross auction sales in 2006 was less than in 2005. The improvement
in this ratio is important because it demonstrates operating leverage -- we were
able to grow our gross auction sales without an equivalent increase in operating
expenses. As a percentage of gross auction sales, G&A was in line with our
expectations.
Although we expect G&A as a percentage of gross auction sales to decrease over
the long term, 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, which may
cause increases in the short term.
INTEREST EXPENSE
Years ended December 31, 2006 2005 % Change
------------------------ ------ ------ --------
Interest expense $1,172 $2,224 -47%
Interest expense is comprised mainly of interest paid on long-term and revolving
debt and operating credit lines and bank charges. Interest expense decreased in
2006 compared to the prior year primarily because of an increase in the amount
of interest that we capitalized to land and buildings under development ($1.5
million in 2006; $0.6 million in 2005).
GAIN ON DISPOSITION OF CAPITAL ASSETS
Years ended December 31, 2006 2005 % Change
------------------------ ------ ------ --------
Gain on disposition of capital assets $1,277 $6,565 -81%
40 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
We sold redundant property in Tampa, Florida in 2006, and this resulted in a
gain on disposition of capital assets of $1.8 million. This gain was partially
offset by losses of $0.4 million recorded on the write off of redundant computer
hardware and software prior to our ERP implementation and the $0.2 million write
down of surplus land in Houston, Texas that was held for resale at the end of
2006. The gain in 2005 included 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. None of these
properties was being used in our operations.
INCOME TAXES
Years ended December 31, 2006 2005 % Change
------------------------ ------- ------- --------
Income taxes $34,848 $28,934 20%
Effective income tax rate 37.9% 35.1%
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, 2006 was higher than the rate we experienced in 2005 as
a result of differences in earnings within the various tax jurisdictions in
which we earn our income. In addition, our income taxes in 2006 included
one-time adjustments relating to uncertain tax positions, which caused an
increase in our effective income tax rate for the year. 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, 2006 2005 % Change
------------------------ ------- ------- --------
Net earnings before income taxes $92,066 $82,514 12%
Net earnings 57,218 53,580 7%
Net earnings per share -- basic 1.66 1.56 6%
Net earnings per share -- diluted 1.64 1.54 7%
Earnings increased in 2006 compared to 2005 mainly as a result of higher gross
auction sales, partially offset by higher operating costs and a lower auction
revenue rate. Net earnings for 2006 would have been $56.2 million, or $1.63 and
$1.61 per basic and diluted share, respectively, if we excluded the $1.6 million
($1.0 million, or $0.3 per diluted share, after tax) net effect of the gain
recorded on the sale of excess property in Florida and the write-down of land
held for resale in Texas. This compares to net earnings of $49.5 million, or
$1.43 per diluted share, in 2005, excluding the impact of total gains of $6.4
million ($4.1 million, or $0.11 per diluted share, after tax) recorded in
connection with the sale of excess property in that period. Excluding the impact
of these items in both periods, which we have highlighted because we do not
consider them to be part of our normal operating results, our net earnings
increased by 14% in 2006.
SUMMARY OF FOURTH QUARTER RESULTS
We earned auction revenues of $70.7 million and net earnings of $9.8 million, or
$0.28 per basic and diluted share, during the fourth quarter of 2006, which
compares to auction revenues of $59.9 million and net earnings of $14.2 million,
or $0.41 per basic and diluted share, in the fourth quarter of 2005. 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 $738.7 million
for the quarter ended December 31, 2006, which is an increase of 25% compared to
the same period in 2005. The growth in our gross auction sales in the fourth
quarter of 2006 compared to the equivalent period in 2005 was attributable
mainly to increased sales in Canada and the United States.
Our auction revenue rate decreased to 9.57% in the fourth quarter of 2006 from
10.16% in the comparable period in 2005, mainly as a result of the performance
of our underwritten business, which achieved a higher than expected return in
2005.
Our G&A increased to $36.6 million in the fourth quarter of 2006, compared to
$26.4 million in the comparable 2005 period. The increase related mainly to
higher costs incurred to support the ongoing and more rapid than expected growth
of our business, together with $2.3 million of legal and related costs in excess
of our otherwise expected level of these expenses.
We experienced a 31% decrease in our earnings in the fourth quarter of 2006
compared to the equivalent period in the prior year because higher auction
revenues in 2006 were more than offset by increased operating costs.
Capital asset additions were $14.6 million for the fourth quarter of 2006,
compared to $12.9 million in the comparable period in 2005. Our capital
expenditures in the fourth quarter of 2006 related primarily to construction of
our new permanent auction sites in Columbus, Ohio; Houston, Texas and Denver,
Colorado, and information technology investments related to our M07 strategic
initiative. Exchange rate changes relating to capital assets held in currencies
other than the United States dollar resulted in a decrease in our reported
capital assets on our consolidated balance sheet of $1.8 million in the fourth
quarter of 2006 compared to a decrease of $0.7 million in the equivalent period
in 2005.
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 years ended December 31, 2006 and 2005.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 41
Q4 2006 Q3 2006 Q2 2006 Q1 2006
-------- -------- -------- --------
Gross auction sales (1) $738,731 $580,271 $830,493 $571,528
-------- -------- -------- --------
Auction revenues $ 70,699 $ 55,688 $ 78,680 $ 55,973
Net earnings 9,790(3) 9,704 24,526(2) 13,198
Net earnings per share -- basic $ 0.28(3) $ 0.28 $ 0.71(2) $ 0.38
Net earnings per share -- diluted 0.28(3) 0.28 0.70(2) 0.38
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(4) 13,675(5)
Net earnings per share -- basic $ 0.41 $ 0.13 $ 0.62(4) $ 0.40(5)
Net earnings per share -- diluted 0.41 0.13 0.61(4) 0.40(5)
(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 2006 included a gain of $1,812
recorded on the sale of excess property in Florida ($1,087 after tax).
Excluding this amount, net earnings would have been $23,439, or $0.68 and
$0.67 per basic and diluted share respectively.
(3) Net earnings in the fourth quarter of 2006 included a write-down of $223
($134 after tax) on land held for resale in Texas. Excluding this amount,
net earnings would have been $9,924, or $0.28 and $0.28 per basic and
diluted share respectively.
(4) Net earnings in the second quarter of 2005 included 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.
(5) Net earnings in the first quarter of 2005 included 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.
LIQUIDITY AND CAPITAL RESOURCES
December 31, 2006 2005 % Change
------------ ------- ------- --------
Working capital $94,369 $84,108 12%
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, 2006 exceeded
the amount we need to satisfy our present operating requirements.
CONTRACTUAL OBLIGATIONS
In 2008 and In 2010 and
Payments Due by Year Total In 2007 2009 2011 After 2011
-------------------- ------- ------- ----------- ----------- ----------
Long-term debt obligations $43,318 $ 237 $ 217 $42,864 $--
Operating leases obligations 5,046 1,938 2,501 607 --
------- ------ ------ ------- ---
Total contractual obligations $48,364 $2,175 $2,718 $43,471 $--
======= ====== ====== ======= ===
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 and
to administrative offices. These properties are located in the United States,
Australia, Singapore, India, China, Japan, 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, 2006 from these
guarantee contracts was $39.7 million (compared to $29.0 million at December 31,
2005), 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, 2006 2005 % Change
------------ -------- -------- --------
Cash provided by (used in):
Operations $ 65,639 $ 85,071 -23%
Investing (46,547) (32,207) -45%
Financing (21,656) (13,137) -65%
42 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
Capital asset additions were $51.2 million for 2006 compared to $42.7 million in
2005. Our capital expenditures in 2006 included construction of our new
permanent auction sites under development in Columbus, Ohio, Denver, Colorado,
Houston, Texas and Saskatoon, Saskatchewan. They also included improvements to
our existing auction sites in various locations, including Chicago and Los
Angeles, and information technology investments related to our M07 strategic
initiative. Cash used in investing activities during 2006 also included $2.3
million spent in connection with the acquisition of the business and certain
assets of Dennis Biliske Auctioneers. Exchange rate changes relating to capital
assets held in currencies other than the United States dollar resulted in an
increase of $3.7 million in the capital assets reported on our consolidated
balance sheet as at December 31, 2006, compared to a $1.8 million decrease in
2005.
We intend to enhance our network of auction sites by adding 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. Over the next four years
we intend to add or replace an average of two auction sites per year, and
possibly up to four sites per year.
From 2007 through 2010, we expect that our annual capital expenditures will be
in the range of $50 million to $100 million per year, as we continue to invest
in the expansion of our network of auction facilities and fund our M07 strategic
initiatives. Actual capital expenditures will vary, depending on the
availability and cost of suitable expansion opportunities and prevailing
business and economic conditions. Depending on the scope of the required system
improvements, the M07 expenditures will likely be primarily for software,
hardware and related systems. We expect to fund future capital expenditures
primarily from working capital or draws on available credit facilities.
Cash used in financing in 2006 included dividends, and we paid regular quarterly
cash dividends of $0.21 per share during each of the quarters ended September
30, and December 31, 2006, and $0.18 per share during each of the quarters ended
March 31 and June 30, 2006. Total dividend payments were $26.9 million for 2006,
compared to $19.9 million in 2005. On January 26, 2007, our Board of Directors
declared a quarterly cash dividend of $0.21 per common share relating to the
quarter ended December 31, 2006. The dividend will be payable on March 16, 2007
to shareholders of record on February 23, 2007 in the amount of approximately
$7.3 million.
Pursuant to new income tax legislation, Canadian resident individuals who
receive "eligible dividends" in 2006 and subsequent years will be entitled to an
enhanced gross-up and dividend tax credit on such dividends. All dividends that
we paid in 2006 will be considered "eligible dividends" for these purposes.
DEBT
December 31, 2006 2005 % Change
------------ ------- ------- --------
Long-term debt (including current portion of long-term debt) $43,318 $43,542 -1%
Long-term debt at December 31, 2006 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 fixed interest rates applicable to these term loans are 4.429%
and 5.61%, respectively. At December 31, 2006, we were in compliance with all of
the financial covenants applicable to our long-term debt.
Future scheduled interest expenses over the next five years under our existing
term debt are as follows:
In 2007 In 2008 In 2009 In 2010 In 2011
------- ------- ------- ------- -------
Interest expense on long-term debt $2,275 $2,260 $2,254 $1,990 $78
In addition to our long-term debt, we have available revolving credit facilities
as follows:
December 31, 2006 2005
------------ -------- --------
Revolving credit facilities -- total available: $118,995 $118,200
Revolving credit facilities -- total unused: $118,995 $118,200
Our credit facilities are with financial institutions in the United States,
Canada, The Netherlands, The United Kingdom and Australia. Certain of the
facilities include commitment fees applicable to the unused credit amount. We
had no floating rate debt outstanding at December 31, 2006.
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, 2006, 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, and we believe that this ratio generally
acts as a natural hedge against exposure to fluctuations in the value of the
United States dollar. As a result, we have not adopted a long-term hedging
strategy to protect against foreign currency rate fluctuations associated with
our operations denominated in currencies other than the United States dollar,
but we will consider hedging specific transactions when appropriate.
During the year ended December 31, 2006 we recorded an increase in our foreign
currency translation adjustment balance of $5.6 million, compared to a decrease
of $2.2 million in 2005. Our foreign currency translation adjustment arises from
the translation at the end of each reporting period of our net assets
denominated in currencies other than the United States dollar into our reporting
currency, in accordance with Canadian GAAP. Increases or decreases in this
balance arise primarily from the strengthening or weakening of non-United States
currencies against the United States dollar. During 2006, both the Euro and the
Canadian dollar strengthened compared to the United States dollar.
TRANSACTIONS WITH RELATED PARTIES
During 2006, we paid $0.7 million (2005 -- $0.8 million) to a company controlled
by David E. Ritchie, the former Chairman of our Board of Directors, who retired
from our Board effective November 30, 2006. The costs were incurred pursuant to
agreements, approved by our Board, by which Mr. Ritchie's company agrees 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 are based on market prices for similar types of facilities and excursions.
We have entered into similar agreements with Mr. Ritchie's company in the past
and intend to do so in the future.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 43
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.
LEGAL AND OTHER PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to legal
proceedings and claims in the ordinary course of our business. Such claims, even
if lacking merit, could result in the expenditure of significant financial and
managerial resources. We are not aware of any legal proceedings or claims that
we believe will have, individually or in the aggregate, a material adverse
effect on us or on our financial condition or results of operation or that
involve a claim for damages, excluding interest and costs, in excess of 10% of
our current assets.
In August 2006, Caterpillar Inc. filed a complaint with the United States
International Trade Commission (or ITC) against 21 companies, including us,
requesting that the ITC conduct an investigation under Section 337 of the U.S.
Tariff Act of 1930, as amended, regarding the importation, sale, or purchase of
certain Caterpillar hydraulic excavators in the United States. In December 2006
a settlement was reached between Caterpillar Inc. and certain of the
respondents, including us, and we have now been terminated from the complaint.
This settlement did not have, and we do not expect that it will have, a material
effect on our business, results of operations or financial condition.
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, which summarizes the accounting
policies and methods used in the preparation of those 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.
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, 2006 and determined that no impairment had occurred.
RECENT ACCOUNTING PRONOUNCEMENTS
During 2005, the Accounting Standards Board of the CICA issued new Handbook
Sections: Section 3855, Financial Instruments -- Recognition and Measurement,
Section 3861, Financial Instruments -- Disclosure and Presentation, Section
3865, Hedges and Section 1530, Comprehensive Income. These accounting standards
apply to interim and annual financial statements for fiscal years beginning on
or after October 1, 2006. We adopted the new sections on a prospective basis on
January 1, 2007, without restatement of prior year comparative information.
These standards provide guidance on the recognition, measurement and
classification of financial assets and financial liabilities. All financial
instruments, including derivatives, are to be included on a company's balance
sheet and measured, either at their fair values or, in circumstances when fair
value may not be considered most relevant, at amortized cost or cost.
These standards establish a new measure of income called comprehensive income.
Comprehensive income represents the entire change in the net assets of an entity
for a period and has two components: net income and other comprehensive income.
The new section provides guidance for reporting items in other comprehensive
income, which will be included on our Consolidated Balance Sheet as a separate
component of shareholders' equity.
The standards also establish new accounting requirements for hedges, including
the criteria under which hedge accounting can be applied and how changes in fair
value are to be reflected on the balance sheet, in income or other comprehensive
income.
We have not yet determined the impact that these changes in accounting policy
will have on our consolidated financial statements in future periods. However,
we do not expect there to be a material effect on the presentation of our
financial condition or results of operations.
DISCLOSURE CONTROLS AND PROCEDURES
We have established and maintained disclosure controls and procedures in order
to provide reasonable assurance that material information relating to the
Company is made known to the appropriate level of management in a timely manner.
Based on current securities legislation in Canada, and the United States 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, 2006.
We performed an evaluation under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures as at December 31, 2006. Based on that
evaluation, we concluded that our disclosure controls and procedures were
effective as of that date.
We do not expect that our disclosure controls and procedures or internal
controls over financial reporting (see below) will prevent all error and fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the company have been detected. In addition, the design of
any system of controls also is based partly on certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
44 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Internal controls over financial reporting are designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with Canadian GAAP and the requirements of
the Securities and Exchange Commission in the United States, as applicable.
Management is responsible for establishing and maintaining adequate internal
controls over financial reporting.
Under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal controls over financial reporting based on
the framework in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control -- Integrated Framework,
management concluded that our internal controls over financial reporting were
effective as of December 31, 2006.
Because of their inherent limitations, internal controls over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with policies and procedures may deteriorate.
Our assessment of the effectiveness of our internal controls over financial
reporting as of December 31, 2006 has been audited by KPMG LLP, the independent
registered public accounting firm that audited our December 31, 2006
consolidated annual financial statements, as stated in their report which is
included herein.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During 2006 we replaced our existing accounting system with several modules of
an ERP system, as a part of our M07 initiative described above. This
implementation resulted in material changes to our internal controls; however,
it was not made as a result of any internal control weakness detected as a part
of our evaluation of our internal controls over financial reporting.
Other than our ERP implementation, there were no changes in internal control
over financial reporting during 2006 that materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. These statements are based on current expectations and estimates
about our business, and include, among others, statements relating to:
- 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;
- increases in the number of consignors and bidders participating in and the
average size of our auctions;
- our key strengths;
- the average percentage of equipment sold at our auctions that leaves the
region of the sale;
- our ability to draw consistently significant numbers of local and
international bidders to our auctions;
- our ability to attract and retain the best people, and to increase the
productivity of our sales force;
- the anticipated improvement, acquisition and development by us of auction
sites;
- the relative percentage of our gross auction sales represented by straight
commission, guarantee and inventory contracts;
- the dollar amount of our exposure to outstanding guarantee contracts;
- our ability to grow our gross auction sales at a manageable pace and
increase our earnings per share;
- our 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 general and
administrative expenses;
- our operating leverage and economies of scale;
- our future capital expenditures;
- our M07 strategic initiatives, the timing of their implementation and the
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;
- financing available to us and the sufficiency of our working capital to
meet our financial needs; and
- the effect on our business, financial condition and results of operations
of the settlement of Caterpillar Inc.'s complaint to the ITC.
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 AND OTHER PARTIES 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 of the purchase price. While we
exercise considerable effort ensuring that all liens have been identified and,
if necessary, discharged prior to the auction, we occasionally do not properly
identify or discharge liens and have
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 45
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;
- maintaining our operating leverage;
- 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.
OUR BUSINESS COULD BE HARMED IF OUR REPUTATION FOR FAIRNESS, HONESTY AND
CONDUCTING ONLY UNRESERVED AUCTIONS WERE DAMAGED.
Strict adherence to the unreserved auction process is one of our founding
principles and, we believe, one of our most significant competitive advantages.
Closely related to this is our reputation for fairness and honesty in our
dealings with our customers. Our ability to attract new customers and continue
to do business with existing customers could be harmed if our reputation for
fairness, honesty and conducting only unreserved auctions were damaged. If we
are unable to maintain our reputation and monitor and enforce our policy of
conducting unreserved auctions, we could lose business and our results of
operations would suffer.
THE AVAILABILITY AND PERFORMANCE OF OUR INTERNAL TECHNOLOGY INFRASTRUCTURE, AS
WELL AS THE IMPLEMENTATION OF AN 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 business. We need to continue to expand and upgrade our technology,
transaction processing systems and network infrastructure both to meet
anticipated 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 any 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 grow.
We have embarked on a program to redesign our business processes and to upgrade
our information systems, including implementing an enterprise resource planning
system. Our business and results of operations could be harmed if this
implementation, which commenced in phases in 2006, is not successful or if
expected efficiencies are not realized. In addition, any difficulties with our
systems 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 could negatively affect our internal controls reporting in
accordance with the provisions of Section 404 of the Sarbanes-Oxley Act and
applicable securities law in Canada, and of our disclosure controls and
procedures, which could negatively affect our reporting in accordance with the
provisions of Section 302 of the Sarbanes-Oxley Act and applicable securities
law in Canada.
OUR BUSINESS COULD BE HARMED IF ONE OR MORE OF OUR CORE ADMINISTRATIVE CENTERS
WERE SUBJECT TO A MAJOR DISASTER OR OUR SYSTEMS WERE SUBJECT TO A SECURITY
BREACH.
We do not currently have a formal disaster recovery plan to address issues
relating to business continuity. If one or more of our core administrative
centers was subject to a major disaster, serious security breach or any other
threat to business continuity, it could materially damage our business, results
of operations and financial condition.
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 business, 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.
46 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
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, health, environmental, 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. These activities could harm our business, 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.
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 license
from third parties intellectual property on which we rely 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.
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
THAT 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, such development or expansion.
Under some environmental laws, an owner or lessee of, or other person involved
in, 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, lessee or other person
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, or at other sites where we may be conducting auctions, or at properties
that we may be selling by auction, 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
claims arising from environmental contamination of any of these properties 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
entering 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
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 47
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 $0.21 per outstanding common
share relating to the third and fourth fiscal quarters of 2006 and $0.18 per
share in connection with the first and second quarters of 2006. 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.
48 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
AUDITORS' REPORT
To the Shareholders of Ritchie Bros. Auctioneers Incorporated
We have audited the consolidated balance sheets of Ritchie Bros. Auctioneers
Incorporated ("the Company") as at December 31, 2006 and 2005 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2006. 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. With respect to the consolidated financial statements for the year
ended December 31, 2006, we also conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
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, 2006
and 2005 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2006 in accordance with
Canadian generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2006, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 19, 2007 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
(KPMG LLP)
Chartered Accountants
Vancouver, Canada
February 19, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Ritchie Bros. Auctioneers
Incorporated
We have audited management's assessment, included in the accompanying annual
report on Form 40-F, that Ritchie Bros. Auctioneers Incorporated ("the Company")
maintained effective internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have conducted our audits on the consolidated financial statements in
accordance with Canadian generally accepted auditing standards. With respect to
the year ended December 31, 2006, we also have conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Our report dated February 19, 2007 expressed an unqualified opinion on
those consolidated financial statements.
(KPMG LLP)
Chartered Accountants
Vancouver, Canada
February 19, 2007
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 49
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of United States dollars, except share and per share
amounts)
Years ended December 31, 2006 2005 2004
------------------------ ----------- ----------- -----------
Auction revenues $ 261,040 $ 212,633 $ 182,257
Direct expenses 36,976 27,035 23,472
----------- ----------- -----------
224,064 185,598 158,785
Expenses:
Depreciation and amortization 15,017 13,172 12,708
General and administrative 118,165 94,670 85,667
----------- ----------- -----------
133,182 107,842 98,375
----------- ----------- -----------
Earnings from operations 90,882 77,756 60,410
Other income (expenses):
Interest expense (1,172) (2,224) (3,217)
Gain on disposition of capital assets 1,277 6,565 229
Other 1,079 417 824
----------- ----------- -----------
1,184 4,758 (2,164)
----------- ----------- -----------
Earnings before income taxes 92,066 82,514 58,246
Income tax expense (note 6):
Current 33,757 28,704 22,251
Future 1,091 230 1,096
----------- ----------- -----------
34,848 28,934 23,347
----------- ----------- -----------
Net Earnings $ 57,218 $ 53,580 $ 34,899
=========== =========== ===========
Net earnings per share (notes 1(l) and 4(e)):
Basic $ 1.66 $ 1.56 $ 1.02
Diluted 1.64 1.54 1.01
----------- ----------- -----------
Weighted average number of shares outstanding 34,546,460 34,366,311 34,160,678
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
/s/ Beverley A. Briscoe /s/ Peter J. Blake
------------------------------------- ----------------------------------------
BEVERLEY A. BRISCOE PETER J. BLAKE
Director Director and Chief Executive Officer
50 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
December 31, 2006 2005
------------ -------- --------
ASSETS
Current assets:
Cash and cash equivalents $172,021 $169,249
Accounts receivable 36,682 20,947
Inventory 5,614 9,991
Advances against auction contracts 1,474 255
Prepaid expenses and deposits 5,267 2,726
Other assets 2,723 1,188
Income taxes receivable 3,212 --
Future income tax asset (note 6) 1,074 601
-------- --------
228,067 204,957
Capital assets (note 2) 285,091 250,645
Other assets 343 1,537
Goodwill 39,537 38,397
Future income tax asset (note 6) 1,189 860
-------- --------
$554,227 $496,396
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Auction proceeds payable $ 65,114 $ 62,392
Accounts payable and accrued liabilities 67,496 46,469
Income taxes payable -- 11,308
Current portion of long-term debt (note 3) 237 220
Future income tax liability (note 6) 851 460
-------- --------
133,698 120,849
Long-term debt (note 3) 43,081 43,322
Other liabilities -- 516
Future income tax liability (note 6) 8,811 6,526
-------- --------
185,590 171,213
Shareholders' equity:
Share capital (note 4) 85,910 79,844
Additional paid-in capital 10,459 8,929
Retained earnings 247,349 217,080
Foreign currency translation adjustment 24,919 19,330
-------- --------
368,637 325,183
-------- --------
$554,227 $496,396
======== ========
Commitments and contingencies (note 7)
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, 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
Exercise of stock options 6,066 (881) -- -- 5,185
Stock compensation tax adjustment -- 391 -- -- 391
Stock compensation expense -- 2,020 -- -- 2,020
Net earnings -- -- 57,218 -- 57,218
Cash dividends paid -- -- (26,949) -- (26,949)
Foreign currency translation adjustment -- -- -- 5,589 5,589
------- ------- -------- ------- --------
Balance, December 31, 2006 $85,910 $10,459 $247,349 $24,919 $368,637
======= ======= ======== ======= ========
See accompanying notes to consolidated financial statements.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 51
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
Years ended December 31, 2006 2005 2004
------------------------ -------- -------- --------
Cash provided by (used in):
Operating activities:
Net earnings $ 57,218 $ 53,580 $ 34,899
Items not involving cash:
Depreciation and amortization 15,017 13,172 12,708
Stock compensation expense 2,020 1,468 1,467
Future income taxes 1,091 230 1,329
Net gain on disposition of capital assets (1,277) (6,565) (229)
Changes in non-cash working capital:
Accounts receivable (15,735) (6,244) 469
Inventory 4,377 3,100 (3,511)
Advances against auction contracts (1,219) 713 (858)
Prepaid expenses and deposits (2,521) (403) 230
Income taxes payable (10,760) 5,012 3,504
Income taxes recoverable (3,212) -- --
Auction proceeds payable 2,722 14,811 3,395
Accounts payable and accrued liabilities 20,511 4,034 7,498
Other (2,593) 2,163 (2,245)
-------- -------- --------
65,639 85,071 58,656
-------- -------- --------
Investing activities:
Acquisition of business (2,300) -- (1,265)
Capital asset additions (51,239) (42,737) (23,448)
Proceeds on disposition of capital assets 5,160 9,929 2,151
Decrease (increase) in other assets 1,832 601 (1,993)
-------- -------- --------
(46,547) (32,207) (24,555)
-------- -------- --------
Financing activities:
Issuance of share capital 5,185 2,914 3,651
Dividends on common shares (26,949) (19,938) (12,644)
Repayment of long-term debt (227) (48,746) (58,459)
Issuance of long-term debt -- 46,016 32,500
Increase (decrease) in other liabilities -- 23 (812)
Decrease in funds committed for debt repayment -- 6,965 11,142
Other 335 (371) --
-------- -------- --------
(21,656) (13,137) (24,622)
-------- -------- --------
Effect of changes in foreign currency rates on cash and
cash equivalents 5,336 (3,110) 4,144
-------- -------- --------
Increase in cash and cash equivalents 2,772 36,617 13,623
Cash and cash equivalents, beginning of year 169,249 132,632 119,009
-------- -------- --------
Cash and cash equivalents, end of year $172,021 $169,249 $132,632
======== ======== ========
Supplemental information:
Interest paid $ 2,186 $ 2,217 $ 3,092
Income taxes paid 47,924 22,696 18,831
======== ======== ========
See accompanying notes to consolidated financial statements.
52 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
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, 2006, 2005 and 2004
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--5 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 and other assets, 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 and other assets 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 from these guarantee contracts 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.
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 53
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, 2006, 2005 and 2004
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 operations 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 denominated in
United States dollars 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 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.
54 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
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, 2006, 2005 and 2004
2. CAPITAL ASSETS:
Accumulated Net book
2006 Cost depreciation value
---- -------- ------------ --------
Buildings $129,489 $26,319 $103,170
Land and improvements 131,856 6,689 125,167
Land and buildings under development 25,782 -- 25,782
Automotive equipment 14,675 5,677 8,998
Yard equipment 15,083 7,284 7,799
Office equipment 8,174 5,075 3,099
Computer equipment 5,207 3,333 1,874
Computer software 10,187 2,298 7,889
Leasehold improvements 2,387 1,074 1,313
-------- ------- --------
$342,840 $57,749 $285,091
======== ======= ========
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
======== ======= ========
During the year, interest of $1,480,000 (2005 -- $553,000; 2004 --
$297,000) was capitalized to the cost of land and buildings under
development.
3. LONG-TERM DEBT:
2006 2005
------- -------
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 $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. 12,864 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, plus interest, with
final payments of AUD275 occurring in 2008. 454 642
------- -------
43,318 43,542
Current portion (237) (220)
------- -------
Non-current portion $43,081 $43,322
======= =======
As at December 31, 2006, principal repayments for the next five
years are as follows:
2007 $ 237
2008 217
2009 --
2010 12,864
2011 30,000
-------
$43,318
=======
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 55
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, 2006, 2005 and 2004
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, 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
Issued for cash, pursuant to stock options exercised 249,200
----------
Issued and outstanding, December 31, 2006 34,673,100
==========
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, 2006, there were 919,884 (2005 --
1,125,834) shares authorized and still available for grants of options
under the stock option plan.
Stock option activity for 2006, 2005 and 2004 is presented below:
Common shares Weighted average
under option exercise price
------------- ----------------
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
Granted 205,950 44.09
Exercised (249,200) 20.80
-------- ------
Outstanding, December 31, 2006 804,348 $27.92
======== ======
Exercisable, December 31, 2006 589,398 $22.05
======== ======
The options outstanding at December 31, 2006 expire on dates ranging
to January 24, 2016
The following is a summary of stock options outstanding and
exercisable at December 31, 2006:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------------
Range of Weighted average Weighted average Number Weighted average
exercise prices Number outstanding remaining life (years) exercise price exercisable exercise price
------------------ ------------------ ---------------------- ---------------- ----------- ----------------
$11.675 -- $13.050 133,400 4.6 $12.39 133,400 $12.39
$13.344 -- $15.525 140,698 5.4 15.13 140,698 15.13
$26.460 -- $32.410 312,300 7.5 29.09 312,300 29.09
$42.690 -- $44.090 217,950 9.1 44.01 3,000 42.69
------- -------
804,348 589,398
======= =======
56 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
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, 2006, 2005 and 2004
4. SHARE CAPITAL (CONTINUED):
(d) Stock-based compensation:
During 2006, the Company recognized compensation cost of $2,020,000
(2005 -- $1,468,000; 2004 -- $1,467,000) 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:
2006 2005 2004
------- ------- -------
Risk free interest rate 4.3% 3.7% 3.0%
Expected dividend yield 1.63% 1.41% 1.15%
Expected lives of options 5 years 5 years 5 years
Expected volatility 21.0% 20.1% 19.6%
The weighted average grant date fair value of options granted during
the year ended December 31, 2006 was $9.86 per option (2005 -- $6.98;
2004 -- $5.34). 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, 2006 Net earnings Shares Per share amount
------------------------------ ------------ ---------- ----------------
Basic net earnings per share $57,218 34,546,460 $ 1.66
Effect of dilutive securities:
Stock options -- 305,540 (0.02)
------- ---------- ------
Diluted net earnings per share $57,218 34,852,000 $ 1.64
======= ========== ======
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
======= ========== ======
5. SEGMENTED INFORMATION:
The Company's principal business activity is the sale of consignment and
self-owned equipment and other assets 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, 2006:
Auction revenues $157,236 $54,862 $29,024 $19,918 $261,040
Capital assets and goodwill 199,659 86,852 25,989 12,128 324,628
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
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 57
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, 2006, 2005 and 2004
6. INCOME TAXES:
Income tax expense differs from that determined by applying the United
States statutory tax rates to the Company's results of operations as
follows:
2006 2005 2004
-------- ------- -------
Statutory federal and state tax rate in the United States 40% 40% 40%
------- ------- -------
Expected income tax expense $36,826 $33,006 $23,298
Differences:
Earnings taxed in foreign jurisdictions (3,912) (5,571) (3,014)
Non-deductible expenses 1,898 1,268 1,467
Realized foreign exchange -- (724) 2,106
Other 36 955 (510)
------- ------- -------
Actual income tax expense $34,848 $28,934 $23,347
======= ======= =======
Temporary differences that give rise to future income taxes are as follows:
2006 2005
-------- -------
Future income tax asset:
Working capital $ 1,074 $ 601
Capital assets 556 260
Stock-based compensation 574 381
Unused tax losses 1,344 1,352
Other 265 130
-------- -------
3,813 2,724
Valuation allowance (168) (168)
-------- -------
Total future income tax asset 3,645 2,556
Current future income tax asset 1,074 601
-------- -------
Non-current future income tax asset 2,571 1,955
-------- -------
Future income tax liability:
Capital assets (2,381) (3,034)
Goodwill (5,486) (4,530)
Other (3,177) (517)
-------- -------
Total future income tax liability (11,044) (8,081)
Current future income tax liability (851) (460)
-------- -------
Non-current future income tax liability (10,193) (7,621)
-------- -------
Net future income taxes $ (7,399) $(5,525)
======== =======
Presented on balance sheet as:
Future income tax asset -- current $ 1,074 $ 601
Future income tax asset -- non-current 1,189 860
Future income tax liability -- current (851) (460)
Future income tax liability -- non-current (8,811) (6,526)
-------- -------
$ (7,399) $(5,525)
======== =======
As at December 31, 2006, the Company has net operating and capital loss
carryforwards of approximately $8,594,000 available to reduce future taxable
income, of which $644,000 expire through 2015, and $7,950,000 remain
indefinitely.
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, Singapore, India and Japan.
The future minimum lease payments as at December 31, 2006 are
approximately as follows:
2007 $1,938
2008 1,486
2009 1,015
2010 524
2011 83
Thereafter --
Total rent expenses in respect of these leases for the year ended December 31,
2006 was $1,796,000 (2005 -- $1,574,000; 2004 -- $1,406,000).
58 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
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, 2006, 2005 and 2004
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
(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, 2006, outstanding guarantees under contract for
industrial equipment to be sold prior to the end of the first quarter
of 2007 totaled $14,581,000 (December 31, 2005 -- $10,277,000 sold
prior to the end of the second quarter of 2006) (undiscounted and
before estimated proceeds from sale at auction). The Company also had
guarantees under contract totaling $25,128,000 relating to
agricultural auctions to be held prior to the end of the second
quarter of 2007 (December 31, 2005 -- $18,704,000 sold prior to the
end of the second quarter of 2006). No liability has been recorded
with respect to these contracts.
8. TRANSACTIONS WITH RELATED PARTIES:
During the year ended December 31, 2006, the Company paid $727,000 (2005 --
$751,000; 2004 -- $758,000) to a company controlled by the former Chairman
of the Company's Board of Directors, who retired in 2006. 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 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, 2006, 2005
and 2004, net earnings in accordance with Canadian GAAP were not
significantly different from net earnings had they been presented in
accordance with United States GAAP.
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:
2006 2005 2004
------- ------- -------
Net earnings in accordance with Canadian and
United States GAAP $57,218 $53,580 $34,899
Other comprehensive income (loss):
Foreign currency translation adjustment 5,589 (2,192) 8,795
------- ------- -------
Comprehensive income in accordance with
United States GAAP $62,807 $51,388 $43,694
======= ======= =======
Accumulated other comprehensive income (loss), which under United States GAAP is
presented as a separate component of shareholders' equity, is comprised of the
following:
2006 2005 2004
------- ------- -------
Foreign currency translation adjustment:
Balance, beginning of year $19,330 $21,522 $12,727
Change during the year 5,589 (2,192) 8,795
------- ------- -------
Balance, end of year $24,919 $19,330 $21,522
======= ======= =======
Ritchie Bros. Auctioneers 2006 ANNUAL REPORT 59
SUPPLEMENTAL QUARTERLY DATA
(Unaudited; tabular dollar amounts expressed in thousands of United States
dollars, except per share data)
Net Earnings Per
Gross Share(6) Closing
Auction Auction Net ----------------- Stock
2006 Sales Revenues Earnings Basic Diluted Price(6)
---- ---------- -------- -------- ----- ------- --------
1st quarter $ 571,528 $ 55,973 $13,198 $0.38 $0.38 $49.50
2nd quarter 830,493 78,680 24,526(1) 0.71(1) 0.70(1) 53.18
3rd quarter 580,271 55,688 9,704 0.28 0.28 53.61
4th quarter 738,731 70,699 9,790(1) 0.28(1) 0.28(1) 53.54
---------- -------- ------- ----- -----
$2,721,023 $261,040 $57,218(1)(4) $1.66(1) $1.64(1)
========== ======== ======= ===== =====
Net Earnings Per
Gross Share(6) Closing
Auction Auction Net ----------------- Stock
2005 Sales Revenues Earnings Basic Diluted Price(6)
---- ---------- -------- -------- ----- ------- --------
1st quarter $ 456,260 $ 48,578 $13,675(2) $0.40(2) $0.40(2) $31.60
2nd quarter 682,711 65,692 21,134(2) 0.62(2) 0.61(2) 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(2)(4) $1.56(2) $1.54(2)
========== ======== ======= ===== =====
Net Earnings Per
Gross Share(6) Closing
Auction Auction Net ----------------- Stock
2004 Sales Revenues Earnings Basic Diluted Price(6)
---- ---------- -------- -------- ----- ------- --------
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(3) 0.05(3) 0.05(3) 30.65
4th quarter 549,796 57,142 11,335(3) 0.34(3) 0.33(3) 33.06
---------- -------- ------- ----- -----
$1,789,402 $182,257 $34,899(3)(4) $1.02(3) $1.01(3)
========== ======== ======= ===== =====
Net Earnings Per
Gross Share(6) Closing
Auction Auction Net ----------------- Stock
2003 Sales Revenues Earnings Basic Diluted Price(6)
---- ---------- -------- -------- ----- ------- --------
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(4) $1.08 $1.07
========== ======== ======= ===== =====
Net Earnings Per
Gross Share(6) Closing
Auction Auction Net ----------------- Stock
2002 Sales Revenues Earnings Basic Diluted Price(6)
---- ---------- -------- -------- ----- ------- --------
1st quarter $ 293,208 $ 29,317 $ 5,363 $0.16 $0.16 $13.58
2nd quarter 414,056 38,864 10,775(5) 0.32(5) 0.32(5) 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 $0.84 $0.84
========== ======== ======= ===== =====
(1) Net earnings in the second and fourth quarters of 2006 included a gain of
$1.8 million recorded on the sale of excess property ($1.1 million after
tax) and a write-down of $0.2 million ($0.1 million after tax) on land held
for resale, respectively. Excluding the impact of these items, net earnings
for the second and fourth quarter of 2006 would have been $23.4 million
($0.68 per basic share and $0.67 per diluted share) and $9.9 million ($0.28
per share basic and diluted share) respectively.
(2) 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).
(3) 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).
(4) The Company recorded stock-based compensation expense of $2.0 million in
2006, $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.
(5) Net earnings for the second quarter of 2002 include non-recurring income of
$0.8 million or $0.02 per share, basic and diluted.
(6) 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.
60 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
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, 2006 2005 2004 2003 2002
------------------------ ---------- ---------- ---------- ---------- ----------
GROSS AUCTION SALES (UNAUDITED) $2,721,023 $2,092,841 $1,789,402 $1,559,393 $1,376,206
========== ========== ========== ========== ==========
STATEMENT OF OPERATIONS DATA:
Auction revenues $ 261,040 $ 212,633 $ 182,257 $ 161,542 $ 133,552
Direct expenses (36,976) (27,035) (23,472) (22,099) (19,684)
---------- ---------- ---------- ---------- ----------
224,064 185,598 158,785 139,443 113,868
Depreciation and amortization (15,017) (13,172) (12,708) (11,773) (9,208)
General and administrative (118,165)(1) (94,670)(1) (85,667)(1) (71,265)(1) (63,786)
---------- ---------- ---------- ---------- ----------
Earnings from operations 90,882 77,756 60,410 56,405 40,874
Interest expense (1,172) (2,224) (3,217) (4,772) (4,302)
Gain on disposition of capital assets 1,277 6,565 229 17 1,758
Other income 1,079 417 824 1,043 697
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 92,066 82,514 58,246 52,693 39,027
Income taxes (34,848) (28,934) (23,347)(2) (16,099) (10,656)
---------- ---------- ---------- ---------- ----------
Net earnings $ 57,218 $ 53,580 $ 34,899 $ 36,594 $ 28,371
========== ========== ========== ========== ==========
Net earnings per share-diluted(3) $ 1.64 $ 1.54 $ 1.01 $ 1.07 $ 0.84
========== ========== ========== ========== ==========
BALANCE SHEET DATA (END OF YEAR):
Working capital (including cash) $ 94,369 $ 84,108 $ 36,871 $ 35,700 $ 25,443
Total assets 554,227 496,396 438,522 411,470 326,115
Long-term debt 43,081 43,322 10,792 27,350 62,612
Total shareholders' equity 368,637 325,183 289,264 252,779 199,374
SELECTED OPERATING DATA (UNAUDITED):
Auction revenues as percentage
of gross auction sales 9.59% 10.16% 10.19% 10.36% 9.70%
Number of consignors at industrial
auctions 32,075 27,912 24,868 23,480 20,919
Number of bidders at industrial auctions 241,132 213,896 202,571 181,039 156,010
Number of buyers at industrial auctions 73,967 62,832 58,858 55,946 50,126
Number of permanent
auction sites (end of year) 26 23 22 22 22
(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 2006, 2005
and 2004 was $2.0 million, $1.5 million and $1.5 million respectively.
(2) 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.
(3) 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 2006 ANNUAL REPORT 61
BOARD OF DIRECTORS
(PHOTO OF EDWARD PITONIAK - BEVERLEY BRISCOE - PETER BLAKE - ROBERT MURDOCH -
DAVID RITCHIE - ERIC PATEL - RUSSELL CMOLIK - CHARLES CROFT)
EDWARD PITONIAK - BEVERLEY BRISCOE - PETER BLAKE - ROBERT MURDOCH - DAVID
RITCHIE - ERIC PATEL - RUSSELL CMOLIK - CHARLES CROFT
ON NOVEMBER 30, 2006, DAVE RITCHIE RETIRED FROM OUR BOARD OF DIRECTORS AND WAS
APPOINTED OUR HONORARY CHAIRMAN EMERITUS.
"Dave has a talent to make each person in a room think he/she is the most
important person there and a personal friend. He has a sincerity and
humbleness about him that is truly unique. He will be missed. The
unreserved auction business model he and his employees developed has set a
standard in the equipment business for fair and unbiased auctions that
allow equipment owners to obtain instant liquidity for their surplus fleet.
The auction values established at Ritchie auctions are often the benchmark
used in the business."
Frank Manfredi -- Manfredi & Associates, Inc.
CHARLES CROFT -- CHAIRMAN
Chuck Croft has a diverse business background, having been involved in several
businesses and industries, including the drilling industry. He was appointed to
the Ritchie Bros. Board in 1998 and became Chairman effective November 30, 2006.
Mr. Croft is also Chair of the Compensation Committee and a member of the
Nominating and Corporate Governance Committee.
PETER BLAKE
Peter Blake joined Ritchie Bros. in 1991, having worked previously with
predecessor firms of PriceWaterhouseCoopers and KPMG. Mr. Blake is a Chartered
Accountant and started with the Company as Controller. He was appointed Vice
President, Finance in 1994, and in 1997 he was appointed Chief Financial Officer
and was elected to the Board. In 2002 Mr. Blake was appointed Senior Vice
President and became CEO effective November 2004.
RUSSELL CMOLIK
Russ Cmolik started with Ritchie Bros. in 1972 as Controller. He assumed
additional responsibilities as the Company grew, including the role of Chief
Financial Officer, and became President and Chief Operating Officer in 1991. Mr.
Cmolik retired in 2002 but remains a Director of the Company, a position he has
held since 1997. Mr. Cmolik is a Chartered Accountant and is currently a member
of the Compensation Committee.
BEVERLEY BRISCOE
Bev Briscoe was appointed to the Ritchie Bros. Board in 2004. Ms. Briscoe has an
extensive background working in industries complementary to the auction business
and currently works as a business consultant and is President of Briscoe
Management Ltd. Ms. Briscoe is Chair of the British Columbia Government's
Industry Training Authority, a member of the boards of BC Rail Corporation,
Goldcorp Inc. (TSX: "G"), Spectra Energy Income Fund (TSX: "SP.un") and
Westminster Savings Credit Union, as well as a director of the Boys and Girls
Club of Greater Vancouver. Ms. Briscoe holds a bachelor of commerce degree and
is a Chartered Accountant (Fellow). Ms. Briscoe is currently Chair of the Audit
Committee and a member of the Nominating & Corporate Governance Committee.
ERIC PATEL
Eric Patel was first elected to the Ritchie Bros. Board in 2004. Mr. Patel has
extensive business and financial experience, most recently as the CFO of Crystal
Decisions, Inc., a privately held software company. Mr. Patel joined Crystal
Decisions in 1999 after holding executive level positions, including that of
CFO, with University Games, Inc., a privately held manufacturer of educational
toys and games. Before 1997, Mr. Patel worked for Dreyer's Grand Ice Cream as
Director of Strategy, for Marakon Associates strategy consultants and for
Chemical Bank. Mr. Patel holds an MBA degree. Mr. Patel is currently a member of
the Audit Committee and is Chair of the Nominating & Corporate Governance
Committee.
ROBERT MURDOCH
Bob Murdoch was elected to the Company's Board in 2006. Mr. Murdoch spent his
career with Lafarge Corporation and affiliates, retiring from the position of
President and Chief Executive Officer in 1992. Mr. Murdoch was a member of the
board of Lafarge, S.A. (NYSE: "LR"; Paris Stock Exchange (Eurolist): "LG") the
Paris-based parent company of Lafarge Corporation, until 2005, and is still a
member of their International Advisory Board. Mr. Murdoch is also a director of
Lallemand Inc. and Timberwest Forest Corp. (TSX: "TWF.un"). Mr. Murdoch holds an
LLB degree. Mr. Murdoch sits on the Compensation Committee.
EDWARD PITONIAK
Ed Pitoniak was appointed to the Company's Board in 2006 and was appointed to
the Audit Committee at the same time. Mr. Pitoniak is President and CEO of
Canadian Hotel Income Properties Real Estate Investment Trust (CHIP REIT -- TSX:
"HOT.un"). He is also a member of CHIP's Board of Trustees. Prior to joining
CHIP in 2004, Mr. Pitoniak was a Senior Vice-President at Intrawest Corporation
for eight years. Before Intrawest, Mr. Pitoniak spent nine years with Times
Mirror Magazines, where he held both top editorial and advertising positions
with Ski Magazine -- specifically, editor-in-chief and advertising director. Mr.
Pitoniak has a Bachelor of Arts degree.
62 Ritchie Bros. Auctioneers 2006 ANNUAL REPORT
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
Charles E. Croft Chairman
Peter J. Blake Director & Chief Executive Officer
Beverley A. Briscoe Director
C. Russell Cmolik Director
Robert W. Murdoch Director
Eric Patel Director
Edward B. Pitoniak Director
Shareholders wishing to speak to the Chairman should call 604.233.6153 or send
an email to leaddirector@rbauction.com.
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
J. Dean Siddle VP -- Senior Valuation Analyst
Steven C. Simpson VP -- Southwest Division, USA
Kevin R. Tink VP -- Agricultural & Western Canada Divisions
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 filings 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 MEETING
The annual meeting of the Company's shareholders will be held at 11am on Friday
April 13, 2007 at the Vancouver Airport Marriot Hotel, 7571 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: jenny.karim@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
DIVIDENDS
All dividends paid by Ritchie Bros. Auctioneers in 2006 and subsequent years
will be eligible dividends, unless indicated otherwise in the Company's
quarterly reports or by press release. New tax legislation in Canada will mean
that Canadian resident individuals who receive eligible dividends in 2006 and
subsequent years will be entitled to an enhanced gross-up and dividend tax
credit on such dividends.
AUCTION SITES
CANADA (MAP)
VANCOUVER, BC 1
+1.604.580.0166 - Fax +1.604.580.1245
PRINCE GEORGE, BC 2
+1.250.963.8491 - Fax +1.250.963.8135
GRANDE PRAIRIE, AB 3
+1.780.538.1100 - Fax +1.780.539.7230
EDMONTON, AB 4
+1.780.955.2486 - Fax +1.780.955.2662
SASKATOON, SK 5
+1.306.933.9333 - Fax +1.306.933.2255
REGINA, SK 6
+1.306.776.2397 - Fax +1.306.776.2443
TORONTO, ON 7
+1.905.857.2422 - Fax +1.905.857.5195
MONTREAL, QC 8
+1.450.464.2888 - Fax +1.450.464.4460
TRURO, NS 9
+1.902.895.3700 - Fax +1.902.662.2272
USA
OLYMPIA, WA 10
+1.360.956.1500 - Fax +1.360.956.1508
SACRAMENTO, CA 11
+1.530.724.3900 - Fax +1.530.724.3270
LOS ANGELES, CA 12
+1.951.940.9441 - Fax +1.951.940.9442
PHOENIX, AZ 13
+1.602.269.5631 - Fax +1.602.269.5674
ALBUQUERQUE, NM 14
+1.505.836.0738 - Fax +1.505.839.2070
DENVER, CO 15
+1.970.535.6700 - Fax +1.970.535.0168
FORT WORTH, TX 16
+1.817.237.6544 - Fax +1.817.238.9898
HOUSTON, TX 17
+1.713.455.5200 - Fax +1.713.455.5270
KANSAS CITY, MO 18
+1.816.318.9159 - Fax +1.816.318.9124
BUXTON, ND 19
+1.701.847.2388 - Fax +1.701.847.3065
MINNEAPOLIS, MN 20
+1.952.469.1700 - Fax +1.952.469.1732
CHICAGO, IL 21
+1.815.941.6400 - Fax +1.815.942.8053
NASHVILLE, TN 22
+1.615.453.4549 - Fax +1.615.453.4550
ATLANTA, GA 23
+1.770.304.3355 - Fax +1.770.304.3366
COLUMBUS, OH 24
+1.937.568.9500 - Fax +1.937.568.9504
STATESVILLE, NC 25
+1.704.873.6633 - Fax +1.704.873.3394
ORLANDO, FL 26
+1.863.420.9919 - Fax +1.863.420.2447
NORTH EAST, MD 27
+1.410.287.4330 - Fax +1.410.287.4332
MEXICO
TOLUCA 28
+52.72.22.1129.22 - Fax +52.72.22.1129.40
SOUTH EAST ASIA
SINGAPORE 29
+65.6477.9222 - Fax +65.6477.9233
EUROPE
MOERDIJK, THE NETHERLANDS 30
+31.168.39.22.00 - Fax +31.168.39.22.50
LIVORNO, ITALY 31
+39.0523.241.094 - Fax +39.0523.943.808
SAGUNTO, SPAIN 32
+34.962.69.85.00 - Fax +34.962.67.35.65
MIDDLE EAST
DUBAI, UAE 33
+971.4.883.8398 - Fax +971.4.883.8495
AUSTRALIA
GOLD COAST, QLD 34
+61.7.3382.4444 - Fax +61.7.3382.4433
MELBOURNE, VIC 35
+61.3.9369.7322 - Fax +61.3.9369.7344
(THINK ORANGE LOGO)
(RITCHIE BROS. AUCTIONEERS LOGO)
Ritchie Bros. Auctioneers
6500 River Road
Richmond, BC
Canada V6X 4G5
Tel: 604.273.7564
Fax: 604.273.6873
www.rbauction.com