RITCHIE BROS AUCTIONEERS INC, 10-Q filed on 5/9/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
May 6, 2016
Document And Entity Information [Abstract]
 
 
Entity Registrant Name
Ritchie Bros Auctioneers Inc 
 
Entity Central Index Key
0001046102 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
106,101,974 
Condensed Consolidated Income Statements (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Condensed Consolidated Income Statements [Abstract]
 
 
Revenues (note 6)
$ 131,945 
$ 115,618 
Costs of services, excluding depreciation and amortization (note 7)
15,313 
11,609 
Gross revenue, net of expenses
116,632 
104,009 
Selling, general and administrative expenses (note 7)
68,307 
63,756 
Depreciation and amortization expenses (note 7)
10,080 
10,616 
Gain on disposition of property, plant and equipment
(246)
(175)
Foreign exchange gain
(683)
(3,207)
Operating income
39,174 
33,019 
Interest income
498 
847 
Interest expense
(1,363)
(1,269)
Equity income (note 18)
519 
233 
Other, net
698 
713 
Other income (expense)
352 
524 
Income before income taxes
39,526 
33,543 
Income tax expense (recovery) (note 8):
 
 
Current
10,009 
10,713 
Deferred
(477)
(1,280)
Income tax expense
9,532 
9,433 
Net income
29,994 
24,110 
Net income attributable to:
 
 
Stockholders
29,406 
23,777 
Non-controlling interests
$ 588 
$ 333 
Earnings per share attributable to stockholders (note 10):
 
 
Basic
$ 0.28 
$ 0.22 
Diluted
$ 0.27 
$ 0.22 
Weighted average number of shares outstanding (note 10):
 
 
Basic
106,917,280 
107,484,944 
Diluted
107,159,010 
107,807,948 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Condensed Consolidated Statements of Comprehensive Income [Abstract]
 
 
Net income
$ 29,994 
$ 24,110 
Other comprehensive income (loss), net of income tax:
 
 
Foreign currency translation adjustment
12,195 
(28,298)
Total comprehensive income (loss)
42,189 
(4,188)
Total comprehensive income (loss) attributable to:
 
 
Stockholders
41,434 
(4,335)
Non-controlling interests
$ 755 
$ 147 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Current Assets:
 
 
Cash and cash equivalents
$ 294,074 
$ 210,148 
Restricted cash
117,944 
83,098 
Trade and other receivables
131,098 
59,412 
Inventory (note 13)
29,452 
58,463 
Advances against auction contracts
3,750 
4,797 
Prepaid expenses and deposits
11,692 
11,057 
Assets held for sale (note 14)
631 
629 
Income taxes receivable
8,592 
2,495 
Total Current Assets
597,233 
430,099 
Property, plant and equipment (note 15)
535,864 
528,591 
Equity-accounted investments (note 18)
7,081 
6,487 
Other non-current assets
3,556 
3,369 
Intangible assets (note 16)
65,400 
46,973 
Goodwill (note 17)
111,569 
91,234 
Deferred tax assets
14,815 
13,362 
Total Assets
1,335,518 
1,120,115 
Current liabilities:
 
 
Auction proceeds payable
289,103 
101,215 
Trade and other payables
130,368 
120,042 
Income taxes payable
1,190 
13,011 
Short-term debt (note 19)
42,504 
12,350 
Current portion of long-term debt (note 19)
46,132 
43,348 
Total Current Liabilities
509,297 
289,966 
Long-term debt (note 19)
56,143 
54,567 
Share unit liabilities
3,188 
5,633 
Other non-current liabilities
8,803 
6,735 
Deferred tax liabilities
35,392 
31,070 
Total Liabilities
612,823 
387,971 
Contingencies (note 22)
   
   
Contingently redeemable non-controlling interest (note 9)
41,444 
24,785 
Share capital:
 
 
Common shares; no par value, unlimited shares authorized, issued and outstanding shares: 105,885,660 (December 31, 2015: 107,200,470)
98,613 
131,530 
Additional paid-in capital
27,969 
27,728 
Retained earnings
594,986 
601,051 
Accumulated other comprehensive income
(45,105)
(57,133)
Shareholders' equity
676,463 
703,176 
Non-controlling interest
4,788 
4,183 
Total Equity
681,251 
707,359 
Total Liabilities and Equity
$ 1,335,518 
$ 1,120,115 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2016
Dec. 31, 2015
Condensed Consolidated Balance Sheets [Abstract]
 
 
Common shares, no par value
   
   
Common shares, issued shares
105,885,660 
107,200,470 
Common shares, outstanding shares
105,885,660 
107,200,470 
Condensed Consolidated Statements of Changes in Equity (USD $)
In Thousands, except Share data
Common stock [Member]
Additional paid-In capital [Member]
Retained earnings [Member]
Accumulated other comprehensive income (loss) [Member]
Non-controlling interest [Member]
Total
Contingently redeemable non-controlling interest, Balance at Dec. 31, 2015
 
 
 
 
 
$ 24,785 
Balance at Dec. 31, 2015
131,530 
27,728 
601,051 
(57,133)
4,183 
707,359 
Balance, shares at Dec. 31, 2015
107,200,470 
 
 
 
 
 
Net income
 
 
29,406 
 
117 
29,523 
Other comprehensive income
 
 
 
12,028 
 
12,028 
Comprehensive income
 
 
29,406 
12,028 
117 
41,551 
Change in value of redeemable non-controlling interest
 
 
(18,317)
 
 
(18,317)
Stock option exercises
3,809 
(778)
 
 
 
3,031 
Stock option exercises, shares
145,190 
 
 
 
 
 
Stock option tax adjustment
 
(51)
 
 
 
(51)
Stock option compensation expense (note 21)
 
1,070 
 
 
 
1,070 
Non-controlling interest acquired in a business combination (note 23)
 
 
 
 
488 
488 
Shares repurchased (note 20)
(36,726)
 
 
 
 
(36,726)
Shares repurchased, shares
(1,460,000)
 
 
 
 
 
Cash dividends paid (note 20)
 
 
(17,154)
 
 
(17,154)
Net income
 
 
 
 
 
471 
Other comprehensive income
 
 
 
 
 
167 
Comprehensive Income attributable redeemable non-controlling interests
 
 
 
 
 
638 
Change in value of contingently redeemable non-controlling interest
 
 
 
 
 
18,317 
Cash dividends paid (note 20)
 
 
 
 
 
(2,296)
Contingently redeemable non-controlling interest, Balance at Mar. 31, 2016
 
 
 
 
 
41,444 
Balance at Mar. 31, 2016
$ 98,613 
$ 27,969 
$ 594,986 
$ (45,105)
$ 4,788 
$ 681,251 
Balance, shares at Mar. 31, 2016
105,885,660 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Operating activities:
 
 
Net income
$ 29,994 
$ 24,110 
Adjustments for items not affecting cash:
 
 
Depreciation and amortization expenses
10,080 
10,616 
Inventory write down (note 13)
 
60 
Stock option compensation expense (note 21)
1,070 
723 
Deferred income tax recovery
(477)
(1,280)
Equity income less dividends received
(519)
(233)
Unrealized foreign exchange gain
(621)
(996)
Gain on disposition of property, plant and equipment
(246)
(175)
Net changes in operating assets and liabilities (note 11)
94,733 
77,409 
Net cash provided by operating activities
134,014 
110,234 
Investing activities:
 
 
Acquisition of Mascus (note 23)
(27,812)
 
Property, plant and equipment additions
(2,444)
(3,327)
Intangible asset additions
(3,711)
(2,419)
Proceeds on disposition of property, plant and equipment
824 
773 
Other, net
(173)
 
Net cash used in investing activities
(33,316)
(4,973)
Financing activities:
 
 
Issuances of share capital
3,031 
4,421 
Share repurchase (note 20)
(36,726)
(47,489)
Dividends paid to stockholders (note 20)
(17,154)
(15,089)
Dividends paid to contingently redeemable non-controlling interests
(2,296)
(1,340)
Proceeds from short-term debt
30,179 
 
Repayment of short-term debt
(2,283)
(185)
Repayment of finance lease obligations
(493)
(532)
Other, net
32 
(105)
Net cash used in financing activities
(25,710)
(60,319)
Effect of changes in foreign currency rates on cash and cash equivalents
8,938 
(8,497)
Increase in cash and cash equivalents
83,926 
36,445 
Cash and cash equivalents, beginning of year
210,148 
139,815 
Cash and cash equivalents, end of year
$ 294,074 
$ 176,260 
General Information
General Information

1.  General information

Ritchie Bros. Auctioneers Incorporated and its subsidiaries (collectively referred to as the “Company”) provide asset management and disposition services for the construction, agricultural, transportation, energy, mining, forestry, material handling, marine and real estate industries through its unreserved auctions, online marketplace services, value-added services and listing and software services.  Ritchie Bros. Auctioneers Incorporated is a company incorporated in Canada under the Canada Business Corporations Act, whose shares are publicly traded on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”).



Significant Accounting Policies
Significant Accounting Policies

2.  Significant accounting policies

(a)

 Basis of preparation

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



Certain information and footnote disclosure required by US GAAP for complete annual financial statements have been omitted and, therefore, these condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K, filed with the Securities Exchange Commission (“SEC”). A selection of the accounting policies for which there has been a change since the annual consolidated financial statements are set out below.  In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, cash flows and changes in equity for the interim periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.



Previously, the Company prepared its consolidated financial statements under International Financial Reporting Standards (“IFRS”) as permitted by securities regulators in Canada, as well as in the United States under the status of a Foreign Private Issuer as defined by the United States SEC. At the end of the second quarter of 2015, the Company determined that it no longer qualified as a Foreign Private Issuer under the SEC rules. As a result, beginning January 1, 2016 the Company was required to report with the SEC on domestic forms and comply with domestic company rules in the United States. The transition to US GAAP was made retrospectively for all periods from the Company’s inception.



(b)

 Revenue recognition

Revenues are comprised of:

·

commissions earned at our auctions through the Company acting as an agent for consignors of equipment and other assets, as well as commissions on online marketplace sales, and

·

fees earned in the process of conducting auctions through all our auction channels and from value-added services, as well as subscription revenues from our listing and software services.

·

2.  Significant accounting policies (continued)

(b)Revenue recognition (continued)

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.  For auction or online marketplace sales, revenue is recognized when the auction or online marketplace sale is complete and the Company has determined that the sale proceeds are collectible. Revenue is measured at the fair value of the consideration received or receivable and is shown net of value-added tax and duties. 



Commissions from sales at our auctions represent the percentage earned by the Company on the gross auction proceeds from equipment and other assets sold at auction. The majority of commissions are earned as a pre-negotiated fixed rate of the gross selling price. Other commissions from sales at our auctions are earned from underwritten commission contracts, when the Company guarantees a certain level of proceeds to a consignor or purchases inventory to be sold at auction.  Commissions also include those earned on online marketplace sales.



Commissions from sales at auction

The Company accepts equipment and other assets on consignment or takes title for a short period of time prior to auction, stimulates buyer interest through professional marketing techniques, and matches sellers (also known as consignors) to buyers through the auction or private sale process.



In its role as auctioneer, the Company matches buyers to sellers of equipment on consignment, as well as to inventory held by the Company, through the auction process. Following the auction, the Company invoices the buyer for the purchase price of the property, collects payment from the buyer, and where applicable, remits to the consignor the net sale proceeds after deducting its commissions, expenses and applicable taxes. Commissions are calculated as a percentage of the hammer price of the property sold at auction. 



On the fall of the auctioneer’s hammer, the highest bidder becomes legally obligated to pay the full purchase price, which is the hammer price of the property purchased and the seller is legally obligated to relinquish the property in exchange for the hammer price less any seller’s commissions. Commission revenue is recognized on the date of the auction sale upon the fall of the auctioneer’s hammer, which is the point in time when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the commission revenue. Subsequent to the date of the auction sale, the Company’s remaining obligations for its auction services relate only to the collection of the purchase price from the buyer and the remittance of the net sale proceeds to the seller.



Under the standard terms and conditions of its auction sales, the Company is not obligated to pay a consignor for property that has not been paid for by the buyer, provided that the property has not been released to the buyer. In the rare event where a buyer refuses to take title of the property,  the sale is cancelled in the period in which the determination is made, and the property is returned to the consignor. Historically, cancelled sales have not been material in relation to the aggregate hammer price of property sold at auction. 



Commission revenues are recorded net of commissions owed to third parties, which are principally the result of situations when the commission is shared with a consignor or with the counterparty in an auction guarantee risk and reward sharing arrangement. Additionally, in certain situations, commissions are shared with third parties who introduce the Company to consignors who sell property at auction.

2.  Significant accounting policies (continued)

(b)Revenue recognition (continued)

Underwritten commission contracts can take the form of guarantee or inventory contracts. Guarantee contracts typically include a pre-negotiated percentage of the guaranteed gross proceeds plus a percentage of proceeds in excess of the guaranteed amount. If actual auction proceeds are less than the guaranteed amount, commission is reduced; if proceeds are sufficiently lower, the Company can incur a loss on the sale. Losses, if any, resulting from guarantee contracts are recorded in the period in which the relevant auction is completed. If a loss relating to a guarantee contract held at the period end to be sold after the period end is known or is probable and estimable at the financial statement reporting date, the loss is accrued in the financial statements for that period. The Company’s exposure from these guarantee contracts fluctuates over time (note 22). 



Revenues related to inventory contracts are recognized in the period in which the sale is completed, title to the property passes to the purchaser and the Company has fulfilled any other obligations that may be relevant to the transaction, including, but not limited to, delivery of the property. Revenue from inventory sales is presented net of costs within revenues on the income statement, as the Company takes title only for a short period of time and the risks and rewards of ownership are not substantially different than the Company’s other underwritten commission contracts.



Fees

Fees earned in the process of conducting our auctions include administrative, documentation, and advertising fees. Fees from value-added services include financing and technology service fees. Fees also subscription revenues from our listing and software services, as well as amounts paid by buyers (a “buyer’s premium”) on online marketplace sales. Fees are recognized in the period in which the service is provided to the customer. 



(c)

   Costs of services, excluding depreciation and amortization expenses

Costs of services are comprised of expenses incurred in direct relation to conducting auctions (“direct expenses”), earning online marketplace revenues, and earning other fee revenues. Direct expenses include direct labour, buildings and facilities charges, and travel, advertising and promotion costs. Costs of services incurred to earn online marketplace revenues include inventory management, referral, inspection, sampling, and appraisal fees. Costs of services incurred in earning other fee revenues include direct labour (including commissions on sales), software maintenance fees, and materials. Costs of services exclude depreciation and amortization expenses.  In comparative periods, costs of services consisted entirely of direct expenses. As a result of the Xcira LLC (“Xcira”) and Mascus International Holdings BV (“Mascus”) acquisitions, significant other costs of services are now incurred in earning our revenues (note 23).

 

(d)

New and amended accounting standards

(i)

Effective January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adoption of this standard did not have an impact on the Company’s consolidated financial statements with respect to the acquisition of Xcira (note 23(b)) as no adjustments to provisional amounts were identified during the measurement period. With respect to the Mascus acquisition (note 23(a)), the Company is still in the measurement period, and has not yet identified any adjustments to provisional amounts.

2.  Significant accounting policies (continued)

(d)   New and amended accounting standards (continued)

(ii)

Effective January 1, 2016, the Company adopted ASU 2015-05,  Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides clarity around a customer’s accounting for fees paid in a cloud computing arrangement. The amendments in ASU 2015-05 add guidance to assist customers in determining whether a cloud computing arrangement includes a software license. Software license elements of cloud computing arrangements are accounted for consistent with the acquisition of other intangible asset licenses. Where there is no software license element, the cloud computing arrangement is accounted for as a service contract. The standard was applied prospectively and did not have an impact on the Company’s consolidated financial statements.



(iii)

Effective January 1, 2016, the Company adopted ASU 2015-02,  Consolidation (Topic 810), Amendments to the Consolidation Analysis, which changes the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”), and eliminates the presumption that a general partner should consolidate a limited partnership that is a voting interest entity. The new guidance also alters the analysis for determining when fees paid to a decision maker or service provider represent a variable interest in a VIE and how interests of related parties affect the primary beneficiary determination. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.



(iv)

Effective January 1, 2016, the Company adopted ASU 2014-12,  Compensation – Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires that a performance target that (1) affects vesting of an award, and (2) could be achieved after the requisite service period of the employee be treated as a performance condition. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.



(e)

 Recent accounting standards not yet adopted

(i)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize almost all leases, including operating leases, on the balance sheet through a right-of-use asset and a corresponding lease liability. For short-term leases, defined as those with a term of 12 months or less, the lessee is permitted to make an accounting policy election not to recognize the lease assets and liabilities, and instead recognize the lease expense generally on a straight-line basis over the lease term. The accounting treatment under this election is consistent with current operating lease accounting. No extensive amendments were made to lessor accounting, but amendments of note include changes to the definition of initial direct costs and accounting for collectability uncertainties in a lease. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Both lessees and lessors must apply ASU 2016-02 using a “modified retrospective transition”, which reflects the new guidance from the beginning of the earliest period presented in the financial statements. However, lessees and lessors can elect to apply certain practical expedients on transition. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.



(ii)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, the first of three standards related to financial instrument accounting. The amendments of ASU 2016-01 require equity method investments (except for equity-method accounted investments and those resulting in consolidation of the investee) to be measured at fair value with changes recognized in net income. For equity investments that do not have readily determinable fair values, the entity may elect to measure the investment at cost less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.    

2.  Significant accounting policies (continued)

 (e)   Recent accounting standards not yet adopted (continued)

The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements. The amendments also:

·

Simplify the impairment assessment of equity investments that do not have readily determinable fair values, by requiring a qualitative assessment to identify impairment. The entity is only required to measure the investment at fair value if the qualitative assessment indicates that impairment exists.

·

Eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost.

·

Require the exit price notion to be used when measuring the fair value of financial instruments for disclosure purposes.

·

Require separate presentation of financial assets and liabilities by measurement category and form of financial asset (i.e. securities or loans & receivables) on the balance sheet or the accompanying notes to the financial statements.

ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is only permitted for the provisions under ASU 2016-01 related to the recognition of changes in fair value of financial liabilities. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.



(iii)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In particular, it moves away from the current industry and transaction specific requirements. ASU 2014-09 creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include: 

1.

Identifying the contract(s) with the customer,

2.

Identifying the separate performance obligations in the contract,

3.

Determining the transaction price,

4.

Allocating the transaction price to the separate performance obligations, and

5.

Recognizing revenue as each performance obligation is satisfied.

The amendments also contain extensive disclosure requirements designed to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB delayed the effective date of ASU 2014-09 by one year so that ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

2.  Significant accounting policies (continued)

 (e)   Recent accounting standards not yet adopted (continued)

(iv)

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net. The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, focusing on whether an entity controls a specified good or service before that good or service is transferred to a customer. Where such control exists – i.e. where the entity is required to provide the specified good or service itself – the entity is a ‘principal’. Where the entity is required to arrange for another party to provide the good or service, it is an agent. The effective date and transition requirements of ASU 2016-08 are the same as for ASU 2014-09, which is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.



(v)

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)." This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company is evaluating how the adoption of this standard will impact its consolidated financial statements



Significant Judgments, Estimates and Assumptions
Significant Judgments, Estimates and Assumptions

3.  Significant judgments, estimates and assumptions

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



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



Judgments, estimates and underlying assumptions are evaluated on an ongoing basis by management, and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstance and such changes are reflected in the assumptions when they occur. Significant estimates include the estimated useful lives of long-lived assets, as well as valuation of goodwill, underwritten commission contracts, contingently redeemable non-controlling interest and share-based compensation.





Seasonality of Operations
Seasonality of Operations

4.  Seasonality of operations

The Company's operations are both seasonal and event driven. Revenues tend to be highest during the second and fourth calendar quarters.  The Company generally conducts more auctions during these quarters than during the first and third calendar quarters.  Late December through mid-February and mid-July through August are traditionally less active periods.

Segmented Information
Segmented Information

5Segmented  information

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



·

Core Auction segment, a network of auction locations that conduct live, unreserved auctions with both on-site and online bidding; and

·

Other includes the results of the Company’s EquipmentOne and Mascus online services, which are not material to the Company’s consolidated financial statements. During the three months ended March 31, 2016, the Company acquired Mascus and has updated its segment reporting such that the results of EquipmentOne and Mascus (subsequent to acquisition in February 2016) are reported as “Other.”



The Chief Operating Decision Maker evaluates segment performance based on earnings (loss) from operations. The significant non-cash item included in segment earnings (loss) from operations is depreciation and amortization.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Core

 

 

 

 

 

 

 

Three months ended March 31, 2016

Auction

 

Other

 

 

Consolidated

 

Revenues

$

127,340 

 

$

4,605 

 

$

131,945 

 

Costs of services, excluding

 

 

 

 

 

 

 

 

 

depreciation and amortization

 

(14,785)

 

 

(528)

 

 

(15,313)

 

Selling, general and administrative expenses

 

(64,820)

 

 

(3,487)

 

 

(68,307)

 

Depreciation and amortization expenses

 

(9,304)

 

 

(776)

 

 

(10,080)

 



 

38,431 

 

$

(186)

 

$

38,245 

 

Gain on disposition of property,

 

 

 

 

 

 

 

 

 

plant and equipment

 

 

 

 

 

 

 

246 

 

Foreign exchange gain

 

 

 

 

 

 

 

683 

 

Operating income

 

 

 

 

 

 

$

39,174 

 

Equity income

 

 

 

 

 

 

 

519 

 

Other and income tax expenses

 

 

 

 

 

 

 

(9,699)

 

Net income

 

 

 

 

 

 

$

29,994 

 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Core

 

 

 

 

 

 

Three months ended March 31, 2015

Auction

 

Other

 

 

Consolidated

 

Revenues

$

112,645 

 

$

2,973 

 

$

115,618 

 

Costs of services, excluding

 

 

 

 

 

 

 

 

 

depreciation and amortization

 

(11,609)

 

 

 -

 

 

(11,609)

 

Selling, general and administrative expenses

 

(60,598)

 

 

(3,158)

 

 

(63,756)

 

Depreciation and amortization expenses

 

(9,696)

 

 

(920)

 

 

(10,616)

 



$

30,742 

 

$

(1,105)

 

$

29,637 

 

Gain on disposition of property,

 

 

 

 

 

 

 

 

 

plant and equipment

 

 

 

 

 

 

 

175 

 

Foreign exchange gain

 

 

 

 

 

 

 

3,207 

 

Operating income

 

 

 

 

 

 

$

33,019 

 

Equity income

 

 

 

 

 

 

 

233 

 

Other and income tax expenses

 

 

 

 

 

 

 

(9,142)

 

Net income

 

 

 

 

 

 

$

24,110 

 



Revenues
Revenues

6Revenues

The Company’s revenue from the rendering of services is as follows:





 

 

 

 

 

 

 

 

 

 





 

 

 

 

 



 

 

 

 

 

Three months ended March 31,

 

2016 

 

 

2015 

Commissions

$

99,793 

 

$

93,140 

Fees

 

32,152 

 

 

22,478 



$

131,945 

 

$

115,618 



Net profits on inventory sales included in commissions are:







 

 

 

 

 



 

 

 

 

 

Three months ended March 31,

 

2016 

 

 

2015 

Revenue from inventory sales

$

124,557 

 

$

153,281 

Cost of inventory sold

 

(111,536)

 

 

(138,578)



$

13,021 

 

$

14,703 



Operating Expenses
Operating Expenses

7Operating expenses

Costs of services, excluding depreciation and amortization



 

 

 

 

 

 



 

 

 

 

 

 

Three months ended March 31,

 

2016 

 

 

2015 

 

Employee compensation expenses

$

6,258 

 

$

4,598 

 

Buildings, facilities and technology expenses

 

2,295 

 

 

1,614 

 

Travel, advertising and promotion expenses

 

5,937 

 

 

4,154 

 

Other costs of services

 

823 

 

 

1,243 

 



$

15,313 

 

$

11,609 

 



Selling, general and administrative (“SG&A”) expenses



 

 

 

 

 

 



 

 

 

 

 

 

Three months ended March 31,

 

2016 

 

 

2015 

 

Employee compensation expenses

$

44,490 

 

$

41,729 

 

Buildings, facilities and technology expenses

 

11,236 

 

 

10,046 

 

Travel, advertising and promotion expenses

 

5,562 

 

 

6,081 

 

Professional fees

 

3,452 

 

 

3,100 

 

Other SG&A expenses

 

3,567 

 

 

2,800 

 



$

68,307 

 

$

63,756 

 



Depreciation and amortization expenses





 

 

 

 

 

 



 

 

 

 

 

 

Three months ended March 31,

 

 

2016 

 

 

2015 

Depreciation expense

 

$

7,783 

 

$

9,280 

Amortization expense

 

 

2,297 

 

 

1,336 



 

$

10,080 

 

$

10,616 



Income Taxes
Income Taxes

8Income taxes

At the end of each interim period, the Company estimates  the effective tax rate expected to be applicable for the full fiscal year.  The estimate reflects, among other items, our best estimate of operating results.  It does not include the estimated impact of foreign exchange rates or unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes.



The Company’s consolidated effective tax rate in respect of operations for the three months ended March 31, 2016 was 24.1% (2015: 28.1%). 

Contingently Redeemable Non-controlling Interest in Ritchie Bros. Financial Services
Contingently Redeemable Non-controlling Interest in Ritchie Bros. Financial Services

9Contingently redeemable non-controlling interest in Ritchie Bros. Financial Services

The Company holds a 51% interest in Ritchie Bros. Financial Services (”RBFS”), an entity  that provides loan origination services to enable the Company’s auction customers to obtain financing from third party lenders.   As a result of the Company’s involvement with RBFS, the Company is exposed to risks related to the recovery of the net assets of RBFS as well as liquidity risks associated with the put option discussed below.



The Company has determined RBFS is a variable interest entity because the Company provides subordinated financial support to RBFS and because the Company’s voting interest is disproportionately low in relation to its economic interest in RBFS while substantially all the activities of RBFS involve or are conducted on behalf of the Company.  The Company has determined it is the primary beneficiary of RBFS as it is part of a related party group that has the power to direct the activities that most significantly impact RBFS’s economic performance, and although no individual member of that group has such power, the Company represents the member of the related party group that is most closely associated with RBFS



The Company and the non-controlling interest (“NCI”) holders each hold options pursuant to which the Company may acquire, or be required to acquire, the NCI holders’ 49% interest in RBFS.  These call and put options became exercisable on April 6, 2016.  As a result of the existence of the put option, the NCI is accounted for as a contingently redeemable equity instrument (the “contingently redeemable NCI”).



At all reporting periods presented, the Company determined that redemption was probable and measured the carrying value of the contingently redeemable NCI at its estimated redemption value. The NCI can be redeemed at a purchase price to be determined through an independent appraisal process conducted in accordance with the terms of the agreement, or at a negotiated price (the “redemption value”) and therefore, the redemption value on exercise may materially differ from the redemption value as at March 31, 2016.  The Company has the option to elect to pay the purchase price in either cash or shares of the Company, subject to the Company obtaining all relevant security exchange and regulatory consents and approvals.



The redemption value of the contingently redeemable NCI was estimated to be $41,444,000 at March 31, 2016. During the first quarter of 2016, the Company commenced price negotiations with the NCI holders, which are still in progress.  As a result, the Company has recorded the contingently redeemable NCI at the estimated redemption value based on the status of these negotiations.

 

The estimation of redemption value required management to make significant judgments, estimates, and assumptions as of the reporting date.

Earnings Per Share Attributable to Stockholders
Earnings Per Share Attributable to Stockholders

10Earnings per share attributable to stockholders



 

 

 

 

 

 

 



 

 

 

 

 

 

 



Net income attributable

 

 

 

Per share

Three months ended March 31, 2016

to stockholders

 

Shares

 

amount

Basic

$

29,406 

 

106,917,280 

 

$

0.28 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

 -

 

241,730 

 

 

(0.01)

Diluted

$

29,406 

 

107,159,010 

 

$

0.27 







 

 

 

 

 

 

 



 

 

 

 

 

 

 



Net income attributable

 

 

 

Per share

Three months ended March 31, 2015

to stockholders

 

Shares

 

amount

Basic

$

23,777 

 

107,484,944 

 

$

0.22 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options

 

 -

 

323,004 

 

 

 -

Diluted

$

23,777 

 

107,807,948 

 

$

0.22 







 

 

 

 

 

 

 



 

 

 

 

 

 

 

For the quarter ended March 31, 2016, stock options to purchase 2,980,470 common shares were outstanding but were excluded from the calculation of diluted earnings per share as they were anti-dilutive (2015:  438,358).

Supplemental Cash Flow Information
Supplemental Cash Flow Information

11. Supplemental cash flow information



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Three months ended March 31,

 

2016 

 

 

2015 

 

 

Restricted cash

$

(31,661)

 

$

(35,335)

 

 

Trade and other receivables

 

(67,653)

 

 

(51,577)

 

 

Inventory

 

30,476 

 

 

13,839 

 

 

Advances against auction contracts

 

1,048 

 

 

18,301 

 

 

Prepaid expenses and deposits

 

278 

 

 

(823)

 

 

Income taxes receivable

 

(6,097)

 

 

(431)

 

 

Auction proceeds payable

 

184,437 

 

 

149,813 

 

 

Trade and other payables

 

4,113 

 

 

(15,001)

 

 

Income taxes payable

 

(12,305)

 

 

(4,910)

 

 

Share unit liabilities

 

(2,358)

 

 

741 

 

 

Other

 

(5,545)

 

 

2,792 

 

 

Net changes in operating assets and liabilities

$

94,733 

 

$

77,409 

 

 



11.  Supplemental cash flow information (continued)





 

 

 

 

 

 

 



 

 

 

 

 

 

 

Three months ended March 31,

 

2016 

 

 

2015 

 

 

Interest paid, net of interest capitalized

$

1,393 

 

$

1,302 

 

 

Interest received

 

498 

 

 

847 

 

 

Net income taxes paid

 

27,172 

 

 

15,551 

 

 



 

 

 

 

 

 

 

Non-cash transactions:

 

 

 

 

 

 

 

Non-cash purchase of property, plant

 

 

 

 

 

 

 

and equipment under capital lease

 

361 

 

 

 -

 

 



Fair Value Measurement
Fair Value Measurement

12Fair value measurement

All assets and liabilities for which fair value is measured or disclosed in the condensed consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement or disclosure:

● Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at measurement date;

● Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and

● Level 3: Unobservable inputs for the asset or liability.





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

March 31, 2016

 

 

December 31, 2015



 

Category

 

Carrying amount

 

 

Fair value

 

 

Carrying amount

 

 

Fair value

Fair vales disclosed, recurring:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

$

294,074 

 

$

294,074 

 

$

210,148 

 

$

210,148 

Restricted cash

 

Level 1

 

117,944 

 

 

117,944 

 

 

83,098 

 

 

83,098 

Short-term debt (note 19)

 

Level 2

 

42,504 

 

 

42,504 

 

 

12,350 

 

 

12,350 

Current portion of long-

 

 

 

 

 

 

 

 

 

 

 

 

 

term debt (note 19)

 

Level 2

 

46,132 

 

 

46,132 

 

 

43,348 

 

 

43,348 

Long-term debt (note 19)

 

Level 2

 

56,143 

 

 

58,318 

 

 

54,567 

 

 

56,126 





The carrying value of the Company‘s cash and cash equivalents, restricted cash, trade and other current receivables, advances against auction contracts, auction proceeds payable, trade and other payables, and current borrowings approximate their fair values due to their short terms to maturity.



The fair values of non-current borrowings are determined through the calculation of each liability‘s present value using market rates of interest at period close.

Inventory
Inventory

13Inventory

At each period end, inventory is reviewed to ensure that it is recorded at the lower of cost and net realizable value. No write down was recorded during the three months ended March 31, 2016 (2015:  $60,000).    



Of inventory held at March 31, 2016,  94% is expected to be sold prior to the end of July 2016, with the remainder to be sold by the end of October 2016 (December 31, 2015:  91% sold by the end of March 2016 with the remainder to be sold by the end of June 2016).



Assets Held For Sale
Assets Held For Sale

14Assets held for sale 



 

 

 

 



 

 

 

 

Balance, December 31, 2015

 

 

$

629 

Other

 

 

 

Balance, March 31, 2016

 

 

$

631 



As at March 31, 2016, the Company’s assets held for sale consisted of land located in Denver, United States, and Orlando, United States, representing excess auction site acreage. Management made the strategic decision to sell this excess acreage to maximize the Company’s return on invested capital. The properties are being actively marketed for sale through an independent real estate broker, and management expects the sales to be completed within 12 months of March 31, 2016. These land assets belong to the Core Auction reportable segment.

Property, Plant and Equipment
Property, Plant and Equipment

15Property, plant and equipment



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

As at March 31, 2016

 

Cost

 

 

Accumulated depreciation

 

 

Net book value

Land and improvements

$

366,245 

 

$

(57,091)

 

$

309,154 

Buildings

 

260,840 

 

 

(86,215)

 

 

174,625 

Yard and automotive equipment

 

60,222 

 

 

(39,401)

 

 

20,821 

Computer software and equipment

 

64,900 

 

 

(55,458)

 

 

9,442 

Office equipment

 

23,204 

 

 

(16,457)

 

 

6,747 

Leasehold improvements

 

21,731 

 

 

(12,870)

 

 

8,861 

Assets under development

 

6,214 

 

 

 -

 

 

6,214 



$

803,356 

 

$

(267,492)

 

$

535,864 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

As at December 31, 2015

 

Cost

 

 

Accumulated depreciation

 

 

Net book value

Land and improvements

$

356,905 

 

$

(54,551)

 

$

302,354 

Buildings

 

254,760 

 

 

(82,100)

 

 

172,660 

Yard and automotive equipment

 

59,957 

 

 

(38,848)

 

 

21,109 

Computer software and equipment

 

60,586 

 

 

(50,754)

 

 

9,832 

Office equipment

 

22,432 

 

 

(15,660)

 

 

6,772 

Leasehold improvements

 

20,893 

 

 

(12,160)

 

 

8,733 

Assets under development

 

7,131 

 

 

 -

 

 

7,131 



$

782,664 

 

$

(254,073)

 

$

528,591 





 

Intangible Assets
Intangible Assets

16Intangible assets



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

As at March 31, 2016

 

Cost

 

 

Accumulated amortization

 

 

Net book value

Trade names and trademarks

$

5,011 

 

$

 -

 

$

5,011 

Customer relationships

 

32,929 

 

 

(7,724)

 

 

25,205 

Software

 

29,555 

 

 

(7,898)

 

 

21,657 

Software under development

 

13,527 

 

 

 -

 

 

13,527 



$

81,022 

 

$

(15,622)

 

$

65,400 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

As at December 31, 2015

 

Cost

 

 

Accumulated amortization

 

 

Net book value

Trade names and trademarks

$

800 

 

$

 -

 

$

800 

Customer relationships

 

22,800 

 

 

(7,097)

 

 

15,703 

Software

 

23,269 

 

 

(5,848)

 

 

17,421 

Software under development

 

13,049 

 

 

 -

 

 

13,049 



$

59,918 

 

$

(12,945)

 

$

46,973 



During the three months ended March 31, 2016, interest of $80,000 (2015: $301,000) was capitalized to the cost of software under development. These interest costs relating to qualifying assets are capitalized at a weighted average rate of 6.39%  (2015:  6.39% ).

Goodwill
Goodwill

17Goodwill



 

 

 

 

 



 

 

 

 

 

Balance, December 31, 2015

 

 

 

$

91,234 

Additions (note 23)

 

 

 

 

19,321 

Foreign exchange movement

 

 

 

 

1,014 

Balance, March 31, 2016

 

 

 

$

111,569 



Equity-Accounted Investments
Equity-Accounted Investments



18.  Equity-accounted investments

The Company holds a 48% share interest in a group of companies detailed below (together, the Cura Classis entities), which have common ownership. The Cura Classis entities provide dedicated fleet management services in three jurisdictions to a common customer unrelated to the Company.  The Company has determined the Cura Classis entities are variable interest entities and the Company is not the primary beneficiary, as it does not have the power to make any decisions that significantly affect the economic results of the Cura Classis entities.  Accordingly, the Company accounts for its investments in the Cura Classis entities following the equity method. 

18.  Equity accounted investments (continued)

A condensed summary of the Company's investments in and advances to equity-accounted investees are as follows (in thousands of U.S. dollars, except percentages):



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Ownership

 

 

March 31,

 

 

December



 

percentage

 

 

2016 

 

 

2015 

Cura Classis entities

 

48% 

 

$

4,081 

 

$

3,487 

Other equity investments

 

32% 

 

 

3,000 

 

 

3,000 



 

 

 

 

7,081 

 

 

6,487 



As a result of the Company’s investments, the Company is exposed to risks associated with the results of operations of the Cura Classis entities.  The Company has no other business relationships with the Cura Classis entities.  The Company’s maximum risk of loss associated with these entities is the investment carrying amount.

Debt
Debt

19Debt



 

 

 

 

 

 



 

 

 

 

 

 



 

Carrying value



 

March 31,

 

December 31,



 

2016 

 

 

2015 

Short-term debt

$

42,504 

 

$

12,350 



 

 

 

 

 

 

Long-term debt:

 

 

 

 

 



 

 

 

 

 

 



Term loan, denominated in Canadian dollars, unsecured, bearing

 

 

 

 

 



interest at 4.225%, due in quarterly installments of interest only,

 

 

 

 

 



with the full amount of the principal due in May 2022.

 

26,143 

 

 

24,567 



 

 

 

 

 

 



Term loan, denominated in United States dollars, unsecured, bearing

 

 

 

 

 



interest at 3.59%, due in quarterly installments of interest only,

 

 

 

 

 



with the full amount of the principal due in May 2022.

 

30,000 

 

 

30,000 



 

 

 

 

 

 



Term loan, denominated in Canadian dollars, unsecured, bearing

 

 

 

 

 



interest at 6.385%, due in quarterly installments of interest only,

 

 

 

 

 



with the full amount of the principal due in May 2016.

 

46,132 

 

 

43,348 



 

 

 

 

 

 



 

 

102,275 

 

 

97,915 



 

 

 

 

 

 

Total debt

$

144,779 

 

$

110,265 



 

 

 

 

 

 

Total long-term debt:

 

 

 

 

 

Current portion

$

46,132