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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 2005
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Commission File Number: 001-13425
RITCHIE BROS. AUCTIONEERS INCORPORATED
6500 River Road
Richmond, BC, Canada
V6X 4G5
(604) 273 7564
(Address of principal executive offices)
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indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F
Form 20-F [ ] Form 40-F [X]
indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):_____
indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):_____
indicate by check mark whether by furnishing information contained in this Form,
the registrant is also thereby furnishing the information to the Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-________
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RITCHIE BROS. AUCTIONEERS INCORPORATED
(Registrant)
Date: March 16, 2005 By: /s/ ROBERT S. ARMSTRONG
------------------------------------
Robert S. Armstrong,
Corporate Secretary
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[RITCHIE BROS. AUCTIONEERS LOGO]
Annual Report 2004
Ritchie Bros, Auctioneers conducts unreserved auctions through our network of
over 110 offices, including 29 auction sites, in 25 countries around the world.
We sell a wide range of construction, transportation, mining, forestry,
petroleum, material handling, marine and agricultural assets. All items in every
Ritchie Bros. auction are sold to the highest bidder without minimum bids or
reserve prices.
CONTENTS
To our Fellow Shareholders 3
The Evolution of Richie Bros. 8
The Evolution of our Customer Base 16
Why Buyers Choose Richie Bros. 16
Why Sellers Choose Richie Bros. 22
The Evolution of an Auction Site 27
Our Plans for Growth in 2005 and Beyond 29
The Ritchie Bros. Auction Process 34
Financial Information 35
Supplemental Quarterly Data 57
Selected Financial and Operating Data 58
Shareholder Information 60
In this annual report, all dollar amounts are stated in United States dollars
unless a different currency is indicated.
Twenty-Five Year Summary
GROSS AUCTION SALES
In billions of US dollars
[BAR CHART]
BUYERS
in thousands
[BAR CHART]
CONSIGNORS
in thousands
[BAR CHART]
FROM UPSTART
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TO MARKET LEADER
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
[EVOLUTION PRONOUNCIATION]
1. AN UNFOLDING: PROCESS OF DEVELOPMENT OR CHANGE
TO OUR FELLOW SHAREHOLDERS
When we look at our organization, we see a company that combines the advantages
of being an industry leader with our historic traits of being nimble and
entrepreneurial. Said another way, we are somewhere on the evolutionary path
between a small company and a large company and we are doing everything we can
to enjoy the benefits of both. We are using our ever-increasing scope and
global reach to offer an unparalleled level of service to our customers, while
at the same time nurturing the culture and guiding principles that have defined
us since our first industrial auction in 1963. AS WE CONTINUE TO EVOLVE, WE WILL
REMAIN TRUE TO OUR ROOTS and use our dominant market position to the advantage
of our customers, employees and shareholders.
In 2004 we sold equipment for more owners and registered more bidders at our
auctions than in any prior year. This contributed to gross auction sales growth
of 15%. As the largest participant in a highly fragmented marketplace we
certainly have the potential to grow at this rate; but the fact that thousands
of additional customers are putting their faith in our unreserved auctions each
year remains significant because it confirms that we are delivering services
that create real value for our customers. We do our utmost to ensure that we
don't take our customers for granted. If we didn't have their trust and if we
weren't able to provide them with the best net return on the sale of their
assets, we wouldn't deserve their business. That's why every Ritchie Bros.
employee is focused on providing our customers with the best-run auctions in the
world.
We remain committed to the unreserved auction process and to providing the best
possible customer service during a time of significant EVOLUTION IN OUR
MARKETPLACE. The markets for used trucks and equipment have become increasingly
transparent in recent years, thanks in large part to the depth of information
available on the internet. Gone are the days when some participants had an
information advantage over others. Now, all buyers and sellers are able to
access timely, independent and accurate market information. In such an
environment, transactions naturally migrate to the most efficient marketplace.
In the equipment world, that efficient marketplace is a Ritchie Bros. unreserved
auction.
Staying on top of changes in the industry and providing an increasingly valuable
service to truck and equipment owners enabled us to achieve SEVERAL MILESTONES
IN 2004. Our $63 million Orlando, Florida auction in February was the largest
ever in Company history, eclipsing a mark set in 1998 in The Netherlands. In
December, our European team reclaimed the record, posting a Euro 51 million ($68
million) sale in Moerdijk, The Netherlands. In fact, teams at eight Ritchie
Bros. sale sites held their
3
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STATESVILLE, NORTH CAROLINA USA
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
largest ever auctions in 2004. Also during the year, our rbauctionBid-Live
internet bidding service (in just its third year of operation) accounted for
$200 million of our total gross auction sales. While the vast majority of our
customers participate in our auctions by attending and bidding in person,
customers using rbauctionBid-Live are now the buyer or runner-up bidder on
between 15% and 20% of all lots available for on-line bidding. This service has
proven to be a perfect fit with our strategy of using technology to enhance, not
replace, our live auctions.
During 2004, we also saw EVOLUTION WITHIN OUR MANAGEMENT TEAM. Peter Blake,
having been with the company for 14 years, most recently as CFO, became CEO on
November 1. Peter assumed the role from outgoing CEO Dave Ritchie. Dave will of
course remain very active in the business and continues to serve as the Chairman
of our Board. In addition, two highly qualified independent directors - Eric
Patel and Beverley Briscoe - were added, giving our seven-member Board a
majority of independent directors. These steps do not signal a change in
direction but merely reinforce the Company's desire to be proactive in the
important areas of management succession and corporate governance. Dave remains
the Company's largest shareholder and his name is still on the door - no matter
how much we grow or change, Dave will be there to ensure that we maintain our
unique corporate culture and our focus on the customer.
As we head into 2005, we are embarking on an aggressive plan to improve the way
we conduct business. We are talking not about a revolution, but rather an
EVOLUTION OF OUR BUSINESS PROCESSES. We have given ourselves until the middle of
2007 to put in place more efficient, consistent and scalable processes that will
enable us to meet our growth objectives through 2010 and beyond. Some of our
processes and systems are excellent, but others need to evolve to keep pace with
our planned growth. We refer to this initiative as M07 (short for Mission 2007)
and we will keep you posted on our progress.
At the end of the day, even though our business, our team and our processes will
continue to evolve, we are still in the business of using unreserved auctions to
create an efficient global marketplace for the purchase and sale of industrial
assets. As we have grown from an upstart regional auctioneer to a global leader
with 110 offices in 25 countries, we have remained true to our core values of
integrity, honesty and fairness. WE WORK HARD, WE HAVE FUN AND WE STRIVE TO
PROVIDE GREAT SERVICE TO OUR CUSTOMERS. It's our legacy and we are proud of it.
We are also proud of the dedication and commitment demonstrated each day by
every member of the Ritchie Bros. family, a family that today includes over 600
full-time employees and thousands of part-time employees. We thank them for
their hard work, their "glass is half-full" attitude and their willingness to
join us on this evolutionary ride. We also offer our sincere thanks to our
fellow shareholders for their support, and to all our customers for choosing
Ritchie Bros. Auctioneers.
/s/ David E. Ritchie /s/ Peter J. Blake
-------------------- ------------------
David E. Ritchie Peter J. Blake
CHAIRMAN CHIEF EXECUTIVE OFFICER
5
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[PICTURE]
Moerdijk, The Netherlands
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
THE EVOLUTION OF RITCHIE BROS.
HOW WE BECAME THE WORLD'S LARGEST AUCTIONEER OF INDUSTRIAL EQUIPMENT
Dedication to our founding principles, including our commitment to the
unreserved auction process, has led to a steady evolution over more than 40
years. What started as a small family business in the town of Kelowa, British
Columbia is now a public company with more than 110 offices, including 29
auction sites, in 25 countries around the world.
Ritchie Bros. has been able to evolve from a small company operating with a
regional focus to a global leader operating around the world by doing what's
right - treating our customers fairly and operating to the highest standards of
business ethics. Sticking to our principles and focusing on our core business
has allowed us to grow consistently over the years, with the result that we now
sell more used trucks and equipment than any other organization in the world.
[PICTURE] FROM THREE BROTHERS...
We operate in the massive and highly fragmented industrial equipment market.
Even though we are the largest participant, our share of the total used truck
and equipment market is probably less than 2%. As our business has matured, we
have remained focused on steadily increasing our share of the global industrial
equipment market. Our strategy is simple - grow our gross auction sales by
developing strong relationships with our customers and by offering those
customers the best-run auctions in the world.
OUR MARKET HAS EVOLVED
Part of our success can be attributed to changes in equipment owners'
perceptions about the auction industry. Thanks in part to our commitment to
ethical business practices, our customers don't view auctions as a method of
last resort. Our unreserved auctions are global marketplaces that deliver an
efficient market for the exchange of industrial assets.
The internet has had a dramatic impact on our market. It has created
transparency and a level playing field; and it has all but eliminated the
information advantage that some participants used to have. Equipment owners are
now much better informed about equipment values and availability. As the market
has become more transparent, buyers and sellers have looked for the most
efficient marketplace. And this shift - away from traditional channels towards
efficient channels - has benefited Ritchie Bros. Our business is very simple: we
provide a marketplace for buyers and sellers to transact business. As the market
has become increasingly transparent, transactions have naturally migrated to the
most efficient marketplace, meaning that more and more equipment owners have
been choosing our auctions. This is a trend that we believe will continue.
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...TO A TEAM OF 600+
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Byemoor, Alberta Canada
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
UNRESERVED
ONE THING THAT HAS NOT CHANGED SINCE DAVE AND HIS BROTHERS HELD THEIR FIRST
AUCTION IS THE FACT THAT EACH AND EVERY RITCHIE BROS. AUCTION 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 TO BUY-BACK, BID-IN OR IN ANY WAY ARTIFICIALLY MANIPULATE THE PRICE
OF ASSETS SOLD IN OUR AUCTIONS.
"UNRESERVED" IS ONE OF OUR MOST SIGNIFICANT COMPETITIVE ADVANTAGES. WE MAINTAIN
A STEADFAST COMMITMENT TO THIS PROCESS 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.
BY MAINTAINING OUR POLICY OF CONDUCTING ONLY UNRESERVED AUCTIONS, WE ARE ABLE TO
ATTRACT A LARGE AND DIVERSE BIDDING AUDIENCE - AN AVERAGE OF OVER 1,300 BIDDERS
FROM ALL OVER THE WORLD PARTICIPATED IN EACH OF OUR INDUSTRIAL AUCTIONS IN 2004.
BY ALLOWING THESE BIDDERS TO COMPETE IN AN OPEN AND FAIR AUCTION ENVIRONMENT, WE
ARE ABLE TO PROVIDE A GLOBAL MARKETPLACE THAT TRANSCENDS LOCAL MARKET CONDITIONS
AND DELIVERS THE BEST POSSIBLE PRICES.
10
[PICTURE]
Los Angeles, California USA
MANAGEMENT ADVISORY COMMITTEE
[PICTURE]
Nick Nicholson
Vice President South Central,
Mexico and South America Divisions
Sylvain Touchette
Vice President Eastern Canada Division
Vic Pospiech
Vice President Administration & Human Resources
Rob Mackay
Executive Vice President
Mike Murray
Vice President Northwest Division
Mike Battistel
Vice President Information Technology,
Chief Information Officer
[PICTURE]
Rob Whitsit
Senior Vice President Southeast and Northeast Divisions
Bob Armstrong
Vice President Finance, Chief Financial Officer,
Corporate Secretary
Dean Siddle
Vice President, Senior Valuation Analyst
Clay Tippett
Vice President Marketing & Customer Relations
Mike Ritchie
Vice President Western Canada Division
Roger Rummel
Senior Vice President
[PICTURE]
Denis Prevost
Vice President National Accounts
Scott Forke
Vice President Central Division
Steve Simpson
Vice President Southwest Division
Peter Blake
Chief Executive Officer
Guylain Turgeon
Managing Director European Operations
Randy Wall
President, Chief Operating Officer
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
OUR AUCTIONS HAVE EVOLVED
We have taken advantage of the internet to add remote bidding to our live
industrial auctions. The rbauctionBid-Live service allows our customers to watch
our auctions over the internet from anywhere in the world and permits qualified
customers to participate - live and in real time - in our unreserved auctions.
This system has proven to be a significant competitive advantage for Ritchie
Bros. Not only has it increased the size, diversity and multi-national character
of our bidding audiences, but the rbauctionBid-Live system also allows our
customers to participate in more than one auction at a time, all from the
comfort of their office or home. Being able to participate in our live auctions
over the internet allows our customers to take less time away from their work.
This is a valuable service for our buyers, roughly eighty percent of whom are
end users of equipment - contractors for example - who are buying
income-producing assets to use in their business. Since launching our internet
bidding service, the average number of bidders participating in our industrial
auctions has increased from approximately 1,000 bidders to over 1,300 bidders.
RBAUCTIONBID-LIVE INTERFACE
[PICTURE]
The vast majority of our bidders still choose to attend our auctions in person;
however, the rbauctionBid-Live service and the depth of information available on
the rbauction.com website have enabled us to expand our bidding audiences,
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.
As our auctions have been evolving, and the number of consignments and bidders
per auction and the average gross auction sales have all been growing. In part,
this is because the success of one auction contributes to the success of the
next - a large bidding audience helps us to attract more equipment to the next
auction, which attracts more bidders, which attracts more equipment, and so on.
In addition, thanks in part to the information available on the rbauction.com
website, our auctions now typically increase in size significantly in the weeks
leading up to the sale, as potential consignors take note of the depth and
selection of trucks and equipment already consigned and decide to consign their
equipment so as not to
13
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
miss out on the opportunity. These are indicators of our positive momentum,
which is fueled by both our steadfast commitment to holding only unreserved
auctions and our company-wide focus on customer service.
OUR AVERAGE INDUSTRIAL AUCTION -
2 YEAR
2004 2002 INCREASE
GROSS AUCTION SALES 12.0 9.8 22%
(in millions of dollars)
REGISTERED BIDDERS 1,378 1,106 25%
LOTS 1,215 1,070 14%
CONSIGNORS 169 148 14%
OUR BUSINESS PROCESSES HAVE EVOLVED
Our auctions have been and will continue to be supported by an infrastructure
that enables us to deliver our services efficiently and effectively. To
facilitate the size and breadth of our operations, we have developed
sophisticated marketing and information technology operations. Yet we are
continually refining the way we do things and are always looking for better ways
to help our customers. In 2004 we embarked on an ambitious program to completely
rethink our business processes with the goal of implementing more efficient,
consistent and scalable processes that will allow our business to continue to
evolve in the years ahead and accommodate the growth we are expecting. We have
labeled the project M07, short for Mission 2007, and our goal is to complete the
main components of this initiative by the end of 2007, leaving us with processes
and systems that will help us to achieve our objectives, while providing the
highest possible level of service to our customers.
OUR TEAM HAS EVOLVED
While we will continue to put considerable energy into the development of
industry leading systems and processes, the real strength of our business
remains our team of over 600 employees around the world. Included in this number
are approximately 200 sales representatives - our Territory and Regional
Managers. We have witnessed a significant growth in our sales force over the
last ten years, and this growth has been supported by the ongoing training and
development of our people, combined with a commitment to recruiting the right
people.
The members of our sales team, together with our Customer Service Managers, are
critical to our success - they represent the frontline in our ongoing effort to
develop strong relationships with our customers. Many of our salespeople come to
us with an equipment background, having worked for an equipment or truck
dealership, rental company or contractor. They apprentice with an experienced
member of our team before taking on their own territory. It can take 24 months
or longer for a new Territory Manager to reach the level of productivity that we
expect.
Recently, we have also been hiring people who may not have an equipment or sales
background but who have post-secondary degrees and are bright, hard working and
ambitious. We put these new recruits through a comprehensive training program
that exposes them to all aspects of our unique business. The first graduates of
this program are now working as Territory Managers in several regions around the
world and many are already demonstrating the potential to become future leaders
of our company. Adding quality people to our team, giving them the right tools
and then helping them up the learning curve is a core part of the continued
evolution of our sales force.
Leading this team is a management group that has also been growing and
developing in recent years; and 2004 marked a significant step in this process.
Dave Ritchie, one of the founding brothers, stepped down from his role as CEO.
Peter Blake, our former CFO, took over the role of CEO as part of an organized
succession plan. As Ritchie Bros. continues to grow and evolve, we will continue
to put significant effort into the training and development of our managers so
that the future of our company can be as solid as our past.
Overseeing our succession plans and the overall direction of our company is our
Board of Directors. We have always been proud of our corporate governance and in
2004 we completed several initiatives in this area. We now have a majority of
independent directors on our Board, with the addition in 2004 of two highly
qualified candidates - Eric Patel and Beverley Briscoe. And with Dave Ritchie
relinquishing the CEO title, we have separated the Chairman and CEO roles. Also
in 2004, we established a fully independent Nominating and Corporate Governance
Committee, with responsibility to oversee Ritchie Bros.' corporate governance
programs. We also adopted a Code of Business Conduct and Ethics, which applies
to all employees, officers and directors. The Code, together with our corporate
governance guidelines and other governance materials, is available on the
rbauction.com website.
14
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[PICTURE]
Moerdijk,The Netherlands
December 1-3, 2004
(euro) 51 Million($68 million)
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
THE EVOLUTION OF OUR CUSTOMER BASE
Most new customers start their relationship with Ritchie Bros. by registering to
bid at one of our auctions. Our experience has shown that once customers start
buying at our auctions and realize the value of the service we offer, they are
well on their way to becoming consignors. Many of our customers are both buyers
and consignors at our auctions - they don't view 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 view this as the natural evolution
of a Ritchie Bros. customer.
Today, roughly eighty percent of our buyers are end-users of trucks and
equipment. Our ability to deliver this global retail marketplace has brought new
consignors to our auctions. In recent years we have seen increasing
participation in our auctions by large, multi-national companies who want access
to the benefits of the Ritchie Bros. method.
An example of this type of consignor is CitiCapital, with whom we recently
signed an agreement under which we are the exclusive remarketer for all North
American industrial equipment returned to CitiCapital at end-of-lease or upon
reposession. As part of our relationship with CitiCapital, they have developed
proprietary software that will allow virtually instant credit approval for
financing applications made online and at our sites. Both aspects of our
relationship with this global leader are positive for Ritchie Bros. and
indicative of the market position we have attained.
WHY BUYERS CHOOSE RITCHIE BROS.
There are many places a buyer can go to acquire equipment, yet an increasing
number of equipment buyers are coming to our auctions. Why?
- RITCHIE BROS. UNRESERVED AUCTIONS PROVIDE A LEVEL PLAYING FIELD AND A
TRANSPARENT MARKET. While some auctioneers openly permit consignors to bid on
their own items, or will bid on the equipment themselves to artificially support
prices, we strictly prohibit consignors from bidding on their own equipment,
either directly or through agents. And Ritchie Bros. does not bid on any of the
equipment in our auctions. Our commitment to these principles ensures that
Ritchie Bros. auctions create an open and fair market for the exchange of
industrial assets.
An appealing aspect of our auctions for buyers is that all bidders participating
in Ritchie Bros. auctions compete on an equal basis regardless of their economic
strength or negotiating power. They know that the people they are bidding
against are legitimate bidders like themselves. As a result, our buyers can
always be confident that they are paying fair market value.
- WE GUARANTEE CLEAR TITLE. If we can't deliver clear title, the buyer receives
a full refund. Without such a guarantee, buyers run the risk of having their
equipment repossessed by the bank that financed the previous owner - something
buyers attending other auctions don't think about until it's too late. We commit
considerable resources to identifying and coordinating the release of liens
before we sell the equipment.
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Chicago,Illinois USA
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Orlando, Florida USA
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
FROM LAST RESORT...
- ALL THE EQUIPMENT IS MARSHALED IN CENTRAL LOCATIONS. We make it easy for
bidders to inspect, test and compare the trucks and equipment in our auctions.
We organize our auction yards so that customers can compare similar items and
determine the condition and value of the equipment before placing any bids. The
market for used income-producing assets is very different from the market for
commodities and collectibles. As a result, marshalling the equipment at our
auction yards and allowing our customers to "kick the tires" are very valuable
features of a Ritchie Bros. auction.
- WE OFFER ONE-STOP SHOPPING. During 2004, the average Ritchie Bros. industrial
auction included over 1,200 lots from 169 different consignors, covering a
diverse array of truck and equipment categories and manufacturers. At our
auctions, an equipment buyer can inspect in one day what might have taken weeks
if the equipment were being offered for sale by a number of vendors in various
regions or by an auctioneer that didn't provide a central marshalling point for
the equipment. A buyer can purchase multiple brands and models of equipment and
attachments in one place, on one day, with one invoice - rather than having to
negotiate with multiple vendors or travelling to multiple locations. And because
many consignors take advantage of our painting and refurbishing services, the
equipment typically requires little, if any, additional investment by its new
owner before it can be put to work.
Not only does every item sell on sale day to the highest bidder regardless of
its price, but once the auctioneer says "SOLD" the negotiations are over. The
buyer simply pays Ritchie Bros. and takes possession of the equipment.
This efficient one stop shopping approach addresses the needs of our
customers, most of whom are contractors who are willing to spend only a limited
amount of time away from their jobsites.
- YOU CAN BID FROM YOUR OFFICE. Customers who are able to satisfy themselves
as to the condition and value of a particular piece of equipment, but can't be
at the auction site on sale day, can still participate in one of two ways:
- Our internet bidding service, rbauctionBid-Live, allows qualified
bidders to hear the auctioneer, follow the bid and ask numbers and
see the item being sold, live and in real-time over the internet.
Bidding is as simple as clicking the bid button, which continuously
updates to reflect the auctioneer's current asking price. By the
end of 2004, over 25,000 customers from 110 countries were
registered to use the rbauctionBid-Live service and internet bidders
were representing approximately 20% of the registered bidders at our
auctions. We sold nearly $200 million worth of trucks and equipment
to internet bidders in 2004.
- Proxy Bids from qualified bidders can be submitted in advance of
the auction via our website, via fax, or by calling the sale site
directly. Customers placing proxy bids specify the maximum price
they are willing to pay for the lots in which they are interested.
Proxy bids are introduced into the auction process just as they
would have been if the bidders had attended the auction in person.
The auctioneer ensures that proxy bidders never pay more than they
would have if they had been there to place their own bids on auction
day.
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... to first choice
[PICTURE]
Moerdijk, The Netherlands
[PICTURE]
WHAT DRIVES THE SUPPLY OF EQUIPMENT TO OUR AUCTIONS?
ANALYSTS ESTIMATE THAT THERE IS APPROXIMATELY $1 TRILLION WORTH OF USED
EQUIPMENT OF THE TYPE WE SELL IN CIRCULATION WORLDWIDE, AND THAT APPROXIMATELY
$100 BILLION OF THAT CHANGES HANDS EACH YEAR. BECAUSE THE OPPORTUNITY AVAILABLE
TO US IS SO LARGE AND OUR MARKET SHARE IS RELATIVELY SMALL, WE ARE ABLE TO GROW
OUR BUSINESS IN GOOD TIMES AND IN BAD, REGARDLESS OF WHAT IS HAPPENING IN THE
BROADER ECONOMY.
ECONOMIC UNCERTAINTY TYPICALLY FUELS THE SUPPLY OF USED EQUIPMENT. SO DO FLEET
REALIGNMENTS, FINANCIAL PRESSURE, MERGERS AND ACQUISITIONS, INVENTORY
REDUCTIONS, LEASE RETURNS, PROJECT COMPLETIONS AND EVEN RETIREMENTS. AS LONG AS
A FEW OF THESE FACTORS ARE AT WORK SOMEWHERE IN THE WORLD, RITCHIE BROS. HAS
CUSTOMERS TO CALL ON. SAID ANOTHER WAY, ANY ECONOMIC, POLITICAL OR OTHER FACTOR
THAT LEADS TO A DESIRE OR NEED FOR PEOPLE TO BUY OR SELL EQUIPMENT CREATES WORK
FOR RITCHIE BROS.
BECAUSE THE USED EQUIPMENT MARKET IS SO LARGE AND BECAUSE THERE ARE SO MANY
DIFFERENT DRIVERS INFLUENCING OWNERS' DECISIONS TO SELL, OUR BUSINESS VOLUME AND
OUR ABILITY TO GROW ARE NOT DIRECTLY TIED TO ECONOMIC CYCLES.
[PICTURE]
Denver, Colorado USA
FROM LOCAL BIDDING AUDIENCES...
WHY SELLERS CHOOSE RITCHIE BROS.
Thousands of new consignors choose Ritchie Bros. each year because they realize
that we can get them higher net proceeds on the sale of their assets than they
would be able to achieve by selling through another channel. In a market that is
estimated to have in the range of $100 billion in transactions annually, private
sales between equipment owners and sales involving equipment dealers and brokers
still account for most of the business. However, the equipment market has become
more sophisticated in recent years, and an increasing number of sellers are
concluding that these traditional channels don't have the ability to access the
global retail marketplace and therefore aren't able to get them the best
possible price for the sale of their trucks and equipment.
As our business has grown and evolved we have introduced more and more equipment
owners around the world to the Ritchie Bros. auction method. Our strategy is
simple - continue to chip away at the broader used truck and equipment markets
by offering a compelling value proposition to our customers. The increasing
transparency in our market helps us to do this.
How does an equipment owner reach the decision to sell his key assets at one of
our unreserved auctions? Our business is built on relationships, and our
relationships with our customers are paramount. An equipment owner can't do
business with us if he doesn't know us; and he won't do business with us if he
doesn't like and trust us. By focusing on customer relationships and by
maintaining our commitment to doing what's right we are earning the trust of
more and more equipment owners around the world.
There are a number of advantages that we are able to provide to our consignors:
- WE DELIVER A GLOBAL MARKETPLACE. We typically mail about 50,000 full-colour
brochures for each of our auctions to a strategic selection of customers from
our proprietary database of over 400,000 potential bidders in more than 200
countries. In addition, all of the equipment offered for sale is listed on our
website and our auctions are advertised in trade journals and industry
publications, as well as promoted to the thousands of bidders attending other
Ritchie Bros. auctions around the world. This marketing effort directly exposes
the trucks and equipment being sold in our auctions to a large and
geographically diverse pool of potential buyers. Interested bidders can then
participate in our auctions either in person or by bidding on-line, which
ensures that the largest possible international audience is participating in the
auction.
- WE ATTRACT A LARGE AND DIVERSE BIDDING AUDIENCE. On average, over 1,300
bidders participated in each of our industrial auctions in 2004, and
approximately eighty percent of our buyers were end users such as contractors
(as compared to resellers). Because of this high participation level from end
users, our auctions are not the wholesale events that people often expect when
they think of auctions. And our bidders participate aggressively, whether they
are at the auction site or bidding over the internet, because they know our
auctions are fair and open. By using the internet to enhance (rather than
replace) our live auctions, we have made it possible for our consignors to get
the best of both the live and on-line worlds.
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Edmonton, Alberta Canada
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Fort Worth, Texas USA
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
- OUR AUCTIONS TRANSCEND LOCAL MARKET CONDITIONS. Because of our extensive
marketing efforts and because the assets we sell flow freely across most
borders, our auctions attract a large number of foreign and
out-of-state/out-of-province buyers. Transportation costs, particularly the
costs of ocean freight, are usually relatively minor compared to the value of
the equipment. As a result, we are able to deliver world market prices when
selling our consignors' equipment, 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.
- WE HELP OUR CONSIGNORS ACHIEVE THE MOST NET DOLLARS ON THE SALE OF THEIR
EQUIPMENT. Although we charge higher commissions than some other auctioneers,
the comprehensive service that we provide and the effort we put into enhancing
the resale value of the equipment enables us to achieve higher returns for
equipment sellers. On sale day, our experienced auctioneers and ringmen create
an exciting atmosphere and a rapid pace. Our auctions provide the environment
needed to generate the best possible prices. We attracted almost 25,000
consignments in 2004 because consignors understood that our unreserved auctions
would put the most net dollars in their pockets at the end of the day.
- WE OFFER AN INTERNATIONAL NETWORK OF AUCTION SITES. With regularly scheduled
auctions at 29 auction sites around the world, and numerous off-site sales,
owners can sell their equipment when and where they want. This gives us an
unparalleled ability to help owners sell their equipment, whether they have a
single piece in their yard or a fleet spread out over several states,
provinces or countries. This network of sites also gives us permanence - our
customers know that we are in business for the long term, which is critical in a
business based on trust.
- WE TAILOR OUR AUCTION CONTRACTS TO MEET THE NEEDS OF OUR CUSTOMERS. Our goal
is to come up with the contract that best suits the needs of the individual
consignor. Most of our consignments are handled on a straight commission basis.
In these cases, we act as agent for the consignor and earn a percentage of the
selling price. In other cases, typically when a consignor is selling a
significant fleet, we can offer to underwrite the sale by providing the owner
with a guarantee or by purchasing the equipment outright. Even though the
equipment still sells unreserved and without any price protection at the
auction, the owner is assured a guaranteed level of proceeds. In these cases, we
factor in a higher commission rate as we are effectively providing an insurance
policy on the resale value of the equipment.
- WE TAKE THE HASSLE OUT OF THE SELLING PROCESS SO OUR CUSTOMERS CAN CONCENTRATE
ON THEIR BUSINESS. We help consignors sell their equipment quickly, efficiently
and with a minimum commitment of time, energy and cost. We can coordinate
transporting the equipment to the auction site and look after any cleaning,
refurbishing or painting required to prepare the equipment for auction. We store
the equipment in our secure yards prior to the sale and until the equipment is
removed by the new owner. We also handle questions from prospective bidders,
take care of the marketing and title searches, and set up the auction yard so
bidders can inspect, test and compare the equipment. Perhaps most importantly,
we help our consignors with all of their equipment - any make, model or
manufacturer, high-value or low-value, big or small, young or old. After the
auction, we handle the collections, coordinate all necessary sales taxes, and
pay out the net proceeds. Our consignors can concentrate on their business
rather than negotiating with numerous potential buyers and dealing with
paperwork.
The fact that CitiCapital has chosen to outsource to us the remarketing of all
North American industrial equipment returned to them at end-of-lease or upon
reposession is indicative of the value we bring to our customers.
- WE ARE A RELIABLE AND REPUTABLE BUSINESS PARTNER. Ritchie Bros. has an
impressive balance sheet, has been conducting unreserved industrial auctions for
over 40 years and is a public company listed on both the New York Stock Exchange
and the Toronto Stock Exchange. Our customers know that we have the financial
strength to live up to our commitments - when they sign a contract with Ritchie
Bros. they know that their equipment will sell, that it will sell for fair
market value, and that they will be paid in full. They can also be proud of
doing business with a trusted and reputable business partner that adheres to the
highest standards of business ethics.
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EVOLUTION OF AN AUCTION SITE - A CASE STUDY:
SACRAMENTO, CALIFORNIA
WE CONDUCTED OUR FIRST OFFSITE SALE IN NORTHERN CALIFORNIA IN 1972. THIS WAS
FOLLOWED BY A SALE IN 1974 AND ANOTHER IN 1978. THIS PATTERN, CHARACTERIZED BY
OCCASIONAL OFFSITE SALES, CONTINUED FOR MANY YEARS BEFORE WE HIRED OUR FIRST
RESIDENT TERRITORY MANAGER IN NORTHERN CALIFORNIA.
IN 1994 WE LEASED A PROPERTY NEAR STOCKTON, CALIFORNIA. WE OPERATED FROM THIS
REGIONAL AUCTION UNIT FOR TEN YEARS, WHILE ESTABLISHING RELATIONSHIPS WITH
EQUIPMENT OWNERS, BUILDING OUR TEAM OF EMPLOYEES AND EXPOSING EQUIPMENT OWNERS
IN NORTHERN CALIFORNIA TO OUR UNRESERVED AUCTIONS.
IN 2003, ONCE WE WERE CERTAIN OF THE MARKET POTENTIAL, WE PURCHASED 90 ACRES ON
THE INTERSTATE HIGHWAY OUTSIDE SACRAMENTO, ON WHICH WE BUILT A NEW PERMANENT
AUCTION SITE. THE SITE OPENED IN MARCH 2005, AND IF HISTORY REPEATS, WE EXPECT
IT TO BE A SPRINGBOARD FOR GROWTH IN NORTHERN CALIFORNIA IN THE YEARS AHEAD.
SACRAMENTO IS AN EXAMPLE OF OUR LOW-RISK APPROACH TO GROWTH. WE ARE NOT FACED
WITH ISSUES OF START-UP LOSSES OR POORLY DEPLOYED CAPITAL BECAUSE WE HIT THE
GROUND RUNNING, WITH MANY YEARS OF EXPERIENCE IN THE REGION ALREADY UNDER OUR
BELTS.
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
THE EVOLUTION OF AN AUCTION SITE
Our business evolves in new geographic markets in a consistent manner,
regardless of the location. Whether we are taking our first steps into New
Delhi, Beijing or Sacramento, we follow the same basic approach. We start by
getting to know customers from a new region when they travel to one of our
existing auction sites. We will then send a Territory Manager into the new
region to assess the market opportunity available to us and to start meeting
more equipment owners. Once we have identified an opportunity in a new region we
typically open a sales office in the area. In 2004 we opened sales offices in
several new areas, including Iran, Indonesia, and China and we hired our first
sales representative in India. In the first quarter of 2005 we opened a sales
office in Poland. There are vast parts of the world where the Ritchie Bros. name
has never been heard. Our goal is for Ritchie Bros. auctions to be familiar to
as many equipment owners in as many regions as possible.
We do not invest to any significant extent in a new market until we are
convinced that there is a profitable opportunity available to us. Our primary
goal in the early stages of market development is to introduce equipment owners
to the Ritchie Bros. model. Encouraging them to attend one of our auctions is
often the first step. Consignments from these new regions are typically
transported to one of our existing auction sites. Eventually we will establish
enough momentum in a new market to conduct an auction at a temporary location in
the region, usually on a rented piece of land or on a consignor's property.
A number of successful sales in a region will give us the confidence to start
looking for a site on which to establish a more permanent presence. Our next
stage of development is often a regional auction unit, located on leased land
and including modest auction and administrative facilities with minimal capital
invested. We had seven of these regional auction units at the end of 2004.
We are equally conservative when we consider evolving a regional auction unit
into a permanent auction site, which is our term for a full-fledged auction
facility on land owned by Ritchie Bros. Our permanent auction sites are located
on an average of approximately 60 acres of land and typically include a
purpose-built covered auction theatre, an equipment display yard, administration
offices, a customer registration area and an environmentally certified paint and
refurbishment facility. We had 22 permanent auction sites at the end of 2004.
Our permanent auction sites have changed significantly in the last number of
years. The sites we have built recently tend to be located on over 90 acres of
land, and we have been enhancing the design of our facilities to improve the
customer experience.
Our network of auction sites is an important competitive advantage that allows
us to deliver an unparalleled level of service to our customers. In addition,
our network helps to increase the exposure to the Ritchie Bros. name amongst
truck and equipment owners - large numbers of potential customers drive by our
auction sites each day. Customers in one region may also have equipment buying
and selling needs in one of our other regions - it is very common for buyers and
consignors to transact business through multiple Ritchie Bros. locations. These
are all important factors contributing to our growth.
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
OUR PLANS FOR GROWTH IN 2005 AND BEYOND
Our business has grown and developed over the last several years, and we expect
further changes in the coming years. Our strategy for dealing with this
continuing evolution is essentially unchanged from the strategy we have been
following since our first industrial auction in 1963. We will remain focused
on customer service and we will continue doing what we do best - selling
industrial assets at unreserved public auctions around the world. We are also
committed to maintaining the unique Ritchie Bros. culture - we are proud to be
an entrepreneurial work-hard / play-hard organization.
The growing number of consignors and bidders choosing Ritchie Bros. points to
the increasing popularity of our auctions. While we have an extensive customer
base, introducing our services to truck and equipment owners who don't yet know
us, and to industries and regions where we are only scratching the surface,
remains a critical growth strategy for Ritchie Bros. At the same time, we must
remain flexible, nimble and responsive to the needs of each customer. We
understand that our customers choose Ritchie Bros. not because we are the
biggest, but because we provide them with value and service.
NEW MARKET OPPORTUNITIES
IN ADDITION TO GROWTH IN OUR CORE TRUCK AND EQUIPMENT
MARKETS, WE HAVE BEEN INCREASING OUR PRESENCE IN OTHER MARKETS. WE WILL LOOK AT
OPPORTUNITIES TO EXPAND INTO MARKETS WHERE WE CAN CREATE VALUE FOR CUSTOMERS BY
BRINGING SOME OR ALL OF THE FOLLOWING COMPETITIVE ADVANTAGES TO THE TABLE:
- Our reputation
- Our international network of auction sites
- Our customer base
- Our marketing systems
- Our internet tools
- And most significantly, the ability of our unreserved auctions to
deliver the best possible price.
It is difficult to estimate our long-term growth potential. However, looking at
our Canadian experience can be instructive. We consider our Canadian operations
to be our most mature - we have been operating in this market for more than 40
years and our gross auction sales in Canada have grown to be in the range of
$300 million. While the population and economy of the United States are roughly
ten times the size of Canada's, our sales in the United States are in the range
of $1.0 billion, or only about three times our Canadian sales. This simple
comparison would suggest that we could grow our sales in the United States to
roughly $3.0 billion per year before reaching the level of market penetration we
currently enjoy in Canada. Extending this logic to Europe would suggest
significant growth potential in that market as well (our current European sales
are less than our Canadian sales).
This tells us that the opportunity available to us in our current markets is
enormous, not to mention the large and growing economies of China, India, Brazil
and other parts of the world where we have yet to hold our first auctions. It
is against this back-drop of market potential that we have developed our
strategies for the next stage of our evolution.
WE INTEND TO CONCENTRATE ON THE FOLLOWING AREAS IN 2005:
EXPANDING INTO NEW GEOGRAPHIC MARKETS
Over the next five years, we expect that most of our sales growth will come from
the United States and Europe. However, we anticipate that the subsequent wave of
growth will come from markets such as China, India, Brazil and Eastern Europe.
We are currently working with customers and opening offices in these markets but
have yet to hold auctions there. In 2004 we opened offices in Tehran, Iran;
Jakarta, Indonesia; and Beijing, China. We also established a presence in New
Delhi, India. As these markets evolve, we expect to increase our activity
levels, leading eventually to local auctions.
EXPANDING INTO RELATED ASSET CATEGORIES
We will continue to look for growth both within and outside our traditional
markets - where ever we can see opportunities to create value for customers. In
recent years, we have boosted our sales of agricultural
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Fort Worth, Texas USA
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
equipment and over-the-road trucks and trailers as well as our sales of unused
equipment. We have also been expanding our activities in the marine sector -
including industrial marine and pleasure craft, and have been selling an
increasing amount of industrial and agricultural real estate.
Our sales of agricultural equipment have been growing rapidly in recent years,
fueled primarily by the growing number of on-the-farm sales we have been holding
in western Canada. We look forward to expanding this business in Canada and into
the United States in the coming years.
EXPANDING OUR INTERNATIONAL NETWORK OF AUCTION SITES
Since 1997 we have made significant investments in our network of auction sites
- adding new sites and upgrading several older ones. We did not open any new
auction sites in 2004 but we were very active in our pursuit of properties in
several regions. We recently acquired 75 acres of land in Nashville, Tennessee
on which we intend to construct a new permanent auction site and we were busy
with the completion of our newest permanent auction site in Sacramento,
California, which will open in March 2005. Currently, we have property under
option and are actively looking for potential sites in several regions in North
America and Europe.
We intend to continue to add or expand permanent auction sites and regional
auction units when suitable opportunities present themselves, most likely at the
rate of one or two per year.
BUILDING OUR CUSTOMER SERVICE TEAM
Our future growth depends on the quality of our customer relationships and our
ability to deliver superior customer service. As a result, it is critical that
we continue to recruit, train and develop the best people. We have enjoyed
continued improvements in the productivity of our sales force in recent years,
and we intend to increase our investments in training and development
initiatives to support further increases in productivity, which should help us
to achieve our sales growth goals.
RETHINKING OUR BUSINESS PROCESSES
In 2004 we launched our Mission 2007 initiative. We are examining our business
processes to ensure that they can handle the next stage of our evolution. We are
committed to making the project a success and have dedicated significant
management resources to ensuring that we design and put in place by 2007 more
efficient, consistent and scalable processes to handle the future growth of our
business. Although we will not take our eye off our goal of growing our sales
and our earnings, we intend to give the M07 project the attention and resources
it deserves in 2005.
RISK MANAGEMENT
THREE-QUARTERS OF OUR BUSINESS IS RELATIVELY RISK FREE BECAUSE IT IS CONDUCTED
ON A STRAIGHT COMMISSION BASIS. WE ASSUMED THE RISK OF SALE ON APPROXIMATELY
ONE-QUARTER OF OUR BUSINESS IN 2004, WHICH IS IN LINE WITH OUR TYPICAL BUSINESS
MIX. IN THESE SITUATIONS WE UNDERWROTE THE CONTRACTS, BY EITHER PROVIDING A
GUARANTEE OF MINIMUM SALE PROCEEDS OR BUYING THE ASSETS OUTRIGHT.
WE MITIGATE OUR RISK WHEN ENTERING INTO UNDERWRITTEN CONTRACTS BY BUILDING A
RISK PREMIUM INTO OUR COMMISSION RATE AND BY FOLLOWING A RIGOROUS APPRAISAL
PROCESS THAT DRAWS ON OUR EXTENSIVE FIELD EXPERIENCE AND OUR PROPRIETARY
DATABASE OF EQUIPMENT SALES. 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 AN
UNPARALLELED 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.
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
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FROM LOCAL...
USING THE INTERNET
We will continue to use the internet to enhance our auctions, not replace them.
Our internet bidding service rbauctionBid-Live is an excellent example of this
strategy. We fully understand that buyers of used trucks and equipment want to
inspect, test and compare the assets before they buy, and that success in our
market will continue to be based largely on personal relationships, reputation
and trust. However, it has been exciting to watch the internet become an
increasingly valuable tool for our customers. An increasing number of customers
are having their first contact with Ritchie Bros. on the rbauction.com website.
Many spend hours on our website gathering information about equipment for sale
and recent selling prices.
Our customers have always been able to turn to their Territory Managers for
information and advice regarding their equipment fleets. The rbauction.com
website has become a complimentary and valuable tool, providing a virtual
dimension to the already deep relationships between Ritchie Bros. and our
customers. We remain committed to being technology leaders and to the extent
that we can use the internet and other technologies to expand our services
further, we will do so.
THE NEXT STAGE OF OUR EVOLUTION
Ritchie Bros. is constantly changing and adapting so that we can continue to
provide the best possible service to our customers in the dynamic and
increasingly transparent used truck and equipment markets. But some things don't
change - our values and our culture. Working from the base of core values laid
down over 40 years ago by our founders Ken, John and Dave Ritchie, we will
continue to evolve our business to meet the needs of our customers, all the
while working to deliver long-term earnings growth and increased shareholder
value.
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
THE RITCHIE BROS. AUCTION PROCESS
STEP 1 GETTING TO KNOW THE OWNER AND HIS EQUIPMENT
The auction process begins when an equipment owner meets with one of our
Territory Managers. We get to know the owner's needs and, if necessary,
we appraise his equipment. The people participating in the appraisal
review photographs of and detailed condition notes about the equipment; a
typical appraisal team includes people from the local area as well as
appraisers working out of our head office and, if necessary, people
with specialized expertise. After their individual appraisals are
complete, members of the appraisal team compare results and conclude on a
final appraised value for the fleet.
STEP 2 DRAFTING THE AUCTION CONTRACT
Next, we meet with the owner and work out the details of the auction
contract. Straight commission contracts are the most common. In some
cases, we offer the consignor alternatives such as a guarantee of minimum
sales proceeds or an outright purchase contract. In certain
circumstances, we offer cash advances and other options. We draft a
contract tailored to the consignor's individual needs and requirements.
STEP 3 GETTING THE EQUIPMENT READY FOR THE AUCTION
Once the equipment arrives at the auction site, we coordinate any
cleaning, refurbishing, repair work or painting that the consignor
requires in order to get the equipment ready for auction. When we see an
opportunity to add value in excess of the costs of refurbishing, we'll
recommend doing the work.
STEP 4 MARKETING THE EQUIPMENT TO THE WORLD
We market the equipment by sending out on average 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 highly
trafficked website at rbauction.com. Our auctions are also advertised
through trade journals and general media, and we promote them at all
intervening Ritchie Bros. auctions, ensuring that the equipment is
exposed to the widest possible audience of potential buyers.
STEP 5 SEARCHING THE EQUIPMENT FOR LIENS
To ensure that buyers can purchase with confidence, we guarantee to our
buyers the clear title of everything we sell. Our search department
identifies and arranges for the release of all liens and encumbrances
so buyers are assured of acquiring good and marketable title to items
purchased at our auctions.
STEP 6 SETTING UP THE AUCTION YARD
The equipment is sorted and displayed in logical groupings so prospective
buyers can easily inspect, test and compare similar pieces. We have
knowledgeable staff on hand to answer bidders' questions. We also arrange
for caterers, finance company representatives, customs brokers,
transportation companies and other service providers to be present on the
site.
STEP 7 AUCTION DAY
On auction day, our auctioneers, ringmen, yard staff, internet services
team and customer relations staff conduct what we believe to be 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.
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
FINANCIAL INFORMATION
PAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
INDEPENDENT AUDITORS' REPORT 46
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations 46
Consolidated Balance Sheets 47
Consolidated Statements of Shareholders' Equity 47
Consolidated Statements of Cash Flows 48
Notes to Consolidated Financial Statements 49
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, 2004 compared to the year ended December 31, 2003. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this document, and with the
disclosures below regarding forward-looking statements and risk factors. The
date of this discussion is as of February 21, 2005. Additional information
relating to our company, including our Annual Information Form, is available by
accessing the SEDAR website at www.sedar.com. None of the information on the
SEDAR website is incorporated by reference into this document by this or any
other reference.
We prepare our consolidated financial statements in accordance with generally
accepted accounting principles in Canada, or Canadian GAAP. There are no
material measurement differences between those financial statements and the
financial position and results of operations that would be reported under
generally accepted accounting principles in the United States, or U.S. GAAP.
Amounts discussed below are based on our consolidated financial statements
prepared in accordance with Canadian GAAP and are presented in United States
dollars. Unless indicated otherwise, all dollar amounts discussed below are
expressed in thousands of dollars, except per share amounts.
Ritchie Bros. is the world's largest auctioneer of industrial equipment. Our
world headquarters are located in Richmond, British Columbia, Canada, and at
December 31, 2004 we operated from 110 locations, including 29 auction sites, in
25 countries around the world. We sell, through unreserved public auctions, a
broad range of industrial assets, including equipment used in the construction,
transportation, mining, forestry, petroleum, material handling, marine and
agricultural industries.
We operate mainly in the auction segment of the global industrial equipment
marketplace. Our primary target markets within the global industrial equipment
market are the used truck and equipment sectors, which are large and fragmented.
The world market for used trucks and equipment continues to grow, primarily as a
result of the increasing, cumulative supply of 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 than 2%.
In recent periods, an average of approximately 80% of the buyers at our auctions
have been end users of equipment (retail buyers), such as contractors, with the
remainder being primarily truck and equipment dealers and brokers (wholesale
buyers). Consignors to our auctions represent a broad mix of equipment owners,
the majority being end users of equipment. Consignment volume at our auctions is
affected by a number of factors, including regular fleet upgrades and
reconfigurations, financial pressure, retirements, and inventory reductions, as
well as by the timing of the completion of major construction and other
projects.
We compete directly for potential purchasers of industrial equipment with other
auction companies. Our indirect competitors include truck and equipment
manufacturers, distributors and dealers that sell new or used trucks and
equipment, and equipment rental companies. When sourcing equipment to sell at
our auctions, we compete with other auction companies, truck and equipment
dealers and brokers, and equipment owners that have traditionally disposed of
equipment through private sales. Private sales between truck and equipment
owners are still the dominant type of transaction in the used truck and
equipment markets.
We believe that we have several key strengths that will enable us to continue to
attract increasing numbers of consignors and bidders to our auctions. Our
principal strengths are our reputation for conducting only unreserved auctions
and our highly publicized commitment to fair dealing. Other important strengths
include our size, the international scope of our operations, our extensive
network of auction sites, our Internet tools and our in-depth experience in the
marketplace.
Strict adherence to the unreserved auction process is one of our founding
principles and, we believe, one of our most significant competitive advantages.
When we say "unreserved" we mean that there are no minimum prices for anything
sold at a Ritchie Bros. auction - each item sells to the highest bidder on sale
day, regardless of the price. In addition, consignors (or their agents) are not
allowed to bid on or buy back or in any way influence the selling price of their
equipment. We have maintained our commitment to the unreserved auction process
since our first industrial auction in 1963.
We attract a broad base of bidders from around the world to our auctions. Our
worldwide marketing efforts help to attract them to the auction, and they are
willing to travel long distances because of our reputation for conducting fair
auctions. These multinational bidding audiences provide a global marketplace
that allows our auctions to transcend local market conditions. Evidence of this
is the fact that in recent periods, an average of over 50% of the equipment sold
at any particular auction leaves the region of the sale. We believe that our
ability to consistently draw significant numbers of local and international
bidders to our auctions, most of whom are end users of trucks and equipment
rather than resellers, is appealing to sellers of used equipment and generates a
greater volume of consigned equipment than our competitors. Higher consignment
volumes attract more bidders, which in turn attract greater consignments, and so
on. During the year ended December 31, 2004, we had more than 202,000 bidder
registrations at our auctions, compared to approximately 181,000 in 2003. We
received nearly 25,000 consignments in 2004, compared to almost 23,000 in 2003.
A consignment is typically comprised of multiple lots.
One of our primary goals is to continue to grow our gross auction sales, which
is the total proceeds from all items sold. Our strategies for accomplishing this
objective include, among others, continued development of markets and regions in
which we already operate and expansion into new and emerging markets and
regions, particularly within Europe, North America and Asia. We intend to
continue to look for ways to capitalize on our competitive advantages outlined
above. Where there are opportunities for us to bring some or all of these
factors into play and assist an owner in realizing the best possible return on
the sale of their assets, we will pursue that opportunity.
We are also using the Internet to increase our level of service and to extend
further the geographic reach of our auctions and the multinational character
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2004 Annual Report
of our bidding audiences. Nearly 20% of the bidders at our auctions in 2004
participated over the Internet. In addition, we continue to develop our
technical and physical infrastructure, as well as our recruiting and training
programs, in order to improve the productivity of our employees and to enhance
the service we provide to our customers. A key aspect of our plans for the
future is a recently launched strategic initiative (referred to internally as
Mission 2007 or M07) that has as its goal the development of more efficient,
consistent and scalable business processes to support our growth objectives. We
are aiming to have the core aspects of this initiative completed by the end of
2007.
During the year ended December 31, 2004, we conducted 147 unreserved industrial
auctions at locations in North America, Europe, the Middle East and Australia.
Although our auctions vary in size, the average Ritchie Bros. industrial auction
in 2004 attracted over 1,300 bidders and featured approximately 1,200 lots
consigned by nearly 170 consignors. The average gross auction sales at these
auctions was approximately $12.0 million. We also held 93 smaller unreserved
agricultural auctions in 2004. Approximately 57% of our auction revenues was
earned from operations in the United States (2003 - 57%), 20% was earned in
Canada (2003 - 19%) and the remaining 23% was earned from operations in
countries other than the United States and Canada (primarily Europe, the Middle
East and Australia) (2003 - 24%). We had 615 full-time employees at December 31,
2004, including 198 sales representatives.
We are a public company and our common shares are listed under the symbol "RBA"
on the New York Stock Exchange and, since January 27, 2004, the Toronto Stock
Exchange (the TSX). At February 21, 2005 we had 34,277,300 common shares issued
and outstanding and stock options outstanding to purchase a total of 994,798
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
A key indicator of our operating performance is gross auction sales,
representing the total proceeds from all items sold at our auctions during the
period. Gross auction sales is not a measure of revenue and is not presented in
our consolidated financial statements. However, we believe that gross auction
sales provides an important comparative measure of our relative operating
performance between periods. Auction revenues are reported as the top line of
our Statement of Operations and, as with certain other Statement of Operations
line items, are best understood by considering their relationship to gross
auction sales.
Auction revenues are comprised of auction commissions earned from consignors
through straight commission and guarantee contracts, net profits on the sale of
inventory items, incidental interest income, handling fees on the sale of
certain lots, and the Internet purchase fee and proxy purchase fee applicable to
purchases through our Internet and proxy bidding systems. All revenue is
recognized when the auction sale is complete and we have determined that the
auction proceeds are collectible.
Straight commissions are our most common type of auction revenues and are
generated by us when we act as agent for consignors and earn a pre-negotiated,
fixed commission rate on the gross sales price of the consigned equipment at
auction. In recent periods, this type of sale has generally represented
approximately 75% of our gross auction sales volume on an annual basis.
In certain other cases, we guarantee minimum sales proceeds to the consignor and
earn a commission based on the actual results of the auction, including a
negotiated percentage of any sales proceeds in excess of the guaranteed amount.
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 exposure from these guarantee
contracts fluctuates over time, but industrial auction guarantees are generally
outstanding for less than 45 days. Agricultural auction guarantees are generally
outstanding for a longer period of time, because many of the contracts are
signed in the fall of one year for auctions to be held in the spring of the next
year. The combined exposure at any time from all outstanding guarantees is
usually less than $30 million. Losses, if any, resulting from guarantee
contracts are recorded in the period in which the relevant auction is completed.
In recent periods, guarantee contracts have generally represented in the range
of 15% of gross auction sales on an annual basis.
Auction revenues also include the net profit or loss on the sale of inventory in
cases where we acquire ownership of equipment for a short time prior to an
auction sale. When purchased, this equipment is assigned to a specific auction
sale and sold at that auction in the same manner as consigned equipment. During
the period that we retain ownership, the cost of the equipment is recorded as
inventory on our balance sheet. The net gain or loss on the sale is recorded as
auction revenues. In recent periods, sales of inventory have generally
represented in the range of 10% of gross auction sales on an annual basis.
The choice by consignors between straight commission, guarantee, or outright
purchase arrangements depends on many factors, including the consignor's risk
tolerance and sale objectives. As a result, the mix of contracts in a particular
quarter or year is not necessarily indicative of future performance. The
composition of our auction revenues and our auction revenue rate (i.e. auction
revenues as a percentage of gross auction sales) depend on the mix and
performance of contracts entered into with consignors in any particular period
and fluctuate from period to period. Our auction revenue rate performance is
presented below.
Prior to 2002, our long-term expected average auction revenue rate was
approximately 8.80%. With the introduction of a handling fee in 2002 and proxy
and Internet purchase fees in 2003, our long-term expected average auction
revenue rate increased to approximately 9.30%. At the end of the second quarter
of 2003, we determined that we were achieving a sustainably higher average
auction revenue rate and we increased our long-term expected average auction
revenue rate to 9.50%. At the end of 2003 we estimated that our average expected
auction revenue rate for 2004 would be in the range of 9.50% to 10.00%, and the
actual rate was 10.19%. Although we achieved a higher than expected auction
revenue rate in 2004, we do not believe that this level is sustainable and
continue to expect that our auction revenue rate in 2005 will be in the range of
9.50% to 10.00%.
The largest contributor to the variability in our auction revenue rate is the
performance of our underwritten business (guarantee and inventory contracts). In
a period when our underwritten business performs better than average, our
auction revenue rate typically exceeds the expected average rate. Conversely, if
our underwritten business performs below average, our auction revenue rate will
typically be below the expected average rate. See further discussion of our
auction revenue rate under "Results of Operations - Auction Revenue."
QUARTERLY AUCTION REVENUE RATE - 5 YEAR HISTORY
[LINE GRAPH]
36
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
Our gross auction sales and auction revenues are affected by the seasonal nature
of the auction business. 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.
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 2005 we hired our first sales representative in Poland. We also moved
into our new permanent auction site in Sacramento, California. In February 2005
we held the largest auction in our history, at our permanent auction site in
Orlando, Florida, with gross auction sales of $79 million.
DEVELOPMENTS IN 2004
Our primary goals for 2004 were to grow gross auction sales, improve sales force
productivity, and increase our customer base. Our related goals included
continued expansion into related markets and regions, and use of the Internet
and other technology to enhance our business. All of these goals were achieved
in 2004, as discussed throughout this report.
David E. Ritchie, our current Chairman, retired from his position as our Chief
Executive Officer, or CEO, effective October 31, 2004. Our Board of Directors
appointed Peter J. Blake, our former Senior Vice-President and Chief Financial
Officer, to become CEO when Mr. Ritchie retired. Robert S. Armstrong, our former
Vice-President Finance and Corporate Secretary, was appointed Vice-President
Finance, Chief Financial Officer and Corporate Secretary effective November 1,
2004. Mr. Ritchie will continue as Chairman of our Board of Directors.
During the fourth quarter of 2004 we established a presence in China, opening a
representative office in Beijing with three full-time employees, and we hired a
sales representative in India, who is our first full-time representative in
this country. Also during the fourth quarter, we purchased 75 acres of land in
Nashville, Tennessee, on which we intend to build a permanent auction site. In
addition in 2004 we opened a representative office in Jakarta, Indonesia and an
office in Tehran, Iran.
On October 29, 2004, our Board of Directors appointed Beverley Briscoe to the
Board. Ms. Briscoe has an extensive background working in industries
complementary to the auction business, most recently as the president of her own
transportation services company, Hiway Refrigeration Ltd. Prior to purchasing
Hiway Refrigeration in 1997, Ms. Briscoe held senior executive positions with
Wajax Industries Ltd., the Rivtow Group of Companies, and the Jim Pattison
Group. Ms. Briscoe is Chair of the British Columbia Government's Industry
Training Authority, a member of the Boards of BC Rail Corporation, Dental
Technologies Inc. and Westminster Savings Credit Union, as well as a Director of
the Boys and Girls Club of Greater Vancouver.
On April 16, 2004, Eric Patel was elected to our Board of Directors. Mr. Patel
has extensive business and financial experience, most recently as the CFO of
Crystal Decisions, Inc., a privately held software company. Prior to joining
Crystal Decisions in 1999, Mr. Patel held executive level positions, including
that of CFO, with University Games, Inc., and worked for Dreyer's Grand Ice
Cream, Marakon Associates strategy consultants and Chemical Bank.
With the addition of Ms. Briscoe and Mr. Patel, our Board of Directors is now
comprised of a majority of independent directors. Ms. Briscoe and Mr. Patel
joined Edward Moul on our Audit Committee; Chuck Croft and Russell Cmolik
stepped down from the Audit Committee during the year. Ms. Briscoe, Mr. Patel
and Mr. Croft were appointed to the newly created Nominating and Corporate
Governance Committee effective October 29, 2004.
In 2004 we set several Company gross auction sales records, including achieving
the highest level of full-year gross auction sales ever. Our record-breaking
performance started in February 2004 at our permanent auction site in Orlando,
Florida, when we sold over $64 million in trucks and equipment, setting a new
record for the largest auction in Ritchie Bros.' history. In December we broke
the record that had been set in February and set a new benchmark for our largest
auction with a $68 million sale at our permanent auction site in Moerdijk in The
Netherlands. During 2004 we set eight new regional records, including the
largest Canadian sale in the Company's history.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements in conformity with Canadian
GAAP, we must make decisions that impact the reported amounts and related
disclosures. Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. In reaching such decisions, we apply judgments based on our
understanding and analysis of the relevant circumstances and historical
experience. On an ongoing basis, we evaluate these judgments and estimates,
including consideration of uncertainties relating to revenue recognition
criteria, recoverability of capital assets, goodwill and future income tax
assets, and the assessment of possible contingent assets or liabilities that
should be recognized or disclosed in our consolidated financial statements.
Actual amounts could differ materially from those estimated by us at the time
our consolidated financial statements are prepared.
The following discussion of critical accounting policies and estimates is
intended to supplement the significant accounting policies presented as note 1
to our consolidated financial statements. Note 1 summarizes the accounting
policies and methods used in the preparation of our consolidated financial
statements. The policies and the estimates discussed below are included here
because they require more significant judgments and estimates in the preparation
and presentation of our consolidated financial statements than other policies
and estimates.
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, 2004 and determined that no impairment had occurred.
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.
37
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
NEW ACCOUNTING POLICIES
STOCK-BASED COMPENSATION
Prior to January 1, 2003, we recognized stock-based compensation expense using
the intrinsic value method of accounting at the date of grant of the underlying
stock option. Under the intrinsic value method, no compensation costs were
recognized in the . financial statements for stock options granted to employees
and directors when they were issued at market value.
In 2003 we adopted on a prospective basis the fair value based method of
accounting for all employee and director stock options granted, modified or
settled on or after January 1, 2003. Under the fair value based method of
accounting, compensation cost is measured using the Black-Scholes option pricing
model at the date of underlying option grant and is expensed over the underlying
award's vesting period. For the year ended December 31, 2004, we recorded
stock-based compensation expense (net of future income tax impact of $0.5
million) of $1.0 million, or $0.03 per common share, basic and diluted (2003 -
$0.9 million, or $0.05 per common share, basic and diluted). No fair value
stock-based compensation expense has been recognized for any stock option grants
in any years prior to January 1, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2003 the Accounting Standards Board in Canada issued Handbook Section
3110, Asset Retirement Obligations, effective for years beginning on or after
January 1, 2004. The new section establishes standards for the recognition and
measurement of liabilities for obligations associated with the retirement of
property, plant and equipment when those obligations result from the
acquisition, construction, development or normal operations of the assets. We
adopted this standard effective January 1, 2004 and it did not have a material
impact on the presentation of our financial condition or results of operations.
OVERALL PERFORMANCE
For the year ended December 31, 2004 we recorded auction revenues of $182.3
million and net earnings of $34.9 million, or $1.01 per diluted common share.
This performance compares to auction revenues of $161.5 million and net earnings
of $36.6 million, or $1.07 per diluted common share, in 2003. Although our
auction revenues increased compared to the prior year, we experienced a decrease
in our net earnings, mainly as a result of higher general and administration
costs and income taxes. In addition, although we had growth in our gross auction
sales, we experienced an auction revenue rate of 10.19% in 2004, which was lower
than the rate of 10.36% achieved in the prior year. We ended the year with
working capital of $36.9 million, compared to $35.7 million at the end of 2003.
SELECTED ANNUAL INFORMATION
The following selected consolidated . financial information as at December 31,
2004, 2003 and 2002 and for each of the years in the three-year period ended
December 31, 2004 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 12 of our consolidated financial
statements for the year ended December 31, 2004. All dollar amounts in the
following table and related notes are in thousands of United States dollars,
except per share data.
Year Ended December 31, 2004 2003 2002
----------------------------------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Auction revenues(1) $ 182,257 $ 161,542 $ 133,552
Direct expenses (23,472) (22,099) (19,684)
--------- --------- ---------
158,785 139,443 113,868
Operating expenses(2)(3) 100,539 86,750 74,841
--------- --------- ---------
Earnings before income taxes 58,246 52,693 39,027
Income taxes(4) 23,347 16,099 10,656
--------- --------- ---------
Net earnings $ 34,899 $ 36,594 $ 28,371
========= ========= =========
Net earnings per share - basic $ 1.02 $ 1.08 $ 0.84
Net earnings per share - diluted 1.01 1.07 0.84
Cash dividends declared per share(5) $ 0.37 $ 0.15 $ -
BALANCE SHEET DATA (PERIOD END):
Working capital (including cash) $ 36,871 $ 35,700 $ 25,443
Capital assets 226,624 210,416 193,490
Total assets 442,409 413,362 329,136
Long-term liabilities 18,714 34,613 67,336
(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, general and
administrative and other income and expenses.
(3) We adopted the fair value method of accounting for stock-based compensation
in 2003, in accordance with amended accounting pronouncements in Canada and
the United States. General and administrative expenses include stock-based
compensation charges in 2004 of $1,467 ($991, or $0.03 per share basic and
diluted, net of taxes) and in 2003 of $1,047 ($880, or $0.03 per share basic
and diluted, net of taxes).
(4) Income taxes in 2004 include taxes of $2,106 recorded in connection with
realized foreign exchange gains at the subsidiary level relating to certain
term debt that came due in 2004.
(5) In addition to the cash dividends declared and paid in 2004, we declared a
cash dividend of $0.11 per common share on January 28, 2005 relating to the
quarter ended December 31, 2004, which is not included in this amount.
38
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
We conduct operations around the world in a number of different currencies, but
our reporting currency is the United States dollar. In 2004, approximately 35%
of our revenues and approximately 40% 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.
The main currencies other than the United States dollar in which our revenues
and operating costs are denominated are the Canadian dollar, the Euro, and the
Australian dollar. In the past, fluctuations in the value of these currencies
have not had a material impact on the presentation of our results of operations.
However, in recent periods there has been a significant increase in the value of
these currencies relative to the United States dollar. This increase, which we
refer to in this discussion as the currency fluctuation, has resulted in higher
reported auction revenues and operating costs than would have been reported had
there been no currency fluctuation, as discussed in more detail below. However,
the higher reported auction revenues and operating expenses in our consolidated
financial statements largely offset, making the impact of the currency
fluctuation on our net earnings essentially neutral.
UNITED STATES DOLLAR EXCHANGE RATE COMPARISON
Years ended December 31, 2004 % Change 2003 % Change 2002
------------------------- ------------- -------- ------------- -------- -------------
Value of one U.S. dollar:
Year-end exchange rate:
Canadian dollar $ 1.1995 -7.5% $ 1.2965 -17.8% $ 1.5776
Euro E 0.7371 -7.1% E 0.7938 -16.7% E 0.9530
Average exchange rate:
Canadian dollar $ 1.3013 -7.1% $ 1.4010 -10.8% $ 1.5703
Euro E 0.8048 -9.1% E 0.8853 -16.6% E 1.0613
AUCTION REVENUES
Years ended December 31, 2004 2003 % Change
----------------------------------- ---------- ---------- --------
Auction revenues - United States(1) $ 104,618 $ 92,273 13%
Auction revenues - Canada(1) 36,258 30,752 18%
Auction revenues - Europe(1) 26,988 21,262 27%
Auction revenues - Other(1) 14,393 17,255 17%
---------- ---------- ---
Total auction revenues $ 182,257 $ 161,542 13%
========== ========== ===
Gross auction sales $1,789,402 $1,559,393 15%
Auction revenue rate 10.19% 10.36%
(1) Information by geographic segment based on auction location.
The increase in auction revenues in 2004 was attributable to higher gross
auction sales and the impact of the currency fluctuation. Gross auction sales
in 2004 increased in the United States, Canada and Europe compared to the year
ended December 31, 2003. Gross auction sales for the year ended December 31,
2004 include $45.2 million relating to agricultural auctions held during the
year (2003 -- $22.4 million). The decrease in the auction revenue rate in 2004
can be attributed mainly to the performance of our guarantee and inventory
contracts. The auction revenue rate performance of these contracts was not as
strong as their unusually strong performance in 2003. This underwritten business
represented 23% of our total gross auction sales in 2004, which is in a similar
range to the levels experienced in prior years (26% in 2003 and 20% in 2002).
Our auction revenue rate of 10.19% for 2004 was only slightly above our expected
range of 9.50% to 10.00%. We expect that our auction revenue rate will be within
the range of 9.50% to 10.00% for 2005. Past experience has shown that our
auction revenue rate is difficult to estimate precisely, and therefore, the
actual auction revenue rate in the future may be above or below this range.
A small change in our auction revenue rate can have a material impact on our
auction revenues and therefore, our net earnings. For example, a 10 basis point
(0.1%) increase or decrease in our auction revenue rate would have impacted
auction revenues by approximately $1.8 million in 2004, of which approximately
$1.1 million or $0.03 per share would have followed 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, 2004 2003 % Change
---------------------------------- ------- ------- --------
Direct expenses $23,472 $22,099 6%
Direct expenses as a percentage of 1.31% 1.42%
gross auction sales
Direct expenses consist of costs incurred as a direct result of an auction sale
being held. Direct expenses include the costs of hiring personnel to assist in
conducting the auction, advertising specifically related to the auction, travel
costs for employees to attend and work at the auction, security hired to
safeguard equipment at the auction site and rental expenses for temporary
auction sites.
39
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
Direct expenses as a percentage of gross auction sales, or the direct expense
rate, fluctuate based on the size and location of auctions held each period. As
the size of auctions increases, the direct expense rate generally decreases.
Moreover, auctions held at permanent auction sites tend to have lower direct
expense rates than auctions held at temporary locations due mainly to the
economies of scale and other efficiencies typically achieved at permanent
auction sites. During 2004 we had eight auctions that achieved record-breaking
gross auction sales and this contributed to an increase in the average size of
our auctions for the year. The average gross auction sales at our industrial
auctions in 2004 increased to $12.0 million, from an average of $10.9 million in
2003. These factors contributed to a lower direct expense rate compared to the
prior year. We expect that the direct expense rate will be in the range of 1.30%
for 2005.
DEPRECIATION EXPENSE
Years ended December 31, 2004 2003 % Change
----------------------- -------- -------- --------
Depreciation expense $ 12,708 $ 11,773 8%
Depreciation is calculated on either a straight line or a declining balance
basis on capital assets employed in our business, including buildings and site
improvements, automobiles, yard equipment, and computer hardware and software.
Depreciation expense grew primarily as a result of the depreciation of new
auction facilities constructed over the past few years and increasing charges
related to capitalized software development costs. In addition, the currency
fluctuation resulted in higher depreciation expense on assets denominated in
currencies other than the United States dollar.
We anticipate that depreciation expense will continue to increase in the future
as existing auction sites are improved and additional permanent auction sites
are acquired and developed, and as capitalized expenditures relating to our M07
strategic initiative are depreciated.
GENERAL AND ADMINISTRATIVE EXPENSES
Years ended December 31, 2004 2003 % Change
----------------------------------- -------- -------- --------
General and administrative expenses $ 85,667 $ 71,265 20%
G&A as a percentage
of gross auction sales 4.79% 4.57%
General and administrative expenses, or G&A, include items such as employee
expenses (salaries, wages, performance bonuses and benefits), non-auction
related travel, information technology, repairs and maintenance,
telecommunications, insurance, rent and lease payments, professional fees,
utilities, and institutional advertising. The increase in G&A is attributable to
a number of factors, including the currency fluctuation and increased costs
incurred in 2004 to support our growth initiatives (such as salaries and wages,
information technology, and repairs and maintenance). We also recorded higher
employee performance bonus accruals as a result of our executive long-term
incentive plan (known as the ELTIP) adopted during the year. The ELTIP was
introduced to ensure that our senior managers have meaningful investments in our
common shares and to align better their interests with those of our
shareholders. In addition, G&A expenses increased as a result of a change in our
method of allocating costs to internal software development projects, which
caused a lower level of costs to be capitalized to such projects in 2004.
Although we expect G&A as a percentage of gross auction sales to decrease going
forward, future levels of G&A will continue to be affected by the expansion of
infrastructure and workforce necessary to support our growth plans, as well as
other factors including fluctuations in foreign exchange rates.
INTEREST EXPENSE
Years ended December 31, 2004 2003 % Change
------------------------ ------ ------- --------
Interest expense $3,217 $4,772 (33%)
Interest expense is comprised mainly of interest and bank charges paid on long
term and revolving debt and operating credit lines. Interest expense decreased
in 2004 because of lower average debt balances and lower average interest rates
applicable to that debt. During 2004, we capitalized $0.3 million of interest
related to properties under development, compared to $0.2 million in 2003.
INCOME TAXES
Years ended December 31, 2004 2003 % Change
------------------------ ------- ------- --------
Income taxes $23,347 $16,099 45%
Effective income tax rate 40.1% 30.6%
Income taxes have been computed based on rates of tax that apply in each of the
tax jurisdictions in which we earn our income. The effective tax rate for the
year ended December 31, 2004 was higher than the rate we experienced in 2003 as
a result of differences in earnings within the various tax jurisdictions in
which we earn our income. In addition, realized foreign exchange gains at the
subsidiary level on certain term debt that came due in 2004 resulted in an
increase of $2.1 million in our income tax provision for the year. This portion
of the income tax provision is unrelated to our operations and we do not expect
to incur an equivalent charge in future periods. Absent this component, our
income tax rate for 2004 would have been 36.5%. Income tax rates in future
periods will fluctuate depending upon the impact of unusual items and the level
of earnings in the different tax jurisdictions in which we earn our income.
NET EARNINGS
Years ended December 31, 2004 2003 % Change
-------------------------------- ------- ------- --------
Net earnings before income taxes $58,246 $52,693 11%
Net earnings 34,899 36,594 (5%)
Net earnings per share - basic 1.02 1.08 (6%)
Net earnings per share - diluted 1.01 1.07 (6%)
Excluding the impact of charges of $2.1 million to our income tax provision in
2004 that we do not expect to recur in future periods (as discussed above), our
net earnings for 2004 would have been $37.0 million, or $1.08 per basic share
and $1.07 per diluted share. The currency fluctuation did not have a material
net effect on earnings for the year ended December 31, 2004 or 2003.
SUMMARY OF FOURTH QUARTER RESULTS
We earned auction revenues of $57.1 million and net earnings of $11.3 million,
or $0.34 per basic share and $0.33 per diluted share, during the fourth quarter
of 2004, which compares to auction revenues of $47.7 million and net earnings of
$12.4 million, or $0.37 per basic share and $0.36 per diluted share, in the
fourth quarter of 2003. Excluding the $1.2 million impact of income taxes
attributable to realized foreign exchange gains at the subsidiary level on
certain term debt that came due in the second half of 2004, which we do not
expect to recur in future periods, net earnings for the fourth quarter of 2004
would have been $12.6 million, or $0.37 per basic share and $0.36 per diluted
share. The fourth quarter is typically one of our stronger quarters, because of
the seasonality inherent in our business, as discussed above. Our gross auction
sales were $549.8 million for the quarter ended December 31, 2004, which is an
increase of 15% compared to the same period in 2003. We achieved growth in all
of our main markets during the fourth quarter of 2004 compared to the same
period in 2003.
Although our fourth quarter auction revenue rate increased to 10.39% from 10.00%
in the fourth quarter of 2003, we experienced a 9% decrease in our earnings
because higher auction revenues were offset by increased G&A and higher income
taxes resulting from charges unrelated to our operations that we do not expect
to incur in future periods, as discussed above. Our G&A increased because of
higher costs associated with ongoing growth in our business, for example
employee performance bonus accruals, employee wages and property-related costs,
and accruals in connection with the ELTIP implemented in 2004. Currency
fluctuations contributed further to the increase in G&A.
We repaid long-term debt of $51.6 million during the fourth quarter of 2004, and
borrowed $32.5 million. Capital asset additions were $8.2 million for the
quarter, compared to $4.6 million in the comparable quarter in 2003. Our capital
expenditures in 2004 related primarily to the construction of our new permanent
auction site in Sacramento, California and to the purchase of land in Nashville,
Tennessee. Exchange rate changes relating to capital assets held in currencies
other than the United States dollar resulted in a further increase in our
reported capital assets on our consolidated balance sheet of $6.2 million in the
fourth quarter of 2004 compared to an increase of $5.2 million in the equivalent
period in 2003.
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
SUMMARY OF QUARTERLY RESULTS
The following tables present our unaudited consolidated quarterly results of
operations for each of our last eight quarters. This data has been derived from
our unaudited consolidated financial statements, which were prepared on the same
basis as the annual audited consolidated financial statements and, in our
opinion, include all normal recurring adjustments necessary for the fair
presentation of such information. These unaudited quarterly results should be
read in conjunction with our audited consolidated financial statements for the
year ended December 31, 2004. All dollar amounts in the following tables and
related footnotes are stated in thousands of United States dollars, except per
share data.
Q4 2004 Q3 2004 Q2 2004 Q1 2004
--------- --------- --------- ---------
Gross auction sales(1) $ 549,796 $ 307,188 $ 553,776 $ 378,642
--------- --------- --------- ---------
Auction revenues $ 57,142 $ 31,449 $ 55,996 $ 37,670
Net earnings (2) 11,335 1,810 15,164 6,590
Net earnings per share - basic $ 0.34 $ 0.05 $ 0.44 $ 0.19
Net earnings per share - diluted 0.33 0.05 0.44 0.19
Q4 2003 Q3 2003 Q2 2003 Q1 2003
--------- --------- --------- ---------
Gross auction sales(1) $ 477,107 $ 277,832 $ 462,979 $ 341,475
--------- --------- --------- ---------
Auction revenues $ 47,719 $ 29,785 $ 47,657 $ 36,381
Net earnings 12,417 2,721 12,881 8,575
Net earnings per share - basic $ 0.37 $ 0.08 $ 0.38 $ 0.25
Net earnings per share - diluted 0.36 0.08 0.38 0.25
(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 third and fourth quarters of 2004 reflect income taxes
of $888 and $1,218, respectively, recorded in connection with realized
foreign exchange gains at the subsidiary level on certain term debt that
came due in the second half of 2004. Excluding this charge, which we do not
expected to recur in future periods, net earnings would have been $2,698, or
$0.08 per share basic and diluted, for the third quarter and $12,553, or
$0.37 per basic share and $0.36 per diluted share, for the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
December 31, 2004 2003 % Change
--------------- -------- -------- --------
Working capital $ 36,871 $ 35,700 3%
Our cash position can fluctuate significantly from period to period, largely as
a result of differences between the timing, size and number of auctions, the
timing of the receipt of auction sale proceeds from buyers, and the timing of
the payment of net amounts due to consignors. We usually collect auction
proceeds from buyers within seven days of the auction and generally pay out
auction proceeds to consignors approximately 21 days following an auction. If
auctions are conducted near a period end, we may hold cash in respect of those
auctions that will not be paid to consignors until after the period end.
Accordingly, we believe that working capital, including cash, is a more
meaningful measure of our liquidity than cash alone. In our opinion, our working
capital balance at December 31, 2004 is adequate to meet our needs.
CONTRACTUAL OBLIGATIONS
Payments Due by Year Total In 2005 In 2006 and 2007 In 2008 and 2009 After 2009
----------------------------- ------- ------- ---------------- ---------------- ----------
Long-term debt $45,925 $35,133 $10,577 $ 215 $ -
Operating leases 3,654 1,330 1,599 725 -
Other long term obligations 2,752 1,189 1,563 - -
------- ------- ------- ------- ---
Total contractual obligations $52,331 $37,652 $13,739 $ 940 $ -
======= ======= ======= ======= ===
Our long-term debt due within one year in the table above includes certain
revolving loans that we expect to extend when they come due and certain term
loans that we expect to renegotiate. Our current assets at December 31, 2004
included funds committed for debt repayment of $1.9 million, which could be used
to reduce the amount payable on any of the term loans that may be repaid in 2005
(see further discussion of long-term debt below). Our operating leases related
primarily to land on which we operate regional auction units. These properties
are located in the United States, Australia, Singapore, Mexico, Canada and the
United Arab Emirates.
Future interest expenses over the next five years are as follows:
In 2005 In 2006 In 2007 In 2008 In 2009
-------- ------- ------- ------- -------
Interest expense on long-term debt $ 1,183 $ 286 $ 22 $ 14 $ -
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
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, 2004 from these
guarantee contracts was $20.9 million (compared to $9.8 million at December 31,
2003), 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.
December 31, 2004 2003 % Change
------------ ---- ---- --------
Cash provided by (used in):
Operations $ 58,656 $ 77,832 (25%)
Investing (24,555) (11,021) (123%)
Financing (24,622) (13,793) (79%)
Capital asset additions were $23.5 million for the year ended December 31, 2004
compared to $16.3 million in 2003. Our capital expenditures in 2004 related
primarily to the construction of our new permanent auction site in Sacramento,
California. Exchange rate changes relating to capital assets held in currencies
other than the United States dollar resulted in a further increase in our
reported capital assets on our consolidated balance sheet of $7.4 million in
2004 compared to an increase of $17.8 million in 2003.
During the year ended December 31, 2004 we completed the following property
acquisitions and disposals:
- In October we entered into an agreement to dispose of our property in
Ocala, Florida for proceeds approximating its book value of $2.1 million.
The proceeds will be received over a period not to exceed three years and
the transaction is being treated as a sales-type lease. The land was no
longer being used in our operations.
- In November we purchased a parcel of land in Nashville, Tennessee for
approximately $1.9 million. We intend to develop the property for a new
permanent auction site.
We also have options to purchase certain other parcels of land in the United
States, but because we were not obligated to purchase any of this land, the
options were not recorded as liabilities in our financial statements. Subsequent
to December 31, 2004 we disposed of a parcel of land in Lake Worth, Texas with a
book value of $0.5 million for proceeds of $6.0 million. The land was not being
used in our operations.
We intend to add additional permanent auction sites in selected locations around
the world as appropriate opportunities arise, though actual expenditure levels
in the future will depend on our ability to identify, acquire and develop
suitable auction sites. We expect that capital expenditures, including
maintenance capital expenditures, will be in the range of $15 million to $20
million per year on average for the next few years. Additional expenditures may
also be required to achieve our Mission 2007 strategic initiatives, depending on
the scope of our required system improvements.
We paid regular quarterly cash dividends totaling $0.37 per share in 2004, for
total dividend payments of $12.6 million, compared to total dividend payments of
$5.1 million in 2003. On January 25, 2005, our Board of Directors declared a
quarterly cash dividend of $0.11 per common share relating to the quarter ended
December 31, 2004. The dividend will be payable on March 18, 2005 to
shareholders of record on February 25, 2005. The total dividend payment is
expected to be approximately $3.8 million.
December 31, 2004 2003 % Change
------------ ---- ---- --------
Long-term debt
(including current portion
of long-term debt) $ 45,925 $ 70,788 (35%)
-------- -------- ---
Credit facilities - total available: $159,923 $199,603
Credit facilities - total unused: 113,998 128,815
We have established credit facilities with financial institutions in the United
States, Canada, The Netherlands, and Australia. We had no floating rate debt at
December 31, 2004 (December 31, 2003 - $4.4 million). However, certain of our
long-term debt at December 31, 2004 consisted of revolving loans drawn on credit
facilities, most of which were recorded in current liabilities in our financial
statements. Some of these revolving loans will be extended in 2005 when they
come due, and are subject to short-term interest rates until their due dates.
During the year ended December 31, 2004 we repaid long-term debt of $58.5
million, compared to $3.7 million in 2003, and borrowed $32.5 million. We had no
new borrowings in 2003. At December 31, 2004, we were in compliance with all of
the financial covenants applicable to our long-term debt.
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.
We are exposed to currency fluctuations and exchange rate risk on all operations
conducted in currencies other than the United States dollar, which is our
reporting currency. We cannot accurately predict the future effects of foreign
currency fluctuations on our financial condition or results of operations. For
the year ended December 31, 2004, approximately 35% of our revenues were earned
in currencies other than the United States dollar and approximately 40% of our
operating costs were denominated in currencies other than the United States
dollar. We have not hedged against foreign currency rate fluctuations associated
with our operations denominated in currencies other than the United States
dollar.
During the year ended December 31, 2004 we recorded an increase in our foreign
currency translation adjustment balance of $8.8 million, compared to $17.2
million in 2003. Our foreign currency translation adjustment arises from the
translation of our net assets denominated in currencies other than the United
States dollar into our reporting currency. Increases in this balance arise
primarily from the strengthening of non-United States currencies against the
United States dollar.
TRANSACTIONS WITH RELATED PARTIES
During the year ended December 31, 2004, we paid approximately $0.8 million to
D.E.R. Resorts Ltd. (or Resorts), a company controlled by David E. Ritchie, the
Chairman of our Board of Directors and our former Chief Executive Officer. The
costs were incurred pursuant to agreements, approved by our Board of Directors,
by which Resorts 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 believe that the terms of the agreements were
at least as favorable to us as we could have obtained from a third party. We
have entered into similar agreements with Resorts in the past and intend to do
so in the future.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future material effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
FORWARD-LOOKING STATEMENTS
This document, including 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 markets and market segments (geographic and otherwise) in
which we conduct auctions, including the international used industrial
equipment market;
- increases in the number of consignors and bidders participating in our
auctions and the average size of our auctions;
- our competitive strengths;
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
- the anticipated improvement, acquisition and development by us of auction
sites;
- our gross auction sales, auction revenues and auction revenue rates,
including expected auction revenue rates and the sustainability of those
rates, and the seasonality of gross auction sales and auction revenues;
- our direct expense rates, depreciation expenses and potential changes in
income taxes;
- the effect on our general and administrative expenses of expanded
infrastructure and workforce;
- our future capital expenditures;
- income taxes in future periods;
- our Internet initiatives and the contribution to our operating results
from Internet-based auction purchases;
- amounts of our revenues and operating costs denominated in currencies
other than the U.S. dollar and the effect of any currency exchange
fluctuations;
- renegotiating and extending existing indebtedness; and
- financing available to us.
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 future performance. Some of the more important
risks we face are outlined below and should be considered by holders of our
common shares. The risks and uncertainties described below are not the only
risks and uncertainties we face. Additional risks and uncertainties not
currently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our business,
results of operations and financial condition would suffer.
WE MAY INCUR LOSSES RELATED TO OUR GUARANTEE AND OUTRIGHT PURCHASE CONTRACTS AND
ADVANCES TO CONSIGNORS.
We generally offer our services to consignors on a straight commission basis. In
some cases we will, subject to our evaluation of the items being consigned,
either offer to:
- guarantee the consignor a minimum level of sale proceeds, regardless of
the ultimate results of the auction; or
- purchase the equipment directly 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, we will incur a loss. Because all of our
auctions are unreserved, we cannot protect against these types of losses by
bidding on or acquiring any items at the auctions. In recent periods, guarantee
contracts and our direct purchases and sales of inventory 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 INCUR LOSSES RELATED TO OUR GUARANTEES OF CLEAR TITLE ON THE ASSETS SOLD
AT OUR AUCTIONS.
We guarantee that each item purchased at our auctions is free of liens and other
encumbrances up to the purchase price paid by the buyer, where title registries
are commercially available. While we expend considerable effort ensuring that
all liens have been identified and, if necessary, discharged prior to the
auction sale, occasionally we have not properly identified or discharged liens
and have had to make payments to the relevant lienholders or purchasers. If we
are unable to recover sufficient funds from the consignors to offset these
payments, we will incur a loss; aggregate losses from these payments could be
material.
WE MAY INCUR LOSSES AS A RESULT OF LEGAL AND OTHER CLAIMS.
We are subject to legal and other claims which arise in the ordinary course of
our business. While the results of these claims have not historically had a
material adverse effect on our financial condition or results of operations, we
may not be able to defend ourselves adequately against these claims in the
future and we may incur a loss. Aggregate losses from these claims could be
material.
OUR OPERATING RESULTS ARE SUBJECT TO QUARTERLY VARIATIONS.
Our revenues and operating results historically have fluctuated from quarter to
quarter. Among the factors that we expect will continue to cause these
fluctuations are:
- the timing, frequency and size of auctions;
- the seasonal nature of the auction business in general, with peak results
typically in the second and fourth calendar quarters, primarily due to 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 sites and related
costs.
Additionally, we generally incur substantial costs when entering new markets,
and the profitability of operations at a new location is uncertain due to
heightened variability in the number and size of auctions at these sites. These
and other factors may cause our future results to fall short of investor
expectations or to not compare favorably to past results.
Decreases in the supply of, demand for, or market values of industrial assets,
primarily used industrial equipment, would harm our business.
Significant erosion in the supply of, demand for, or market values of used
trucks and equipment could reduce our auction revenues and impact our financial
condition and results of operations. Most of the factors that affect the supply
of, and demand for, used trucks and equipment are beyond our control, and market
values for used trucks and equipment fluctuate based on circumstances beyond
our control. In addition, price competition for new trucks and equipment has a
direct impact on the supply of, demand for, and market value of used trucks and
equipment.
WE MAY BE UNABLE TO SUSTAIN AND MANAGE OUR GROWTH.
A principal component of our strategy is to continue our growth, primarily by
increasing earnings from operations in existing markets and by expanding into
new geographic markets and into auction market segments that we have not
historically emphasized. We may not be successful in growing our business or in
managing this growth. Our growth depends on our ability to accomplish a number
of things, including:
- identifying and developing new markets and market segments;
- identifying and acquiring, on favorable terms, suitable new auction sites
and, possibly, businesses that are suitable acquisition candidates;
- successfully integrating new sites and any acquired businesses with our
existing operations;
- achieving acceptance by potential consignors and buyers of the auction
process generally;
- establishing and maintaining favorable relationships with consignors and
bidders in new markets and market segments, and maintaining these
relationships in existing markets;
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
- capitalizing on changes in the supply of and demand for industrial assets,
both on a local and global basis;
- receiving required governmental authorizations for proposed development or
expansion;
- designing and implementing business processes that are able to profitably
support our growth; and
- successfully managing expansion and obtaining required financing.
Any growth we achieve may require additional employees and increase the scope of
both our operating and financial systems and the geographic area of our
operations. This will increase our operating complexity and the level of
responsibility of existing and new management personnel. We may be unable 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.
Our ability to improve our systems and controls may be limited by increased
costs, technological challenges, or lack of qualified employees. Our past
results and growth may not be indicative of our prospects or our ability to
penetrate new markets, many of which may have different competitive conditions
and demographic characteristics than our current markets.
OUR SUBSTANTIAL INTERNATIONAL OPERATIONS EXPOSE US TO FOREIGN EXCHANGE RATE
FLUCTUATIONS AND POLITICAL AND ECONOMIC INSTABILITY, WHICH COULD HARM OUR
OPERATING RESULTS.
We conduct business globally and intend to continue expanding our international
presence. Fluctuating currency exchange rates, acts of terrorism or war, and
changing social, economic and political conditions and regulations may adversely
affect our business in international markets and our related operating results.
Fluctuations in currency exchange rates between the different countries in which
we conduct auctions impact the purchasing power of buyers, the motivation of
consignors, asset values and asset flows between different countries. These
factors and other global economic conditions may impair our business and harm
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. Changes
in currency exchange rates against the United States dollar, particularly for
the Canadian dollar or the Euro, could affect the results presented in our
financial statements and cause our earnings to fluctuate.
COMPETITION IN OUR CORE MARKETS MAY LEAD TO REDUCED REVENUES AND PROFITABILITY.
The used truck and equipment sectors of the global industrial equipment market,
and the auction segment of those markets, are highly fragmented. We compete
directly for potential purchasers of industrial equipment with other auction
companies. Our indirect competitors include equipment manufacturers,
distributors and dealers that sell new or used equipment, and equipment rental
companies. When sourcing equipment to sell at our auctions, we compete with
other auction companies, equipment dealers and brokers, and equipment owners
that have traditionally disposed of equipment in private sales.
Our direct competitors are primarily regional auction companies. Some of our
indirect competitors have significantly greater financial and marketing
resources and name recognition than we do. New competitors with greater
financial and other resources may enter the industrial equipment auction market
in the future. Additionally, existing or future competitors may succeed in
entering and establishing successful operations in new geographic markets prior
to our entry into those markets. They may also compete against us through
Internet-based services. If existing or future competitors seek to gain or
retain market share by reducing commission rates, we may also be required to
reduce commission rates, which may reduce our revenue and harm our operating
results and financial condition.
WE DEPEND ON A NUMBER OF KEY PERSONNEL, AND OUR BUSINESS COULD BE HARMED IF WE
LOST THE SERVICES OF ONE OR MORE OF THEM. WE ALSO HAVE A NEW CEO EFFECTIVE
NOVEMBER 1, 2004
Our future performance and development will depend to a significant extent on
the efforts and abilities of our executive officers and senior managers. The
loss of the services of one or more of these individuals could harm our
business. We do not maintain key man insurance on the lives of any of our
executive officers. Our success will depend largely on our continuing ability to
attract, develop and retain skilled employees in all areas of our business.
Peter J. Blake, our former Senior Vice-President and Chief Financial Officer,
became CEO effective November 1, 2004, replacing David E. Ritchie, who had been
CEO for many years and is one of our founders. Although Mr. Blake has been with
Ritchie Bros. for 14 years, he does not have the same years of experience as Mr.
Ritchie and has not previously been in the CEO role.
OUR OPERATIONS ARE SUBJECT TO SUBSTANTIAL ENVIRONMENTAL AND OTHER REGULATIONS,
WHICH MAY SIGNIFICANTLY INCREASE OUR EXPENSES OR LIMIT OUR OPERATIONS AND
ABILITY TO EXPAND.
A variety of federal, provincial, state and local laws, rules and regulations
apply to our business. These relate to, among other things, the auction
business, imports and exports of equipment, worker safety, privacy of customer
information, and the use, storage, discharge and disposal of environmentally
sensitive materials. Failure to comply with applicable laws, rules and
regulations could result in substantial liability to us, suspension or cessation
of some or all of our operations, restrictions on our ability to expand at
present locations or into new locations, requirements for the acquisition of
additional equipment or other significant expenses or restrictions.
The development or expansion of auction sites depends upon receipt of required
licenses, permits and other governmental authorizations. Our inability to obtain
these required items could harm our business. Additionally, changes or
concessions required by regulatory authorities could result in significant
delays in, or prevent completion of, this development or expansion.
Under some laws regulating the use, storage, discharge and disposal of
environmentally sensitive materials, an owner or lessee of real estate may be
liable for the costs of removal or remediation of hazardous or toxic substances
located on or in, or emanating from, the real estate, and related costs of
investigation and property damage. These laws often impose liability without
regard to whether the owner or lessee knew of, or was responsible for, the
presence of the hazardous or toxic substances. Environmental contamination may
exist at our owned or leased auction sites from prior activities at these
locations or from neighboring properties. In addition, auction sites that we
acquire or lease in the future may be contaminated, and future use of or
conditions on any of our properties or sites could result in contamination. The
costs related to environmental contamination of any of the properties we own or
lease could harm our financial condition and results of operations.
There are restrictions in the United States and Europe that may affect the
ability of equipment owners to transport certain equipment between specified
jurisdictions. One example of these restrictions is environmental certification
requirements in the United States, which prevent non-certified equipment from
being entered into commerce in the United States. If these restrictions were to
materially inhibit the ability of customers to ship equipment to or from our
auction sites, they could reduce our gross auction sales and harm our business.
International bidders and consignors could be deterred from participating in our
auctions if governmental bodies impose additional export or import regulations
or additional duties, taxes or other charges on exports or imports. Reduced
participation by international bidders and consignors could reduce our gross
auction sales and harm our business, financial condition and results of
operations.
OUR INSURANCE MAY BE INSUFFICIENT TO COVER LOSSES THAT MAY OCCUR AS A RESULT OF
OUR OPERATIONS.
We maintain property and general liability insurance. This insurance may not
remain available to us at commercially reasonable rates, and the amount of our
coverage may not be adequate to cover any liability we incur. Our auctions
generally involve the operation of large equipment close to a large number of
people, and an accident could damage our facilities or injure auction attendees.
Any major accident could harm our reputation and 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.
OUR INTERNET-RELATED INITIATIVES MAY NOT IMPROVE OUR RESULTS OVER THE LONG TERM
AND ARE SUBJECT TO TECHNOLOGICAL OBSOLESCENCE AND POTENTIAL SERVICE
INTERRUPTIONS; IN ADDITION, WE MAY NOT BE ABLE TO COMPETE WITH OUR COMPETITORS'
TECHNOLOGIES.
We have invested significant resources in the development of our Internet
presence, including our rbauctionBid-Live Internet bidding service. In spite of
our investment, these new technologies may not result in any material
improvement in our financial condition or results of operations over the long
term and may require further investment. We may also not be able to continue to
adapt our
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RITCHIE BROS. AUCTIONEERS
2004 Annual Report
business to Internet commerce, our Internet technologies may become obsolete,
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 offered over the
Internet, including equipment-searching capabilities, will depend largely on the
continued development and maintenance of our infrastructure and the Internet in
general. The performance of the Internet, as well as some of our internal
hardware and software systems, is critical to our ability to offer online
services. "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. If we were unable to provide services over the Internet at an
acceptable level of performance or reliability, our reputation could be damaged,
which might result in us losing customers, which could result in adverse
consequences for our business.
OUR BUSINESS IS DEPENDENT ON THE AVAILABILITY AND PERFORMANCE OF OUR INTERNAL
TECHNOLOGY INFRASTRUCTURE
The satisfactory performance, reliability and availability of our website,
processing systems and network infrastructure are important to our reputation
and our business. We will need to continue to expand and upgrade our technology,
transaction processing systems and network infrastructure both to meet increased
usage of our rbauctionBid-Live service and other services offered on our website
and to implement new features and functions. If we are unable to expand and
upgrade our systems and infrastructure to accommodate any increases in the use
of our Internet services in a timely fashion, or should we lose access to or the
functionality of our systems for any reasons, our business could be harmed.
We use both internally developed and licensed systems for transaction processing
and accounting, including billing and collections processing. We may need to
improve these systems in order to accommodate the growth in our business. Any
inability to upgrade our technology, transaction processing systems or network
infrastructure to accommodate increased transaction volumes could have adverse
consequences on our business. These difficulties could harm or limit our ability
to expand our business.
We do not currently have a formal disaster recovery plan. If we were subject to
a serious security breach or a threat to business continuity, it could damage
our business and lead to financial losses, which could be material.
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.
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2004 Annual Report
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Ritchie Bros. Auctioneers
Incorporated (the "Company") as at December 31, 2004 and 2003 and the
consolidated statements of operations, shareholders' equity and cash follows for
each of the years in the three-year period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2004 and 2003 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
February 11, 2005
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in thousands of United States dollars,
except share and per share amounts)
Years ended December 31, 2004 2003 2002
------------------------ ----------- ----------- -----------
Auction revenues $ 182,257 $ 161,542 $ 133,552
Direct Expenses: 23,472 22,099 19,684
----------- ----------- -----------
158,785 139,443 113,868
Expenses:
Depreciation and amortization 12,708 11,773 9,208
General and administrative 85,667 71,265 63,786
----------- ----------- -----------
98,375 83,038 72,994
----------- ----------- -----------
Earnings from operations 60,410 56,405 40,874
Other income (expenses):
Interest (3,217) (4,772) (4,302)
Other 1,053 1,060 2,455
----------- ----------- -----------
(2,164) (3,712) (1,847)
----------- ----------- -----------
Earnings before income taxes 58,246 52,693 39,027
Income taxes (note 9):
Current 22,251 14,738 8,097
Future 1,096 1,361 2,559
----------- ----------- -----------
23,347 16,099 10,656
----------- ----------- -----------
Net Earnings $ 34,899 $ 36,594 $ 28,371
----------- ----------- -----------
Net earnings per share (notes 1(l) and 7(e)):
Basic $ 1.02 $ 1.08 $ 0.84
Diluted 1.01 1.07 0.84
----------- ----------- -----------
Weighted average number of shares outstanding 34,160,678 33,795,978 33,586,404
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
/s/ G. Edward Moul /s/ Peter J. Blake
------------------ ------------------
G. EDWARD MOUL PETER J. BLAKE
Director Director
46
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars)
December 31, 2004 2003
------------ -------- ---------
ASSETS
Current assets:
Cash and cash equivalents $132,632 $ 119,009
Accounts receivable 19,281 17,064
Inventory 13,091 9,580
Advances against auction contracts 968 110
Funds committed for debt repayment (note 6) 1,857 13,000
Prepaid expenses and deposits 2,323 2,553
Net investment in lease (note 4) 654 --
Current future income tax asset (note 9) 496 354
-------- ---------
171,302 161,670
Capital assets (note 3) 226,624 210,416
Net investment in lease (note 4) 1,267 --
Funds committed for debt repayment (note 6) 5,108 5,107
Other assets 609 537
Goodwill 37,499 35,632
-------- ---------
$442,409 $ 413,362
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Auction proceeds payable $ 47,581 $ 44,186
Accounts payable and accrued liabilities 45,334 35,150
Income taxes payable 6,383 3,196
Current portion of long-term debt (note 6) 35,133 43,438
-------- ---------
134,431 125,970
Long-term debt (note 6) 10,792 27,350
Other liabilities (note 5) 1,563 2,375
Future income tax liability (note 9) 6,359 4,888
-------- ---------
153,145 160,583
Shareholders' equity:
Share capital (note 7) 76,445 72,794
Additional paid-in capital 7,859 6,075
Retained earnings 183,438 161,183
Foreign currency translation adjustment 21,522 12,727
-------- ---------
289,264 252,779
-------- ---------
$442,409 $ 413,362
======== =========
Commitments and contingencies (note 10)
Subsequent events (note 7(c))
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in thousands of United States dollars)
Foreign
Additional currency Total
Share paid-in Retained translation shareholders'
capital capital earnings adjustment equity
-------- ---------- --------- ----------- -------------
Balance, December 31, 2001 $ 69,134 $ 4,332 $ 101,311 $ (8,844) $ 165,933
Net proceeds on stock options 365 -- -- -- 365
exercised
Stock compensation tax adjustment -- 314 -- -- 314
Net earnings -- -- 28,371 -- 28,371
Foreign currency translation adjustment -- -- -- 4,391 4,391
-------- --------- --------- ----------- -----------
Balance, December 31, 2002 69,499 4,646 129,682 (4,453) 199,374
Net proceeds on stock options 3,295 -- -- -- 3,295
exercised
Stock compensation tax adjustment -- 382 -- -- 382
Stock compensation expense 1,047 1,047
Net earnings -- -- 36,594 -- 36,594
Cash dividends paid (5,093) -- (5,093)
Foreign currency translation adjustment -- -- -- 17,180 17,180
-------- --------- --------- -------- ---------
Balance, December 31, 2003 72,794 6,075 161,183 12,727 252,779
Net proceeds on stock options 3,651 -- -- -- 3,651
exercised
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
======== ======== ========= ======== =========
See accompanying notes to consolidated financial statements.
47
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
Years ended December 31, 2004 2003 2002
-------------------------------------------- ---------- --------- ---------
Cash provided by (used in):
Operations:
Net earnings $ 34,899 $ 36,594 $ 28,371
Items not involving cash:
Depreciation 12,708 11,773 9,208
Stock compensation expense 1,467 1,047 -
Future income taxes 1,329 1,361 2,559
Net gain on disposition of capital assets (229) (17) (758)
Changes in non-cash working capital:
Accounts receivable (2,217) (3,364) (1,325)
Inventory (3,511) (2,357) (4,283)
Advances against auction contracts (858) 69 (92)
Prepaid expenses and deposits 230 (493) (733)
Income taxes payable 3,504 3,578 -
Income taxes recoverable - 2,485 (761)
Auction proceeds payable 3,395 26,826 5,553
Accounts payable and accrued liabilities 10,184 1,606 10,270
Other (2,245) (1,276) (653)
--------- --------- ---------
58,656 77,832 47,356
--------- --------- ---------
Investing activities:
Acquisition of business (1,265) - (8,743)
Capital asset additions (23,448) (16,273) (29,037)
Proceeds on disposition of capital assets 2,151 5,368 4,789
Investment in lease (1,921) - -
Increase in other assets (72) (116) (421)
--------- --------- ---------
(24,555) (11,021) (33,412)
--------- --------- ---------
Financing activities:
Issuance of share capital 3,651 3,295 365
Dividends on common shares (12,644) (5,093) -
Issuance of long term debt 32,500 - 5,000
Repayment of long term debt (58,459) (3,747) (3,628)
Decrease in other liabilities (812) (383) 2,758
Decrease in short term debt - (2,758) (2,556)
Decrease (increase) in funds committed for
debt repayment 11,142 (5,107) (5,107)
--------- --------- ---------
(24,622) (13,793) (3,168)
--------- --------- ---------
Effect of foreign currency rates on cash and
cash equivalents 4,144 3,769 1,913
--------- --------- ---------
Increase in cash and cash equivalents 13,623 56,787 12,689
Cash and cash equivalents, beginning of year 119,009 62,222 49,533
--------- --------- ---------
Cash and cash equivalents, end of year $ 132,632 $ 119,009 $ 62,222
========= ========= =========
Supplemental information:
Interest paid $ 3,092 $ 4,675 $ 3,951
Income taxes paid $ 18,831 $ 8,675 $ 8,861
========= ========= =========
See accompanying notes to consolidated financial statements.
48
RITCHIE BROS. AUCTIONEERS
2004 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, 2004, 2003 and 2002
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 incorporated in July 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 12, 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 3years
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.
(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 earned by the Company acting as an agent for
consignors of equipment are comprised mostly of auction commissions,
but also include net profits on the sale of inventory, incidental
interest income, Internet and proxy purchase fees, and handling fees
on the sale of certain lots. All revenue is recognized when the
auction sale is complete and the Company has determined that the
auction proceeds are collectible.
Auction commissions represent the percentage earned by the Company
on the gross proceeds from equipment sold at auction. The majority
of auction commissions is earned as a 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 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 overtime (see note 10(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.
49
RITCHIE BROS. AUCTIONEERS
2004 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, 2004, 2003 and 2002
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 operations is considered
to be self-sustaining. Accordingly, the financial statements of the
Company's operations that are not located in the United States have
been translated into United States dollars using the exchange rate
at the end of each reporting period for asset and liability amounts
and the average exchange rate for each reporting period for amounts
included in the determination of earnings. Any gains or losses from
the translation of asset and liability amounts have been included in
the foreign currency translation adjustment account, which is
included as a separate component of shareholders' equity. Monetary
assets and liabilities recorded in foreign currencies are translated
into the appropriate functional currency at the rate of exchange in
effect at the balance sheet date. Foreign currency denominated
transactions are translated into the appropriate functional currency
at the exchange rate in effect on the date of the transaction. Any
exchange gain and losses on these transactions 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 future income tax
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 recoverable, income taxes payable, auction proceeds payable,
accounts payable and accrued liabilities and short-term debt,
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 bank term loans
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
7(e)).
(m) Stock-based compensation:
The Company has a stock-based compensation plan, which is described
in note 7(c) and (d). The Company recognizes compensation expense
using the fair value method at the date of grant (note 2). Under the
fair value based method, compensation cost attributable to options
granted to employees and directors is measured at the fair value of
the underlying option at the grant date using the Black-Scholes
option pricing model. Compensation expense is recognized 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.
2. CHANGE IN ACCOUNTING POLICY:
Prior to January 1, 2003, the Company recognized stock-based
compensation expense using the intrinsic value method at the date of
grant of the underlying option. Under the intrinsic value method, no
compensation costs were recognized in the financial statements for
stock options granted to employees and directors at market value.
The Company adopted, on a prospective basis, the fair value based
method to account for employee stock based compensation effective
January 1, 2003. Under the fair value based method, compensation
cost is measured using the Black-Scholes option pricing model at the
date of grant of the option and is expensed over the award's vesting
period (note 7(d)).
For the year ended December 31, 2004, the stock-based compensation
expense (net of future income tax impact of $476,000) was $991,000,
or $0.03 per common share basic and diluted (2003 - $880,000 or
$0.03 per common share basic and diluted). No fair value stock-based
compensation expense has been recognized for any stock option grants
in any years prior to January 1, 2003.
50
RITCHIE BROS. AUCTIONEERS
2004 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, 2004, 2003 and 2002
3. CAPITAL ASSETS:
Accumulated Net book
2004 Cost depreciation value
------------------------------------ --------- ------------ --------
Buildings $ 113,742 $ 18,588 $ 95,154
Land and improvements 100,154 4,125 96,029
Land and buildings under development 13,538 - 13,538
Automotive equipment 11,389 4,272 7,117
Yard equipment 9,540 4,685 4,855
Office equipment 6,169 3,799 2,370
Computer equipment 5,784 2,940 2,844
Computer software 11,114 8,766 2,348
Leasehold improvements 3,321 952 2,369
--------- -------- --------
$ 274,751 $ 48,127 $226,624
========= ======== ========
Accumulated Net book
2003 Cost depreciation value
------------------------------------ --------- ------------ --------
Buildings $ 112,133 $ 15,198 $ 96,935
Land and improvements 94,253 3,453 90,800
Land and buildings under development 3,143 - 3,143
Automotive equipment 10,219 3,766 6,453
Yard equipment 8,558 3,951 4,607
Office equipment 5,716 3,245 2,471
Computer equipment 4,076 2,032 2,044
Computer software 8,751 5,531 3,220
Leasehold improvements 1,430 687 743
--------- -------- --------
$ 248,279 $ 37,863 $210,416
========= ========= ========
During the year, interest of $297,000(2003-$161,000) was capitalized to
the cost of land and building under development.
4. NET INVESTMENT IN LEASE:
During the year ended December 31, 2004, the Company entered into a sales
type lease with a term of two years for the sale of certain redundant
property. Finance income in respect of this lease for the year ended
December 31, 2004 was not significant.
5. ACQUISITION:
On August 1, 2002, the Company acquired certain assets of All Peace
Auctions (2001) Ltd., an industrial and agricultural equipment auctioneer,
and All Peace Auctions Ltd., the owner of the property on which the
majority of the auction business was conducted (collectively, "All
Peace"). All Peace was based in Grande Prairie, Alberta, Canada.
The aggregate purchase price of $9,190,000 was settled through the payment
of $5,409,000 of cash and future annual installments totalling $3,781,000
with a present value of $3,255,000 at the date of acquisition. To reflect
the fact that the future payments are due over time, $526,000 was recorded
as a discount to the long-term liability and is being amortized to
interest expense over the four-year term of repayment. The future
installments are unsecured and non-interest bearing.
Other liabilities are as follows:
2004 2003
-------- --------
Present value of future payments $ 2,752 $ 3,338
Current portion (1,189) (963)
-------- --------
$ 1,563 $ 2,375
======== ========
51
RITCHIE BROS. AUCTIONEERS
2004 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, 2004, 2003 and 2002
6. LONG-TERM DEBT:
2004 2003
---------- ----------
Term loans, unsecured, bearing interest between 5.95% and 7.91%, due in minimum annual
installments of $2.9 million ($1 .0 million towards principal, $1.9 million towards
a sinking fund), with final payments occurring in 2005 and 2006. $ 17,000 $ 17,250
Revolving loans, denominated in Canadian dollars, unsecured, bearing interest at the
Canadian Prime Rate plus 0.25%, due in monthly installments of interest only, with the
full amount of the principal due in 2005. 12,505 11,568
Revolving loans, unsecured, bearing interest between 3.165% and 3.175%, due in monthly
installments of interest only, with the full amount of the principal due in 2005. 15,500 -
Term loan, denominated in Australian dollars, secured by deeds of trust on specific
property, bearing interest between the Australian prime rate and 6.5%, due in quarterly
installments of AUD75,000, plus interest, with final payment occurring in 2008. 920 1,111
Revolving loans, unsecured, bearing interest at 1.95%, due in minimum annual installments
of $5 million ($1.75 million towards principal, $3.25 million towards a sinking fund)
plus interest, with the final payment occurring in 2004. - 28,000
Term loans, unsecured, bearing interest between 2.60% and 7.91%, due in minimum annual
installments of $500,000 plus interest, with final payment occurring in 2005.
The loans were repaid in full in 2004. - 8,500
Term loan denominated in Euros, secured by deeds of trust on specific property, bearing
interest at the Amsterdam Interbank Offered Rate plus 0.88%, due in quarterly installments
of EUR 56,723 including interest, with the final payment occurring in 2013.
The loan was repaid in full in 2004. - 4,359
---------- ----------
45,925 70,788
Current portion (35,133) (43,438)
---------- ----------
Non-current portion $ 10,792 $ 27,350
========== ==========
Funds committed for debt payments (6,965) (18,107)
---------- ----------
$ 3,827 $ 9,243
========== ==========
As at December 31, 2004, principal repayments including sinking fund
requirements are as follows for the next five years:
2005 $ 35,133
2006 10,342
2007 235
2008 215
2009 -
--------
$ 45,925
========
The Company expects to refinance certain of its long-term debt in 2005. If
this occurs, the funds committed for debt repayment recorded in current
assets on the balance sheet, in excess of any amounts used to repay debt,
will become cash and cash equivalents and available for general purposes.
52
RITCHIE BROS. AUCTIONEERS
2004 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, 2004, 2003 and 2002
7. 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, 2001 33,534,460
Issued for cash, pursuant to stock options exercised 84,204
----------
Issued and outstanding, December 31, 2002 33,618,664
Issued for cash, pursuant to stock options exercised 348,980
----------
Issued and outstanding, December 31, 2003 33,967,544
Issued for cash, pursuant to stock options exercised 294,656
----------
Issued and outstanding, December 31, 2004 34,262,300
==========
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 31,2004, there were
1,326,034 (2003 -1,616,234) shares authorized and available for
grants of options under the stock option plan. Stock option activity
for 2002, 2003 and 2004 is presented below:
Number of Weighted average
options outstanding exercise price
------------------- --------------
Outstanding, December 31, 2001 753,438 $ 9.81
Granted 186,400 13.05
Exercised (84,204) 4.34
-------- ---------
Outstanding, December 31, 2002 855,634 11.06
Granted 308,800 15.53
Cancelled (2,000) 15.53
Exercised (348,980) 9.45
-------- ---------
Outstanding, December 31, 2003 813,454 13.32
Granted 292,000 26.47
Cancelled (1,800) 26.46
Exercised 294,656) 12.39
-------- ---------
Outstanding, December 31, 2004 808,998 $ 18.38
======== =========
Exercisable, December 31, 2004 534,798 $ 14.44
======== =========
The options outstanding at December 31, 2004 expire on dates ranging
to September 22, 2014.
The following is a summary of stock options outstanding and
exercisable at December 31, 2004;
Options outstanding Options exercisable
---------------------------------------- ------------------------------
Range of Weighted average Weighted average Number Weighted average
exercise prices Number outstanding remaining life (year) exercise price exercisable exercise price
---------------- ------------------ --------------------- ---------------- ----------- ----------------
$11.675 - $13.050 222,800 6.6 $ 12.30 214,800 $ 12.30
$13.344 - $15.525 295,998 7.3 15.01 295,998 15.01
$26.460 - $28.170 290,200 9.1 26.47 24,000 26.46
------- --- -------- ------- ---------
808,998 534,798
======= =======
Subsequent to December 31,2004, the Company granted options to
purchase a total of 200,800 of its common shares to certain employees
and directors of the Company. The options have an exercise price of
$32.41 and an expiry date of January 25, 2015.
53
RITCHIE BROS. AUCTIONEERS
2004 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, 2004, 2003 and 2002
7. SHARE CAPITAL (CONTINUED):
(d) Stock-based compensation:
Prior to January 1, 2003, the Company used the intrinsic value
method to account for stock-based compensation awards. This method
did not result in any compensation expense in 2002. Had compensation
expense for option grants made under the Company's stock option plan
during the year ended December 31,2002 been recorded in accordance
with the fair value method at the applicable grant dates, the
Company's net earnings for 2002 would have been as indicated by the
pro forma amounts below;
Per share amount
Net Earnings Basic Diluted
------------ ------- -------
Net earnings - as reported $ 28,371 $ 0.84 $ 0.84
Stock-based compensation expense (727) (0.02) (0.02)
---------- ------- -------
Net earnings - pro forma $ 27,644 $ 0.82 $ 0.82
---------- ------- -------
During 2004, the Company recognized compensation cost of $1,467.000
(2003 - $1,047,000) in respect of options granted under its stock
option plan. This amount was calculated in accordance with the fair
value method of accounting.
For the purposes described above, the fail 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:
2004 2003 2002
------- ------- -------
Risk free interest rate 3.0% 3.1% 4.9%
Expected dividend yield 1.15% 0% 0%
Expected lives of options 5 years 5 years 5 years
Expected volatility 19.6% 18.3% 27,0%
The weighted average grant date fair value of options granted
during the year ended December 31, 2004 was $5.34 per option (2003
- $3.67; 2002 - $4.37). 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, 2004 Earnings Shares Per share amount
------------------------------ --------- ---------- ----------------
Basic net earnings per share $ 34,899 34,160,678 $ 1.02
Effect of dilutive securities:
Stock options - 338,544 (0.01)
--------- ---------- -------
Diluted net earnings per share $ 34,899 34,499,222 $ 1.01
--------- ---------- -------
Year ended December 31, 2003 Earnings Shares Per share amount
------------------------------ --------- ---------- ----------------
Basic net earnings per share $ 36,594 33,795,978 $ 1.08
Effect of dilutive securities:
Stock options _ 341,574 (0.01)
--------- ---------- -------
Diluted net earnings per share $ 36,594 34,137,552 $ 1.07
--------- ---------- -------
Year ended December 31, 2002 Earnings Shares Per share amount
------------------------------ --------- ---------- ----------------
Basic net earnings per share $ 28,371 33,586,404 $ 0.84
Effect of dilutive securities:
Stock options - 244,444 -
--------- ---------- -------
Diluted net earnings per share $ 28,371 33,830,848 $ 0.84
--------- ---------- -------
54
RITCHIE BROS. AUCTIONEERS
2004 AnnualReport
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, 2004, 2003 and 2002
8. SEGMENTED INFORMATION:
The Company's principal business activity is the sale of consignment and
self-owned equipment at auctions. This business represents a single
reportable segment.
The Company determines its activities by geographic segment based on the
location of its auctions. Summarized information by geographic segment is
as follows:
United States Canada Europe Other Combined
------------- ------ ------ ----- --------
Year ended December 31, 2004:
Auction revenues $104,618 $ 36,258 $ 26,988 $ 14,393 $182,257
Capital assets and goodwill 145,208 78,354 26,048 14,513 264,123
Year ended December 31, 2003:
Auction revenues $ 92,273 $ 30,752 $ 21,262 $ 17,255 $161,542
Capital assets and goodwill 136,624 72,277 24,086 13,061 246,048
Year ended December 31, 2002:
Auction revenues $ 84,348 $ 17,650 $ 15,678 $ 15,876 $133,552
Capital assets and goodwill 135,921 60,177 20,189 11,559 227,846
9. 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:
2004 2003 2002
-------- -------- --------
Statutory federal and state tax rate in the United States 40% 40% 40%
-------- -------- --------
Expected income tax expense $ 23,298 $ 21,077 $ 15,611
Differences:
Earnings taxed in low rate jurisdictions (3,014) (4,806) (5,175)
Realized foreign exchange gain 2,106 - -
Other 957 (172) 220
-------- -------- --------
Actual income tax expense $ 23,347 $ 16,099 $ 10,656
======== ======== ========
Future income tax assets and liabilities are as follows:
2004 2003
------- ------
Future income tax assets (liabilities)
Working capital $ 496 $ 354
Capital assets 680 513
Stock-based compensation 277 251
Unused tax losses 1,326 1,070
Other 1,407 926
------- ------
Total future income Tax assets 4,186 3,114
Valuation allowance (168) (168)
------- ------
Net future income tax assets 4,018 2,946
------- ------
Future income tax liabilities arising from temporary differences between
the tax basis of net assets and their carrying value:
Capital assets (3,754) (1,328)
Goodwill (3,555) (4,319)
Other (2,572) (1,833)
-------- -------
Total future income tax liabilities (9,881) (7,480)
-------- -------
Net future income tax liability (5,863) (4,534)
Net current future income tax asset 496 354
-------- -------
Net non-current future income tax liability $ (6,359) $(4,888)
-------- -------
55
RITCHIE BR0S. AUCTIONEERS
2004 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, 2004, 2003 and 2002
10. COMMITMENTS AND CONTINGENCIES:
(a) Operating leases:
The Company is party to certain operating leases. These operating
leases relate to auction sites and offices located in the United
Arab Emirates, Mexico, the United States, Canada, Australia, China
and Singapore. The future minimum lease payments as at December
31,2004 are approximately as follows:
2005 $ 1,330
2006 1,080
2007 519
2008 483
2009 242
Thereafter -
-----------
Total rent expenses in respect of these leases for the year ended
December 31, 2004 was $1,406,000 (2003 - $1,304,000; 2002 -
$1,069,000).
(b) Contingencies:
Certain of the Company's operating leases for auction sites contain
clauses that require the Company to return the auction site to the
state and condition in which it was at the inception of the lease if
the Company terminates the lease or does not renew it at the end of
the lease term. The occurrence and amount of the potential liability
for these site restoration costs is not determinable at the date of
these financial statements.
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, 2004 the Company had outstanding guarantees under
contract totaling $6,203,000 (undiscounted and before estimated
proceeds from sale at auction) for industrial equipment to be sold
prior to March 31,2005 (December 31, 2003 - $5,650,000). The Company
also had guarantees under contract totaling $14,726,000 relating to
agricultural sales to be held prior to June 16, 2005 (December 31,
2003 - $4,136,000). The Company has not recorded a liability with
respect to these guarantee contracts.
11. TRANSACTIONS WITH RELATED PARTIES:
During the year ended December 31, 2004, the Company paid $758,000 (2003 -
$597,000; 2002 - $537,000) to a company controlled by the Chairman of the
Company's Board of Directors. The costs were incurred pursuant to
agreements, approved by the Company's Board of Directors, by which the
related company agrees to provide meeting rooms, accommodations, meals and
recreational activities at its facilities on Stuart Island in British
Columbia, Canada, for certain of the Company's customers and guests. The
agreements set forth the fees and costs per excursion, which are based on
market prices for similar types of facilities and excursions. The Company
believes that the terms of the agreements were at least as favorable as
could have been obtained from an independent third party. The Company has
entered into similar agreements with the related party in the past and
intends to do so in the future.
12. 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, 2004, 2003
and 2002, net earnings in accordance with Canadian GAAP was not
significantly different from net earnings had they been presented in
accordance with United States GAAP.
US GAAP requires the preparation of a statement of comprehensive income.
Comprehensive income is defined as the change in equity of a business
enterprise during the period from transactions and other events and
circumstances from non-owner sources. The statement of comprehensive
income reconciles the reported net earnings to the comprehensive income
amount as follows:
2004 2003 2002
--------- --------- -----------
Net earnings in accordance with Canadian and United States GAAP $ 34,899 $ 36,594 $ 28,371
Other comprehensive income:
Foreign currency translation adjustment 8,795 17,180 4,391
--------- --------- -----------
Comprehensive income in accordance with United States GAAP $ 43,694 $ 53,774 $ 32,762
========= ========= ===========
Accumulated other comprehensive income (loss), which under United states
GAAP is Presented as a separete component of shareholder's equity, is
comprised of the following:
2004 2003 2002
--------- --------- ----------
Foreign currency translation adjustment:
Balance, beginning of year $ 12,727 $ (4,453) $ (8,844)
Current period change 8,795 17,180 4,391
--------- --------- ---------
Balance, end of year $ 21,522 $ 12,727 $ (4,453)
========= ========= =========
56
RICHIE BROS. AUCTIONEERS
2004 Annual Report
SUPPLEMENTAL QUARTERLY DATA
(Unaudited; tabular dollar amounts expressed in thousands of United States
Dollars, except per share data)
Gross
Auction Auction Net Net Earnings Per Share(6) Closing(6)
2004 Sales Revenues Earnings Basic Diluted Stock Price
----------------------------------------------------------------------------------------------------------------
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(1) 0.05(1) 0.05(1) 30.65
4th quarter 549,796 57,142 11,335(1) 0.34(1) 0.33(1) 33.06
-------------------------------------------------------------------------------
$ 1,789,402 $ 182,257 $ 34,899(1)(2) $ 1.02(1) $ 1.01(1)
===============================================================================
Gross
Auction Auction Net Net Earnings per Share Closing
2003 Sales Revenues Earnings Basic Diluted Stock Price
----------------------------------------------------------------------------------------------------------------
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 277,332 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(2) $ 1,08 $ 1.07
===============================================================================
Gross
Auction Auction Net Net Earnings per Share Closing
2002 Sales Revenues Earnings Basic Diluted Stock Price
----------------------------------------------------------------------------------------------------------------
1st quarter $ 293,208 $ 29,317 $ 5,363 $ 0.16 $ 0.16 $ 13.58
2nd quarter 414,056 38,864 10,775(3) 0.32(3) 0.32(3) 15.61
3rd quarter 208,071 20,991 1,111 0.03 0.03 14.90
4rh quarter 460,871 44,380 11,122 0.33 0.33 16.18
-------------------------------------------------------------------------------
$ 1,376,206 $ 133,552 $ 28,371(4) $ 0.84 $ 0.84
===============================================================================
Gross
Auction Auction Net Net Earnings per Share Closing
2001 Sales Revenues Earnings Basic Diluted Stock Price
----------------------------------------------------------------------------------------------------------------
1st quarter $ 289,724 $ 25,445 $ 3,062 $ 0.09 $ 0.09 $ 11.75
2nd Quarter 373,990 35,025 6,351(5) 0.19(5) 0.19(5) 13.75
3rd quarter 179,294 16,851 (955) (0.03) (0.03) 12.43
4th quarter 447,889 39,670 11,596 0.35 0.34 12.44
-------------------------------------------------------------------------------
$ 1,290,897 $ 116,991 $ 20,054(4)(5) $ 0.60(5) $ 0.59(5)
===============================================================================
Gross
Auction Auction Net Net Earnings per Share Closing
2000 Sales Revenues Earnings Basic Diluted Stock Price
----------------------------------------------------------------------------------------------------------------
1st quarter $ 289,928 $ 26,769 $ 3,609 $ 0.11 $ 0.11 $ 12.75
2nd quarter 353,354 29,570 6,109 0.18 0.18 11.97
3rd quarter 231,550 21,554 1,503 0.04 0.04 10.69
4th quarter 358,142 28,232 5,984 0.18 0.18 10.38
-------------------------------------------------------------------------------
$ 1,232,974 $ 106,125 $ 17,205(6) $ 0.51 $ 0.51
===============================================================================
(1) 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).
(2) The Company recorded stock-based compensation expense of $1.5 million
($1.0 million net of income taxes) in 2004 and $1.0 million ($0.9 million
net of income taxes) in 2003 relating to the prospective adoption of the
new stock-based compensation accounting policy on January 1, 2003.
(3) Net earnings for the second quarter of 2002 include non-recurring income
of $0.8 million or $0.02 per share.
(4) The Company stopped amortizing goodwill effective January 1, 2002 in
accordance with new accounting pronouncements. The amortization expense in
prior years was $1.7 million in 2001 and $1.7 million in 2000.
(5) Excluding the impact of $2.0 million in withholding taxes paid on an
intercompany dividend in the second quarter of 2001, net earnings for the
quarter would have been $8.4 million ($0.25 per share, basic or diluted)
and net earnings for the full year would have been $22.1 million ($0.66
per basic share, $0.65 per diluted share).
(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.
57
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
SELECTED FINANCIAL AND OPERATING DATA
(Tabular dollar amounts expressed in thousands of United States dollars, except
per share data)
Years ended December 31, 2004 2003 2002 2001 2000
-------------------------------- ------------- ------------- -------------- ------------- -------------
GROSS AUCTION SALES (UNAUDITED) $ 1,789,402 $ 1,559,393 $ 1,376,206 $ 1,290,897 $ 1,232,974
============= ============= ============== ============= =============
STATEMENT OF OPERATIONS DATA:
Auction revenues $ 182,257 $ 161,542 $ 133,552 $ 116,991 $ 106,125
Direct expenses (23,472) (22,099) (19,684) (18,861) (17,936)
------------- ------------- -------------- ------------- -------------
158,785 139,443 113,868 98,130 88,189
Depreciation and amortization 112,708) (11,773) (9,208)(2) (9,076)(2) (7,761)(2)
General and administrative (85,667)(1) (71,265)(1) (63,786) (56,517) (52,942)
------------- ------------- -------------- ------------- -------------
Earnings from operations 60,415 56,405 40,874 32,537 27,486
Interest expense (3,217) (4,772) (4,302) (4,024) (3,378)
Other income 1,053 1,060 2,455(3) 1,409 1,252
------------- ------------- -------------- ------------- -------------
Earnings before income taxes 58,246 52,693 39,027 29,922 25,360
Income taxes (23,347)(4) (16,099) (10,656) (9,868)(4) (8,155)
------------- ------------- -------------- ------------- -------------
Net earnings $ 34,899 $ 36, 594 $ 28,371 $ 20,054 $ 17,205
============= ============= ============== ============= =============
Net earnings per share-diluted(5) $ 1.01 $ 1.07 $ 0.84 $ 0.59 $ 0.51
============= ============= ============== ============= =============
BALANCE SHEET DATA (END OF YEAR):
Working capital (including cash) $ 36,871 $ 35,700 $ 25,443 $ 19,279 $ 30,857
Total assets 442,409 413,362 329,136 275,543 268,353
long-term debt 10,792 27,350 62,612 61,217 57,821
Total shareholders' equity 289,264 252,779 199,374 165,933 148,764
SELECTED OPERATING DATA (UNAUDITED):
Auction revenues as percentage
of gross auction sales 10.19% 10.36% 9.70% 9.06% 8.61%
Number of consignors 24,868 23,480 20,919 19,196 18,177
Number of bidders 202,571 181,039 156,010 139,339 122,154
Number of buyers 58,858 55,946 50,126 46,647 41,940
Number of permanent
auction sites (end of year) 22 22 22 21 20
------------- ------------- -------------- ------------- -------------
(1) General and administrative expenses in 2003 include stock-based
compensation expense of $1.0 million ($0.9 million net of income taxes, or
$0.03 per diluted share) relating to the prospective adoption of the
stock-based compensation accounting policy. The Company adopted the fair
value method of accounting effective January 1, 2003. Stock-based
compensation expense in 2004 was $1.5 million ($1.0 million net of income
taxes).
(2) The Company stopped amortizing goodwill effective January 1, 2002 in
accordance with new accounting pronouncements. The amortization expense in
prior years was $1.7 million in 2001 and $1.7 million in 2000.
(3) Other income in 2002 includes $1.0 million of non-recurring income.
(4) 2004 income tax expense includes $2.1 million relating to realized foreign
exchange gains at the subsidiary level on certain term debt that came due
in 2004, which is not expected to recur in future periods. 2001 income tax
expense includes a charge of $2.0 million for withholding taxes paid on an
intercompany dividend.
(5) 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.
58
RILTCHIE BROS, AUCTIONEERS
2004 Annual Report
[PHOTO]
BOARD OF DIRECTORS
Eric Patel
C. Russell Cmolik
Peter J. Blake
Charles E. Croft
David E. Ritchie
CHAIRMAN
Beverley A. Briscoe
G. Edward Moul
[PHOTO]
TORONTO STOCK EXCHANGE
LISTING CEREMONY
Robert S. Armstrong
VICE PRESIDENT FINANCE, CHIEF FINANCIAL OFFICER,
CORPORATE SECRETARY
David E. Ritchie
CHAIRMAN
Peter J. Blake
CHIEF EXECUTIVE OFFICER
Sylvain Touchette
VICE PRESIDENT EASTERN CANADA DIVISION
Jeremy M.T. Black
SENIOR MANAGER, FINANCE
59
RITCHIE BROS. AUCTIONEERS
2004 Annual Report
SHAREHOLDER INFORMATION
ADDRESS
Ritchie Bros. Auctioneers Incorporated
6500 River Road
Richmond, BC
Canada, V6X4G5
Telephone: 604.273.7564
Canada (toll-free) 1.800.663.1739
USA (toll-free) 1.800.663.8457
Facsimile: 604.273.6873
Website: www.rbauction.com
BOARD OF DIRECTORS
David E.Ritchie Chairman
Peter J. Blake Director & Chief Executive Officer
C. Russell Cmolik Director
Charles E. Croft Director
G. Edward Moul Director
Eric Patel Director
Beverley A. Briscoe Director
Mr. Moul serves as Lead Independent Director. Shareholders wishing to speak to
the Lead Independent Director should call 604.233.6153 or send an email to
leaddirector@rbauction.com.
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
Robert K. Mackay* Executive VP
Michael J. Murray VP - Northwest Division
David D. Nicholson VP - South Central, Mexico and South America
Divisions
Victor E. Pospiech VP - Human Resources & Administration
C. Denis Prevost VP - National Accounts
Michael G. Ritchie VP - Western Canada Division
Roger W. Rummel* Senior VP
J. Dean Siddle VP - Senior Valuation Analyst
Steven Simpson VP - Southwest Division
R. Clay Tippett VP - Marketing & Customer Relations
Sylvain M. Touchette VP - Eastern Canada Division
Guylain Turgeon Managing Director-European Operations
Randall J. Wall* President & Chief Operating Officer
Robert K. Whitsit * Senior VP - Southeast and Northeast Divisions
* Member of Executive Committee
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 GENERAL MEETING
The Annual General Meeting of the Company's shareholders will be held at 11am on
Friday April 15, 2005 at the Best Western Richmond Hotel, 7551 Westminster
Highway, Richmond, BC V6X 1A3.
STOCK EXCHANGES
Ritchie Bros. Auctioneers Incorporated is listed on the New York Stock Exchange
and the Toronto Stock Exchange and on both exchanges, trades under the symbol
"RBA".
TRANSFER AGENT
Communications concerning transfer requirements, address changes and lost
certificates should be directed to:
Computershare Trust Company of Canada
510 Burrard Street
2nd Floor
Vancouver, British Columbia
Canada V6C 3B9
Telephone: 604.661.0226
Canada and USA (toll-free): 1.800.564.6253
Facsimile: 604.661.9401
Facsimile (toll-free): 1.800.249.7775
Email: kimwong@computershare.com
Self-service www.computershare.com
Co-agent in the United States:
Computershare Trust Company of New York
New York, NY
AUDITORS
KPMG LLP
Vancouver, Canada
60
AUCTION SITES
[CANADA MAP]
VANCOUVER, BC (1)
Tel+1.604.580.0166 Fax +1.604.580.1245
PRINCE GEORGE, BC (2)
Tel+1.250.963.8491 Fax +1.250.963.8135
GRANDE PRAIRIE, AB (3)
Tel+1.780.538.1100 Fax +1.780.539.7230
EDMONTON, AB (4)
Tel+1.780.955.2486 Fax +1.780.955.2662
TORONTO, ON (5)
Tel+1.905.857.2422 Fax +1.905.857.5195
MONTREAL, QC (6)
Tel+1.450.464.2888 Fax +1.450.464.4460
TRURA,NS (7)
Tel+1.902.895.3700 Fax +1.902.662.2272
[USA MAP]
OLYMPIA,WA (8)
Tel+1.360.956.1500 Fax +1.360.956.1508
SACRAMENTO, CA (9)
Tel+1.530.724.3900 Fax +1.530.724.3270
LOS ANGELES, CA (10)
Tel+1.951.940.9441 Fax +1.951.940.9442
PHOENIX, AZ (11)
Tel+1.602.269.5631 Fax +1.602.269.5674
ALBUQUERQUE, NM (12)
Tel+1.505.836.0738 Fax +1.505.839.2070
DENVER, CO (13)
Tel+1.303.659.3962 Fax +1.303.659.2902
FORT WORTH, TX (14)
Tel+1.817.237.6544 Fax +1.817.238.9898
HOUSTON, TX (15)
Tel+1.713.455.5200 Fax +1.713.455.5270
KANSAS CITY, MO (16)
Tel+1.816.318.9159 Fax +1.816.318.9124
MINNEAPOLIS, MN (17)
Tel+1.952.469.1700 Fax +1.952.469.1732
CHICAGO, IL (18)
Tel+1.815.941.6400 Fax +1.815.942.8053
ATLANTA, GA (19)
Tel+l.770.304.3355 Fax +1.770.304.3366
STATESVILLE, NC (20)
Tel+1.704.873.6633 Fax +1.704.873.3394
ORLANDO, FL (21)
Tel+1.863.420.9919 Fax +1.863.420.2447
NORTH EAST, MD (22)
Tel+1.410.287.4330 Fax +1.410.287.4332
[MEXICO MAP]
TOLUCA, MEX (23)
Tel+52.72.22.1129.22
Fax +52.72.22.1129.40
[SOUTH EAST ASIA MAP]
SINGAPORE (24)
Tel+65.6477.9222 Fax +65.6477.9233
[EUROPE MAP]
MOERDIJK, NLD (25)
Tel +31.168.39.22.00 Fax +31.168.39.22.50
VALENCIA, ESP (26)
Tel +34.962.69.85.00 Fax +34.962.67.35.65
[MIDDLE EAST MAP]
DUBAI, UAE (27)
Tel+971.4.883.8398 Fax +971.4.883.8495
[AUSTRALIA MAP]
GOLD COAST, QLD (28)
Tel +61.7.3382.4444 Fax +61.7.3382.4433
MELBOURNE, VIC (29)
Tel +61.3.9369.7322 Fax +61.3.9369.7344
[RITCHIE BROS. LOGO]
Ritchie Bros. Auctioneers
6500 River Road
Richmond, BC
Canada V6X 4G5
Tel: 604.273.7564
Fax: 604.273.6873
WWW.RBAUCTION.COM