10-Q 1 v452443_10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
 
OR
 
¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

          

Commission file number: 001-13425

 

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Ritchie Bros. Auctioneers Incorporated

 (Exact Name of Registrant as Specified in its Charter)

 

Canada   N/A
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
9500 Glenlyon Parkway    
Burnaby, British Columbia, Canada   V5J 0C6
(Address of Principal Executive Offices)   (Zip Code)

 

(778) 331-5500

(Registrant’s Telephone Number, including Area Code)

 

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “Accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

      Large Accelerated Filer x     Accelerated Filer ¨    Non-Accelerated Filer ¨    Smaller Reporting Company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date: 106,679,740 common shares, without par value, outstanding as of November 8, 2016.

 

 

 

 

RITCHIE BROS. AUCTIONEERS INCORPORATED

FORM 10-Q

For the quarter ended September 30, 2016

 

INDEX

 

Cautionary Note Regarding Forward-Looking Statements  1
       
PART I – FINANCIAL INFORMATION
ITEM 1:  Consolidated Financial Statements  3
ITEM 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations  41
ITEM 3:  Quantitative and Qualitative Disclosures About Market Risk  78
ITEM 4:  Controls and Procedures  78
       
PART II – OTHER INFORMATION
ITEM 1:  Legal Proceedings  79
ITEM 1A:  Risk Factors  79
ITEM 2:  Unregistered Sales of Equity Securities and Use of Proceeds  81
ITEM 6:  Exhibits  82
       
SIGNATURES

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

The information discussed in this Quarterly Report on Form 10-Q of Ritchie Bros. Auctioneers Incorporated (“Ritchie Bros.”, the “Company”, “we” or “us”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Canadian securities laws. These statements are based on our current expectations and estimates about our business and markets, and include, among others, statements relating to:

 

·our future strategy, objectives, targets, projections, and performance;

 

·our ability to drive shareholder value;

 

·market opportunities;

 

·our internet initiatives and the level of participation in our auctions by internet bidders, and the success of EquipmentOne and our other online marketplaces;

 

·our ability to grow our core auction business, including our ability to increase our market share among traditional customer groups, including those in the used equipment market, and do more business with new customer groups in new sectors;

 

·the impact of our new initiatives, services, investments, and acquisitions on us and our customers;

 

·our ability to integrate our acquisitions;

 

·potential future mergers and acquisitions, including the planned merger of Ritchie Bros. and IronPlanet Holdings, Inc.;

 

·ability for the planned merger of Ritchie Bros. and IronPlanet Holdings, Inc. to accelerate our customer-centric, multi-channel diversification strategy, enhance online offerings, penetrate into larger, additional sectors, and significantly increase our revenue and net income using the strength of our balance sheet;

 

·potential future strategic alliances, including the planned alliance between Ritchie Bros., IronPlanet, Inc., and Caterpillar Inc.

 

·ability for the planned alliance between Ritchie Bros., IronPlanet, Inc., and Caterpillar Inc. to significantly strengthen our relationship with Caterpillar dealers;

 

·our ability to add new business and information solutions, including, among others, our ability to maximize and integrate technology to enhance our existing services and support additional value-added service offerings;

 

·the effect of Original Equipment Manufacturer production on our Gross Auction Proceeds (“GAP”) (as defined under “Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations”);

 

·the supply trend of equipment in the market and the anticipated price environment for late model equipment, as well as the resulting effect on our business and GAP;

 

·the growth potential of Ritchie Bros. Financial Services, as well as expectations towards and significance of its service offerings and geographical expansion in the near future;

 

·fluctuations in our quarterly revenues and operating performance resulting from the seasonality of our business;

 

·our ability to grow our sales force, minimize turnover, and improve Sales Force Productivity (as described below);

 

·our ability to implement new performance measurement metrics to gauge our effectiveness and progress;

 

·the relative percentage of GAP represented by straight commission or underwritten (guarantee and inventory) contracts, and its impact on revenues and profitability;

 

·our Revenue Rates (as described below), the sustainability of those rates, the impact of our commission rate and fee changes, and the seasonality of GAP and revenues;

 

·our future capital expenditures and returns on those expenditures;

 

·the proportion of our revenues, operating expenses, and operating income denominated in currencies other than the United States (“U.S.”) dollar or the effect of any currency exchange and interest rate fluctuations on our results of operations;

 

Ritchie Bros. 1

 

 

·financing available to us, our ability to refinance borrowings, and the sufficiency of our working capital to meet our financial needs; and

 

·our ability to satisfy our present operating requirements and fund future growth through existing working capital and credit facilities.

 

Forward-looking statements are typically identified by such words as “anticipate”, “believe”, “could”, “continue”, “estimate”, “expect”, “intend”, “may”, “ongoing”, “plan”, “potential”, “predict”, “will”, “should”, “would”, “could”, “likely”, “generally”, “future”, “period to period”, “long-term”, 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 discussed in “Part II, Item 1A: Risk Factors” of this Quarterly Report on Form 10-Q and in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com, are among those that we consider may affect our performance materially or could cause our actual financial and operational results to differ significantly from our expectations. Except as required by applicable securities law and regulations of relevant securities exchanges, we do not intend to update publicly any forward-looking statements, even if our expectations have been affected by new information, future events or other developments. You should consider our forward-looking statements in light of the factors listed or referenced under “Risk Factors” herein and other relevant factors.

 

Ritchie Bros. 2

 

  

PART I

 

ITEM 1:CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Condensed Consolidated Income Statements

(Expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Revenues (note 6)  $128,876   $109,318   $419,626   $380,413 
Costs of services, excluding depreciation and amortization (note 7)   14,750    12,045    49,821    40,681 
    114,126    97,273    369,805    339,732 
Selling, general and administrative expenses (note 7)   69,000    58,170    211,153    187,165 
Acquisition-related costs (note 7)   4,691    -    5,440    - 
Depreciation and amortization expenses (note 7)   10,196    10,017    30,560    31,402 
Gain on disposition of property, plant and equipment   (570)   (234)   (1,017)   (1,200)
Impairment loss (note 8)   28,243    -    28,243    - 
Foreign exchange loss (gain)   281    718    332    (2,051)
                     
Operating income   2,285    28,602    95,094    124,416 
                     
Other income (expense):                    
Interest income   369    548    1,354    2,075 
Interest expense   (934)   (1,239)   (3,357)   (3,816)
Equity income (note 19)   213    363    1,209    769 
Other, net   247    739    1,214    2,370 
    (105)   411    420    1,398 
                     
Income before income taxes   2,180    29,013    95,514    125,814 
                     
Income tax expense (recovery) (note 9):                    
Current   9,652    8,700    35,767    38,778 
Deferred   (2,472)   (934)   (5,838)   (4,167)
    7,180    7,766    29,929    34,611 
                     
Net income (loss)  $(5,000)  $21,247   $65,585   $91,203 
                     
Net income (loss) attributable to:                    
Stockholders  $(5,137)  $20,825   $63,979   $89,685 
Non-controlling interests   137    422    1,606    1,518 
   $(5,000)  $21,247   $65,585   $91,203 
                     
Earnings (loss) per share attributable to stockholders (note 11):                    
Basic  $(0.05)  $0.19   $0.60   $0.84 
Diluted  $(0.05)  $0.19   $0.60   $0.83 
                     
Weighted average number of shares
outstanding (note 11):
                    
Basic   106,622,376    107,137,417    106,595,088    107,041,819 
Diluted   107,525,051    107,517,888    107,221,390    107,433,359 

 

See accompanying notes to the condensed consolidated financial statements.

 

Ritchie Bros. 3

 

 

Condensed Consolidated Statements of Comprehensive Income

(Expressed in thousands of United States dollars)

(Unaudited)

 

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
                 
Net income (loss)  $(5,000)  $21,247   $65,585   $91,203 
Other comprehensive income (loss), net of income tax:                    
Foreign currency translation adjustment   590    (10,817)   7,990    (33,903)
                     
Total comprehensive income (loss)  $(4,410)  $10,430   $73,575   $57,300 
                     
Total comprehensive income (loss) attributable to:                    
Stockholders   (4,550)   10,115    71,798    56,075 
Non-controlling interests   140    315    1,777    1,225 
   $(4,410)  $10,430   $73,575   $57,300 

 

See accompanying notes to the condensed consolidated financial statements.

 

Ritchie Bros. 4

 

 

Condensed Consolidated Balance Sheets

(Expressed in thousands of United States dollars, except share data)

(Unaudited)

 

 

   September 30,   December 31, 
   2016   2015 
Assets          
Current assets:          
Cash and cash equivalents  $230,984   $210,148 
Restricted cash   83,413    83,098 
Trade and other receivables   192,420    59,412 
Inventory (note 14)   42,371    58,463 
Advances against auction contracts   3,839    4,797 
Prepaid expenses and deposits   12,672    11,057 
Assets held for sale (note 15)   390    629 
Income taxes receivable   5,882    2,495 
    571,971    430,099 
Property, plant and equipment (note 16)   528,634    528,591 
Equity-accounted investments (note 19)   7,649    6,487 
Other non-current assets   4,770    3,369 
Intangible assets (note 17)   66,681    46,973 
Goodwill (note 18)   92,307    91,234 
Deferred tax assets   15,475    13,362 
   $1,287,487   $1,120,115 
           
Liabilities and Equity          
Current liabilities:          
Auction proceeds payable  $274,741   $101,215 
Trade and other payables   122,288    120,042 
Income taxes payable   4,299    13,011 
Short-term debt (note 20)   39,013    12,350 
Current portion of long-term debt (note 20)   -    43,348 
    440,341    289,966 
Long-term debt (note 20)   101,590    54,567 
Share unit liabilities   3,526    5,633 
Other non-current liabilities   13,647    6,735 
Deferred tax liabilities   30,592    31,070 
    589,696    387,971 
           
Commitments (note 23)          
Contingencies (note 24)          
Contingently redeemable:          
Non-controlling interest (note 10)   -    24,785 
Performance share units (note 22)   3,438    - 
Stockholders' equity (note 21):          
Share capital:          
Common stock; no par value, unlimited shares          
authorized, issued and outstanding shares:          
106,661,268 (December 31, 2015: 107,200,470)   120,911    131,530 
Additional paid-in capital   26,602    27,728 
Retained earnings   591,430    601,051 
Accumulated other comprehensive loss   (49,314)   (57,133)
Stockholders' equity   689,629    703,176 
Non-controlling interest   4,724    4,183 
    694,353    707,359 
   $1,287,487   $1,120,115 

 

See accompanying notes to the condensed consolidated financial statements

 

Ritchie Bros. 5

 

 

Condensed Consolidated Statements of Changes in Equity

(Expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

 

   Attributable to stockholders           Contingently redeemable 
       Additional       Accumulated   Non-       Non-   Performance 
   Common stock   paid-In       other   controlling       controlling   share 
   Number of       capital   Retained   comprehensive   interest   Total   interest   units 
   shares   Amount   ("APIC")   earnings   income (loss)   ("NCI")   equity   ("NCI")   ("PSUs") 
Balance, December 31, 2015   107,200,470   $131,530   $27,728   $601,051   $(57,133)  $4,183   $707,359   $24,785   $- 
                                              
Net income   -    -    -    63,979    -    272    64,251    1,334    - 
Other comprehensive                                             
income   -    -    -    -    7,819    2    7,821    169    - 
    -    -    -    63,979    7,819    274    72,072    1,503    - 
Change in value of contingently                                             
redeemable NCI   -    -    -    (21,186)   -    -    (21,186)   21,186    - 
Stock option exercises   920,798    26,107    (5,405)   -    -    -    20,702    -    - 
Stock option tax adjustment   -    -    254    -    -    -    254    -    - 
Stock option compensation                                             
expense (note 22)   -    -    4,025    -    -    -    4,025    -    - 
Modification of PSUs (note 22)   -    -    -    (70)   -    -    (70)   -    2,175 
Equity-classified PSU                                             
expense (note 22)   -    -    -    -    -    -    -    -    1,222 
Equity-classified PSU dividend                                             
equivalents   -    -    -    (20)   -    -    (20)   -    20 
Change in value of contingently                                             
redeemable equity-classified PSUs   -    -    -    (21)   -    -    (21)   -    21 
NCI acquired in a business                                             
combination (note 25)   -    -    -    -    -    596    596    -    - 
Acquisition of NCI   -    -    -    -    -    (226)   (226)   (44,141)   - 
Shares repurchased (note 21)   (1,460,000)   (36,726)   -    -    -    -    (36,726)   -    - 
Cash dividends paid (note 21)   -    -    -    (52,303)   -    (103)   (52,406)   (3,333)   - 
Balance, September 30, 2016   106,661,268   $120,911   $26,602   $591,430   $(49,314)  $4,724   $694,353   $-   $3,438 

 

See accompanying notes to the condensed consolidated financial statements.

 

Ritchie Bros. 6

 

 

Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of United States dollars)

(Unaudited)

 

 

Nine months ended September 30,  2016   2015 
Cash provided by (used in):          
Operating activities:          
Net income  $65,585   $91,203 
Adjustments for items not affecting cash:          
Depreciation and amortization expenses (note 7)   30,560    31,402 
Inventory write down (note 14)   2,284    480 
Impairment loss (note 8)   28,243    - 
Stock option compensation expense (note 22)   4,025    3,094 
Equity-classified PSU expense (note 22)   1,222    - 
Deferred income tax recovery   (5,838)   (4,167)
Equity income less dividends received   (1,209)   (769)
Unrealized foreign exchange loss   586    1,463 
Gain on disposition of property, plant and equipment   (1,017)   (1,200)
Net changes in operating assets and liabilities (note 12)   38,982    36,922 
Net cash provided by operating activities   163,423    158,428 
           
Investing activities:          
Acquisition of Mascus (note 25)   (28,123)   - 
Acquisition of Petrowsky (note 25)   (6,250)   - 
Acquisition of contingently redeemable NCI (note 10)   (41,092)   - 
Acquisition of NCI (note 25)   (226)   - 
Property, plant and equipment additions   (12,600)   (12,643)
Intangible asset additions   (12,041)   (4,248)
Proceeds on disposition of property, plant and equipment   3,259    4,700 
Other, net   (243)   - 
Net cash used in investing activities   (97,316)   (12,191)
           
Financing activities:          
Issuances of share capital   20,702    29,251 
Share repurchase (note 21)   (36,726)   (47,489)
Dividends paid to stockholders (note 21)   (52,303)   (47,191)
Dividends paid to contingently redeemable NCI   (3,436)   (1,340)
Proceeds from short-term debt   52,584    8,566 
Repayment of short-term debt   (28,641)   (6,558)
Proceeds from long-term debt   46,572    - 
Repayment of long-term debt   (46,568)   - 
Repayment of finance lease obligations   (1,282)   (1,599)
Other, net   (512)   75 
Net cash used in financing activities   (49,610)   (66,285)
           
Effect of changes in foreign currency rates on
cash and cash equivalents
   4,339    (13,212)
           
Increase in cash and cash equivalents   20,836    66,740 
Cash and cash equivalents, beginning of period   210,148    139,815 
Cash and cash equivalents, end of period  $230,984    206,555 

 

See accompanying notes to the condensed consolidated financial statements.

 

Ritchie Bros. 7

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

1. General information

 

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

 

 

2. Significant accounting policies

 

(a)Basis of preparation

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

 

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

 

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

 

(b)Revenue recognition

Revenues are comprised of:

 

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

 

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

 

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

 

Ritchie Bros. 8

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

2. Significant accounting policies (continued)

 

(b)Revenue recognition (continued)

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

 

Commissions from sales at auction

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

 

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

 

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

 

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

 

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

 

Underwritten commission contracts can take the form of guarantee or inventory contracts. Guarantee contracts typically include a pre-negotiated percentage of the guaranteed gross proceeds plus a percentage of proceeds in excess of the guaranteed amount. If actual auction proceeds are less than the guaranteed amount, commission is reduced; if proceeds are sufficiently lower, the Company can incur a loss on the sale. Losses, if any, resulting from guarantee contracts are recorded in the period in which the relevant auction is completed. If a loss relating to a guarantee contract held at the period end to be sold after the period end is known or is probable and estimable at the financial statement reporting date, the loss is accrued in the financial statements for that period. The Company’s exposure from these guarantee contracts fluctuates over time (note 24).

 

Ritchie Bros. 9

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

2. Significant accounting policies (continued)

 

(b)Revenue recognition (continued)

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

 

Fees

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

 

(c)Costs of services, excluding depreciation and amortization expenses

Costs of services are comprised of expenses incurred in direct relation to conducting auctions (“direct expenses”), earning online marketplace revenues, and earning other fee revenues. Direct expenses include direct labour, buildings and facilities charges, and travel, advertising and promotion costs. Costs of services incurred to earn online marketplace revenues include inventory management, referral, inspection, sampling, and appraisal fees. Costs of services incurred in earning other fee revenues include direct labour (including commissions on sales), software maintenance fees, and materials. Costs of services exclude depreciation and amortization expenses. In comparative periods, costs of services consisted entirely of direct expenses. As a result of the Xcira LLC (“Xcira”) and Mascus International Holdings BV (“Mascus”) acquisitions, significant other costs of services are now incurred in earning our revenues (note 25).

 

(d)Share-based payments

The Company classifies a share-based payment award as an equity or liability payment based on the substantive terms of the award and any related arrangement.

 

Equity-classified share-based payments

The Company has a stock option compensation plan that provides for the award of stock options to selected employees, directors and officers of the Company. The cost of options granted is measured at the fair value of the underlying option at the grant date using the Black-Scholes option pricing model. The Company also has a senior executive performance share unit (“PSU”) plan that provides for the award of PSUs to selected senior executives of the Company. The Company has the option to settle executive PSU awards in cash or shares and expects to settle them in shares. The cost of PSUs granted is measured at the fair value of the underlying PSUs at the grant date using a binomial model.

 

This fair value of awards expected to vest under these plans is expensed over the respective remaining service period of the individual awards, on a straight-line basis, with recognition of a corresponding increase to APIC in equity. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in earnings, such that the consolidated expense reflects the revised estimate, with a corresponding adjustment to equity.

 

Any consideration paid on exercise of the stock options is credited to the common shares together with any related compensation recognized for the award. Dividend equivalents on the senior executive plan PSUs are recognized as a reduction to retained earnings over the service period.

 

Ritchie Bros. 10

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

2. Significant accounting policies (continued)

 

(d)Share-based payments (continued)

 

Equity-classified share-based payments (continued)

PSUs awarded under the senior executive and employee PSU plans (described in note 22) are contingently redeemable in cash in the event of death of the participant. The contingently redeemable portion of the senior executive PSU awards, which represents the amount that would be redeemable based on the conditions at the date of grant, to the extent attributable to prior service, is recognized as temporary equity. The balance reported in temporary equity increases on the same basis as the related compensation expense over the service period of the award, with any excess of the temporary equity value over the amount recognized in compensation expense charged against retained earnings. In the event it becomes probable an award is going to become eligible for redemption by the holder, the award would be reclassified to a liability award.

 

Liability-classified share-based payments

The Company maintains other share unit compensation plans that vest over a period of up to five years after grant. Under those plans, the Company is either required or expects to settle vested awards on a cash basis or by providing cash to acquire shares on the open market on the employee’s behalf, where the settlement amount is determined using the volume weighted average price of the Company’s common shares for the twenty days prior to the vesting date or, in the case of deferred share unit (“DSU”) recipients, following cessation of service on the Board of Directors.

 

These awards are classified as liability awards, measured at fair value at the date of grant and re-measured at fair value at each reporting date up to and including the settlement date. The determination of the fair value of the share units under these plans is described in note 22. The fair value of the awards is expensed over the respective vesting period of the individual awards with recognition of a corresponding liability. Changes in fair value after vesting are recognized through compensation expense. Compensation expense reflects estimates of the number of instruments expected to vest.

 

The impact of fair value and forfeiture estimate revisions, if any, are recognized in earnings such that the cumulative expense reflects the revised estimates, with a corresponding adjustment to the settlement liability. Liability-classified share unit liabilities due within 12 months of the reporting date are presented in trade and other payables while settlements due beyond 12 months of the reporting date are presented in non-current liabilities.

 

Employee share purchase plan

The Company matches employees’ contributions to the share purchase plan, which is described in more detail in note 22. The Company’s contributions are expensed as share-based compensation.

 

(e)New and amended accounting standards

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

 

Ritchie Bros. 11

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

2. Significant accounting policies (continued)

 

(e)New and amended accounting standards (continued)

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

 

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

 

(iv)Effective January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adoption of this standard did not have an impact on the Company’s consolidated financial statements with respect to the acquisition of Xcira (note 25(b)) as no adjustments to provisional amounts were identified during the measurement period. During the period from February 19, 2016 to September 30, 2016, the Company recognized working capital adjustments related to the Mascus acquisition (note 25(a)), which resulted in a net $343,000 increase in goodwill.

 

(f)Recent accounting standards not yet adopted

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

 

2.Identifying the separate performance obligations in the contract,

 

3.Determining the transaction price,

 

4.Allocating the transaction price to the separate performance obligations, and

 

5.Recognizing revenue as each performance obligation is satisfied.

 

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

 

Ritchie Bros. 12

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

2. Significant accounting policies (continued)

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(iv)In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, focusing on whether an entity controls a specified good or service before that good or service is transferred to a customer. Where such control exists – i.e. where the entity is required to provide the specified good or service itself – the entity is a ‘principal’. Where the entity is required to arrange for another party to provide the good or service, it is an agent.

 

Ritchie Bros. 13

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

2. Significant accounting policies (continued)

 

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

The effective date and transition requirements of ASU 2016-08 are the same as for ASU 2014-09, which is for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

(v)In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718), which makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. Specifically, ASU 2016-09 requires an entity to recognize share-based payment award income tax effects in the income statement when the awards vest or are settled, and as a result, the requirement for entities to track APIC pools is eliminated. In addition, the amendments allow entities to make a policy election to either estimate forfeiture or recognize forfeitures as they occur. ASC 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

(vi)In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies the following two aspects of ASU 2014-09 (Topic 606): identifying performance obligations and the licensing implementation guidance. ASC 2016-10 affects the guidance in ASU 2014-09, and so has the same effective date and transition requirements. ASU 2016-10 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

(vii)In May 2016, the FASB issued ASU 2016-12, Narrow Scope Improvements and Practical Expedients, which makes narrow scope improvements and practical expedients to the following aspects of ASU 2014-09 (Topic 606):

 

·Assessing one specific collectability criterion and accounting for contracts that do not meet certain criteria

 

·Presentation for sales taxes and other similar taxes collected from customers

 

·Non-cash consideration

 

·Contract modification at transition

 

·Completed contracts at transition

 

·Technical correction

 

ASC 2016-10 affects the guidance in ASU 2014-09, and so has the same effective date and transition requirements. ASU 2016-10 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

(viii)In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements, which replaces the ‘incurred loss methodology’ credit impairment model with a new forward-looking “methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.” ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is only permitted for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

Ritchie Bros. 14

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

2. Significant accounting policies (continued)

 

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

(ix)In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments are applied using a retrospective transition method to each period presented, unless impracticable to do so, in which case they are applied prospectively as of the earliest date practicable. The Company is evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

 

 

3. Significant judgments, estimates and assumptions

 

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

 

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

 

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

 

 

4. Seasonality of operations

 

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

 

 

5. Segmented information

 

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

 

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

 

·Other includes the results of the Company’s EquipmentOne and Mascus online services, which are not material to the Company’s consolidated financial statements. On February 19, 2016, the Company acquired Mascus and updated its segment reporting such that the results of EquipmentOne and Mascus (subsequent to acquisition) are reported as “Other.”

 

Ritchie Bros. 15

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

5. Segmented information (continued)

 

The Chief Operating Decision Maker evaluates segment performance based on earnings (loss) from operations, which is calculated as revenues less costs of services, selling, general and administrative (“SG&A”) expenses, depreciation and amortization expenses, and impairment loss. The significant non-cash items included in segment earnings (loss) from operations are depreciation and amortization expenses and impairment loss.

 

   Three months ended   Nine months ended 
   September 30, 2016   September 30, 2016 
   Core           Core         
   Auction   Other   Consolidated   Auction   Other   Consolidated 
Revenues  $122,789   $6,087   $128,876   $402,671   $16,955   $419,626 
Costs of services, excluding
depreciation and amortization
   (14,131)   (619)   (14,750)   (48,354)   (1,467)   (49,821)
SG&A expenses   (63,998)   (5,002)   (69,000)   (197,222)   (13,931)   (211,153)
Depreciation and amortization expenses   (9,259)   (937)   (10,196)   (27,960)   (2,600)   (30,560)
Impairment loss   -    (28,243)   (28,243)   -    (28,243)   (28,243)
   $35,401   $(28,714)  $6,687   $129,135   $(29,286)  $99,849 
Acquisition-related costs             (4,691)             (5,440)
Gain on disposition of property,
plant and equipment
             570              1,017 
Foreign exchange loss             (281)             (332)
Operating income            $2,285             $95,094 
Equity income             213              1,209 
Other and income tax expenses             (7,498)             (30,718)
Net income (loss)            $(5,000)            $65,585 

 

 

   Three months ended   Nine months ended 
   September 30, 2015   September 30, 2015 
   Core           Core         
   Auction   Other   Consolidated   Auction   Other   Consolidated 
Revenues  $105,421   $3,897   $109,318   $369,711   $10,702   $380,413 
Costs of services, excluding
depreciation and amortization
   (12,045)   -    (12,045)   (40,681)   -    (40,681)
SG&A expenses   (54,797)   (3,373)   (58,170)   (177,196)   (9,969)   (187,165)
Depreciation and amortization expenses   (9,357)   (660)   (10,017)   (29,025)   (2,377)   (31,402)
   $29,222   $(136)  $29,086   $122,809   $(1,644)  $121,165 
Gain on disposition of property,
plant and equipment
             234              1,200 
Foreign exchange gain (loss)             (718)             2,051 
Operating income            $28,602             $124,416 
Equity income             363              769 
Other and income tax expenses             (7,718)             (33,982)
Net income            $21,247             $91,203 

  

Ritchie Bros. 16

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

6. Revenues

 

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

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Commissions  $96,110   $83,648   $314,084   $301,379 
Fees   32,766    25,670    105,542    79,034 
   $128,876   $109,318   $419,626   $380,413 

 

Net profits on inventory sales included in commissions are:

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Revenue from inventory sales  $176,381   $105,678   $411,970   $409,105 
Cost of inventory sold   (159,850)   (97,745)   (376,364)   (372,577)
   $16,531   $7,933   $35,606   $36,528 

 

 

7. Operating expenses

 

Certain prior period operating expenses have been reclassified to conform with current year presentation.

 

Costs of services, excluding depreciation and amortization

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Employee compensation expenses  $6,593   $5,309   $21,731   $16,185 
Buildings, facilities and technology expenses   1,709    1,745    6,015    5,191 
Travel, advertising and promotion expenses   4,991    5,120    18,287    16,207 
Other costs of services   1,457    (129)   3,788    3,098 
   $14,750   $12,045   $49,821   $40,681 

 

SG&A expenses

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Employee compensation expenses  $43,077   $36,287   $135,129   $122,062 
Buildings, facilities and technology expenses   12,466    10,516    36,671    30,849 
Travel, advertising and promotion expenses   6,273    5,388    18,594    16,274 
Professional fees   3,675    3,157    9,524    9,456 
Other SG&A expenses   3,509    2,822    11,235    8,524 
   $69,000   $58,170   $211,153   $187,165 

 

Ritchie Bros. 17

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

7. Operating expenses (continued)

 

Acquisition-related costs

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Iron Planet Holdings Inc.
("IronPlanet") (note 24)
  $4,514   $-   $4,514   $- 
Mascus (note 25)   -    -    749    - 
Petrowsky Auctioneers Inc.
("Petrowsky") (note 25)
   177    -    177    - 
   $4,691   $-   $5,440   $- 

 

Depreciation and amortization expenses

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Depreciation expense  $7,751   $8,491   $23,466   $26,718 
Amortization expense   2,445    1,526    7,094    4,684 
   $10,196   $10,017   $30,560   $31,402 

 

 

8. Impairment loss

 

Goodwill impairment

The Company performs impairment tests on goodwill on an annual basis in accordance with US GAAP, or more frequently if events or changes in circumstances indicate that those assets might be impaired. Goodwill is tested for impairment at a reporting unit level, which is at the same level or one level below an operating segment. A goodwill impairment loss is recognized when the carrying amount of the reporting unit is greater than its fair value. The goodwill impairment loss is calculated as the excess of the carrying amount of the goodwill over its implied fair value.

 

Goodwill arising from the acquisition of AssetNation, the provider of our online marketplaces, forms part of the EquipmentOne reporting unit. During the three months ended September 30, 2016, an indicator of impairment was identified with respect to the EquipmentOne reporting unit. The indicator consisted of a decline in actual and forecasted revenue and operating income compared with previously projected results, which was primarily due to the recent performance of the EquipmentOne reporting unit.

 

As a result of the identification of an indicator of impairment of the EquipmentOne reporting unit, a US GAAP two-step goodwill impairment test was performed at September 30, 2016. Step one of the goodwill impairment test indicated that the carrying amount (including goodwill) of the EquipmentOne reporting unit exceeded its fair value. Accordingly, the impairment test proceeded to step two, wherein the step one fair value of the EquipmentOne reporting unit was used to estimate the implied fair value of the goodwill.

 

The second step of the goodwill impairment test involved allocating the EquipmentOne reporting unit fair value to all the assets and liabilities of that reporting unit based on their estimated fair values. Management used a blended analysis of the earnings approach, which employs a discounted cash flow methodology, and the market approach, which employs a multiple of earnings methodology, to determine the fair values of the intangible assets and to measure the goodwill impairment loss.

Ritchie Bros. 18

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

8. Impairment loss (continued)

 

Goodwill impairment (continued)

Based on the results of the goodwill impairment test, the Company recorded an impairment loss on the EquipmentOne reporting unit goodwill of $23,574,000 on September 30, 2016.

 

Long-lived asset impairment

Long-lived assets, which are comprised of property, plant and equipment and definite-lived intangible assets, are assessed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. For the purpose of impairment testing, long-lived assets are grouped and tested for recoverability at the lowest level that generates independent cash flows from another asset group. The carrying amount of the long-lived asset group is not recoverable if it exceeds the sum of the future undiscounted cash flows expected to result from the long-lived asset group’s use and eventual disposition. Where the carrying amount of the long-lived asset group is not recoverable, its fair value is determined in order to calculate any impairment loss. An impairment loss is measured as the excess of the long-lived asset group’s carrying amount over its fair value.

 

At September 30, 2016, for the same reason noted above under the goodwill impairment test, management determined that there was an indicator that the carrying amount of the long-lived assets arising from our acquisition of AssetNation (the “EquipmentOne long-lived assets”) might not have been recoverable. As such, the Company performed the recoverability test, for which purpose management determined that the asset group to which the EquipmentOne long-lived assets belonged was the EquipmentOne reporting unit.

 

The results of the recoverability test indicated that the EquipmentOne reporting unit carrying amount (including goodwill but excluding deferred tax assets, deferred tax liabilities, and income taxes payable) exceeded the sum of its future undiscounted cash flows. As such, management then used an earnings approach to estimate the fair values of the EquipmentOne long-lived assets and compared those fair values to their carrying amounts.

 

Based on the results of the long-lived asset impairment test, the Company recorded a pre-tax impairment loss on the EquipmentOne reporting unit customer relationships of $4,669,000 on September 30, 2016. In connection with this impairment loss, the Company recorded a deferred tax benefit of $1,798,000 to the income tax provision. The result of this impairment test was reflected in the carrying value of the EquipmentOne reporting unit prior to the completion of the goodwill impairment test described above.

 

 

9. Income taxes

 

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

 

The Company’s consolidated effective tax rate in respect of operations for the three and nine months ended September 30, 2016 was 329.4% and 31.3%, respectively (2015: 26.8% and 27.5%). 

 

Ritchie Bros. 19

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

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

 

Until July 12, 2016, the Company held a 51% interest in Ritchie Bros. Financial Services (”RBFS”), an entity that provides loan origination services to enable the Company’s auction customers to obtain financing from third party lenders. As a result of the Company’s involvement with RBFS, the Company is exposed to risks related to the recovery of the net assets of RBFS as well as liquidity risks associated with the put option discussed below.

 

Management determined that RBFS was a variable interest entity because the Company provided subordinated financial support to RBFS and because the Company’s voting interest was disproportionately low in relation to its economic interest in RBFS while substantially all the activities of RBFS involved or were conducted on behalf of the Company. Management also determined that the Company was the primary beneficiary of RBFS as the Company was part of a related party group that had the power to direct the activities that most significantly impacted RBFS’s economic performance, and although no individual member of that group had such power, the Company represented the member of the related party group that was most closely associated with RBFS.

 

Until July 12, 2016, the Company and the non-controlling interest (“NCI”) holders each held options pursuant to which the Company could acquire, or be required to acquire, the NCI holders’ 49% interest in RBFS. These call and put options became exercisable on April 6, 2016, and the Company had the option to elect to pay the purchase price in either cash or shares of the Company, subject to the Company obtaining all relevant security exchange and regulatory consents and approvals. As a result of the existence of the put option, the NCI was accounted for as a contingently redeemable equity instrument (the “contingently redeemable NCI”). The NCI could be redeemed at a purchase price to be determined through an independent appraisal process conducted in accordance with the terms of the agreement, or at a negotiated price (the “redemption value”).

 

For the comparative reporting period presented, management determined that redemption was probable and measured the carrying amount of the contingently redeemable NCI at its estimated December 31, 2015 redemption value of $24,785,000. The estimation of redemption value at that date required management to make significant judgments, estimates, and assumptions.

 

On July 12, 2016 the Company completed its acquisition of the NCI. On that date, the Company acquired the NCI holders’ 49% interest in RBFS for total consideration of 57,900,000 Canadian dollars ($44,141,000). That purchase price consisted of cash consideration of 53,900,000 Canadian dollars ($41,092,000) and 4,000,000 Canadian dollars ($3,049,000) representing the acquisition date fair value of contingent consideration payable to the former shareholders of RBFS. The contingent payment is payable if RBFS achieves a specified annual revenue growth rate over a three-year post-acquisition period, and is calculated as a specified percentage of the accumulated earnings of RBFS after the three-year post-acquisition period. The maximum amount payable under the contingent payment arrangement is 10,000,000 Canadian dollars. The Company may pay an additional amount not exceeding 1,500,000 Canadian dollars over a three-year period based on the former NCI holders providing continued management services to RBFS.

 

Ritchie Bros. 20

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

11. Earnings (loss) per share attributable to stockholders

 

Basic earnings per share (“EPS”) attributable to stockholders was calculated by dividing the net income attributable to stockholders by the weighted average (“WA”) number of common shares outstanding. Diluted EPS attributable to stockholders was calculated by dividing the net income attributable to stockholders after giving effect to outstanding dilutive stock options and PSUs by the WA number of shares outstanding adjusted for all dilutive securities.

 

   Three months ended   Nine months ended 
   September 30, 2016   September 30, 2016 
   Net loss   WA       Net income   WA     
   attributable to   number   Per share   attributable to   number   Per share 
   stockholders   of shares   amount   stockholders   of shares   amount 
Basic  $(5,137)   106,622,376   $(0.05)  $63,979    106,595,088   $0.60 
Effect of dilutive securities:                              
PSUs   -    81,610    -    -    27,203    - 
Stock options   -    821,065    -    -    599,099    - 
Diluted  $(5,137)   107,525,051   $(0.05)  $63,979    107,221,390   $0.60 

 

 

   Three months ended   Nine months ended 
   September 30, 2015   September 30, 2015 
   Net income   WA       Net income   WA     
   attributable to   number   Per share   attributable to   number   Per share 
   stockholders   of shares   amount   stockholders   of shares   amount 
Basic  $20,825    107,137,417   $0.19   $89,685    107,041,819   $0.84 
Effect of dilutive securities:
Stock options
   -    380,471    -    -    391,540    (0.01)
Diluted  $20,825    107,517,888   $0.19   $89,685    107,433,359   $0.83 

 

In respect of PSUs awarded under the senior executive and employee PSU plans (described in note 22), performance and market conditions, depending on their outcome at the end of the contingency period, can reduce the number of vested awards to nil or to a maximum of 200% of the number of outstanding PSUs. For the three and nine months ended September 30, 2016, PSUs to purchase 253,646 and 231,671 common shares, respectively, were outstanding but excluded from the calculation of diluted EPS attributable to stockholders as they were anti-dilutive. For the three and nine months ended September 30, 2016, stock options to purchase nil and 1,002,929 common shares, respectively, were outstanding but excluded from the calculation of diluted EPS attributable to stockholders as they were anti-dilutive (2015: 113,073 and 206,733).

 

Ritchie Bros. 21

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

12. Supplemental cash flow information

 

Nine months ended September 30,  2016   2015 
Restricted cash  $2,002   $(54,547)
Trade and other receivables   (129,980)   (63,469)
Inventory   15,257    (1,565)
Advances against auction contracts   914    23,146 
Prepaid expenses and deposits   (774)   711 
Income taxes receivable   (3,387)   (4,226)
Auction proceeds payable   172,273    140,728 
Trade and other payables   (5,331)   (15,754)
Income taxes payable   (9,410)   5,520 
Share unit liabilities   2,413    3,631 
Other   (4,995)   2,747 
Net changes in operating
assets and liabilities
  $38,982   $36,922 

 

         
Nine months ended September 30,  2016   2015 
Interest paid, net of interest capitalized  $3,859   $3,856 
Interest received   1,353    2,072 
Net income taxes paid   44,869    32,775 
           
Non-cash transactions:          
           
Non-cash purchase of property, plant
and equipment under capital lease
   1,009    53 

 

 

13. Fair value measurement

 

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

 

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

 

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

 

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

 

Ritchie Bros. 22

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

13. Fair value measurement (continued)

 

      September 30, 2016   December 31, 2015 
   Category  Carrying amount   Fair value   Carrying amount   Fair value 
Fair values disclosed, recurring:                       
Cash and cash equivalents  Level 1  $230,984   $230,984   $210,148   $210,148 
Restricted cash  Level 1   83,413    83,413    83,098    83,098 
Short-term debt (note 20)  Level 2   39,013    39,013    12,350    12,350 
Current portion of long-term debt (note 20)  Level 2   -    -    43,348    43,348 
Long-term debt (note 20)  Level 2   101,590    104,558    54,567    56,126 
Fair value measurements:                       
EquipmentOne reporting unit:                       
Customer relationships (note 17)  Level 3  $6,300   $6,300   $12,431   $N/A 
Goodwill (note 18)  Level 3  $14,357   $14,357   $37,931   $N/A 

 

The carrying amount of the Company‘s cash and cash equivalents, restricted cash, trade and other current receivables, advances against auction contracts, auction proceeds payable, trade and other payables, short-term debt, and current portion of long-term debt approximate their fair values due to their short terms to maturity. The fair values of the Company’s long-term debt are determined through the calculation of each liability‘s present value using market rates of interest at period close.

 

 

14. Inventory

 

At each period end, inventory is reviewed to ensure that it is recorded at the lower of cost and net realizable value. During the three and nine months ended September 30, 2016, the Company recorded an inventory write-down of $882,000 and $2,284,000 respectively (2015: $167,000 and $480,000).

 

Of inventory held at September 30, 2016, 100% is expected to be sold prior to the end of December 2016 (December 31, 2015: 91% sold by the end of March 2016 with the remainder sold by the end of June 2016).

 

 

15. Assets held for sale

 

Balance, December 31, 2015  $629 
Disposal   (242)
Other   3 
Balance, September 30, 2016  $390 

 

During the three months ended September 30, 2016, the Company sold excess auction site acreage in Denver, United States, for net proceeds of $735,000 resulting in a gain of $493,000.

 

As at September 30, 2016, the Company’s assets held for sale consisted of excess auction site acreage located in Orlando, United States. Management made the strategic decision to sell this excess acreage to maximize the Company’s return on invested capital. This land asset belongs to the Core Auction reportable segment.

 

Ritchie Bros. 23

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

15. Assets held for sale (continued)

 

The property continues to be actively marketed for sale through an independent real estate broker, and management expects the sales to be completed within 12 months of September 30, 2016.

 

 

16. Property, plant and equipment

 

As at September 30, 2016  Cost   Accumulated
depreciation
   Net book value 
Land and improvements  $366,504   $(60,194)  $306,310 
Buildings   260,472    (90,582)   169,890 
Yard and automotive equipment   58,574    (39,941)   18,633 
Computer software and equipment   65,205    (57,682)   7,523 
Office equipment   23,249    (16,839)   6,410 
Leasehold improvements   22,000    (13,780)   8,220 
Assets under development   11,648    -    11,648 
   $807,652   $(279,018)  $528,634 

 

As at December 31, 2015  Cost   Accumulated
depreciation
   Net book value 
Land and improvements  $356,905   $(54,551)  $302,354 
Buildings   254,760    (82,100)   172,660 
Yard and automotive equipment   59,957    (38,848)   21,109 
Computer software and equipment   60,586    (50,754)   9,832 
Office equipment   22,432    (15,660)   6,772 
Leasehold improvements   20,893    (12,160)   8,733 
Assets under development   7,131    -    7,131 
   $782,664   $(254,073)  $528,591 

 

 

17. Intangible assets

 

As at September 30, 2016  Cost   Accumulated
amortization
   Net book value 
Trade names and trademarks  $4,959   $-   $4,959 
Customer relationships   22,538    (544)   21,994 
Software   34,496    (11,245)   23,251 
Software under development   16,477    -    16,477 
   $78,470   $(11,789)  $66,681 

 

Ritchie Bros. 24

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

 

17. Intangible assets (continued)

 

As at December 31, 2015  Cost   Accumulated
amortization
   Net book value 
Trade names and trademarks  $800   $-   $800 
Customer relationships   22,800    (7,097)   15,703 
Software   23,269    (5,848)   17,421 
Software under development   13,049    -    13,049 
   $59,918   $(12,945)  $46,973 

 

During the three and nine months ended September 30, 2016, interest of $111,000 and $287,000, respectively was capitalized to the cost of software under development (2015: $130,000 and $642,000). These interest costs relating to qualifying assets are capitalized at a weighted average rate of 5.32% (2015: 6.39%).

 

During the three and nine months ended September 30, 2016, an impairment loss of $4,669,000 was recognized on the customer relationships within the EquipmentOne reporting unit (note 8), reducing the carrying amount from $10,969,000 to an estimated fair value of $6,300,000, which formed the new cost basis of those assets at September 30, 2016. Subsequent to the EquipmentOne reporting unit indefinite-lived intangible asset impairment test, management concluded that an indefinite life of the EquipmentOne reporting unit trade names and trademarks could no longer be supported. Commencing September 30, 2016, the Company has commenced amortizing those trade names and trademarks over their useful life, which management has estimated to be 15 years.

 

18. Goodwill

 

Balance, December 31, 2015  $91,234 
Additions (note 25)   23,972 
Impairment loss (note 8)   (23,574)
Foreign exchange movement   675 
Balance, September 30, 2016  $92,307 

 

The carrying amount of goodwill has been allocated to reporting units for impairment testing purposes (note 8) as follows:

 

   September 30,   December 31, 
   2016   2015 
Core Auction  $58,113   $53,303 
EquipmentOne   14,357    37,931 
Mascus   19,837    - 
   $92,307   $91,234 

 

Ritchie Bros. 25

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

19. Equity-accounted investments

 

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

 

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

 

   Ownership   September 30,   December 31, 
   percentage   2016   2015 
Cura Classis entities   48%  $4,821   $3,487 
Other equity investments   32%   2,828    3,000 
         7,649    6,487 

 

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

 

Ritchie Bros. 26

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

20. Debt

 

   Carrying value 
   September 30,   December 31, 
   2016   2015 
Short-term debt  $39,013   $12,350 
           
Long-term debt:          
           
Term loan, denominated in Canadian dollars, unsecured, bearing
interest at 4.225%, due in quarterly installments of interest only,
with the full amount of the principal due in May 2022.
   25,894    24,567 
           
Term loan, denominated in United States dollars, unsecured, bearing
interest at 3.59%, due in quarterly installments of interest only,
with the full amount of the principal due in May 2022.
   30,000    30,000 
           
Revolving loan, denominated in Canadian dollars, unsecured, bearing
interest at a weighted average rate of 1.75%, due in monthly
installments of interest only, with the committed, revolving credit
facility available until May 2018.
   45,696    - 
           
Term loan, denominated in Canadian dollars, unsecured, bearing
interest at 6.385%, due in quarterly installments of interest only,
with the full amount of the principal due in May 2016.
   -    43,348 
           
    101,590    97,915 
           
Total debt  $140,603   $110,265 
Total long-term debt:          
Current portion  $-   $43,348 
Non-current portion   101,590    54,567 
   $101,590   $97,915 

 

At December 31, 2015, the current portion of long-term debt consisted of a Canadian dollar 60,000,000 term loan under the Company’s uncommitted, revolving credit facility. The Company refinanced this term loan on a long-term basis when it fell due on May 4, 2016 by drawing on its committed, revolving credit facility.

 

Short-term debt at September 30, 2016 is comprised of drawings in different currencies on the Company’s committed and uncommitted revolving credit facilities of $359,358,000 (December 31, 2015: committed revolving credit facilities of $312,693,000), and have a weighted average interest rate of 1.6% (December 31, 2015: 1.8%).

 

As at September 30, 2016, the Company had available committed revolving credit facilities aggregating $256,801,000, of which $168,139,000 is available until May 2018. The Company also had available uncommitted credit facilities aggregating $193,367,000, of which $169,106,000 expires November 2017. The Company has a committed seasonal bulge credit facility of $50,000,000, which is available in February, March, August and September until May 2018. This bulge credit facility is not included in the available credit facilities totals above as at September 30, 2016.

 

Ritchie Bros. 27

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

20. Debt (continued)

 

On August 29, 2016, the Company obtained a financing commitment (the “Commitment Letter”) from Goldman Sachs Bank USA (“GS Bank”) pursuant to which GS Bank is committing to provide (i) a senior secured revolving credit facility in an aggregate principal amount of $150,000,000 (the “Revolving Facility”) and (ii) a senior unsecured bridge loan facility in an aggregate principal amount of up to $850,000,000 (the “Bridge Loan Facility”, and together with the Revolving Facility, the “Facilities”). Under the terms of the Commitment Letter, the Company may replace all or a portion of the Bridge Loan Facility with senior unsecured debt securities or certain other bank loan facilities. Debt issue costs related to these Facilities are discussed in note 24.

 

 

21. Equity and dividends

 

Share capital

 

Preferred stock

Unlimited number of senior preferred shares, without par value, issuable in series.

Unlimited number of junior preferred shares, without par value, issuable in series.

All issued shares are fully paid. No preferred shares have been issued.

 

Share repurchase

During March 2016, 1,460,000 common shares (March 2015: 1,900,000) were repurchased at a weighted average (“WA”) share price of $25.16 (2015: $24.98) per common share. The repurchased shares were cancelled on March 15, 2016 (2015: March 26, 2015). There were no share repurchases during the three months ended September 30, 2016 and 2015.

 

The Company declared and paid the following dividends during the three and nine months ended September 30, 2016 and 2015:

 

   Declaration date  Dividend per
share
   Record date  Total
dividends
   Payment date
Nine months ended September 30, 2016:                   
Fourth quarter 2015  January 15, 2016  $0.1600   February 12, 2016  $17,154   March 4, 2016
First quarter 2016  May 9, 2016   0.1600   May 24, 2016   17,022   June 14, 2016
Second quarter 2016  August 5, 2016   0.1700   September 2, 2016   18,127   September 23, 2016
                    
Nine months ended September 30, 2015:                   
Fourth quarter 2014  January 12, 2015  $0.1400   February 13, 2015  $15,089   March 6, 2015
First quarter 2015  May 7, 2015   0.1400   May 29, 2015   14,955   June 19, 2015
Second quarter 2015  August 6, 2015   0.1600   September 4, 2015   17,147   September 25, 2015

 

Declared and undistributed

Subsequent to September 30, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.17 cents per common share, payable on December 19, 2016 to stockholders of record on November 28, 2016. This dividend payable has not been recognized as a liability in the financial statements. The payment of this dividend will not have any tax consequence for the Company.

 

Foreign currency translation reserve

Foreign currency translation adjustments include intra-entity foreign currency transactions that are of a long-term investment nature, which generated net gains of $958,000 and $9,569,000 for the three and nine months ended September 30, 2016, respectively (2015: net losses of $4,609,000 and $16,136,000).

 

Ritchie Bros. 28

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

22. Share-based payments

 

Share-based payments consist of the following compensation costs recognized in selling, general and administrative expenses:

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Stock option compensation expense  $1,555   $1,038   $4,025   $3,094 
Share unit expense:                    
Equity-classified PSUs   736    -    1,222    - 
Liability-classified share units   1,515    (12)   8,295    3,907 
Employee share purchase plan -
employer contributions
   403    346    1,152    977 
   $4,209   $1,372   $14,694   $7,978 

 

 

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. Stock option activity for the nine months ended September 30, 2016 and the year ended December 31, 2015 is presented below:

 

           WA     
   Common   WA   remaining   Aggregate 
   shares under   exercise   contractual   intrinsic 
   option   price   life (in years)   value 
                 
Outstanding, December 31, 2014   3,897,791    22.09           
Granted   880,706    25.50           
Exercised   (1,412,535)   21.11        $9,426 
Forfeited   (89,884)   23.10           
                     
Outstanding, December 31, 2015   3,276,078    23.40           
Granted   1,268,101    24.34           
Exercised   (920,798)   22.48        $7,047 
Forfeited   (82,256)   24.31           
                     
Outstanding, September 30, 2016   3,541,125   $23.96    7.7   $39,352 
                     
Exercisable, September 30, 2016   1,413,544   $22.97    5.8   $17,110 

 

The fair value of the stock option grants is estimated on the date of the grant using the Black-Scholes option pricing model. The significant assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2016 and 2015 are presented in the following table on a weighted average basis:

 

Nine months ended September 30,  2016   2015 
Risk free interest rate   1.1%   1.8%
Expected dividend yield   2.36%   2.18%
Expected lives of the stock options   5 years    5 years 
Expected volatility   26.9%   26.4%

 

Ritchie Bros. 29

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts expressed in thousands of United States dollars, except where noted)

(Unaudited)

22. Share-based payments (continued)

 

Stock option plan (continued)

Risk free interest rate is the US Treasury Department five-year treasury yield curve rate on the date of the grant. Expected dividend yield assumes a continuation of the most recent quarterly dividend payments. Expected life of options is based on the age of the options on the exercise date over the past 25 years. Expected volatility is based on the historical common share price volatility over the past five years.

 

The compensation expense arising from option grants is amortized over the relevant vesting periods of the underlying options. As at September 30, 2016, the unrecognized stock-based compensation cost related to the non-vested stock options was $5,495,000, which is expected to be recognized over a weighted average period of 2.3 years.

 

Share unit plans

Share unit activity for the nine months ended September 30, 2016 and the year ended December 31, 2015 is presented below:

 

   Equity-classified awards   Liability-classified awards 
   PSUs   PSUs (1)   Restricted share units   DSUs 
       WA grant       WA grant       WA grant       WA grant 
       date fair       date fair       date fair       date fair 
   Number   value   Number   value   Number   value   Number   value 
Outstanding, December 31, 2014   -   $-    238,573   $23.38    403,587   $22.32    42,289   $22.33 
Granted   -    -    218,699    24.57    20,528    26.38    29,072    26.07 
Vested and settled   -    -    (6,870)   22.22    (28,887)   22.53    (13,365)   22.34 
Forfeited   -    -    (28,817)   23.23    (62,274)   21.56    -    - 
                                         
Outstanding, December 31, 2015   -   $-    421,585   $24.03    332,954   $22.70    57,996   $24.21 
Granted   6,593    30.41    255,728    23.25    3,836    27.68    13,489    27.66 
Transferred to (from) equity
awards on modification
   257,934    27.34    (257,934)   23.86    -    -    -    - 
Vested and settled   -    -    (68,683)   23.08    (158,704)   22.14    (1,847)   25.28 
Forfeited   (11,663)   27.41    (38,341)   22.69    (15,050)   22.68    -    - 
                                         
Outstanding, September 30, 2016   252,864   $27.43    312,355   $23.90    163,036   $23.36    69,638   $24.85 

 

(1)Liability-classified PSUs include PSUs awarded under the employee PSU plan, the sign-on grant PSU plan, and other PSUs plans in place prior to 2015 that are cash-settled and not subject to market vesting conditions.

 

As at September 30, 2016, the unrecognized share unit expense related to equity-classified PSUs was $5,708,000, which is expected to be recognized over a weighted average period of 2.0 years. The unrecognized share unit expense related to liability-classified PSUs was $6,215,000, which is expected to be recognized over a weighted average period of 2.0 years. The unrecognized share unit expense related to liability-classified restricted share units (“RSUs”) was $985,000, which is expected to be recognized over a weighted average period of 0.7 years. There is no unrecognized share unit expense related to liability-classified DSUs as they vest immediately upon grant.

 

Senior executive and employee PSU plans</