10-K 1 tv486592_10k.htm 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

Commission file number: 001-13425

 

 

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   (778) 331-5500
(Address of Principal Executive Offices)   (Registrant’s Telephone Number, including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Exchange on Which Registered
Common Shares   New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

 

Indicate by check mark whether the registrant (1) has 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 þ 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 (§ 232.405 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 þ No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference on Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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

 

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨   Smaller reporting company ¨
    (Do not check if a  
smaller reporting company)
Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

At June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers and Directors are "affiliates" of the registrant) was approximately $3,074,207,007. The number of common shares of the registrant outstanding as of February 23, 2018, was 107,328,067.

 

 

 

Documents Incorporated by Reference

 

Certain portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission (“SEC”) pursuant to Regulation 14A not later than 120 days after the registrant's fiscal year ended December 31, 2017, in connection with the registrant’s 2018 Annual and Special Meeting of Shareholders, are incorporated herein by reference into Part III of this Annual Report on Form 10-K.

 

 

 

 

RITCHIE BROS. AUCTIONEERS INCORPORATED

FORM 10-K

For the year ended December 31, 2017

 

INDEX

 

Cautionary Note Regarding Forward-Looking Statements 1
     
PART I
ITEM 1: Business 3
ITEM 1A: Risk Factors 13
ITEM 1B: Unresolved Staff Comments 29
ITEM 2: Properties 29
ITEM 3: Legal Proceedings 32
ITEM 4: Mine Safety Disclosures 32
     
PART II
ITEM 5: Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 33
ITEM 6: Selected Financial Data 38
ITEM 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk 81
ITEM 8: Financial Statements and Supplementary Data 81
ITEM 9: Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 146
ITEM 9A: Controls and Procedures 146
ITEM 9B: Other Information 150
     
PART III
ITEM 10: Directors, Executive Officers and Corporate Governance 150
ITEM 11: Executive Compensation 150
ITEM 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 150
ITEM 13: Certain Relationships and Related Transactions, and Director Independence 150
ITEM 14: Principal Accountant Fees and Services 150
     
PART IV
ITEM 15: Exhibits, Financial Statement Schedules 151
ITEM 16: Form 10-K Summary 155
     
SIGNATURES

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

The information discussed in this Annual Report on Form 10-K 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, performance, and key enablers;
·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 IronPlanet, Marketplacee, and our other online marketplaces;
·our ability to grow our businesses, acquire new customers, enhance our sector reach, drive geographic depth, and scale our operations;
·the impact of our initiatives, services, investments, and acquisitions on us and our customers;
·the acquisition or disposition of properties;
·our ability to integrate our acquisitions;
·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 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 Gross Transaction Value (“GTV”) (defined under “Part I, Item 1: Business” of this Annual Report on Form 10-K);
·fluctuations in our quarterly revenues and operating performance resulting from the seasonality of our business;
·our compliance with all laws, rules, regulations, and requirements that affect our business;
·effects of various economic, financial, industry, and market conditions or policies, including the supply and demand for property, equipment, or natural resources;
·the behavior of equipment pricing;
·the relative percentage of GTV represented by straight commission or underwritten (guarantee and inventory) contracts, and its impact on revenues and profitability;
·our Revenue Rates (described under “Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K), the sustainability of those rates, and the seasonality of GTV and revenues;

·the projected increase to our fee revenues as a result of the harmonization of our fee structure;

·our future capital expenditures and returns on those expenditures;
·the effect of any currency exchange and interest rate fluctuations on our results of operations;
·the grant and satisfaction of equity awards pursuant to our compensation plans;
·any future declaration and payment of dividends, including the tax treatment of any such dividends;
·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.

 

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Forward-looking statements are typically identified by such words as “aim”, “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 I, Item 1A: Risk Factors” of this Annual Report on Form 10-K for the year ended December 31, 2017 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.

 

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PART I

 

ITEM 1:BUSINESS

 

Company Overview

Ritchie Bros. Auctioneers Incorporated (“Ritchie Bros.”, the “Company”, “we”, or “us”) (NYSE & TSX: RBA) is a world leader in asset management and disposition of used industrial equipment and other durable assets, selling $4.5 billion of used equipment and other assets during 2017. Our expertise, unprecedented global reach, market insight, and trusted portfolio of brands provide us with a unique position in the used equipment market. We primarily sell used equipment for our customers through live, unreserved auctions at 45 auction sites worldwide, which are simulcast online to reach a global bidding audience. On May 31, 2017, we acquired IronPlanet Holdings, Inc. (“IronPlanet”) for $776.5 million, a leading online marketplace for heavy equipment and other durable assets. Between its inception in 1999 and 2016, IronPlanet sold over $5 billion of used heavy equipment online and registered more than 1.5 million users worldwide. These complementary used equipment brand solutions, together with Marketplacee, our online marketplace that supports reserved pricing, provide different value propositions to equipment owners and allow us to meet the needs and preferences of a wide spectrum of equipment sellers and buyers. In the past three years, we have also added a private brokerage service (Ritchie Bros. Private Treaty) and an online listing service (Mascus).

 

Through our unreserved auctions, online marketplaces, and private brokerage services, we sell a broad range of used and unused equipment, including earthmoving equipment, truck trailers, government surplus, oil and gas equipment and other industrial assets. Construction and heavy machinery comprise the majority of the equipment sold through our multiple brand solutions. Customers selling equipment through our sales channels include end users (such as construction companies), equipment dealers, original equipment manufacturers (“OEMs”) and other equipment owners (such as rental companies). Our customers participate in a variety of sectors, including heavy construction, transportation, agriculture, energy, and mining.

 

We operate globally with locations in more than 20 countries, including the United States, Canada, Australia, the United Arab Emirates, and the Netherlands, and employ more than 2,100 full time employees worldwide.

 

History and development of our business

Ritchie Bros. Auctioneers Incorporated was amalgamated on December 12, 1997 under, and is governed by, the Canada Business Corporation Act.

 

Ritchie Bros. was founded in 1958 in Kelowna, British Columbia, Canada. We held our first major industrial auction in 1963, selling over $600,000 worth of construction equipment in Radium, British Columbia. By 1970, we had established operations in the United States and held our first American sale in Beaverton, Oregon. In 1987, we held our first European auctions in Liverpool, the United Kingdom, and Rotterdam, the Netherlands. Our first Australian auction was held in 1990 and was followed by expansion into Asia with subsequent sales in Japan, the Philippines, Hong Kong, Thailand, and Singapore. We held our first Mexican auction in 1995 and our first auction in the Middle East in Dubai, the United Arab Emirates, in 1997.

 

In March 1998, we completed an initial public offering of our common shares. Our common shares trade on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the ticker symbol “RBA”.

 

In early 2013, we commercially launched our online marketplace, EquipmentOne. We continued to expand our digital capabilities through the following acquisitions over the past five years:

 

·Xcira LLC (“Xcira”) on November 4, 2015 – a proven leader in simulcast auction technology that provides a seamless customer experience for online bidding at live on site auctions

 

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·Mascus International Holding B.V. (“Mascus”) on February 19, 2016 – a global online listing service to advertise equipment and other assets for sale
·IronPlanet on May 31, 2017 (the “Acquisition”) – operates online and event-based equipment auctions under a number of brands discussed in more detail below

 

On consummation of the Acquisition on May 31, 2017, we formed an alliance with Caterpillar Inc. (“Caterpillar”), pursuant to a Strategic Alliance and Remarketing Agreement (the “Alliance”) that we entered into on August 29, 2016. As discussed in more detail below, under the Alliance, we became Caterpillar's preferred global partner for live on site and online auctions for used Caterpillar equipment.

 

During the past five years, we also continued to grow our live on site auction business by acquiring:

 

·The remaining interest in Ritchie Bros. Financial Services (“RBFS”) on July 12, 2016 – provides financing and leasing options to equipment purchasers, as a brokerage business, through several bank relationships (RBFS does not leverage our balance sheet for the loans it originates)
·Petrowsky Auctioneers (“Petrowsky”) on August 1, 2016 – a leading regional industrial auctioneer in the Northern United States that offers live on site and simulcast live online auctions
·Kramer Auctions Ltd. and Kramer Auctions—Real Estate Division Inc. (together, “Kramer”) on November 15, 2016 – a premier Canadian agricultural auctioneer, offering both on-the-farm and live on site auctions for customers selling equipment, livestock and real-estate in the agricultural sector

 

Strategy

At the beginning of 2015, we formalized a new strategy that centered around becoming a more diversified, multi-channel company that offered a full range of asset management and disposition solutions, all on a greater scale, that would provide even more choice to customers. In 2017, we took definitive steps towards furthering this strategy by completing the transformational acquisition of IronPlanet, a leading online marketplace for heavy equipment and other durable assets. The acquisition of IronPlanet positions Ritchie Bros. as one of the world’s leading one-stop-shop asset disposition companies. We are transforming our business and the industry through our technology and data, our breadth of solutions, and our people.

 

We continue to evolve our strategy as we integrate IronPlanet and develop our multi-channel business, focusing on two overarching strategic objectives: (i) grow share of the auction segment and (ii) penetrate the upstream market. The following discussion highlights how we performed against our strategy following the executable pillars of our road map, Grow, Drive, and Optimize.

 

GROW Revenues and Earnings

We are committed to pursuing growth initiatives that will further enhance our sector reach, drive geographic depth, meet a broader set of customer needs, and add scale to our operations. Over the last several years, we have undertaken a meaningful strategic transformation, through both organic and acquisitive growth initiatives, to broaden our service offering and the value propositions that we provide to different segments of the used asset and equipment market. Notably, the Acquisition with IronPlanet positions us to accelerate this strategy and take positive and meaningful steps towards meeting our strategic objectives.

 

We are focused on the following initiatives to deliver growth:

 

·Leveraging and scaling our one-stop-shop multi-channel solution set to drive organic market share and incremental penetration with existing customers;
·Scaling multi-channel capabilities, including our IronPlanet Weekly Featured Auction and Marketplacee, to grow within existing sectors as well as penetrating new sector opportunities;
·Leveraging and expanding multi-channel capabilities internationally; and

 

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·Driving increased penetration of auction services and, specifically, RBFS.

 

DRIVE Efficiencies and Effectiveness

We plan to take advantage of opportunities to improve overall effectiveness of our organization. We are committed to driving efficiencies and effectiveness by:

 

·Improving sales effectiveness and sales productivity through consistent go-to-market processes;
·Leveraging the rich data sets that we have at our disposal to create a unique and differentiated customer experience and delivering trust and confidence across our consignor and buyer bases;
·Modernizing legacy systems and working to unify auction platforms to deliver technology efficiencies and create network effects for buyers and sellers by comprehensively meeting their needs, ease of use, and our business model;
·Scaling the business and leveraging our expanded set of multi-channel assets to optimize our overall asset utilization and site optimization efforts while delivering choice to our customers;
·Achieving acquisition synergies; and
·Targeting operating expense growth lower than revenue growth.

 

OPTIMIZE our Balance Sheet

Our business model provides us with the ability to generate strong cash flows. Cash flow represents our ability to convert revenue to cash, and provides a meaningful indication of the strength of our business. We will focus not only on profit growth but also further enhancing cash flow, reviewing contract structures and auction site returns to improve the cash flow and asset returns of our Auctions and Marketplaces (“A&M”) segment. During 2016, we also adjusted our capital structure, taking on more debt (through a new syndicated credit facility and issuance of senior unsecured notes) to acquire IronPlanet. We also continued to be prudent with our organic capital expenditures.

 

The acquisition of IronPlanet is a transformational transaction that will increase both the scale and the scope of our Company. The enhanced scale of our combined business is expected to drive further operating leverage from our unique business model, and provide new opportunities to operate more efficiently by utilizing an increasingly digital service offering.

 

We are focused on these areas to deliver optimization of our balance sheet:

 

·Increasing cash flows from operating activities;
·Targeting net capital spend at less than 10% of revenue;
·Investing in information technology systems to optimize business processes and reduce costs; and
·Managing debt levels while returning cash via ongoing dividends.

 

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Service Offerings

We offer our equipment buyer and seller customers multiple distinct, complementary, multi-channel brand solutions that address the range of their needs. Our global customer base has a variety of transaction options, breadth of services, and the widest selection of used equipment available to them. The tables below illustrate the various channels and brand solutions available under our A&M segment, as well as our other services.

 

A&M segment

 

Channels

 

Brand Solutions

 

Description of Offering

        n  Live unreserved on site with live simulcast online auctions
Live On Site Auctions       n  Event-based sales of used construction and heavy equipment held in the Caterpillar dealer geographies
        n  Event-based sales of used energy equipment
        n  Online marketplace for selling and buying used equipment
Online Auctions and Marketplaces       n  Online marketplace offering multiple price and timing options
        n  Online marketplace for the sale of government and military assets
        n  Online truck and trailer marketplace
Brokerage Service       n  Confidential, negotiated sales

 

Contact options

We offer consignors several contract options to meet their individual needs and sale objectives. Through our A&M business, options include:

 

·Straight commission contracts, where the consignor receives the gross proceeds from the sale less a pre-negotiated commission rate;
·Guarantee contracts, where the consignor receives a guaranteed minimum amount plus an additional amount if proceeds exceed a specified level; and
·Inventory contracts, where we purchase the equipment temporarily for resale.

 

We refer to guarantee and inventory contracts as underwritten contracts. In 2017, our underwritten business accounted for approximately 16% of our GTV, compared to 25% in 2016 and 29% in 2015.

 

Value-added services

As part of our A&M business, we provide a wide array of value-added services to make the process of buying and selling equipment convenient for our customers. In addition to the other services listed in the table below, we also provide these value-added services to our customers:

 

·conducting title searches, where registries are commercially available, to ensure equipment is sold free and clear of all liens and encumbrances (if we are not able to deliver clear title, we provide a full refund up to the purchase price to the buyer);
·making equipment available for inspection, testing, and comparison by prospective buyers;
·displaying high-quality, zoomable photographs of equipment on our website;

 

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·providing free detailed equipment information on our website for most equipment;
·providing access to insurance and powertrain warranty products;
·providing access to transportation companies and customs brokerages through our partner, uSHIP; and
·handling all pre-auction marketing, as well as collection and disbursement of proceeds.

 

Our IronClad Assurance equipment condition certification provides online marketplace buyers with information on the condition of the equipment that includes, but is not limited to, providing buyers with pictures and comprehensive inspection information of key systems and components.

 

Other services

 

Channels

 

Brand Solutions

 

Description of Offering

Financial Service       n  Loan origination service that uses a brokerage model to match loan applicants with appropriate financial lending institutions
Appraisal Service       n  Unbiased, certified appraisal services, as well as truck and lease return inspection services
Online Listing Service       n  Online equipment listing service and B2B dealer portal
Ancillary Services       n  Repair, paint, and other make-ready services
Logistical Service       n  End-to-end transportation and customs clearance solution for sellers and buyers with shipping needs

 

Intellectual Property

We believe our intellectual property has significant value and is an important factor in marketing our organization, services, and website, as well as differentiating us from our competitors. We own or hold the rights to use valuable intellectual property such as trademarks, service marks, domain names and tradenames. We protect our intellectual property in Canada, the United States, and internationally through federal, provincial, state, and common law rights, including registration of certain trade mark and service marks for many of our brands, including our core brands. We also have secured patents for inventions and have registered our domain names.

 

We rely on contractual restrictions and rights to protect certain of our proprietary rights in products and services. Effective protection of our intellectual property can be expensive to maintain and may require litigation. We must protect our intellectual property rights and other proprietary rights in many jurisdictions throughout the world. In addition, we may, from time to time, be subject to intellectual property claims, including allegations of infringement, which can be costly to defend. For a discussion of the risks involved with intellectual property litigation and enforcement of our intellectual property rights, see the related information in “Part I, Item 1A: Risk Factors” of this Annual Report on Form 10-K.

 

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Competition

 

Competition Overview

The global used industrial equipment market is highly fragmented and often fluid between sales channels. We compete for purchasers and sellers of used equipment with other asset management and disposition companies. These companies include non-auction competitors such as equipment manufacturers, distributors and dealers, used equipment brokers, equipment rental companies, and other online marketplaces. We compete based on breadth, brand reputation, security, technology, and global reach of our services, as well as in the variety of contracts and methods and channels of selling equipment. We also compete with private sales – often securing new business from equipment owners who had previously tried selling their equipment privately.

 

Competitive advantages

Our key strengths provide distinct competitive advantages, and have enabled us to achieve significant and profitable growth over the long term. Our Gross Transaction Value1 (“GTV”) has grown at a compound annual growth rate of 9.30% over the last 25 years, as illustrated below.

 

 

Global platform

Our business is a leader of equipment disposition services, with global reach, including 45 auction sites in more than 20 countries, including the United States, Canada, Australia, the United Arab Emirates, and the Netherlands. Our online bidding technology and Ritchie Bros. website are available in nine and 22 languages, respectively. Our global presence ensures we generate global market pricing for our equipment sellers, as we reach international buyers and equipment demand, helping to deliver strong price realization through our sales channels. This global reach provides us and our selling customers with the ability to transcend local market conditions.

 

 

 

1GTV represents total proceeds from all items sold at our auctions and online marketplaces. GTV is not a measure of financial performance, liquidity, or revenue, and is not presented in our consolidated financial statements.

 

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Breadth of solutions

We have the unique ability to meet all the buyers’ and sellers’ specific needs in a one-stop shop manner. The event-driven auction, which has been our core business for over 50 years, is just one solution—albeit a powerful solution—to meet customers’ varied needs. By delivering choice, we can work with customers as a trusted advisor to provide them with a tailored suite of equipment disposition solutions and, in the medium and long term, asset management. This is truly a fundamental evolution and transformation in the industry.

 

While we have a full suite of solutions, most of our auction volumes are generated through three core solutions. First, the unreserved live on site integrated auctions that provide our customers care, custody, and control. This offering is Ritchie Bros. Auctioneers, our primary business. Second, weekly online auctions for sellers looking to manage the disposition of their assets on a more frequent basis and being able to sell from their yard or location without having to move equipment. This offering is the IronPlanet Weekly Featured Auction. Third, our reserve online marketplace that affords sellers with control over price and timing, and with solutions such as Make Offer, Buy Now, and Reserve Price selling formats for buyers. We have recently launched a combined reserved online marketplace bringing together EquipmentOne and IronPlanet’s Daily Marketplace. The combined offering is known as Marketplacee.

 

An industry leader in a highly fragmented market

Based on a review of the construction, transportation and agricultural used equipment markets that we conducted in 2016, we believe the global used equipment market is valued at more than $300 billion2, including an opportunity in the United States of over $50 billion. The market is highly fragmented and fluid between sales channels; however, we believe our multi-channel brand solutions can meet a broad range of customer preferences and needs. While our business is a global market leader for the sale of used equipment, we currently have only 1.4% of the estimated global used equipment market, based on GTV during 2017. The United States represents a key area for growth with positive industrial tailwinds around infrastructure and construction.

 

Multi-channel product offering

Our multi-channel brand solutions provide a wide range of options for used industrial equipment, which appeal to a variety of personal preferences for sellers and buyers. We continue to build on our strong brand equity and loyal customer base by providing many value-added services to equipment sellers and buyers, including financing and leasing solutions, appraisal services, insurance services, refurbishment, and logistics services. We continue to look for even more ways to support the equipment industry and serve the various needs of equipment owners.

 

Diverse sector coverage

Our sales solutions cater to the needs of end users, dealers, and other equipment sellers across a variety of sectors, such as construction, transportation, agriculture, energy, and mining. This diversity of sectors mitigates sector-specific exposure and enables the sale of equipment with cross-sector applications, regardless of sector-specific cyclicality.

 

Experienced management team

Our experienced management team continues to capitalize on the strength of our live on site auction offering, while expanding our online offering through multiple acquisitions to better serve our existing customers and to attract new customers. Our executives have served as officers of a number of well-known global public companies, and we have developed a deep understanding of the used equipment market and customer base.

 

 

 

2Global used equipment market has been sourced through 1) Manfredi & Associates (2015), 2) ACT Research Co., LLC. (2016). This figure does not include the markets for used Class 1 trucks globally and used Class 2 and 3 trucks and trailers outside of the United States, 3) Company estimates. No third-party research report available or commissioned and 4) U.S. Federal Highway Administration.

 

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Data and sector intelligence

We transacted hundreds of thousands of assets through our sales channels in 2017 and had more than 694,000 people register to bid as users of www.rbauction.com or www.ironplanet.com in 2017. The volume of transactions and customer interactions have provided us with a unique, proprietary database of information. This database provides us with some of the world’s best information to identify market trends and estimate used equipment values.

 

The Role of Technology

The role of technology in our business continues to evolve and become more meaningful as more buyers adopt mobile and online channels to transact their business with us. We have been on a pathway to leverage digital and technology capabilities to improve the consumer auction and leverage technology as a competitive differentiator.

 

The acquisition of IronPlanet was an inflection point in our business and was a step change in this direction as it positioned us as a technology-enabled asset disposition company. The combination of IronPlanet’s technology and our existing assets results in tools and capabilities that provide our customers, both buyers and sellers, with more efficient and richer experiences for creation of deeper brand loyalty.

 

Buyers will now find it easier to locate inventory across all our websites with our enhanced search capabilities while sellers leverage both our rich data repository as well as our platform solution tools to give them the insights, tools, and solutions to manage their assets in an informed, efficient manner.

 

Offerings and initiatives

 

Integrated search capabilities

We are focused on helping buyers find what they are looking for easily and quickly while providing access to the largest equipment inventory across our brands and solutions. Our focus on improving our search capabilities allows us to extend our reach to more customers in a channel agnostic manner.

 

Marketplacee

Bringing together EquipmentOne and IronPlanet’s Daily Marketplace, we introduced a new sales solution, Marketplacee, in late 2017. Marketplacee is a flexible, online marketplace that gives customers the choice of negotiating offers, selling their assets at fixed prices, or setting a reserve (minimum) price. These three selling options are designed to give sellers more control over the selling price and processing of their assets while still benefiting from our marketing and expansive, global buyer network. Marketplacee provides choice to buyers who may prefer to buy in different formats based on their individual needs.

 

Platform solutions

Our unique software solutions allow us to work with sellers as a true business advisor as we provide tools, data, and insights to help our customers make real-time asset disposition decisions and deepen our relationships with our customers.

 

Auction management systems

We are in the preliminary stages of this initiative of leveraging one holistic platform to drive the live on site auction and online marketplace experience. Today, we have two discrete platforms. Known as project “MARS”, the new platform is a transformative initiative allowing us to simplify our technology footprint, reduce complexity, spur future innovation, and enable the development of customer-facing growth drivers such as more sophisticated personalization, data-driven insights, and real-time data-driven marketing.

 

RBA mobile app

Providing customers with the ability to search, register, and bid at our live on site auctions around the world using mobile devices. Mobile capabilities provide another opportunity to make our customer experiences easy and flexible so they can conduct business with us seven days a week, 24 hours a day.

 

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Segmented Information

Segmented information is disclosed in the consolidated financial statements and the notes thereto included in footnote 4 to “Part II, Item 8: Financial Statements and Supplementary Data” presented elsewhere in this Annual Report on Form 10-K. Segmented information from prior years has been restated in footnote 4 to reflect the identification of the A&M reporting segment as of September 30, 2017.

 

Geographical Information

Geographical information about our revenues is disclosed in “Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations — Geographic Analysis”, which is incorporated into this Item 1 by reference. Our international operations are subject to certain risks, as disclosed in “Part I, Item 1A: Risk Factors” of this Annual Report on Form 10-K.

 

The distribution of our long-lived assets includes property, plant and equipment according to the country in which they are located, is as follows:

 

       Outside of   United         
   Canada   Canada   States   Europe   Other 
Long-lived assets distribution                         
December 31, 2017   22%   78%   52%   16%   10%
December 31, 2016   21%   79%   55%   14%   10%
December 31, 2015   20%   80%   55%   15%   10%

 

Seasonality

Our GTV and associated A&M segment revenues are affected by the seasonal nature of our business. GTV and A&M segment 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. Given the operating leverage inherent in our business model, the second and fourth quarter also tend to produce higher operating margins, given the higher volume and revenue generated in those quarters.

 

Governmental Regulations and Environmental Laws

Our operations are subject to a variety of federal, provincial, state and local laws, rules, and regulations throughout the world. We believe that we are compliant in all material respects with those laws, rules, and regulations that affect our business, and that such compliance does not impose a material impediment on our ability to conduct our business.

 

We believe that, among other things, laws, rules, and regulations related to the following list of items affect our business:

 

·Imports and exports of equipment. Particularly, there are restrictions in the United States and Europe that may affect the ability of equipment owners to transport certain equipment between specified jurisdictions. Also, engine emission standards in some jurisdictions limit the operation of certain trucks and equipment in those regions.
·Development or expansion of auction sites. Such activities depend upon the receipt of required licenses, permits, and other governmental authorizations. We are also subject to various local zoning requirements pertaining to the location of our auction sites, which vary among jurisdictions.
·The use, storage, discharge, and disposal of environmentally sensitive materials. Under such laws, an owner or lessee of, or other person involved in, real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as related costs of investigation and property damage. These laws often impose liability without regard to whether the owner or lessee or other person knew of, or was responsible for, the presence of such hazardous or toxic substances.

 

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·Worker health and safety, privacy of customer information, and the use, storage, discharge, and disposal of environmentally sensitive materials.

 

Available Information

The information contained on or accessible through our website is not part of this Annual Report on Form 10-K. We file required reports on Form 10-K, Form 10-Q, Form 8-K, proxy materials and other filings required under the Exchange Act. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330.  The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

We maintain a website at www.rbauction.com and copies of our reports on Form 10-K, Form 10-Q and Form 8-K, proxy materials and other filings required under the Exchange Act, are available on our website, free of charge, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the SEC. We have an investor website at www.investor.ritchiebros.com. None of the information on our websites is incorporated into this Annual Report on Form 10-K by this or any other reference.

 

We maintain a Code of Business Conduct and Ethics for our directors, officers and employees (“Code of Conduct”). A copy of our Code of Conduct may be found on our website in the Corporate Governance section.

 

Additional information related to Ritchie Bros. is also available on SEDAR at www.sedar.com.

 

ITEM 1A:RISK FACTORS

 

An investment in our common stock involves a high degree of risk. In addition to the other information included in this Annual Report on Form 10-K, you should carefully consider each of the risks described below before purchasing our common shares. The risk factors set forth below are not the only risks that may affect our business. Our business could also be affected by additional risks not currently known to us or that we currently deem to be immaterial. If any of the following risks actually occur, our business, financial condition and results of operations could materially suffer. As a result, the trading price of our common shares could decline, and you may lose all or part of your investment. Information in this section may be considered “forward-looking statements.” See “Cautionary Note Regarding Forward-Looking Statements” for a discussion of certain qualifications regarding such statements.

 

Damage to our reputation could harm our business.

One of our founding principles is that we operate a fair and transparent business, and consistently act with integrity.  Maintaining a positive reputation is key to our ability to attract and maintain customers, investors and employees.  Damage to our reputation could cause significant harm to our business.  Harm to our reputation could arise in a number of ways, including, but not limited to, employee conduct which is not aligned with our Code of Business Conduct and Ethics (and associated Company policies around behavioural expectations) or our Company’s core values, safety incidents, failure to maintain customer service standards, loss of trust in the fairness of our sales processes, and other technology or compliance failures.

 

We may not realize the anticipated benefits of, and synergies from, the Acquisition and may become responsible for certain liabilities and integration costs as a result.

Business acquisitions involve the integration of new businesses that have previously operated independently from us. The integration of our operations with those of IronPlanet is expected to result in financial and operational benefits, as well as operating synergies. There can be no assurance, however, regarding when or the extent to which we will be able to realize these and other benefits. Integration may also be difficult, unpredictable, and subject to delay because of possible company culture conflicts and different opinions on future business development.

 

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We may be required to integrate or, in some cases, replace, numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing, employee benefits, payroll and regulatory compliance, many of which may be dissimilar. Difficulties associated with the integration of acquired businesses could have a material adverse effect on our business.

 

Even if we are able to successfully integrate the operations of Ritchie Bros. and IronPlanet, we may not realize the full benefits that we anticipate. If we achieve the expected benefits, they may not be achieved within the anticipated time frame. Also, the benefits from the Acquisition may be offset by costs incurred in integrating Ritchie Bros. and IronPlanet, increases in other expenses, operating losses or problems in the business unrelated to the Acquisition. As a result, there can be no assurance that such synergies or other benefits will be achieved.

 

In addition, in connection with the Acquisition, we have assumed, and may assume in connection with future acquisitions, certain potential liabilities. To the extent such liabilities are not identified by us or to the extent indemnifications obtained from third parties are insufficient to cover such liabilities, these liabilities could have a material adverse effect on our business.

 

We have incurred substantial indebtedness in connection with the Acquisition, and the degree to which we are leveraged may materially and adversely affect our business, financial condition and results of operations.

We have incurred substantial indebtedness in connection with the Acquisition. As of December 31, 2017, we have $819.9 million of total debt outstanding, consisting of $335.9 million under a new five-year credit agreement (the “Credit Agreement”) with a syndicate of lenders entered into on October 27, 2016 (the “New Facilities”), and $500.0 million aggregate principal amount of 5.375% senior unsecured notes issued December 21, 2016 (the “Notes”), partially reduced by $16.8 million of unamortized debt issue costs, as well as $0.8 million under our foreign credit facilities. There is $637.8 million of availability under the New Facilities.

 

Our ability to make payments on and to refinance our indebtedness, including the debt incurred pursuant to the Acquisition as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on marketing, advertising and new product innovation, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in our industry, including both the live and online auction industry, could be impaired.

 

The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.

 

In addition, our substantial leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our substantial leverage could also impede our ability to withstand downturns in our industry or the economy in general.

 

We may incur substantial additional indebtedness in the future. The terms of the Credit Agreement and the indenture governing the Notes will limit, but not prohibit, us from incurring additional indebtedness. If we incur any additional indebtedness that has the same priority as the Notes and the guarantees thereof, the holders of that indebtedness will be entitled to share rateably with the holders of the Notes and the guarantees thereof in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us.

 

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Subject to restrictions in the Credit Agreement and the indenture governing the Notes, we also will have the ability to incur additional secured indebtedness that would be effectively senior to the Notes offered hereby, to the extent of the value of the assets securing such obligations. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

 

Our debt instruments have restrictive covenants that could limit our financial flexibility.

The terms of the Credit Agreement, as well as the indenture governing the Notes, contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our ability to borrow under our New Facilities is subject to compliance with a consolidated leverage ratio covenant and a consolidated interest coverage ratio covenant.

 

The Credit Agreement includes other restrictions that limit our ability in certain circumstances to: incur indebtedness; grant liens; engage in mergers, consolidations and liquidations; make asset dispositions, restricted payments and investments; enter into transactions with affiliates; and amend, modify or prepay certain indebtedness. The indenture governing the Notes contains covenants that limit our ability in certain circumstances to:

 

·incur additional indebtedness (including guarantees thereof);
·incur or create liens on their assets securing indebtedness;
·make certain restricted payments;
·make certain investments;
·dispose of certain assets;
·allow to exist certain restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
·engage in certain transactions with affiliates; and
·consolidate, amalgamate or merge with or into other companies.

 

Our failure to comply with these covenants could result in an event of default that, if not cured or waived, could result in the acceleration of substantially all of our funded debt. We do not have sufficient working capital to satisfy our debt obligations in the event of an acceleration of all or a significant portion of our outstanding indebtedness.

 

Competition in our core markets could result in reductions in our future revenues and profitability.

The global used equipment market, including the auction segment of that market, is highly fragmented. We compete for potential purchasers and sellers of equipment with other auction companies and with non-auction competitors such as equipment manufacturers, distributors and dealers, equipment rental companies, and other online marketplaces. When sourcing equipment to sell at our auctions or other marketplaces, we compete with other on site and online auction companies, Original Equipment Manufacturer (“OEM”) and independent dealers, equipment brokers, other third parties, and equipment owners that have traditionally disposed of equipment in private sales.

 

Some of our 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 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 and other combined service offerings.

 

If commission rates decline, or if our strategy to compete against our many competitors is not effective, our revenues, market share, financial condition and results of operations may be adversely impacted. We may be susceptible to loss of business if competing models become more appealing to customers. If our selling model becomes undesirable or we are not successful in adding services complementary to our existing selling model and business, we may not be successful increasing market penetration over the long-term, which could prevent us from achieving our long-term earnings growth targets.

 

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Our relationships with key long-term customers may be materially diminished or terminated.  

We have long-standing and/or strategic relationships with a number of our customers and business partners, many of whom could unilaterally terminate their relationship with us or materially reduce the amount of business they conduct with us at any time.  Market competition, business requirements and financial conditions could adversely affect our ability to continue or expand our relationships with our customers and business partners. There is no guarantee that we will be able to retain or renew existing agreements, or maintain relationships with any of our customers or business partners, on acceptable terms or at all.  The loss of one or more of our major customers or business partners could adversely affect our business, financial condition and results of operations.

 

Decreases in the supply of, demand for, or market values of used equipment, could harm our business.

Our revenues could decrease if there was significant erosion in the supply of, demand for, or market values of used equipment, which could adversely affect our financial condition and results of operations. We have no control over any of the factors that affect the supply of, and demand for, used equipment, and the circumstances that cause market values for equipment to fluctuate —  including, among other things, economic uncertainty, disruptions to credit and financial markets, lower commodity prices, and our customers’ restricted access to capital — are beyond our control. Recent economic conditions have caused fluctuations in the supply, mix and market values of used equipment available for sale, which has a direct impact on our revenues.

 

In addition, price competition and the availability of equipment directly affect the supply of, demand for, and market value of used equipment. Climate change initiatives, including significant changes to engine emission standards applicable to equipment, may also adversely affect the supply of, demand for or market values of equipment.

 

We may incur losses as a result of our guarantee and inventory contracts and advances to consignors.

Our most common type of auction contract is a straight commission contract, under which we earn a pre-negotiated, fixed commission rate on the gross sales price of the consigned equipment at auction. Straight commission contracts are used by us when we act as agent for consignors. In recent years, a majority of our annual business has been conducted on a straight commission basis. In certain other situations, we will enter into underwritten transactions and either offer to:

 

·guarantee a minimum level of sale proceeds to the consignor, regardless of the ultimate selling price of the consignment at the auction; or
·purchase the equipment outright from the seller for sale in a particular auction.

 

We determine the level of guaranteed proceeds or inventory purchase price based on appraisals performed on equipment by our internal personnel. Inaccurate appraisals could result in guarantees or inventory values that exceed the realizable auction proceeds. In addition, a change in market values could also result in guarantee or inventory values exceeding the realizable auction proceeds. If auction proceeds are less than the guaranteed amount, our commission will be reduced and we could potentially incur a loss, and, if auction proceeds are less than the purchase price we paid for equipment that we take into inventory temporarily, we will incur a loss. Because a majority of our auctions are unreserved, there is no way for us to protect against these types of losses by bidding on or acquiring any of the items at such auctions. In addition, we do not hold inventory indefinitely waiting for market conditions to improve. If our exposure to underwritten contracts increases, this risk would be compounded.

 

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.

 

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The availability and performance of our technology infrastructure, including our websites, is critical to our business.

The satisfactory performance, reliability and availability of our websites, enterprise resource planning system, processing systems and network infrastructure are important to our reputation and our business. Our systems may experience service interruptions or degradation because of hardware or software defects or malfunctions, computer denial of service, cyber events, human error and natural events beyond our control. Some of our systems are not fully redundant, and our recovery planning may not be sufficient for all possible disruptions.

 

Further, we will need to continue to expand, integrate, consolidate, and upgrade our technology, transaction processing systems and network infrastructure both to meet increased usage of our online bidding service and other services offered on our websites, to implement new features and functions and as a result of the Acquisition. Our business and results of operations could be harmed if we were unable to expand and upgrade in a timely manner our systems and infrastructure to accommodate any increases in the use of our internet services, or if we were to lose access to or the functionality of our internet systems for any reason, especially if such loss of service prevented internet bidders from effectively participating in one of our auctions. Frequent, persistent or ill-timed interruptions to our internet services could cause current or potential customers to believe that our systems are unreliable, which could lead to the loss of customers and harm our reputation.

 

We use both internally developed and licensed systems for transaction processing and accounting, including billings and collections processing. We continually upgrade and improve these systems to accommodate growth in our business. If we are unsuccessful in continuing to upgrade our technology, transaction processing systems or network infrastructure to accommodate increased transaction volumes, it could harm our operations and interfere with our ability to expand our business.

 

If the mobile solutions available to consumers are not effective, the use of our technology platform could decline.

Visits and purchases made on mobile devices by consumers have increased in recent years. The smaller screen size and reduced functionality associated with some mobile devices may make the use of a technology platform more difficult or less appealing to customers. Visits to our marketplaces on mobile devices may not convert into purchases as often as visits made through personal computers, which could result in less revenue for us.

 

Further, although we strive to provide engaging mobile experiences for customers who visit our mobile websites using a browser on their mobile device, as new mobile devices and mobile platforms are released, we may encounter problems in developing or supporting applications for them. In addition, supporting new devices and mobile device operating systems may require substantial time and resources. The success of our mobile applications could also be harmed by factors outside our control, such as:

 

·actions taken by providers of mobile operating systems or mobile application, or app, download stores;
·unfavorable treatment received by our mobile apps, especially as compared to competing apps, such as the placement of our mobile apps in a mobile app download store;
·increased costs to distribute or have customers use our mobile apps; or
·changes in mobile operating systems, such as iOS and Android, that degrade the functionality of our mobile websites or mobile apps or that give preferential treatment to competitive products.

 

If customers encounter difficulty accessing or using our technology platform on their mobile devices, or if sellers and buyers choose not to use our technology platform on their mobile devices, our growth prospects and our business may be adversely affected.

 

A deterioration of general macroeconomic conditions could materially and adversely affect our business.

Our performance is subject to macroeconomic conditions and their impact on customer spending. Adverse macroeconomic conditions typically result in a general tightening in credit markets, lower levels of liquidity, increased default and bankruptcy rates, and depressed levels of activity and investment.

 

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Challenging macroeconomic conditions may have a negative impact on the operations, financial condition and liquidity of many customers and, as a result, may negatively impact the volume of equipment listed for sale and the prices of equipment sold in our marketplace, thereby having a negative impact on our revenue and ability to grow our business. If sellers choose not to sell their assets as a result of adverse economic conditions, buyers are unable to purchase equipment based on their inability to obtain sufficient financing or are unwilling to do so given the market climate, or if customers are in general financial distress, our operations may be negatively affected and revenue from our marketplace may decrease.

 

Our ability to provide a high quality customer experience may depend on third parties and external factors over which we may have little or no control.

Our ability to provide a high quality and efficient customer experience is also dependent on external factors over which we may have little or no control, including, without limitation, the reliability and performance of the equipment sold in our marketplaces and the performance of third-party carriers who transport purchased equipment on behalf of buyers. If our customers are dissatisfied with the accuracy of our appraisals and inspections, the quality of the business insights provided by our other value-added services, or do not receive the equipment they purchased in a timely manner or in the condition that they expect, customers may stop using us to purchase equipment. Failure to provide customers with high quality and efficient customer experiences could substantially harm our reputation and adversely impact our efforts to develop customer and industry trust in our brands.

 

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes in this or other regulations could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as certain federal, provincial, state and local laws, rules and regulations, including those governing the internet and e-commerce. Existing and future laws and regulations may impede the growth of the internet, e-commerce or other services, and increase the cost of doing business, including providing online auction services. These regulations and laws may cover taxation, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts, and other communications, consumer protection, broadband residential Internet access and the characteristics and quality of services. It is not clear how existing laws governing issues such as property ownership, sales, use and other taxes, libel, and personal privacy apply to the Internet and e-commerce. Changes to regulations and unfavorable resolution of these issues may harm our business and results of operations.

 

Our future expenses may increase significantly and our operations and ability to expand may be limited as a result of environmental and other regulations.

A variety of federal, provincial, state and local laws, rules and regulations throughout the world, including local tax and accounting rules, apply to our business. These relate to, among other things, the auction business, imports and exports of equipment, property ownership laws, licensing, worker safety, privacy of customer information, land use and the use, storage, discharge and disposal of environmentally sensitive materials. Complying with revisions to laws, rules and regulations could result in an increase in expenses and a deterioration of our financial performance. Failure to comply with applicable laws, rules and regulations could result in substantial liability to us, suspension or cessation of some or all of our operations, restrictions on our ability to expand at present locations or into new locations, requirements for the acquisition of additional equipment or other significant expenses or restrictions.

 

The development or expansion of auction sites depends upon receipt of required licenses, permits and other governmental authorizations. Our inability to obtain these required items could harm our business. Additionally, changes or concessions required by regulatory authorities could result in significant delays in, or prevent completion of, such development or expansion.

 

Under some environmental laws, an owner or lessee of, or other person involved in, real estate may be liable for the costs of removal or remediation of hazardous or toxic substances located on or in, or emanating from, the real estate, and related costs of investigation and property damage. These laws often impose liability without regard to whether the owner, lessee or other person knew of, or was responsible for, the presence of the hazardous or toxic substances.

 

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Environmental contamination may exist at our owned or leased auction sites, or at other sites on which we may conduct auctions, or properties that we may be selling by auction, 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 claims arising from environmental contamination of any of these properties could harm our financial condition and results of operations.

 

There are restrictions in the United States, Canada and Europe and other jurisdictions in which we do business that may affect the ability of equipment owners to transport certain equipment between specified jurisdictions or the saleability of older equipment. One example of these restrictions is environmental certification requirements in the United States, which prevent non-certified equipment from entering into commerce in the United States. In addition, engine emission standards in some jurisdictions limit the operation of certain trucks and equipment in those markets.

 

These restrictions, or changes to environmental laws, including laws in response to climate change, could inhibit materially the ability of customers to ship equipment to or from our auction sites, reducing our GTV and harming our business, financial condition and results of operations.

 

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 GTV and harm our business, financial condition and results of operations.

 

Our substantial international operations expose us to foreign exchange rate fluctuations that could harm our results of operations.

We conduct business in many countries around the world and intend to continue to expand our presence in international markets, including emerging markets. Fluctuating currency exchange rates may negatively affect our business in international markets and our related results of operations.

 

Although we report our financial results in U.S. dollars, a significant portion of our revenues and expenses are generated outside the United States, primarily in currencies other than the U.S. dollar. In particular, a significant portion of our revenues are earned, and expenses incurred, in the Canadian dollar and the Euro. As a result, our financial results are impacted by fluctuations in foreign currency exchange rates. We do not currently engage in foreign currency hedging arrangements, and, consequently, foreign currency fluctuations may adversely affect our results of operations.

 

The results of operations of our foreign subsidiaries are translated from local currency into U.S. dollars for financial reporting purposes. If the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated revenues or expenses will result in increased U.S. dollar denominated revenues and expenses. Similarly, if the U.S. dollar strengthens against foreign currencies, particularly the Canadian dollar and the Euro, our translation of foreign currency denominated revenues or expenses will result in lower U.S. dollar denominated revenues and expenses. Foreign currency movements relative to the U.S. dollar positively impacted revenues by $3.2 million in 2017, and negatively by $6.8 million and $40.5 million, respectively, in 2016 and 2015.

 

In addition, currency exchange rate fluctuations between the different countries in which we conduct our operations impact the purchasing power of buyers, the motivation of consignors, asset values and asset flows between various countries, including those in which we do not have operations. These factors and other global economic conditions may harm our business and our results of operations.

 

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Our business is subject to the risks of operating internationally.

We operate in a large number of international jurisdictions. There are risks inherent in doing business internationally, including, but not limited to:

 

·trade barriers, trade regulations, currency controls, import or export regulations, and other restrictions on doing business freely;
·local labor, environmental, tax, and other laws and regulations, and uncertainty or adverse changes in such laws and regulations or the interpretations thereof;
·difficulties in staffing and managing foreign operations;
·economic, political, social or labor instability or unrest, or changes in conditions;
·terrorism, war, hostage-taking, or military repression;
·corruption;
·expropriation and nationalization;
·high rates of inflation; and
·uncertainty as to litigation in foreign jurisdictions and enforcement of local laws.

 

If we violate the complex foreign and U.S. laws and regulations that apply to our international operations, we may face fines, criminal actions or sanctions, prohibitions on the conduct of our business and damage to our reputation. These risks inherent in our international operations increase our costs of doing business internationally and may result in a material adverse effect on our operations or profitability.

 

Our business operations may be subject to a number of federal and local laws, rules and regulations including export control regulations.

Our business operations may be subject to a number of federal and local laws, rules and regulations, including the Export Administration Regulations, or EAR, maintained by the U.S. Department of Commerce, the International Traffic in Arms Regulations, or ITAR, maintained by the U.S. Department of State, economic sanctions regulations maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, and similar regulations in Canada and the European Union (“EU”). We have implemented procedures regarding compliance with these laws, including monitoring, on an automatic and manual basis, the potential sellers and buyers in our marketplace and restricting business from certain countries. We can offer no assurances that these procedures will always be effective.

 

We have implemented certain processes and procedures to prevent sellers and buyers that are located in a prohibited jurisdiction or are prohibited persons from participating in our marketplaces. Such processes and procedures are designed so that our business is in compliance with OFAC-administered sanctions regulations and other applicable sanction regulations, including those in Canada and the E.U.

 

If we were to violate applicable export control or sanctions regulations, we could be subject to administrative or criminal penalties which, in certain circumstances, could be material. We could be subject to damages, financial penalties, denial of export privileges, incarceration of our employees, other restrictions on our operations, and reputational harm. Further, any action on the part of the U.S. Department of State, the U.S. Department of Commerce, OFAC or other applicable regulator against the company or any of our employees for potential violations of these laws could have a negative impact on our reputation and business, which might decrease stockholder value.

 

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Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the Corruption of Foreign Public Officials Act, or the CFPOA, and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the CFPOA, the U.S. domestic bribery statute contained in 18 U.S.C. §201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act of 2010, or the U.K. Bribery Act, and possibly other anti-corruption, anti-bribery and anti-money laundering laws in countries in which we conduct activities or facilitate the buying and selling of equipment. We face significant risks if we fail to comply with the FCPA, the CFPOA and other anti-corruption and anti-bribery laws that prohibit companies and their employees and third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties or candidates, employees of public international organizations, and private-sector recipients for the corrupt purpose of obtaining or retaining business, directing business to any person, or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA, the CFPOA or other applicable laws and regulations. In addition, we leverage various third parties to sell our solutions and conduct our business abroad. We, our channel partners, and our other third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We may be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. Our Code of Business Conduct and Ethics and other corporate policies mandate compliance with these anti-bribery laws, which often carry substantial penalties.

 

Any violation of the FCPA, other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, which could have a material and adverse effect on our reputation, business, operating results and prospects. In addition, responding to any enforcement action may result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.

 

We are pursuing a long-term growth strategy that includes acquisitions and developing and enhancing an appropriate sales strategy, which requires upfront investment with no guarantee of long-term returns.

We continue to pursue a long-term growth strategy, including developing and enhancing an appropriate sales strategy, that contemplates upfront investments, including (i) investments in emerging markets that may not generate profitable growth in the near term, (ii) adding new business and information solutions, and (iii) developing our people. Planning for future growth requires investments to be made now in anticipation of growth that may not materialize, and if our strategies do not successfully address the needs of current and potential customers, we may not be successful in maintaining or growing our GTV and our financial condition and results of operations may be adversely impacted. We may also not be able to improve our systems and controls as a result of increased costs, technological challenges, or lack of qualified employees. A large component of our selling, general and administrative expenses is considered fixed costs that we will incur regardless of any GTV growth. There can be no assurances that our GTV and revenues will be maintained or grow at a more rapid rate than our fixed costs.

 

Part of our growth strategy includes growth through acquisitions, such as the Acquisition, which poses a number of risks. We may not be successful in identifying appropriate acquisition candidates, consummating acquisitions on satisfactory terms or integrating any newly acquired or expanded business with our current operations. Additionally, significant costs may be incurred in connection with any acquisition and our integration of such businesses with our business, including legal, accounting, financial advisory and other costs. We may also not realize the anticipated benefits of, and synergies from, such acquisition. We cannot guarantee that any future business acquisitions will be pursued, that any acquisitions that are pursued will be consummated, or that we will achieve the anticipated benefits of completed acquisitions.

 

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Our business is subject to risks relating to our ability to safeguard our information systems, including the cyber-security and privacy of our customers’ confidential information.

We rely on information technology to manage our business, including maintaining proprietary databases containing sensitive and confidential information about our customers, suppliers, counterparties and employees (which may include personally identifiable information and credit information). An increasing number of websites have disclosed cyber breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their websites or infrastructure. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently, we may not be able to anticipate these techniques or to implement adequate preventative measures. Unauthorized parties may also attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving our employees or contractors. A party that is able to circumvent our security measures could misappropriate our or our customers’ confidential information, cause interruption to our operations, damage our computing infrastructure or otherwise damage our reputation. Although we maintain information security measures, there can be no assurance that we will be immune from these security risks, and any breach of our information security may have a material adverse impact on our business and results of operations.

 

Under credit card payment rules and our contracts with credit card processors, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. We may also be held liable for certain fraudulent credit card transactions and other payment disputes with customers. If we were unable to accept payment cards, our results of operations would be materially and adversely affected.

 

Security breaches could damage our reputation, cause a loss of confidence in the security of our services and expose us to a risk of loss or litigation and possible liability for damages. We may be required to make significant expenditures to protect against security breaches or to alleviate problems caused by any breaches. These issues are likely to become costlier as we expand. Our insurance policies may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to fully collect, if at all, under these insurance policies.

 

Income and commodity tax amounts, including tax expense, may be materially different than expected.

Our global operations are subject to tax interpretations, regulations, and legislation in the numerous jurisdictions in which we operate, all of which are subject to continual change.

 

We accrue and pay income taxes and have significant income tax assets, liabilities, and expense that are estimates based primarily on the application of those interpretations, regulations and legislation, and the amount and timing of future taxable income. Accordingly, we cannot be certain that our estimates and reserves are sufficient. The timing concerning the monetization of deferred income tax amounts is uncertain, as they are dependent on our future earnings and other events. Our deferred income tax amounts are valued based upon substantively enacted income tax rates in effect at the time, which can be changed by governments in the future.

 

The audit and review activities of tax authorities affect the ultimate determination of the actual amounts of commodity taxes payable or receivable, income taxes payable or receivable, deferred income tax assets and liabilities, and income tax expense.

 

There is no assurance that taxes will be payable as anticipated or that the amount or timing of receipt or use of the tax-related assets will be as currently expected. Our experience indicates that taxation authorities are increasing the frequency and depth of audits and reviews and, while our approach to accounting for tax positions has generally been deemed appropriate through recent audits by taxation authorities, future tax authority determinations could have a material impact to our financial position.

 

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The effects of newly enacted U.S. tax legislation have not yet been fully analyzed and could be materially different from our current estimates.

On December 22, 2017, U.S. tax legislation known as the Tax Cuts and Jobs Act, or TCJA, was signed into law, significantly reforming the U.S. Internal Revenue Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits. The TCJA added a minimum tax on a U.S. corporation’s taxable income after adding back certain deductible payments to non-U.S. affiliates. In addition, the TCJA disallows deductions for interest and royalty payments from U.S. companies to non-U.S. affiliates that are hybrid payments or made to hybrid entities. We continue to examine the impact the TCJA may have on our business. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax expense in the year of enactment. The impact of the TCJA on holders of common shares is uncertain and could be adverse.

 

Losing the services of one or more key personnel could materially affect our business and require us to incur substantial additional costs to recruit replacement personnel.

The growth and performance of our business depends to a significant extent on the efforts and abilities of our executive officers and senior managers. Many of our key executives have extensive experience with our business. These officers have knowledge and an understanding of our company and industry that cannot be readily duplicated. The loss of any member of our senior management team could impair our ability to execute our business plan and growth strategy, cause us to lose customers and reduce our revenues.

 

Our business could be harmed if we lost the services of any of these individuals. We do not maintain key person insurance on the lives of any of our executive officers. As a result, we would have no way to cover the financial loss if we were to lose the services of members of our senior management team. This uncertainty may adversely affect our ability to attract and retain key employees.

 

If any of our key personnel were to join a competitor or form a competing company, existing and potential customers could choose to form business relationships with that competitor instead of us. There can be no assurance that confidentiality, non-solicitation, non-competition or similar agreements signed by our former directors, officers, or employees, or by IronPlanet stockholders or our transactional counterparties, will be effective in preventing a loss of business.

 

Our future success largely depends on our ability to attract, develop and retain skilled employees in all areas of our business, as well as to design an appropriate organization structure and plan effectively for succession. Although we actively manage our human resource risks, there can be no assurance that we will be successful in our efforts. If we fail to attract, develop and retain skilled employees in all areas of our business, our financial condition and results of operations may be adversely affected and we may not achieve our growth or performance objectives.

 

We are regularly subject to general litigation and other claims, which could have an adverse effect on our business and results of operations.

We are subject to general litigation and other claims that arise in the ordinary course of our business. The outcome and impact of such litigation cannot be predicted with certainty, but regardless of the outcome, these proceedings can have an adverse impact on us because of legal costs, diversion of management resources and other factors. While the results of these claims have not historically had a material effect on our business, financial condition or results of operations, we may not be able to defend ourselves adequately against these claims in the future, and these proceedings may have a material adverse impact on our financial condition or results of operations.

 

In addition to other legal proceedings, we may also be subject to intellectual property claims, which are extremely costly to defend, could require us to pay significant damages, and could limit our ability to use certain technologies in the future. Companies in the Internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights.

 

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We periodically receive notices that claim we have infringed, misappropriated, or misused other parties’ intellectual property rights. To the extent we gain greater public recognition, we may face a higher risk of being the subject of intellectual property claims.

 

Third-party intellectual property rights may cover significant aspects of our technologies or business methods or block us from expanding our offerings. Any intellectual property claim against us, with or without merit, could be time consuming and expensive to settle or litigate and could divert the attention of our management. Litigation regarding intellectual property rights is inherently uncertain due to the complex issues involved, and we may not be successful in defending ourselves in such matters.

 

Many potential litigants, including some patent holding companies, have the ability to dedicate substantial resources to enforcing their intellectual property rights. Any claims successfully brought against us could subject us to significant liability for damages, and we may be required to stop using technology or other intellectual property alleged to be in violation of a third party’s rights. We also might be required to seek a license for third-party intellectual property. Even if a license is available, we could be required to pay significant royalties or submit to unreasonable terms, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, which could require significant time and expense. If we cannot license or develop technology for any allegedly infringing aspect of our business, we would be forced to limit our service and may be unable to compete effectively. Any of these results could harm our business.

 

We may be unable to adequately protect or enforce our intellectual property rights, which could harm our reputation and adversely affect our growth prospects.

We regard our proprietary technologies and intellectual property as integral to our success. We protect our proprietary technology through a combination of trade secrets, third-party confidentiality and nondisclosure agreements, additional contractual restrictions on disclosure and use, and patent, copyright, and trademark laws.

 

We currently are the registered owners of many Internet domain names internationally. As we seek to protect our domain names in an increasing number of jurisdictions, we may not be successful in doing so in certain jurisdictions. Our competitors may adopt trade names or domain names similar to ours, thereby impeding our ability to promote our marketplace and possibly leading to customer confusion. In addition, we could face trade name or trademark or service mark infringement claims brought by owners of other registered or unregistered trademarks or service marks, including trademarks or service marks that may incorporate variations of our brand names. The legal means we use to protect our proprietary technology and intellectual property do not afford complete protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We cannot guarantee that any of our present or future intellectual property rights will not lapse or be invalidated, circumvented, challenged or abandoned; our intellectual property rights will provide competitive advantages to us; our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; any of our pending or future patent applications will be issued or have the coverage originally sought; or our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak.

 

We also may allow certain of our registered intellectual property rights, or our pending applications or registrations for intellectual property rights, to lapse or to become abandoned if we determine that obtaining or maintaining the applicable registered intellectual property rights is not worthwhile.

 

Further, although it is our practice to enter into confidentiality agreements and intellectual property assignment agreements with our employees and contractors, these agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.

 

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Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy, reverse engineer, or otherwise obtain and use our products or technology. We cannot be certain that we will be able to prevent unauthorized use of our technology or infringement or misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights. Effective patent, copyright, trademark, service mark, trade secret, and domain name protection is time-consuming and expensive to maintain. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others, which could result in substantial costs and diversion of our resources. In addition, our efforts may be met with defenses and counterclaims challenging the validity and enforceability of our intellectual property rights or may result in a court determining that our intellectual property rights are unenforceable. If we are unable to cost-effectively protect our intellectual property rights, then our business could be harmed. If competitors are able to use our technology or develop proprietary technology similar to ours or competing technologies, our ability to compete effectively and our growth prospects could be adversely affected.

 

We are subject to the terms of open source licenses because our technology platform incorporates open source software.

Some of the software powering our marketplace incorporates software covered by open source licenses. The terms of many open source licenses have not been interpreted by U.S. courts and there is a risk that the licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to operate our marketplace. Under certain open source licenses, we could be required to publicly release the source code of our software or to make our software available under open source licenses. To avoid the public release of the affected portions of our source code, we could be required to expend substantial time and resources to re-engineer some or all of our software which could significantly interrupt our operations.

 

In addition, use of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or controls on the origin of the software. Use of open source software may also present additional security risks because the public availability of this software may make it easier for hackers and other third parties to determine how to compromise our technology platform. Any of these risks could be difficult to eliminate or manage and, if not addressed, could adversely affect our business, financial condition and results of operations.

 

Our business continuity plan may not operate effectively in the event of a significant interruption of our business.

We depend on our information and other systems and processes for the continuity and effective operation of our business. We have implemented a formal business continuity plan covering most significant aspects of our business that would take effect in the event of a significant interruption to our business, or the loss of key systems as a result of a natural or other disaster. Although we have tested our business continuity plan as part of the implementation, there can be no assurance that it will operate effectively or that our business, results of operations and financial condition will not be materially affected in the event of a significant interruption of our business.

 

If we were subject to a disaster or serious security breach, it could materially damage our business, financial condition and results of operations.

 

Our insurance may be insufficient to cover losses that may occur as a result of our operations.

We maintain property and general liability insurance. This insurance may not remain available to us at commercially reasonable rates, and the amount of our coverage may not be adequate to cover all liabilities that we may incur. Our auctions generally involve the operation of large equipment close to a large number of people, and despite our focus on safe work practices, an accident could damage our facilities or injure auction attendees. Any major accident could harm our reputation and our business. In addition, if we were held liable for amounts exceeding the limits of our insurance coverage or for claims outside the scope of our coverage, the resulting costs could harm our financial condition and results of operations.

 

Ritchie Bros.25

 

 

Certain global conditions may affect our ability to conduct successful events.

Like most businesses with global operations, we are subject to the risk of certain global conditions, such as pandemics or other disease outbreaks or natural disasters that could hinder our ability to conduct our scheduled auctions, restrict our customers’ travel patterns or their desire to attend auctions or impact our online operations, including disrupting the Internet or mobile networks or one or more of our service providers. If this situation were to occur, we may not be able to generate sufficient equipment consignments to sustain our business or to attract enough bidders to our auctions to achieve world fair market values for the items we sell. This could harm our financial condition and results of operations.

 

Our operating results are subject to quarterly variations.

Historically, our revenues and operating results have fluctuated from quarter to quarter. We expect to continue to experience these fluctuations as a result of the following factors, among others:

 

·the size, timing and frequency of our auctions;
·the seasonal nature of the auction business in general, with peak activity typically occurring in the second and fourth calendar quarters, mainly as a result of the seasonal nature of the construction and natural resources industries;
·the performance of our underwritten (guarantee and outright purchase) contracts;
·general economic conditions in the geographical regions in which we operate; and
·the timing of acquisitions and development of auction facilities and related costs.

 

In addition, we may incur substantial costs when entering new geographies and the profitability of operations at new locations is uncertain as a result of the increased variability in the number and size of auctions at new sites. These and other factors may cause our future results to fall short of investor expectations or not to compare favorably to our past results. Further, as our results generally fluctuate from quarter to quarter, period-to-period comparisons of our results of operations may not be meaningful indicators of future performance.

 

New regulation in the areas of consumer privacy and commercial electronic messages may restrict or increase costs of our marketing efforts.

Our operation and marketing activities are subject to various types of regulations, including laws relating to the protection of personal information, consumer protection and competition. User data protection and communication-based laws may be interpreted and applied inconsistently from country to country, and these laws continue to develop in ways we cannot predict and that may adversely affect our business. Complying with these varying national requirements could cause us to incur substantial costs or require us to change our business practices in a manner with adverse effects on our business, and violations of privacy-related laws can result in significant penalties. See “— We process, store, and use personal information and other data, which subjects us to a variety of evolving governmental regulation, industry standards and self-regulatory schemes, contractual obligations, and other legal obligations related to privacy and data protection, which may increase our costs, decrease adoption and use of our products and services and expose us to liability.” A determination that there have been violations of laws relating to our marketing practices under communications-based laws could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our business.

 

One example of such a law is Canada’s Anti-Spam Law, or CASL, which came into force on July 1, 2014. CASL prohibits the transmission of electronic messages for commercial purposes to an electronic address, which includes an electronic mail account, an instant messaging account, a telephone account, or any similar account, unless the recipient has consented to receiving the message and the message complies with the requirements under CASL, including the implementation of an unsubscribe mechanism. CASL further imposes certain restrictions on a service provider’s ability to automatically install or cause to be installed computer software (including software updates) on a person’s device without the person’s consent. CASL, in its current form, may impose additional costs and processes with respect to communicating with existing and prospective customers and may limit cross-selling opportunities for affiliated companies, depending on whether the appropriate consents have been obtained. Penalties for non-compliance with CASL are considerable, including administrative monetary penalties of up to 10 million Canadian dollars.

 

Ritchie Bros.26

 

 

The provisions of CASL providing a private right of action were intended to come into force on July 1, 2017; however, this has been suspended by the Canadian federal government pending further review. If the provisions providing for a private right of action take effect at a later date, they will allow any person to bring claims for contravention of CASL’s terms. The private right of action may lead to increased risk of class action suits. The Canadian Radio-television and Telecommunications Commission has also begun actively enforcing CASL and penalizing non-compliant organizations.

 

We process, store, and use personal information and other data, which subjects us to a variety of evolving governmental regulation, industry standards and self-regulatory schemes, contractual obligations, and other legal obligations related to privacy and data protection, which may increase our costs, decrease adoption and use of our products and services and expose us to liability.

There are a number of federal, provincial, state, local laws, rules and regulations, as well as contractual obligations and industry standards, that provide for certain obligations and restrictions with respect to data privacy and security, and the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data. The scope of these obligations and restrictions is changing, subject to differing interpretations, and may be inconsistent among countries or conflict with other rules, and their status remains uncertain.

 

Within the EU, strict laws, including EU Directive 95/46/EC, already apply in connection with the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure and protection of personal information and other customer data. The EU model has been replicated substantially or in part in various jurisdictions outside the United States. Data protection regulators within the EU and other jurisdictions have the power to fine non-compliant organizations significant amounts and seek injunctive relief, including the cessation of certain data processing activities. If personal data transfers to us and by us from the EU are considered illegitimate under EU Directive 95/46/EC and applicable member states’ implementations thereof, we may face a risk of enforcement actions taken by EU data protection authorities.

 

Additionally, the General Data Protection Regulation (“GDPR”), which replaces the EU Directive 95/46/EC and strengthens the existing data protection regulations in the EU, is set to enter into full force on May 25, 2018. The GDPR applies to all EU citizens’ data, regardless of whether such data is collected, stored or processed within the EU. Penalties for non-compliance with the GDPR are considerable, allowing EU regulators to impose a monetary penalty equal to the greater of €100 million or 4% of a non-compliant organization’s worldwide annual sales. Such fines would be in addition to the rights of individuals to sue for damages in respect of any data privacy breach which causes them to suffer loss.

 

As Internet commerce and related technologies continue to evolve, thereby increasing a service provider’s capacity to collect, store, retain, protect, use, process and transmit large volumes of personal information, increasingly restrictive regulation by federal, provincial, state or foreign agencies becomes more likely. We believe that the adoption of increasingly restrictive regulation in the field of data privacy and security is likely in both the United States and in other jurisdictions, possibly as restrictive as the EU model. Obligations and restrictions imposed by current and future applicable laws, regulations, contracts and industry standards may affect our ability to provide all the current features of our products and services, and could require us to change our business practices in a manner adverse to our business.

 

In 2015, Canada’s federal privacy legislation was amended to implement mandatory data breach notification requirements and fines of up to 100,000 Canadian dollars per occurrence for organizations that fail to keep a log of breaches or notify the Office of the Privacy Commissioner or affected individuals. The amendments are not yet in force pending approval of related regulations, which were published for public comment in 2017. Such obligations and restrictions may limit our ability to collect, store, process, use, transmit and share data with our affiliated entities and third party partners. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations. Failure to comply with obligations and restrictions related to data privacy and security could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity and other losses that could harm our business.

 

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In addition to government activity, privacy advocacy groups and industry groups have adopted and are considering the adoption of various self-regulatory standards and codes of conduct that, if applied to our business or current practices may place additional burdens on us, which may increase the costs of our products and services further reducing demand and harming our business.

 

Our customers may also accidentally disclose their passwords or store them on a mobile device that is lost or stolen, creating the perception that our systems are not secure against third-party access. Additionally, our third-party contractors may have access to customer data. If these or other third-party vendors violate applicable laws or our policies, such violations may also put our customers’ information at risk and could in turn have a material and adverse effect on our business. Any failure by us to protect our customers’ privacy and data, including as a result of our systems being compromised by hacking or other malicious or surreptitious activity, could result in a loss of customer confidence and ultimately in a loss of customers, which could materially and adversely affect our business.

 

Our articles, by-laws, shareholder rights plan and Canadian legislation contain provisions that may have the effect of delaying or preventing a change in control.

Certain provisions of our articles of amalgamation, and by-laws, as well as certain provisions of the Canada Business Corporations Act (the “CBCA”) and applicable Canadian securities law, could discourage potential acquisition proposals, delay or prevent a change in control or materially adversely impact the price that certain investors might be willing to pay for our common shares. Our articles of amalgamation authorize our board of directors to determine the designations, rights and restrictions to be attached to, and to issue an unlimited number of, junior preferred shares and senior preferred shares.

 

Our by-laws contain provisions establishing that shareholders must give advance notice to us in circumstances where nominations of persons for election to our board of directors are made by our shareholders other than pursuant to either a requisition of a meeting made in accordance with the provisions of the CBCA or a shareholder proposal made in accordance with the provisions of the CBCA.

 

Among other things, these advance notice provisions set a deadline by which shareholders must notify us in writing of an intention to nominate directors for election to the board of directors prior to any shareholder meeting at which directors are to be elected and set forth the information required in this notice for it to be valid.

 

Our board of directors has adopted a shareholder rights plan (the “Rights Plan”), pursuant to which we issued one right in respect of each common share outstanding. Under the Rights Plan, following a transaction in which any person becomes an “acquiring person” as defined in the Rights Plan, each right will entitle the holder to receive a number of common shares provided in the Rights Plan. The purposes of the Rights Plan are (i) to provide our board of directors time to consider value-enhancing alternatives to a take-over bid and to allow competing bids to emerge; (ii) to ensure that shareholders are provided equal treatment under a take-over bid; and (iii) to give adequate time for shareholders to properly assess a take-over bid without undue pressure. The Rights Plan can potentially impose a significant penalty on any person commencing a takeover bid that would result in the offeror becoming the beneficial owner of 20% or more of our outstanding common shares.

 

Any of these provisions, as well as certain provisions of the CBCA and applicable Canadian securities law, may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders.

 

U.S. civil liabilities may not be enforceable against us, our directors, or our officers.

We are governed by the CBCA and our principal place of business is in Canada. Many of our directors and officers reside outside of the United States, and all or a substantial portion of their assets, as well as a substantial portion of our assets, are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us and such directors and officers or to enforce judgments obtained against us or such persons, in U.S. courts, in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws or any other laws of the United States.

 

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Additionally, rights predicated solely upon civil liability provisions of U.S. federal securities laws or any other laws of the United States may not be enforceable in original actions, or actions to enforce judgments obtained in U.S. courts, brought in Canadian courts, including courts in the Province of British Columbia.

 

We are governed by the corporate laws of Canada which in some cases have a different effect on shareholders than the corporate laws of Delaware.

We are governed by the CBCA and other relevant laws, which may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our charter documents, have the effect of delaying, deferring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance.

 

ITEM 1B:UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2:PROPERTIES

 

We own and lease various properties in Canada, the United States and 10 other countries around the world. We use the properties as auction sites and executive and administrative offices. Our corporate headquarters are located in Burnaby, Canada, and are held through a lease that expires in May 2030. We also lease a United States Leadership Office in Chicago, United States, a European head office in Breda, the Netherlands, and IronPlanet’s head office in Pleasanton, United States. We own an administrative office in Lincoln, United States.

 

International network of auction sites

We generally attempt to establish our auction sites in industrial areas close to major cities. Although we lease some auction sites, we have historically preferred to purchase land and construct purpose-built facilities once we have established a base of business and determined that a region can generate sufficient financial returns to justify the investment.

 

We generally do not construct a permanent auction site in a region until we have conducted several offsite sales in the area, and often we will operate from a regional auction site for several years before considering a more permanent investment. This process allows us to establish our business and evaluate the market potential before we make a significant investment. We will not invest in a permanent auction site unless we believe there is an opportunity for significant, profitable growth in that region. Our average expenditure on a permanent auction site has been in the range of $20 to $25 million in recent years, including land, improvements and buildings.

 

We currently have 45 locations in our auction site network. A permanent auction site includes locations that we own and on which we have constructed an auction theatre and other facilities (e.g. refurbishment), and that we lease with an original term longer than three years and on which we have built permanent structures with an investment of more than $1.5 million. We have 39 permanent auction sites as of the date of this Annual Report on Form 10-K.

 

A regional auction site is a location that we lease on a term longer than one year, have limited investment in facilities (i.e. less than $1.5 million) and on which we average more than two auctions per year on a rolling two-year basis and have at least two full time staff. This category also includes sites located on land that we own with limited investment in facilities. We have six regional auction sites as of the date of this Annual Report on Form 10-K.

 

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Our auction site network as of the date of this discussion is as follows:

 

   Number of acres   Year placed     Lease
   Total   Developed   Developable   into service  Nature  expiry date
Permanent auction sites                        
Canada:                        
Edmonton, Alberta   267    175    92   2002  Owned   
Grande Prairie, Alberta   153    68    68   2009  Owned   
Prince George, British Columbia1   114    60    50   2003  Owned   
Montreal, Quebec   91    68    -   2000  Owned   
Toronto, Ontario   65    65    -   1998  Owned   
Saskatoon, Saskatchewan   60    38    13   2006  Owned   
Regina, Saskatchewan   47    17    30   2007  Owned   
Halifax, Nova Scotia   28    28    -   1997  Owned   
Chilliwack, British Columbia   24    24    -   2010  Owned   
United States:                        
Orlando, Florida   227    189    27   2002  Owned   
Chehalis, Washington   204    131    40   2012  Owned   
North East, Maryland   193    80    28   2001  Owned   
Denver, Colorado   143    70    72   2007  Owned   
Kansas City, Missouri   140    40    60   2008  Owned   
Columbus, Ohio   135    95    30   2007  Owned   
Houston, Texas   128    116    -   2009  Owned   
Minneapolis, Minnesota   122    70    52   2009  Owned   
Raleigh-Durham, North Carolina 1   113    45    56   2012  Owned   
Fort Worth, Texas   127    127    -   1994  Owned   
Atlanta, Georgia   94    62    7   1996  Owned   
Chicago, Illinois   91    71    20   2000  Owned   
Sacramento, California   90    90    -   2005  Owned   
Nashville, Tennessee   81    70    11   2006  Owned   
Las Vegas, Nevada   77    77    -   2012  Leased  31-May-33
St Louis, Missouri1   67    63    4   2010  Owned   
Los Angeles, California   65    63    2   2000  Owned   
Phoenix, Arizona   48    48    -   2002  Owned   
Salt Lake City, Utah   37    37    -   2010  Leased  28-Feb-24
Albuquerque, New Mexico1   11    11    -   1999  Owned   
Albuquerque, New Mexico   4    1    2   2010  Leased  15-May-18

 

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   Number of acres   Year placed     Lease
   Total   Developed   Developable   into service  Nature  expiry date
Permanent auction sites                        
(continued)                        
Other:                        
Mexico City (Polotitlan), Mexico   324    82    207   2008  Owned   
Madrid (Ocaña), Spain   85    65    20   2010  Owned   
Moerdijk, The Netherlands   62    62    -   1999  Owned   
Milan (Caorso), Italy   62    42    10   2010  Owned   
Paris (St. Aubin sur Gaillon), France   50    50    -   2008  Owned   
Dubai, United Arab Emirates   44    44    -   1999  Leased  30-Jun-19
Brisbane, Australia   42    42    -   1999  Owned   
Meppen, Germany   41    41    -   2010  Leased  31-Oct-19
Melbourne (Geelong), Australia   40    40    -   2013  Owned   
Tokyo (Narita), Japan   17    17    -   2010  Owned   

 

   Number of acres   Year placed     Lease
   Total   Developed   Developable   into service  Nature  expiry date
Regional auction sites                        
Tipton, United States   60    60    -   2010  Leased  30-Jun-21
Manchester, United States1   54    25    10   2013  Leased  1-Oct-18
North Franklin, United States   23    23    -   2017  Leased  31-Jul-21
North Battleford, Canada   21    11    10   2017  Leased  14-Nov-19
Lethbridge, Canada   24    20    4   2011  Leased  31-Dec-19
Donington Park, United Kingdom2   11    11    -   2012  Leased  31-Dec-18

 

(1)On November 9, 2017, we announced the closure of these Northern American sites. See further details below.
(2)We received early notification from the landlord that the lease for Donington Park will be terminated effective December 31, 2018 instead of December 31, 2020. We intend to continue operating in the United Kingdom and, as such are exploring alternative sites within this region for relocation.

 

We also own the following developable properties that are not currently under development but are available for future auction site expansion:

 

   Number   Year 
   of acres   acquired 
Casa Grande, United States   125    2010 
Tulare, United States   99    2011 

 

We believe that our administrative offices and developed auction sites are adequate and suitable for the conduct of our operations. Further, we believe that our properties that are being developed to expand our existing auction sites are sufficient to support the growth of our live on site business.

 

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The closure of five North American auction sites, as note above, was completed at the end of 2017. We have provided termination notices on the leased sites and we are exploring various options towards the future use of the owned sites, including sale or lease. The closure of these five sites is one element of an overall strategy to grow larger live auction events at the remaining yards as well as grow the online auction and online marketplace channels.

 

In mid-2017, with the acquisition of Iron Planet and signing of the strategic relationship with Caterpillar, we were able to conduct a very successful auction in our Narita, Japan yard which we had previously considered exiting given our shift to increased digital sales in that market. We have decided to continue to utilize the Narita yard in 2018 to conduct more live auctions in partnership with Nippon Cat and will not be pursuing any disposition of the Narita yard at this time.

 

ITEM 3:LEGAL PROCEEDINGS

 

We have no material legal proceedings pending, other than ordinary routine litigation incidental to the business, and we do not know of any material proceedings contemplated by governmental authorities.

 

ITEM 4:MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5:MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Outstanding Share Data

We are a public company and our common shares are listed under the symbol “RBA” on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”). Financial information about our equity and share-based payments is set forth in our consolidated financial statement footnotes 27 “Equity and Dividends” and 28 “Share-based Payments” in “Part II, Item 8: “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

 

Market Information

Our common shares, without par value, are issued in registered form. The transfer agent for the shares is Computershare Trust Company of Canada, 100 University Avenue, 9th Floor, Toronto, Ontario M5J 2Y1. Our common shares trade on the NYSE and on the TSX under the symbol “RBA”. On February 23, 2018, there were 322 holders of record of our common shares that do not include the shareholders for whom shares are held in a nominee or street name.

 

The following table sets forth the high and low prices of our common shares by quarter for 2017 and 2016:

 

   NYSE (US dollars)   TSX (Canadian dollars) 
Quarter ended  High   Low   High   Low 
December 31, 2017  $31.66   $24.08   $39.57   $30.63 
September 30, 2017  $31.75   $26.68   $39.47   $34.03 
June 30, 2017  $33.00   $27.65   $44.95   $36.64 
March 31, 2017  $35.21   $30.41   $46.58   $40.07 
December 31, 2016  $39.96   $33.50   $52.88   $45.47 
September 30, 2016  $36.79   $27.13   $48.29   $34.80 
June 30, 2016  $34.69   $26.41   $44.20   $34.58 
March 31, 2016  $27.59   $21.03   $35.75   $29.73 

 

Dividend Policy

We currently pay a regular quarterly cash dividend of $0.17 per common share. We currently intend to continue to declare and pay a regular quarterly cash dividend on our common shares; however, any decision to declare and pay dividends in the future will be made at the discretion of our Board, after considering our operating results, financial condition, cash requirements, financing agreement restrictions and any other factors our Board may deem relevant. In 2017, we paid total cash dividends of $0.68 per common share, compared to $0.66 per common share in 2016, and $0.60 per common share in 2015.

 

Because Ritchie Bros. Auctioneers Incorporated is a holding company with no material assets other than the shares of its subsidiaries, our ability to pay dividends on our common shares depends on the income and cash flow of our subsidiaries. No financing agreements to which our subsidiaries are party currently restrict those subsidiaries from paying dividends.

 

Pursuant to income tax legislation, Canadian resident individuals who receive “eligible dividends” in 2006 and subsequent years will be entitled to an enhanced gross-up and dividend tax credit on such dividends. All dividends that we pay are “eligible dividends” unless indicated otherwise.

 

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Comparison of Cumulative Return

The following graph compares the cumulative return on a $100 investment in our common shares over the last five fiscal years beginning December 31, 2012 through December 31, 2017, to that of the cumulative return on a $100 investment in the Russell Global Index (“Russell 2000”), the S&P / TSX Composite Index (“S&P/TSX”) and the Dow Jones Industrial Average Index (“DJIA”) for the same period. In calculating the cumulative return, reinvestment of dividends, if any, is assumed. The indices are included for comparative purpose only. This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

 

Company / index  2012   2013   2014   2015   2016   2017 
RBA (NYSE)  $100.00   $106.14   $124.23   $111.91   $156.97   $138.63 
Russell 2000  $100.00   $157.05   $162.59   $153.31   $183.17   $207.24 
S&P/TSX  $100.00   $113.94   $122.39   $108.82   $127.88   $135.58 
DJIA  $100.00   $135.68   $145.88   $142.62   $161.76   $202.33 

 

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Securities Authorized for Issuance under Equity Compensation Plans

The following table is as of December 31, 2017:

 

   Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
   Weighted average exercise price of
outstanding options, warrants and
rights
   Number of securities  remaining
available for future issuance under 
equity compensation plans (excluding
securities reflected in column (a))
 
Plan Category  (a)   (b)   (c) 
Equity compensation plans approved by security holders   5,278,385(1)  $24.29(2)   4,459,270(3)
Equity compensation plans not approved by security holders   -    -    - 
Total   5,278,385   $24.29    4,459,270 

 

(1)Reflects our stock option plans, performance share units (“PSUs”) granted under the Senior Executive PSU Plan (March 2015) and the Employee PSU Plan (March 2015) (together, the “2015 PSU Plans”), Sign-On Grant PSUs granted to our Chief Executive Officer (“CEO”) (the “CEO SOG PSUs”) and equity-classified restricted share units. This amount reflects 100% of target number of PSUs granted and includes dividend equivalent rights credited in connection with such PSUs.

  

Under the 2015 PSU Plans, the number of PSUs that vest is conditional upon specified market, service, and performance vesting conditions being met. The market vesting condition is based on the relative performance of our share price in comparison to the performance of a pre-determined portfolio of other companies’ share prices. The non-market vesting conditions are based on the achievement of specific performance measures and can result in participants earning between 0% and 200% of the target number of PSUs granted. Further, the Company has the option to choose whether to settle the PSUs in cash or in shares.

 

The CEO SOG PSUs are subject to service and market vesting conditions based on the relative performance of our share price in comparison to the performance of a pre-determined portfolio of other companies’ share prices and can result in earning between 0% and 200% of the target number of SOG PSUs granted.

 

For a further description of our stock option plans and share unit plans, see “Part II, Item 8: Financial Statements and Supplementary Data”.

 

(2)Weighted average exercise price does not include the effect of our outstanding share units.

 

(3)Consists of:
a.3,402,481 common shares available for issuance Amended and Restated Stock Option Plan, the IronPlanet 1999 Stock Plan, and the IronPlanet 2015 Stock Plan.
b.1,000,000 common shares that we may elect to issue upon settlement of our PSUs granted under the 2015 PSU Plans.
c.146,789 common shares that we may elect to issue upon settlement of our CEO SOG PSUs.

 

Issuer Purchases of Equity Securities

 

Share repurchase program

No share repurchases were made pursuant to our Normal Course Issuer Bid (“NCIB”), which expired March 2, 2017, or by any other means during 2017. For details of the March 2016 share repurchases pursuant to our NCIB, refer to “Part II, Item 8: Financial Statements and Supplementary Data” presented elsewhere in this Annual Report on Form 10-K.

 

Exchange Controls

Canada has no system of exchange controls. There are no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors.  There are no laws in Canada or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments to U.S. Resident Holders (as defined below) of our common shares, except as discussed in “Certain Canadian Federal Income Tax Considerations for U.S. Residents” below.

 

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There are no limitations under the laws of Canada or in our organizational documents on the right of foreigners to hold or vote our common shares, except that the Investment Canada Act may require review and approval by the Minister of Industry (Canada) of certain acquisitions of control of Ritchie Bros. by a “non-Canadian”.  “Non-Canadian” generally means an individual who is not a Canadian citizen, or a corporation, partnership, trust or joint venture that is ultimately controlled by non-Canadians.

 

Certain Canadian Federal Income Tax Considerations for U.S. Residents

The following summarizes certain Canadian federal income tax consequences generally applicable under the Income Tax Act (Canada) and the regulations enacted thereunder (collectively, the “Canadian Tax Act”) and the Canada-United States Income Tax Convention (1980) (the “Convention”) to the holding and disposition of common shares.

 

This comment is restricted to holders of common shares each of whom, at all material times for the purposes of the Canadian Tax Act and the Convention, (i) is resident solely in the United States, (ii) is entitled to the full benefits of the Convention, (iii) holds all common shares as capital property, (iii) holds no common shares that are “taxable Canadian property” (within the meaning of the Canadian Tax Act) of the holder, (iv) deals at arm’s length with and is not affiliated with Ritchie Bros., (v) does not and is not deemed to use or hold any common shares in a business carried on in Canada, and (vi) is not an insurer that carries on business in Canada and elsewhere (each such holder, a “U.S. Resident Holder”).

 

Certain U.S.-resident entities that are fiscally transparent for United States federal income tax purposes (including limited liability companies) may not be regarded by the Canada Revenue Agency (“CRA”) as entitled to the benefits of the Convention. Members of or holders of an interest in such an entity that holds common shares should consult their own tax advisers regarding the extent, if any, to which the CRA will extend the benefits of the Convention to the entity in respect of its common shares.

 

Generally, a U.S. Resident Holder’s common shares will be considered to be capital property of a U.S. Resident Holder provided that the U.S. Resident Holder acquired the common shares as a long-term investment; is not a trader or dealer in securities; did not acquire, hold or dispose of the common shares in one or more transactions considered to be an adventure or concern in the nature of trade (i.e. speculation); and does not hold the common shares as inventory in the course of carrying on a business.

 

This summary is based on the current provisions of the Canadian Tax Act and the Convention in effect on the date hereof, all specific proposals to amend the Canadian Tax Act and Convention publicly announced by or on behalf of the Minister of Finance (Canada) on or before the date hereof, and the current published administrative and assessing policies of the CRA. It is assumed that all such amendments will be enacted as currently proposed, and that there will be no other material change to any applicable law or administrative or assessing practice, whether by judicial, legislative, governmental or administrative decision or action, although no assurance can be given in these respects. Except as otherwise expressly provided, this summary does not take into account any provincial, territorial or foreign tax considerations, which may differ materially from those set out herein.

 

This summary is of a general nature only and it is not intended to be, nor should it be construed to be, legal or tax advice to any holder of common shares, and no representation with respect to Canadian federal income tax consequences to any holder of common shares is made herein. Accordingly, holders of common shares should consult their own tax advisers with respect to their individual circumstances.

 

Disposition of common shares

A U.S. Resident Holder will not be subject to tax under the Canadian Tax Act in respect of any capital gain realized by such U.S. Resident Holder on a disposition of common shares unless the common shares constitute “taxable Canadian property” (within the meaning of the Canadian Tax Act) of the U.S. Resident Holder at the time of disposition and the U.S. Resident Holder is not entitled to relief under the Convention.

 

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Generally, a U.S. Resident Holder’s common shares will not constitute “taxable Canadian property” of the U.S. Resident Holder at a particular time at which the common shares are listed on a “designated stock exchange” (which currently includes the TSX and NYSE) unless at any time during the 60-month period immediately preceding a disposition both of the following conditions are true:

 

(i)the U.S. Resident Holder, any one or more persons with whom the U.S. Resident Holder does not deal at arm’s length, or any partnership in which the holder or persons with whom the holder did not deal at arm’s length holds a membership interest directly or indirectly through one or more partnerships, alone or in any combination, owned 25% or more of the issued shares of any class or series of our share capital; and
(ii)more than 50% of the fair market value of the common shares was derived directly or indirectly from, or from any combination of, real or immovable property situated in Canada, “Canadian resource properties” (as defined in the Canadian Tax Act), “timber resource properties” (within the meaning of the Canadian Tax Act), or options in respect of, interests in or civil law rights in, such properties whether or not such properties exist.

 

In certain circumstances, a common share may be deemed to be “taxable Canadian property” for purposes of the Canadian Tax Act.

 

Even if the common shares constitute “taxable Canadian property” to a U.S. Resident Holder, under the Convention, such a U.S. Resident Holder will not be subject to tax under the Canadian Tax Act on any capital gain realized by such holder on a disposition of such common shares, provided the value of such common shares is not derived principally from real property situated in Canada (within the meaning of the Convention).

 

U.S. Resident Holders whose shares may be taxable Canadian property should consult their own tax advisors.

 

Dividends on common shares

Under the Canadian Tax Act, dividends on shares paid or credited to a non-resident of Canada (or amounts paid or credited on account, or in lieu of payment of, or in satisfaction of, dividends) will be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividends (subject to reduction under the provisions of any applicable tax treaty). Under the Convention, a U.S. resident that beneficially owns the dividends will generally be subject to Canadian withholding tax at the rate of 15% of the gross amount of such dividends unless the beneficial owner is a company which owns at least 10% of the voting shares of Ritchie Bros. at that time, in which case the rate of Canadian withholding tax is generally reduced to 5%.

 

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ITEM 6:SELECTED FINANCIAL DATA

 

The following table sets forth selected consolidated financial data as of and for the years ended December 31, 2013 through December 31, 2017. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Prior to 2015, our consolidated financial statements were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). All prior periods presented below have been restated from IFRS to U.S. GAAP. The following selected consolidated financial information should be read in conjunction with “Part II, Item 7: Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and the consolidated financial statements and the notes thereto included in “Part II, Item 8: Financial Statements and Supplementary Data” presented elsewhere in this Annual Report on Form 10-K. Also see “Recently Adopted Accounting Pronouncements” included in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

(in U.S.$000's, except per  Year ended and as at December 31, 
share amounts)  2017   2016   2015   2014   2013 
Consolidated Income Statements Data                         
Revenues  $610,517   $566,395   $515,875   $481,097   $467,403 
Operating income   107,454    135,722    174,840    127,927    136,959 
Income before income taxes   77,394    130,494    176,436    129,038    134,755 
Net income attributable to stockholders   75,027    91,832    136,214    90,981    93,644 
Earnings per share attributable to stockholders:                         
Basic  $0.70   $0.86   $1.27   $0.85   $0.88 
Diluted   0.69    0.85    1.27    0.85    0.87 
Consolidated Balance Sheets Data                         
Working capital  $120,032   $125,164   $140,133   $140,482   $110,205 
Total assets   2,017,312    1,599,533    1,120,115    1,121,510    1,161,985 
Long-term debt   812,892    595,706    97,915    110,846    177,234 
Contingently redeemable non-controlling interests   -    -    24,785    17,287    8,303 
Stockholders' equity   739,682    687,057    703,176    691,932    686,095 
Consolidated Statements of Cash Flows Data                         
Dividends declared per common share  $0.68   $0.66   $0.60   $0.54   $0.51 
Acquisition of subsidiaries, net of cash acquired  $675,851   $45,511   $12,107   $-   $- 
Net capital spending   34,411    29,785    14,152    29,595    37,066 

 

Subsidiaries acquired as disclosed in the table above consist of IronPlanet in May 2017, Kramer in November 2016, Petrowsky in August 2016, Mascus in February 2016, and Xcira in November 2015.

 

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ITEM 7:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

About Us

Ritchie Bros. Auctioneers Incorporated (“Ritchie Bros.”, the “Company”, “we”, or “us”) (NYSE & TSX: RBA) is a world leader in asset management and disposition of used industrial equipment and other durable assets, selling $4.5 billion of used equipment and other assets during 2017. Our expertise, unprecedented global reach, market insight, and trusted portfolio of brands provide us with a unique position in the used equipment market. We primarily sell used equipment for our customers through live, unreserved auctions at 45 auction sites worldwide, which are simulcast online to reach a global bidding audience. On May 31, 2017, we acquired IronPlanet Holdings, Inc. (“IronPlanet”) for $776.5 million, a leading online marketplace for heavy equipment and other durable assets (the “Acquisition”). These complementary used equipment brand solutions, together with Marketplacee, our online marketplace that supports reserved pricing, provide different value propositions to equipment owners and allow us to meet the needs and preferences of a wide spectrum of equipment sellers and buyers. In the past three years, we have also added a private brokerage service (Ritchie Bros. Private Treaty) and an online listing service (Mascus).

 

During 2017, we continued to integrate our IronPlanet acquisition, which resulted in changes in our basis of organization, including our leadership structure, sales processes, and management reporting. Most significantly, we began to assess the performance of our business and allocate resources based on whether our services are transactional (generating value from the disposition of assets) or non-transactional in nature, and redesigned key metrics accordingly. These changes resulted in the identification of the following new operating segments:

 

·Auctions and Marketplaces (“A&M”) – This is our only reportable segment, which consists of our live on site auctions, online auctions and marketplaces, and brokerage service;
·Ritchie Bros. Financial Services (“RBFS”) – This is our financial brokerage service, which is reported within the “other” category of our segmented information; and
·Mascus – This is our online listing service, which is reported within the “other” category of our segmented information.

 

The “other” category also includes results from various value-added services and make-ready activities, including our equipment refurbishment services, Asset Appraisal Services (“AAS”), and logistical services through Ritchie Bros. Logistics (“RB Logistics”).

 

Key performance metric changes

Our new segmented information disclosure distinguishes between revenues and expenses generated from transactional asset disposition services, which are services that generate Gross Transaction Value3 (“GTV”), and those that do not generate GTV. GTV replaces the previous term of Gross Auction Proceeds (“GAP”) used by Ritchie Bros. and Gross Merchandise Volume used by IronPlanet, providing a common nomenclature across all channels.

 

With the change in segment reporting, we updated our GTV and Revenue Rate key metrics. GTV represents the total proceeds from all items sold in conjunction with our A&M segment. We have retrospectively restated GTV to exclude GTV from our AAS business. GTV attributable to AAS was $18.6 million during the period from IronPlanet acquisition until December 31, 2017. In addition, effective August 1, 2017, GTV no longer includes EquipmentOne buyer premiums. Excluding AAS GTV and EquipmentOne buyer premiums has a less than 1% impact on GTV reported to date.

 

 

 

3GTV represents total proceeds from all items sold at our live on site auctions and online marketplaces. GTV is not a measure of financial performance, liquidity, or revenue, and is not presented in our consolidated financial statements.

 

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We also introduced a segment Revenue Rate, which is calculated as A&M segment revenue divided by GTV. When referring to the original Revenue Rate metric, which is calculated as total, consolidated revenues divided by GTV, we will use the term ‘Consolidated Revenue Rate’.

 

Overview

The following discussion and analysis summarizes significant factors affecting our consolidated operating results and financial condition for the years ended December 31, 2017, 2016, and 2015. This discussion and analysis should be read in conjunction with the “Cautionary Note Regarding Forward-Looking Statements”, “Part II, Item 6: Selected Financial Data”, and the consolidated financial statements and the notes thereto included in “Part II, Item 8. Financial Statements and Supplementary Data” presented in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties.

 

Our actual results could differ materially from those expressed or implied in any forward-looking statements due to various factors, including those set forth under “Part I, Item 1A: Risk Factors” in this Annual Report on Form 10-K. The date of this discussion is as of February 26, 2018.

 

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“US GAAP”). Except for GTV, which is a measure of operational performance and not a measure of financial performance, liquidity, or revenue, the amounts discussed below are based on our consolidated financial statements. Unless indicated otherwise, all tabular dollar amounts, including related footnotes, presented below are expressed in thousands of United States (“U.S.”) dollars.

 

We make reference to various non-GAAP financial measures throughout this discussion and analysis. These measures do not have a standardized meaning, and are therefore unlikely to be comparable to similar measures presented by other companies.

 

Consolidated Highlights

 

Financial highlights

Key highlights for fiscal 2017 were:

 

·GTV of $4.5 billion; a 3% increase over 2016
·Revenues of $610.5 million; an increase of 8% versus $566.4 million in 2016
·Consolidated Revenue Rate of 13.66%; a 59 basis points (“bps”) increase over 2016
·A&M segment revenues up 6% with segment Revenue Rate up 36 bps to 12.63% versus 12.27% in 2016
·Revenues from other services of $46.2 million; an increase of 34% compared to 2016
·Cash provided by operating activities of $146.3 million after interest expense of $33.2 million in 2017 resulting from the additional debt undertaken for the IronPlanet acquisition
·Declared quarterly dividends aggregating to $0.68 per common share in 2017

 

Our 2017 financial performance was influenced by a few notable factors: first, our business experienced broad-based effects of unprecedented demand for infrastructure projects. This led to high equipment utilization rates and an overall equipment shortage, principally in the United States, resulting in lower than expected full year GTV and revenue performance. Other notable factors included:

 

·Our Columbus, United States, live on site auction, which generated $76.6 million of GTV in the third quarter of 2016 compared to $10.5 million in the third quarter of 2017;
·Our largest-ever auction in Grande Prairie, Canada, in March 2016, which generated more than $46.0 million (62.0 million Canadian dollars) of GTV, with no similar auction on the calendar in 2017; and

 

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·A volume decrease in our underwritten business, most significantly in Western Canada, where we continued to see fewer disposals of oil and gas assets due to commodity price improvements.

 

In addition, we completed the significant acquisition of IronPlanet and immersed ourselves in the integration of the businesses. During the integration, we experienced some temporary sales productivity decline, which was expected due to the size of the Acquisition.

 

In 2017, we generated $75.0 million of net income attributable to stockholders. Diluted earnings per share (“EPS”) attributable to stockholders was $0.69 including $38.3 million of acquisition-related costs and $38.3 million of interest expense, compared to a diluted EPS attributable to stockholders of $0.85 in 2016. Diluted adjusted EPS attributable to stockholders4 (non-GAAP measure) decreased 30% to $0.81 in 2017 from $1.15 in 2016.

 

Operational highlights

In 2017, our operational focus was on executing our A&M business while integrating the IronPlanet acquisition. Some notable highlights were:

 

·Completing the IronPlanet acquisition – the financing of which significantly increased our debt levels – which accelerated our multi-channel evolution and digital capabilities, while providing customers with unprecedented choice in our online marketplaces.
·Achieving our 2017 integration milestones, which included the following accomplishments:

 

§Integrating the separate Ritchie Bros. and IronPlanet sales teams into a single, unified, customer-facing sales force.
§Completing the first phase of the technology integration – The Sales Unification Phase. This phase provides our sales teams with the ability to sell across platforms and integrate pricing and appraisal tools.
§Combining EquipmentOne and IronPlanet’s Daily Marketplace to create our Marketplacee solution; a premium service offering unprecedented control and selection for buyers.
§Delivering growth of 6% and 16% in GTV and revenues, respectively, in our business outside of the United States and Canada in 2017 compared to 2016.
§Expanding RBFS capabilities to the broader customer base.
§

Initiating a harmonization of our live on site auction transaction fee structure with that of our online marketplace. The new harmonized fee structure, which will take effect in 2018, is intended to make customers channel agnostic with respect to purchasing equipment. The harmonization is expected to increase our fee revenues.

§Staying on track to realize $20 million in run-rate IronPlanet acquisition synergies by the end of fiscal 2018.

 

·Realizing positive equipment pricing due to the robust equipment demand environment combined with lower supply.
·Expanding our government business in North America and the United Kingdom.
·

Initiating our operational efficiency and site optimization program, the Acquisition enabled us to leverage our asset base more effectively. Specifically, our post-acquisition multi-channel product suite enabled us to execute the strategy to cease live on site auction operations at five sites. We will continue to drive volume from those regions to our online marketplaces and other live on site auction locations. 

 

 

 

4Diluted adjusted EPS attributable to stockholders is a non-GAAP financial measure. We believe that comparing diluted adjusted EPS attributable to stockholders for different financial periods provides useful information about the growth or decline of our diluted EPS attributable to stockholders for the relevant financial period, and eliminates the financial impact of adjusting items we do not consider to be part of our normal operating results. Diluted adjusted EPS attributable to stockholders is calculated by dividing adjusted net income attributable to stockholders (non-GAAP measure) (described in footnote 7), net of the effect of dilutive securities, by the weighted average number of dilutive shares outstanding. Diluted adjusted EPS attributable to stockholders is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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·Leveraging our alliance with Caterpillar to gain momentum on dealer transactions, with 52 contracts signed in North America and 21 internationally.

 

Results of Operations

 

Financial overview  Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's, except EPS)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Revenues  $610,517   $566,395   $515,875   $44,122   $50,520    8%   10%
Costs of services, excluding depreciation and amortization ("D&A")   79,013    66,062    56,026    12,951    10,036    20%   18%
Selling, general and administrative expenses   323,270    283,529    254,389    39,741    29,140    14%   11%
Acquisition-related costs   38,272    11,829    601    26,443    11,228    224%   1868%
D&A expenses   52,694    40,861    42,032    11,833    (1,171)   29%   (3%)
Gain on disposal of property, plant and equipment   (1,656)   (1,282)   (9,691)   (374)   8,409    29%   (87%)
Impairment loss   8,911    28,243    -    (19,332)   28,243    (68%)   100%
Foreign exchange loss (gain)   2,559    1,431    (2,322)   1,128    3,753    79%   (162%)
Operating income   107,454    135,722    174,840    (28,268)   (39,118)   (21%)   (22%)
Operating income margin   17.6%   24.0%   33.9%   n/a    n/a    -640 bps    -990 bps 
Other income (expense)   (30,060)   (5,228)   1,596    (24,832)   (6,824)   475%   (428%)
Income tax expense   2,088    36,982    37,861    (34,894)   (879)   (94%)   (2%)
Net income attributable to stockholders   75,027    91,832    136,214    (16,805)   (44,382)   (18%)   (33%)
Diluted EPS attributable to stockholders  $0.69   $0.85   $1.27   $(0.16)  $(0.42)   (19%)   (33%)
Effective tax rate   2.7%   28.3%   21.5%   n/a    n/a    -2560 bps    680 bps 
GTV  $4,467,982   $4,334,815   $4,247,635   $133,167   $87,180    3%   2%
Consolidated Revenue Rate   13.66%   13.07%   12.14%   n/a    n/a    59 bps    93 bps 
A&M segment:                                   
Revenues   564,298    531,826    505,865    32,472    25,961    6%   5%
Revenue Rate   12.63%   12.27%   11.91%   n/a    n/a    36 bps    36 bps 

 

Revenues

Our revenues are comprised of:

 

·commissions earned at our live on site auctions and online marketplace sales where we act as an agent for consignors of equipment and other assets; and
·fees earned in the process of conducting live on site auctions and online marketplace sales, including online marketplace listing and inspection fees, fees from value-added services and make-ready activities, as well as fees paid by buyers on online marketplace sales.

 

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Revenues increased $44.1 million, or 8%, in 2017 compared to 2016. This increase was primarily due to the Acquisition, which closed on May 31, 2017, and increases in revenues from RBFS, Mascus, and value-added services. Unaudited pro forma revenues decreased 2% from $676.2 million in 2016 to $659.9 million in 2017. Foreign exchange rates had a positive impact on revenues in 2017 as a significant portion of revenues are in Canada and the Netherlands.

 

Revenues increased $50.5 million, or 10%, in 2016 compared to 2015. This increase was primarily due to the performance of our underwritten business, volume increases in GTV, and increases in revenues from Mascus, RBFS, and our value-added services. This increase was partially offset by a negative foreign exchange rate impact on revenues in 2016.

 

Geographic analysis

The distribution of our revenues across the geographic regions in which we operate was as follows, where the geographic location of revenues corresponds to the location in which the sale occurred, or in the case of online sales, where the company earning the revenues is incorporated:

 

Revenue distribution  Canada   Outside of
Canada
   United States   Europe   Other 
Year ended December 31, 2017   28%   72%   53%   11%   8%
Year ended December 31, 2016   33%   67%   49%   9%   9%
Year ended December 31, 2015   32%   68%   50%   9%   9%

 

On a U.S. dollar basis, the proportion of revenue earned in the United States and Europe grew during 2017 compared to 2016. Growth in the United States over the comparative period was primarily due to the Acquisition. Growth in Europe was primarily due to the performance of our live on site auction activities in Spain, as well as an increase in revenues from Mascus. The decrease in Canada was primarily driven by changes in our auction calendar and fewer oil and gas dispersals in Western Canada. Regarding auction calendar changes, we held the largest-ever auction in Grande Prairie in the first quarter of 2016 that generated over $46.0 million (62.0 million Canadian dollars) of GTV, with no similar auction on the Canadian calendar in 2017.

 

The proportion of revenue grew in Canada in 2016 compared to 2015, primarily due to the performance of our underwritten business, volume increases in GTV, and increases in revenues from RBFS, Mascus, and our value-added services.

 

Gross Transaction Value

We believe that revenues are best understood by considering their relationship with GTV. The following table presents GTV by channel:

 

(in U.S. $000's)  Year ended December 31, 
   2017   2016   2015   $ Change   % Change 
   GTV   % of
total
   GTV   % of
total
   GTV   % of
total
   2017 over 2016   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Live on site auctions  $3,947,730    88%  $4,186,811    97%  $4,127,631    97%  $(239,081)  $59,180    (6)%   1%
Online marketplaces:                                                  
Featured (1)   278,260    6%   -    -    -    -    278,260    -    100%   - 
Other (2)   241,992    5%   148,004    3%   120,004    3%   93,988    28,000    64%   23%
GTV  $4,467,982    100%  $4,334,815    100%  $4,247,635    100%  $133,167   $87,180    3%   2%

 

(1)This represents GTV from IronPlanet’s Weekly Featured Auction, which operates under an unreserved auction model.
(2)This includes GTV from Marketplacee and, before that, EquipmentOne.

 

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2017 performance

Overall, GTV increased $133.2 million, or 3%, in 2017 compared to 2016. The increase was primarily due to the Acquisition, and the resulting increase in online marketplace GTV, as well as a positive impact of foreign exchange rates over the comparative period. The increase was partially offset by a decrease GTV from live on site auctions, which was primarily due to a decrease in the number of lots in 2017 compared to 2016 and 2016 auction activity discussed below.

  

The total number of industrial and agricultural lots decreased 5% to 417,600 in 2017 from 437,300 in 2016, and GTV on a per-lot basis decreased 3% to $9,300 in 2017 compared to $9,600 in 2016. We believe these decreases were primarily driven by constrained supply of used equipment, and the resulting impact on the mix and age of equipment that came to market, as well as some lower sales productivity as we complete the integration of our sales teams post-Acquisition. With respect to 2016 auction activity, our Columbus, United States, live on site auction generated $76.6 million of GTV in the third quarter of 2016 compared to $10.5 million in the third quarter of 2017. In addition, we held the largest-ever auction in Grande Prairie, Canada, in March 2016, which generated more than $46.0 million (62.0 million Canadian dollars) of GTV, with no similar auction on the calendar in 2017.

 

During 2017, we continued to actively pursue the use of underwritten commission contracts from a strategic perspective, and when the opportunity arose, only entered such contracts when the risk/reward profile of the terms were agreeable. The volume of underwritten commission contracts decreased to 16% of our GTV in 2017 from 25% in 2016, primarily due to the pressure on used equipment market supply volume. The tight supply of used equipment, coupled with improved pricing, resulted in less seller interest in underwritten commission contracts. Straight commission contracts continue to account for the majority of our GTV.

 

2016 performance

GTV increased $87.2 million, or 2%, in 2016 compared to 2015, primarily due to an increase in the number of live on site industrial and agricultural lots year-over-year. The total number of industrial and agricultural lots increased 12% to 437,300 in 2016 from 390,300 in 2015. The effect of this increase was partially offset by a decrease in GTV on a per-lot basis of 9% to $9,600 in 2016 from $10,600 in 2015, which was primarily due to the mix and age of equipment that came to market in 2016.

 

A decrease in the volume of underwritten contracts to 25% of our GTV in 2016 from 29% in 2015 also partially offset the increase in GTV. This decrease was primarily due to the underwritten contracts associated with the Casper, Wyoming, offsite auction that was held on March 25, 2015.

 

Included in GTV for 2016 was $29.6 million of assets that transacted on a dealer-to-dealer basis on EquipmentOne’s online marketplaces, primarily due to the launch of EquipmentOne’s Enterprise Software Solution (“ESS”) in 2016. Dealer-to-dealer transactions on EquipmentOne’s online marketplaces were not significant prior to the introduction of ESS in 2016.

 

Costs of services

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. Typically, agricultural auctions and auctions located in frontier regions are costlier than auctions held at our permanent and regional auction sites as they do not benefit from economies of scale and frequency.

 

Costs of services incurred to earn online marketplace revenues include inspection costs, facilities costs, and inventory management, referral, 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 D&A expenses.

 

Costs of services increased $13.0 million, or 20%, in 2017 compared to 2016. This increase is primarily due to costs associated with the growth in our inspection and appraisal activities because of the Acquisition.

 

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Costs of services increased $10.0 million, or 18%, in 2016 compared to 2015. This increase was primarily due to the increase in number of lots at our live on site auctions, the increase in the number of agricultural auctions and live on site auctions located in frontier regions, a full year’s contribution of costs from Xcira, and a strategic increase in advertising and promotional expenditure targeted at our larger live on site auctions, including our five-day, premier global auction in Orlando, United States. We believe the targeted increase in advertising and promotional expenditure contributed to the increase in GTV in 2016 compared to 2015.

 

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

 

Headcount

The majority of our SG&A expenses are comprised of employee compensation costs. Our headcount, which includes IronPlanet and excludes Xcira and Mascus employees, increased net 516, or 31%, to 2,165 at December 31, 2017 from 1,649 at December 31, 2016. This increase was primarily due to the Acquisition, as well as a net 30 increase from RBFS to support the growth of that business. Xcira and Mascus added another 100 full-time employees to our December 31, 2017 headcount, which is a net decrease of one compared to the combined headcount of 101 at December 31, 2016.

 

Our headcount, excluding Xcira and Mascus employees, increased net 127, or 8%, to 1,649 at December 31, 2016 from 1,522 at December 31, 2015. This increase included an increase of net 23 equipment inspectors, yard staff, and other personnel at our Edmonton, Canada, auction site to support growth in that region. While some of that increase in that region came from the addition of new employees, a portion was also the result of the conversion of part time employees to full time employees. The increase in total headcount also included a net 18 increase from RBFS to support the growth of that business. Xcira and Mascus added another 101 full-time employees to our December 31, 2016 headcount, compared to 50 added solely by Xcira at December 31, 2015.

 

2017 performance

SG&A expenses increased $39.7 million, or 14%, during 2017 compared to 2016. This increase is primarily due to post-Acquisition increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher commitment and other bank fees attributable to our new credit facility. Foreign exchange rates had a negative impact on SG&A expenses in 2017 as a significant portion of administration expenses are in Canada and the Netherlands.

 

This increase in SG&A expenses from 2016 to 2017 was partially offset by a decrease in share unit expense from mark-to-market fair value changes in our liability-classified share units. This decrease was primarily due to the modification of our Chief Executive Officer Sign-On Grant Performance Share Units (“CEO SOG PSUs”) from liability-classified to equity-classified on May 1, 2017, as well as the performance of our common share price.

 

2016 performance

SG&A expenses increased $29.1 million, or 11%, in 2016 compared to 2015. This increase is primarily due to an increase in employee compensation primarily due to our headcount growth and an increase in share unit expense from mark-to-market fair value changes in our liability-classified share units. This increase was partially offset by a decrease in termination benefits, primarily due to the difference between those resulting from the Separation Agreement with our former President, US & LATAM, in 2016 compared to those resulting from the Separation Agreement with our former Chief Sales Officer in 2015.

 

The increase in SG&A expenses year-over-year was also due to an increase in costs required to support the growing fee revenues generated by our value-added services, contributions of expenses from our 2016 acquisitions (Mascus, Petrowsky, and Kramer), a full year’s contribution of expenses from Xcira, and increased rental fees resulting from the replacement of our aged and retired company vehicles with new vehicles under operating leases. Foreign exchange rates had a positive impact on SG&A expenses in 2016.

 

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Impairment loss

In 2017, we recognized an impairment loss of $8.9 million on certain technology assets. Comparatively, we recognized an impairment loss of $28.2 million on our EquipmentOne goodwill and customer relationships in 2016.

 

Acquisition-related costs

Acquisition-related costs consist of operating expenses directly incurred as part of a business combination, due diligence and integration planning – including those related to the Acquisition – and continuing employment costs that are recognized separately from our business combinations. Business combination, due diligence, and integration operating expenses include advisory, legal, accounting, valuation, and other professional or consulting fees, and travel and securities filing fees.

 

Acquisition-related costs in 2017 totalled $38.3 million and consisted primarily of $34.7 million associated with the Acquisition. IronPlanet acquisition-related costs for 2017 included $9.1 million of non-recurring acquisition and finance structure advisory fees, $8.9 million of legal fees related to the regulatory approval process and closing of the transaction, $4.8 million of stock option compensation expenses resulting from accelerated vesting of options assumed as part of the Acquisition, $3.1 million of severance and retention costs that followed the Acquisition in the resulting corporate reorganization, and various integration costs.

 

This compares to $11.8 million of acquisition related expenses for 2016, of which $8.2 million was associated with the Acquisition.

 

Foreign exchange loss (gain)

We conduct operations around the world in many different currencies, but our presentation currency is the U.S. dollar. In 2017, approximately 44% of our revenues and 53% of our operating expenses were denominated in currencies other than the U.S. dollar, compared to 48% and 58%, respectively, in 2016 and 45% and 58%, respectively, in 2015.

 

We recognized $2.6 million of transactional foreign exchange losses in 2017, $1.4 million of losses in 2016, and $2.3 million of gains in 2015. Foreign exchange losses and gains are primarily the result of settlement of non-functional currency-denominated monetary assets and liabilities.

 

U.S. dollar exchange rate comparison

The following table presents the variance in select foreign exchange rates over the comparative reporting periods:

 

   Year ended December 31, 
               % Change 
Value of one U.S. dollar  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Period-end exchange rate                         
Canadian dollar  $1.2471   $1.3442   $1.3839    (7)%   (3)%
Euro   0.8465    0.9506    0.9208    (11)%   3%
Average exchange rate                         
Canadian dollar  $1.2981   $1.3256   $1.2788    (2)%   4%
Euro   0.8871    0.9042    0.9017    (2)%   - 

 

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Operating income

 

2017 performance

Operating income decreased $28.3 million, or 21%, in 2017 compared to 2016. This decrease was primarily due to the higher SG&A expenses, acquisition-related costs, costs of services, and D&A expenses. These increases were partially offset by the revenue increase and lower impairment loss over the same comparative period. Foreign exchange rates did not have a significant impact on operating income in 2017. Adjusted operating income5 (non-GAAP measure) decreased $30.2 million, or 18%, to $133.8 million in 2017 compared to $164.0 million in 2016.

 

Primarily for the same reasons noted above, operating income margin, which is our operating income divided by revenues, decreased 640 bps to 17.6% in 2017 compared to 24.0% in 2016. Adjusted operating income margin6 (non-GAAP measure) decreased 700 bps to 21.9% in 2017 from 28.9% in 2016.

 

2016 performance

Operating income decreased $39.1 million, or 22%, in 2016 compared to 2015. This decrease was primarily due to the increase in SG&A expense, the recognition of an impairment loss, higher acquisition-related costs and costs of services, and a decrease in gains on disposal of property, plant and equipment in 2016 compared to 2015. This decrease was partially offset by the increase in revenues year-over-year. Foreign exchange rates had a negative impact on operating income in 2016. Adjusted operating income (non-GAAP measure) decreased $2.5 million, or 1%, to $164.0 million in 2016 compared to $166.5 million in 2015.

 

Primarily for the same reasons noted above, operating income margin decreased 990 bps to 24.0% in 2016 compared to 33.9% in 2015. Adjusted operating income margin (non-GAAP measure) decreased 340 bps to 28.9% in 2016 from 32.3% in 2015.

 

Other income (expense)

Other income (expense) is comprised of the following:

 

   Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Interest income  $3,194   $1,863   $2,660   $1,331   $(797)   71%   (30)%
Interest expense   (38,291)   (5,564)   (4,962)   (32,727)   (602)   588%   12%
Equity income (loss)   (26)   1,028    916    (1,054)   112    (103)%   12%
Debt extinguishment costs   -    (6,787)   -    6,787    (6,787)   (100)%   100%
Other, net   5,063    4,232    2,982    831    1,250    20%   42%
Other income (expense)  $(30,060)  $(5,228)  $1,596   $(24,832)  $(6,824)   475%   (428)%

 

 

 

5

Adjusted operating income is a non-GAAP measure. We use income statement and balance sheet performance scorecards to align our operations with our strategic priorities. We concentrate on a limited number of metrics to ensure focus and to facilitate quarterly performance discussions. Our income statement scorecard includes the performance metric, adjusted operating income. We believe that comparing adjusted operating income for different financial periods provides useful information about the growth or decline of operating income for the relevant financial period. We calculate adjusted operating income by eliminating from operating income the pre-tax effects of significant non-recurring items that we do not consider to be part of our normal operating results, such as acquisition-related costs, management reorganization costs, severance, retention, gains/losses on sale of certain property, plant and equipment, impairment losses, and certain other items, which we refer to as ‘adjusting items’. Adjusted operating income is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

6Our income statement scorecard includes the performance metric, adjusted operating income margin, which is a non-GAAP measure. We believe that comparing adjusted operating income margin for different financial periods provides useful information about the growth or decline of our operating income for the relevant financial period. We calculate adjusted operating income margin by dividing adjusted operating income (non-GAAP measure) by revenues. Adjusted operating income margin is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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We incurred additional indebtedness to finance the Acquisition. As of December 31, 2017, our debt was $819.9 million, compared to $619.6 million as of December 31, 2016. The increase in interest expense in 2017 compared to 2016 is primarily due to our higher debt balances, as well as minimal increases in short-term interest rates.

 

Debt extinguishment costs were incurred in the fourth quarter of 2016 in association with the early termination of pre-existing long-term debt due in May 2022.

 

Income tax expense and effective tax rate

 

Recent Tax Legislation

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as reducing the U.S. federal statutory tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income, and adopting a territorial tax system.  The TCJA reduces the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. The one-time transition tax is based on our total post-1986 earnings and profits (“E&P”) of controlled foreign affiliates of our US subsidiaries that we previously deferred from US income tax.  

 

The TCJA includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its subsidiaries. In addition, the TCJA disallows deductions for interest and royalty payments from U.S. companies to non-U.S. affiliates that are hybrid payments (“HYBRID”) or made to hybrid entities.  The GILTI, BEAT, and HYBRID provisions of the TCJA will be effective for us beginning January 1, 2018.

 

The TCJA is effective in the first quarter of fiscal year 2018. As of December 31, 2017, we have not completed our accounting for the tax effects of the TCJA. In December 2017, we recorded a provisional net benefit based on reasonable estimates for those tax effects. The provisional net benefit is subject to revisions as we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, Financial Accounting Standards Board, and other standard-setting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date.

 

During the fourth quarter of fiscal year 2017, we recorded an estimated net benefit of $9.7 million related to the TCJA, due to the impact of the one-time transition tax on the deemed repatriation of deferred foreign income of $0.3 million, and the impact of changes in the tax rate of $10.1 million on deferred tax assets and liabilities.

 

2017 performance

We recorded an income tax expense of $2.0 million in 2017 compared to $37.0 million in 2016. Our effective tax rate was 2.7% in 2017 compared to 28.3% in 2016. The decrease in income tax expense over the comparative period was primarily the result of a greater proportion of earnings taxed in jurisdictions with lower tax rates, a $10.1 million deferred income tax recovery due to the remeasurement of deferred income tax assets and liabilities arising from changes in statutory tax rates (as noted above), and a decrease in the valuation allowance applied to deferred income tax assets.  This decrease was partially offset by an increase in non-deductible expenses and $2.3 million of expense related to an increase in uncertain tax positions. We increased our uncertain tax position in the first quarter of 2017 due to an unfavourable outcome of a tax dispute in one of our European operating jurisdictions.

 

2016 performance

Income tax expense was $37.0 million in 2016, compared to an income tax expense of $37.9 million in 2015. Our effective tax rate was 28.3% in 2016 compared to 21.5% in 2015. Income tax expense for 2016 reflected the impact of a non-deductible goodwill impairment loss recorded in the third quarter of 2016. The increase in the effective tax rate year-over-year was also due to the higher estimate of non-deductible acquisition-related costs, partially offset by a greater estimated proportion of annual earnings taxed in jurisdictions with lower tax rates.

 

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Net income

 

2017 performance

Net income attributable to stockholders decreased $16.8 million, or 18%, in 2017 compared to 2016. This decrease was primarily due to the decrease in operating income and the increase in interest expense, partially offset by a lower income tax expense over the same comparative period. Adjusted net income attributable to stockholders7 (non-GAAP measure) decreased $35.6 million, or 29%, to $87.7 million in 2017 from $123.3 million in 2016.

 

For these same reasons, net income decreased $18.2 million, or 19%, in 2017 compared to 2016. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)8 (non-GAAP measure) decreased $18.6 million, or 9%, to $191.5 million in 2017 from $210.1 million in 2016.

 

Primarily for the same reasons noted above, net income margin decreased 420 bps to 12.3% in 2017 from 16.5% in 2016. Adjusted EBITDA margin9 (non-GAAP measure) decreased 570 bps to 31.4% in 2017 from 37.1% in 2016.

 

Debt at December 31, 2017 represented 10.9 times net income for 2017. This compares to debt at December 31, 2016, which represented 6.6 times net income for 2016. The increase in this debt/net income multiplier was primarily due to a net increase in long-term debt in 2017, combined with the decrease in net income for 2017 compared to 2016. The increase in debt was primarily due to funding for the Acquisition. Adjusted net debt/adjusted EBITDA10 (non-GAAP measure) was 2.9 times as at and for the year ended December 31, 2017 compared to -0.4 times as at and for the year ended December 31, 2016.

 

2016 performance

Net income attributable to stockholders decreased $44.4 million, or 33%, in 2016 compared to 2015. This decrease was primarily due to the decrease in operating income and the increase in debt extinguishment costs over the same comparative period. Adjusted net income attributable to stockholders (non-GAAP measure) increased $2.2 million, or 2%, to $123.3 million in 2016 from $121.1 million in 2015.

 

Primarily for the same reasons noted above, net income decreased $45.1 million, or 33%, in 2016 compared to 2015. Adjusted EBITDA (non-GAAP measure) decreased $2.3 million, or 1%, to $210.1 million in 2016 from $212.4 million in 2015.

 

 

 

7

Adjusted net income attributable to stockholders is a non-GAAP financial measure. We believe that comparing adjusted net income attributable to stockholders for different financial periods provides useful information about the growth or decline of our net income attributable to stockholders for the relevant financial period, and eliminates the financial impact of adjusting items we do not consider to be part of our normal operating results. Adjusted net income attributable to stockholders represents net income attributable to stockholders excluding the effects of adjusting items and is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

8Adjusted EBITDA is a non-GAAP financial measure that we believe provides useful information about the growth or decline of our net income when compared between different financial periods. Adjusted EBITDA was also an element of the performance criteria for certain performance share units that we granted our employees and officers in 2013 and 2014. Adjusted EBITDA is calculated by adding back depreciation and amortization expenses, interest expense, and current income tax expense, and subtracting interest income and deferred income tax recovery from net income excluding the pre-tax effects of adjusting items. Adjusted EBITDA is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

9Adjusted EBITDA margin is a non-GAAP financial measure that we believe provides useful information about the growth or decline of our net income when compared between different financial periods. Adjusted EBITDA margin presents adjusted EBITDA (non-GAAP measure) as a multiple of revenues. Adjusted EBITDA margin is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

10Adjusted net debt/adjusted EBITDA is a non-GAAP financial measure. We believe that comparing adjusted net debt/adjusted EBIDTA on a trailing 12-month basis for different financial periods provides useful information about the performance of our operations as an indicator of the amount of time it would take us to settle both our short and long-term debt. We do not consider this to be a measure of our liquidity, which is our ability to settle only short-term obligations, but rather a measure of how well we fund liquidity. Measures of liquidity are discussed further below under “liquidity and capital resources”. We calculate adjusted net debt/adjusted EBITDA by dividing adjusted net debt (non-GAAP measure) by adjusted EBITDA (non-GAAP measure). Adjusted net debt (non-GAAP measure) is calculated by subtracting cash and cash equivalents and long-term debt held in escrow from debt. Adjusted net debt/adjusted EBITDA is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Primarily for the same reasons above, net income margin decreased 1040 bps to 16.5% in 2016 from 26.9% in 2015. Adjusted EBITDA margin (non-GAAP measure) decreased 410 bps to 37.1% in 2016 from 41.2% in 2015.

 

Debt at December 31, 2016 represented 6.6 times net income in 2016. This compares to debt at December 31, 2015, which represented 0.8 times net income in 2015. The increase in this debt/net income multiplier was primarily due to a net increase in long-term debt in 2016, combined with the decrease in net income for 2016 compared to 2015. The increase in debt was primarily due to funding for the Acquisition. Adjusted net debt/adjusted EBITDA7 (non-GAAP measure) was -0.4 as at and for the year ended December 31, 2016 compared to -0.5 as at and for the year ended December 31, 2015.

 

Diluted EPS

 

2017 performance

Diluted EPS attributable to stockholders decreased 19% to $0.69 in 2017 from $0.85 in 2016. This decrease is primarily due to the decrease in net income attributable to stockholders, combined with an increase in the weighted average number of dilutive shares outstanding over the same comparative period. The increase in the weighted average number of dilutive shares is primarily due to the modification of certain share units, including the CEO SOG PSUs, from liability-classified to equity-classified in May 2016 and May 2017, as well as the assumption of IronPlanet stock options as part of the Acquisition. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) decreased 30% to $0.81 in 2017 from $1.15 in 2016.

 

2016 performance

Diluted EPS attributable to stockholders decreased 33% to $0.85 in 2016 from $1.27 in 2015. This decrease is primarily due to the decrease in net income attributable to stockholders, combined with an increase in the weighted average number of dilutive shares outstanding over the same comparative period. Diluted adjusted EPS attributable to stockholders (non-GAAP measure) increased 2% to $1.15 in 2016 from $1.13 in 2015.

 

Segment Performance

 

   Year ended December 31, 2017   Year ended December 31, 2016   Year ended December 31, 2015 
   A&M   Other   Consolidated   A&M   Other   Consolidated   A&M   Other   Consolidated 
Revenues  $564,298   $46,219   $610,517   $531,826   $34,569   $566,395   $505,865   $10,010   $515,875 
Costs of services, excluding D&A   (75,685)   (3,328)   (79,013)   (65,248)   (814)   (66,062)   (56,026)   -    (56,026)
SG&A expenses   (308,874)   (14,396)   (323,270)   (272,317)   (11,212)   (283,529)   (249,852)   (4,537)   (254,389)
Impairment loss   (8,911)   -    (8,911)   (28,243)   -    (28,243)   -    -    - 
Segment profit  $170,828   $28,495   $199,323   $166,018   $22,543   $188,561   $199,987   $5,473   $205,460 

 

Auctions and Marketplaces reportable operating segment

 

Used equipment market update

Our A&M segment businesses are influenced by certain market forces of the used equipment market, particularly with regards to supply, age of equipment, and pricing.

 

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Supply volume

The volume of used equipment transactions is affected by the ongoing production of new equipment and trucks, the demand for equipment, the rate of equipment utilization and the motivations of equipment owners to realign and replace their fleets. Our goal is to capture a greater proportion of the transactions through our multi-channel strategy. Most of our businesses generate revenue based on a percent of the selling price of goods sold through our sales channels. As such, influences on used equipment pricing can affect corporate performance. Factors such as regional or global economic and construction activity, the supply of good quality used equipment, availability of low-cost financing and changes to regional regulations can affect the demand for, and therefore price of, equipment sold through our auctions and online marketplaces.

 

During 2017, we experienced used equipment market supply volume pressure, particularly in the United States. High levels of construction activity in the United States resulted in owners holding onto their equipment, rental business utilization reaching peak levels, and various dealers being understock and dealing with long lead times between placing orders with original equipment manufacturers (“OEMs”) and production of the new equipment. Our customers are also experiencing longer lead times for new equipment production by OEMs. We believe these supply volume constraints negatively impacted GTV and the volume of underwritten commission contracts over the comparative period.

 

Age of equipment

With owners and dealers utilizing and/or holding onto their equipment in response to the macro-economic conditions discussed above, we saw a deterioration in the overall age of equipment coming to market relative to recent years. We observed increases in the age of equipment across all asset sectors and geographies. All other things being equal, older equipment sells for lower prices and reduces the commission-based revenue we earn.

 

Pricing

Overall, we saw improvement in used equipment market pricing during 2017, a continuation of the marginal improvement that we first observed during the second half of 2016. This pricing performance varied among asset sectors and geographies.

 

Construction assets continued to perform well during 2017, with late model equipment experiencing the most pricing improvement, representative of the tightening equipment supply in North America and increased demand for used equipment. Transportation assets rebounded slightly from 2016, with lower mileage truck tractors experiencing the most lift. Agricultural equipment experienced some pricing weakness in the United States during 2017. Some oil and gas equipment continued to experience the price improvement that we first noted in the second quarter of 2017, indicating that oil and gas equipment pricing may have bottomed in the second half of 2016.

 

Regionally, North America continued to be our strongest geographical region for equipment values during 2017, responding most favorably to changes in commodity pricing and the overall economic environment. Beginning in the third quarter of 2017, we are also seeing improved pricing in our European operations.

 

Industrial auction metrics

During 2017, we conducted 245 unreserved industrial auctions at locations in North America, Europe, the Middle East, Australia, New Zealand, and Asia, compared to 233 during 2016.

 

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Our key industrial auction metrics11 are shown below:

 

   Year ended December 31, 
               % Change 
   2017   2016   2015   2017 over
2016
   2016 over
2015
 
Bidder registrations   575,500    549,000    507,500    5%   8%
Consignments   56,850    53,450    47,600    6%   12%
Buyers   139,900    138,400    123,700    1%   12%
Lots   382,500    398,500    354,500    (4)%   12%

 

We saw increases in all key industrial auction metrics in 2017 compared to 2016, except for the number of lots. The decrease in lots was primarily due to the 2016 Columbus, United States, and Grande Prairie, Canada, auction activity discussed above, as well as the performance of the used equipment market, which experienced supply volume pressure over the comparative period.

 

We saw increases in all key industrial auction metrics in 2016 compared to 2015, primarily due to our focused efforts on growing the business combined with the performance of the used equipment market, which remained stable during most of 2016 and improved marginally late in the third quarter and into the fourth quarter of 2016.

 

Although our auctions vary in size, our average industrial auction results on a trailing 12-month basis are described in the following table:

 

   Year ended December 31, 
               Change 
   2017   2016   2015   2017 over
2016
   2016 over
2015
 
GTV  $15.2 million   $16.8 million   $16.8 million   $-1.6 million   $- 
Bidder registrations   2,348    2,356    2,219    -    6%
Consignors   232    229    209    1%   10%
Lots   1,562    1,711    1,551    (9)%   10%

 

We saw a decrease in the average GTV per industrial auction in 2017 compared to 2016. We believe the decrease was primarily driven by constrained supply of used equipment, and the resulting impact on the mix and age of equipment that came to market, as well as some lower sales productivity as we complete the integration of our sales teams post-Acquisition. Primarily for the same reasons above, we saw a decrease in the average number of lots per industrial auction in 2017 compared to 2016.

 

Primarily for the same reasons discussed above, we saw improvements in all our average industrial auction metrics for 2016 compared to 2015, except GTV per industrial auction, which did not change between 2015 and 2016.

 

Online bidding at live on site auctions

Internet bidders comprised 69% of the total bidder registrations at our live on site auctions in 2017 compared to 66% in 2016. This increase in the level of internet bidders continues to demonstrate our ability to drive multi-channel participation at our auctions.

 

 

 

11

For a breakdown of these key industrial auction metrics by month, please refer to our website at www.rbauction.com. None of the information in our website is incorporated by reference into this document by this or any other reference.

 

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Website metrics12

Our IronPlanet websites www.ironplanet.com, www.govplanet.com, and www.truckplanet.com, provide access to our online marketplaces. Traffic across all our websites increased 23% in 2017 compared to 2016, with the addition of IronPlanet traffic accounting for 78% of the increase. Traffic across all our websites remained consistent between 2015 and 2016.

 

Results of A&M segment operations

 

   Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Revenues  $564,298   $531,826   $505,865   $32,472   $25,961    6%   5%
Costs of services, excluding D&A   (75,685)   (65,248)   (56,026)   (10,437)   (9,222)   16%   16%
SG&A expenses   (308,874)   (272,317)   (249,852)   (36,557)   (22,465)   13%   9%
Impairment loss   (8,911)   (28,243)   -    19,332    (28,243)   (68)%   100%
Segment profit  $170,828   $166,018   $199,987   $4,810   $(33,969)   3%   (17)%

 

Revenues

As the A&M segment revenue is generated from transactional asset disposition services, we believe that these revenues are best understood by considering their relationship to GTV. Therefore, in the third quarter of 2017 we introduced the metric ‘segment Revenue Rate’, which is calculated as segment revenue divided by GTV.

 

Segment revenues by geographical region and segment Revenue Rate are presented below:

 

   Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
United States  $310,722   $268,399   $257,812   $42,323   $10,587    16%   4%
Canada   150,143    172,214    156,692    (22,071)   15,522    (13)%   10%
International   103,433    91,213    91,361    12,220    (148)   13%   - 
Segment revenues  $564,298   $531,826   $505,865   $32,472   $25,961    6%   5%
                                    
GTV  $4,467,982   $4,334,815   $4,247,635   $133,167   $87,180    3%   2%
Segment Revenue Rate   12.63%   12.27%   11.91%   n/a    n/a    36 bps    36 bps 

 

 

 

12None of the information in our websites is incorporated by reference into this document by this or any other reference.

 

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Our historical quarterly segment Revenue Rates are presented in the graph below:

  

 

 

2017 performance

Changes in segment revenues in 2017 compared to 2016 were primarily due to:

 

·United States – 16% increase primarily due to the Acquisition, partially offset by the effect of constrained supply on used equipment in that region, the third quarter 2016 Columbus, United States, live on site auction, as well as some lower sales productivity as we complete the integration of our sales teams post-Acquisition.

 

·Canada – 13% decrease primarily driven by changes in our auction calendar and fewer oil and gas dispersals in Western Canada. Regarding auction calendar changes, we held the largest-ever auction in Grande Prairie in the first quarter of 2016 that generated more than $46.0 million (62.0 million Canadian dollars) of GTV, with no similar auction on the Canadian calendar in 2017.

 

·International – 13% increase primarily due to live on site auction activities in Spain, and the Acquisition.

 

Segment Revenue Rate grew from 12.27% in 2016 to 12.63% in 2017, primarily due to the Acquisition, which resulted in higher buyer transaction and listing fees from our online marketplace channel, and improved performance on underwritten transactions.

 

2016 performance

Increases in segment revenues in Canada and the United States in 2016 compared to 2015 were primarily due to the performance of our underwritten business and volume increases in GTV.

 

Our segment Revenue Rate grew from 11.91% in 2015 to 12.27% in 2016, primarily due to our underwritten contract performance. While our underwritten contract volume decreased during 2016 compared to 2015, our underwritten contract commission rates increased over the same comparative period.

 

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Costs of services

Segment costs of services by nature and as a percentage of GTV are presented below:

 

   Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Employee compensation  $33,498   $27,643   $22,855   $5,855   $4,788    21%   21%
Buildings, facilities and technology   7,552    7,365    7,179    187    186    3%   3%
Travel, advertising and promotion   23,475    23,688    22,150    (213)   1,538    (1)%   7%
Other costs of services   11,160    6,552    3,842    4,608    2,710    70%   71%
Segment cost of services  $75,685   $65,248   $56,026   $10,437   $9,222    16%   16%
                                    
GTV  $4,467,982   $4,334,815   $4,247,635   $133,167  $87,180   3%   2%
Segment costs of services
as a percentage of GTV
   1.69%   1.51%   1.32%    n/a     n/a     18 bps     19 bps 

 

2017 performance

Segment costs of services increased 16% in 2017 compared to 2016 primarily due to the Acquisition, which drove the increase in our online marketplace GTV and revenues. The increase in online marketplace revenue resulted in an increase in the costs incurred to earn those revenues, which were primarily related to inspection activities. Other costs of services include storage and shipping costs, primarily associated with costs to move equipment off government facilities as part of our GovPlanet channel activities.

 

The increase in segment costs of services was also due to an increase in the number of live on site agricultural auctions held during 2017 compared to 2016. We held 157 unreserved agricultural auctions in 2017 compared to 123 in 2016.

 

2016 performance

Segment costs of services increased 16% in 2016 compared to 2015, primarily for the same reasons described above explaining the consolidated costs of services increase over the same comparative period.

 

SG&A expenses

Segment SG&A expenses, which include our corporate head office support costs, are presented by nature below:

 

   Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Employee compensation  $198,523   $173,329   $163,155   $25,194   $10,174    15%   6%
Buildings, facilities and technology   51,504    47,790    40,820    3,714    6,970    8%   17%
Travel, advertising and promotion   29,071    23,310    21,800    5,761    1,510    25%   7%
Professional fees   12,388    12,506    12,204    (118)   302    (1)%   2%
Other SG&A expenses   17,388    15,382    11,873    2,006    3,509    13%   30%
Segment SG&A expenses  $308,874   $272,317   $249,852   $36,557   $22,465    13%   9%

 

Our segment SG&A expenses increased $36.6 million, or 13%, in 2017 compared to 2016. The increase is primarily due to the Acquisition, including increased headcount, travel costs, and search engine fees associated with our online marketplace channel, as well as merit increases and higher bank fees attributable to our new credit facility.

 

Our segment SG&A expenses increased $22.5 million, or 9%, in 2016 compared to 2015, primarily for the same reasons described above explaining the consolidated SG&A expense increase over the same comparative period.

 

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Productivity

The majority of our business continues to be generated by our A&M segment operations. Sales Force Productivity within this segment is an operational statistic that we believe provides a gauge of the effectiveness of our Revenue Producers in increasing our GTV and, ultimately, our net income. The following table presents the composition of our Revenue Producers over the past two years:

 

   Q4 2017   Q3 2017   Q2 2017   Q1 2017   Q4 2016   Q3 2016   Q2 2016   Q1 2016   Q4 2015 
Regional Sales Managers   68    62    62    52    51    50    45    49    46 
Territory Managers   387    372    379    301    301    304    304    296    296 
Revenue Producers   455    434    441    353    352    354    349    345    342 

 

Historically, we measured Sales Force Productivity as trailing 12-month GTV divided by the number of Revenue Producers at the reporting date. As a result of the timing and impact of the Acquisition on both GTV and the number of Revenue Producers, we updated our Sales Force Productivity measure calculations as at and for the 12-month periods ended December 31, 2017 and 2016.

 

Our updated Sales Force Productivity measure calculation as at and for the 12-month period ended December 31, 2017 is the sum of the following two amounts:

 

·GTV for the five months, pre-Acquisition, ended May 31, 2017, divided by the average number of Revenue Producers over the same five-month period; and

 

·GTV for the seven months, post-Acquisition, ended December 31, 2017, divided by the average number of Revenue Producers over the same seven-month period.

 

Under the revised calculation, our Sales Force Productivity as at and for the year ended December 31, 2017 was $11.0 million per Revenue Producer.

 

We similarly updated the calculations of the measure over the comparative periods to be GTV for the years ended December 31, 2016 and 2015, divided by the average number of Revenue Producers over each year. Under the revised calculation, our Sales Force Productivity as at and for the years ended December 31, 2016 and 2015 was $12.5 million and $12.2 million, respectively. No IronPlanet GTV or Revenue Producers are included in this comparative metric.

 

Sales Force Productivity decreased by $1.5 million per Revenue Producer in 2017 compared to 2016. We believe the decrease is due to a combination of factors, including:

 

·The acquisition of Revenue Producers from IronPlanet that had a lower Sales Force Productivity than Ritchie Bros. sales personnel, pre-Acquisition. IronPlanet’s Sales Force Productivity was $7.6 million per Revenue Producer for the trailing 12-month period ended May 31, 2017.

 

·The constrained supply of used equipment.

 

·Some lower sales productivity as we complete the integration of our sales teams post-Acquisition.

 

Sales Force Productivity improved marginally between 2015 and 2016 under the revised calculation.

 

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Other services

 

   Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Revenues  $46,219   $34,569   $10,010   $11,650   $24,559    34%   245%
Costs of services, excluding D&A   (3,328)   (814)   -    (2,514)   (814)   309%   100%
SG&A expenses   (14,396)   (11,212)   (4,537)   (3,184)   (6,675)   28%   147%
Other category profit  $28,495   $22,543   $5,473   $5,952   $17,070    26%   312%

 

2017 performance

Revenue from other services grew $11.7 million, or 34%, in 2017 compared to 2016. This increase was primarily due to the Acquisition, which added $3.4 million of AAS revenue in 2017, a 26% increase in RBFS revenue, and a 32% increase in Mascus revenue from $7.5 million to $9.9 million, and an 85% increase in RB Logistics revenues over the comparative period.

 

Funded volume, which represents the amount of lending brokered by RBFS, increased 17% from $261.4 million in 2016 to $306.4 million in 2017. RBFS segment revenues were $16.1 million in 2017, a 26% increase compared to $12.8 million in 2016. RBFS operating profit increased 28% over the same comparative period to $8.2 million from $6.4 million.

 

2016 performance

Revenue from other services grew $17.1 million, or 312% in 2016 compared to 2015, primarily due to the performance of our value-added services, the acquisition of Mascus that contributed $7.5 million in revenues, and a 30% increase in RBFS revenue over the comparative period. We also launched RB Logistics in 2016, which contributed $0.4 million of revenues in its start-up year.

 

Funded volume increased 17% from $222.6 million in 2015 to $261.4 million in 2016. RBFS segment revenues were $12.8 million in 2016, a 30% increase compared to the $9.8 million in 2015. RBFS segment operating profit increased 19% over the same comparative period to $6.4 million from $5.4 million.

 

Outstanding Share Data

We are a public company and our common shares are listed under the symbol “RBA” on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”). Financial information about our equity and share-based payments is set forth in our consolidated financial statement footnotes 27 “Equity and Dividends” and 28 “Share-based Payments” in “Part II, Item 8: Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

 

Share repurchase program

Our normal course issuer bid (“NCIB”) that was approved by the TSX on March 1, 2016 expired on March 2, 2017 and was not renewed. No share purchases were made pursuant to the NCIB, or by any other means, during the year end December 31, 2017.

 

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Liquidity and Capital Resources

 

Working capital

 

   December 31,   December 31,         
(in U.S. $000's)  2017   2016   $ Change   % Change 
Cash and cash equivalents  $267,910   $207,867   $60,043    29%
Current restricted cash  $63,206   $50,222   $12,984    26%
                     
Current assets  $508,487   $377,998   $130,489    35%
Current liabilities   388,455    252,834    135,621    54%
Working capital  $120,032   $125,164   $(5,132)   (4)%

 

We believe that working capital is a more meaningful measure of our liquidity than cash alone. Our working capital decreased during fiscal 2017, primarily due to the payment of dividends of $72.8 million and interest on our debt, partially offset by operating income generated during the period.

 

Cash flows

 

   Year ended December 31, 
               $ Change   % Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
   2017 over
2016
   2016 over
2015
 
Cash provided by (used in):                                   
Operating activities  $146,266   $177,558   $196,459   $(31,292)  $(18,901)   (18)%   (10)%
Investing activities   (710,954)   (116,862)   (29,348)   (594,092)   (87,514)   508%   298%
Financing activities   120,565    404,143    (80,689)   (283,578)   484,832    (70)%   (601)%
Effect of changes in foreign currency rates   17,150    4    (26,265)   17,146    26,269    428650%   (100)%
Net increase (decrease) in cash, cash equivalents, and restricted cash  $(426,973)  $464,843   $60,157   $(891,816)  $404,686    (192)%   673%

 

Operating activities

Cash provided by operating activities can fluctuate significantly from period to period due to factors such as differences in the timing, size, and number of auctions during the period, the volume of our underwritten contracts, the timing of the receipt of auction proceeds from buyers and of the payment of net amounts due to consignors, as well as the location of the auction with respect to restrictions on the use of cash generated therein.

 

2017 performance

Cash provided by operating activities decreased $31.3 million, or 18%, during 2017 compared to 2016. This decrease was primarily due to a decrease in cash earnings, which included decreases in net income of $18.2 million, and a decrease in non-cash charges, which included decreases in impairment losses of $19.3 million. Changes in certain of our operating assets and liabilities also contributed to the decline in cash flow from operations. Particularly, changes in inventory used $35.1 million more cash during 2017 compared to 2016. This was primarily due to large inventory packages held at the end of 2015 being sold in the February 2016 Orlando auction, combined with a large inventory package held in Canada at the end of 2017 that relates to a dispersal of oil and gas equipment, most of which is to be sold in the March 2018 Grande Prairie auction.

 

2016 performance

Cash provided by operating activities decreased $18.9 million, or 10%, during 2016 compared to 2015. This decrease was primarily due to the decrease in cash earnings, which included decreases in net income of $45.1 million, partially offset by an increase in non-cash charges, which included an impairment loss of $28.2 million.

 

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Changes in certain of our operating assets and liabilities also contributed to the decline in cash flow from operations, partially offset by change in inventory providing $44.2 million more cash in 2016 compared to 2015. This was primarily due to large inventory packages held at the end of 2015 being sold in the February 2016 Orlando auction, combined with a decrease in the volume of inventory deals in 2016 compared to 2015.

 

Investing activities

Net cash used in investing activities increased $594.1 million during 2017 compared to 2016. This increase is primarily due to the May 2017 acquisition of IronPlanet for $675.9 million (net of cash acquired) compared to the acquisitions of the RBFS non-controlling interest, Mascus, Kramer, and Petrowsky for a total of $86.6 million (net of cash acquired) in 2016.

 

Net cash used in investing activities increased $87.5 million during 2016 compared to 2015. This increase is primarily due to the 2016 acquisitions noted above compared to the 2015 acquisition of Xcira for $12.1 million (net of cash acquired), as well as a $10.0 million increase in proceeds on disposition of property, plant and equipment year-over-year. The decrease in proceeds on disposition of property, plant and equipment year-over-year was primarily due to the $8.4 million gain on sale of excess land in Edmonton, Canada, in 2015.

 

CAPEX intensity presents net capital spending as a percentage of revenue. We believe that comparing CAPEX intensity on a trailing 12-month basis for different financial periods provides useful information as to the amount of capital expenditure that we require to generate revenues.

 

   Year ended December 31, 
               Change 
(in U.S. $ millions)  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Property, plant and equipment additions  $10.8   $18.9   $22.1    (43)%   (14)%
Intangible asset additions   28.6    17.6    8.8    63%   100%
Proceeds on disposition of property plant and equipment   (5.0)   (6.7)   (16.7)   (25)%   (60)%
Net capital spending  $34.4   $29.8   $14.2    15%   110%
Revenues  $610.5   $566.4   $515.9    8%   10%
CAPEX intensity   5.6%   5.3%   2.8%   30 bps    250 bps 

 

2017 performance

CAPEX intensity for 2017 increased compared to CAPEX intensity for 2016, primarily due to the net capital spending increase of 15% exceeding the revenue increase of 8% over the comparative period. The net capital spending increase was primarily due to an increase in the capitalization of costs of intangible assets under development. Significant software development projects in 2017 included systems integration following the Acquisition and other acquisitions, as well as enhanced functionality for our online marketplace sales channel. The decrease in cash provided by operating activities combined with the increase in net capital spending resulted in a decrease in operating free cash flow (“OFCF”)13 (non-GAAP measure) of $35.9 million, or 24%, to $111.9 million in 2017 from $147.8 million in 2016.

 

 

 

13OFCF is non-GAAP financial measure that we believe, when compared on a trailing 12-month basis to different financial periods provides an effective measure of the cash generated by our business and provides useful information regarding cash flows remaining for discretionary return to stockholders, mergers and acquisitions, or debt reduction. Our balance sheet scorecard includes the performance metric, OFCF. OFCF is also an element of the performance criteria for certain annual short-term incentive awards we grant to our employees and officers. We calculate OFCF by subtracting net capital spending from cash provided by operating activities. OFCF is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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2016 performance

CAPEX intensity for 2016 increased compared to CAPEX intensity for 2015, primarily due to the net capital spending increase of 110% exceeding the revenue increase of 10% over the comparative period. The net capital spending increase was primarily due to the decrease in proceeds on disposition of property, plant and equipment discussed above. OFCF (non-GAAP measure) decreased $34.5 million, or 19%, to $147.8 million in 2016 from $182.3 million in 2015.

 

Financing activities

Net cash provided by financing activities decreased $283.6 million in 2017 compared to 2016. We borrowed $310.5 million less debt, net of repayments, in 2017 compared to 2016. This increase in cash provided by financing activities was partially offset by a $36.7 million decrease in share repurchases year-over-year because no share repurchases were executed in 2017.

 

Net cash provided by financing activities increased $484.8 million in 2016 compared to 2015, primarily due to gross proceeds of $500.0 million received in exchange for the issue of our senior unsecured notes in December 2016 (the “Notes”). This increase was partially offset by the payment of $10.6 million in debt issue costs in 2016.

 

Dividend information

We declared and paid regular cash dividends of $0.17 per common share for the quarters ended December 31, 2016, March 31, 2017, June 30, 2017, and September 31, 2017. We have declared, but not yet paid, a dividend of $0.17 per common share for the quarter ended December 31, 2017.

 

Total dividend payments in 2017 were $72.8 million to stockholders and $40.8 thousand to non-controlling interests. This compares to total dividend payments of $70.5 million and $64.3 million to stockholders in 2016 and 2015, respectively, and $3.4 million and $1.3 million to non-controlling interests in 2015, respectively. All dividends we pay are “eligible dividends” for Canadian income tax purposes unless indicated otherwise.

 

Our dividend payout ratio, which we calculate as dividends paid to stockholders divided by net income attributable to stockholders, increased to 97.1% in 2017 from 76.8% in 2016. This increase is primarily the result of the decrease in net income attributable to stockholders combined with the increase in our dividends paid to stockholders, year-over-year. Our adjusted dividend payout ratio14 (non-GAAP measure) increased to 83.0% in 2017 from 57.2% in 2016.

 

Our dividend payout ratio increased to 76.8% in 2016 from 47.2% in 2015. This increase is primarily the result of the decrease in net income attributable to stockholders combined with the increase in our dividends paid to stockholders, year-over-year. Our adjusted dividend payout ratio (non-GAAP measure) increased to 57.2% in 2016 from 53.1% in 2015.

 

Return on average invested capital

Our return on average invested capital is calculated as net income attributable to stockholders divided by our average invested capital. We calculate average invested capital over a trailing 12-month period by adding the average long-term debt over that period to the average stockholders’ equity over that period.

 

 

 

14

Adjusted dividend payout ratio is non-GAAP financial measure. We believe that comparing the adjusted dividend payout ratio for different financial periods provides useful information about how well our net income supports our dividend payments. Adjusted dividend payout ratio is calculated by dividing dividends paid to stockholders by adjusted net income attributable to stockholders (non-GAAP measure). Adjusted dividend payout ratio is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Return on average invested capital decreased 350 bps to 5.3% in 2017 from 8.8% in 2016. This decrease is primarily due to a $375.7 million, or 36%, increase in average invested capital year-over-year, which was driven by the issuance of the Notes in the fourth quarter of 2016 and the delayed-draw term loans borrowed in the second quarter of 2017. Also contributing to the decrease in return on average invested capital over this comparative period was a $16.8 million, or 18%, decrease in net income attributable to stockholders. Return on invested capital (“ROIC”) excluding escrowed debt15 (non-GAAP measure) decreased 930 bps to 6.2% in 2017 from 15.5% in 2016.

 

Return on average invested capital decreased 820 bps to 8.8% in 2016 from 17.0% in 2015. This decrease is primarily due to a $240.0 million, or 30%, increase in average invested capital year-over-year, which was driven by the issuance of the Notes in the fourth quarter of 2016. Also contributing to the decrease in return on average invested capital over this comparative period was a $44.4 million, or 33%, decrease in net income attributable to stockholders. ROIC excluding escrowed debt (non-GAAP measure) increased 40 bps to 15.5% in 2016 from 15.1% in 2015.

 

Debt and credit facilities

At December 31, 2017, our short-term debt of $7.0 million consisted of borrowings under our committed revolving credit facilities and had a weighted average annual interest rate of 2.7%. This compares to current borrowings of $23.9 million at December 31, 2016 with a weighted average annual interest rate of 2.2%.

 

As at December 31, 2017, we had a total of $812.9 million long-term debt with a weighted average annual interest rate of 4.8%. This compares to long-term debt of $595.7 million as at December 31, 2016 with a weighted average annual interest rate of 4.9%.

 

Our long-term debt and available credit facilities at December 31, 2017 and 2016 were as follows:

 

   Year ended December 31, 
(in U.S. $000's)  2017   2016   % Change 
Long-term debt  $812,892   $595,706    36%
Committed               
Revolving credit facilities   685,000    687,000    (0)%
Revolving credit facilities available   646,991    548,649    18%
Delayed draw facility   316,546    325,000    (3)%
Delayed draw facility available   -    325,000    (100)%
Total credit facilities  $1,001,546   $1,012,000    (1)%
Total credit facilities available   646,991    873,649    (26)%

 

 

 

15

ROIC excluding escrowed debt is a non-GAAP financial measure that we believe, by comparing on a trailing 12-month basis for different financial periods provides useful information about the after-tax return generated by our investments by removing the impact of the issue of the Notes, which were held in escrow at December 31, 2016. While the Notes were in escrow and not accessible by us, they were not contributing to the generation of net income. We believe that by adjusting debt to remove funds we do not have access to, we are providing more accurate information about the after-tax return generated by our investments. We calculate ROIC excluding escrowed debt as adjusted net income attributable to stockholders (non-GAAP measure) divided by adjusted average invested capital (non-GAAP measure). We calculate adjusted average invested capital (non-GAAP measure) as the adjusted average long-term debt (non-GAAP measure) and average stockholders’ equity over a trailing 12-month period. We calculate adjusted average long-term debt (non-GAAP measure) as the average of adjusted opening long-term debt (non-GAAP measure) and adjusted ending long-term debt (non-GAAP measure). Adjusted opening long-term debt (non-GAAP measure) and adjusted ending long-term debt (non-GAAP measure) are calculated as opening or ending long-term debt, as applicable, as reported in our consolidated financial statements reduced by long-term debt held in escrow. ROIC excluding escrowed debt is reconciled to the most directly comparable GAAP measures in our consolidated financial statements under “Non-GAAP Measures” below.

 

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Syndicated credit facility

On October 27, 2016, we entered a five-year credit agreement (the “Credit Agreement”) with a syndicate of lenders, including Bank of America, N.A. (“BofA”) and Royal Bank of Canada, that provides us with:

 

1)Multicurrency revolving facilities of up to $675.0 million (the “Multicurrency Facilities”);

 

2)A delayed draw term loan facility of up to $325.0 million (the “Delayed-Draw Facility” and together with the Multicurrency Facilities, the “Syndicated Facilities”); and

 

3)At our election and subject to certain conditions, including receipt of related commitments, incremental term loan facilities and/or increases to the Multicurrency Facilities in an aggregate amount of up to $50 million.

 

We may use the proceeds from the Multicurrency Facilities for general corporate purposes. During the second quarter of 2017, the full amount of the Delayed-Draw Facility was drawn to finance the Acquisition.

 

The Syndicated Facilities are secured by the assets of Ritchie Bros. Auctioneers Incorporated and certain of its subsidiaries in Canada and the United States. The Syndicated Facilities may become unsecured again, subject to Ritchie Bros. meeting specified credit rating or leverage ratio conditions. The Syndicated Facilities mature five years after the closing date of the Credit Agreement. The Delayed-Draw Facility is amortized in equal quarterly installments in an annual amount of 5% for the first two years after the closing of the Acquisition, and 10% in the third through fifth years after the closing of the Acquisition, with the balance payable at maturity.

 

Borrowings under the Credit Agreement bear floating rates of interest, which, at our option, are based on either a base rate (or Canadian prime rate for certain Canadian dollar borrowings) or LIBOR (or such customary floating rate customarily used by BofA for currencies other than U.S. dollars). In either case, an applicable margin is added to the rate. The applicable margin ranges from 0.25% to 1.50% for base rate loans, and 1.25% to 2.50% for LIBOR (or the equivalent of such currency) loans, depending on our leverage ratio at the time of borrowing. We must also pay quarterly in arrears a commitment fee equal to the daily amount of the unused commitments under the Syndicated Facilities multiplied by an applicable percentage per annum (which ranges from 0.25% to 0.50% depending on our leverage ratio).

 

We incurred debt issuance costs of $9.7 million in connection with the Credit Agreement, of which $4.7 million was allocated to the Multicurrency Facilities and $5.0 million was allocated to the Delayed-Draw Facility. As the former allocation is not related to specific draws, the costs have been capitalized as other non-current assets and are being amortized over the term of the Syndicated Facilities. For the latter allocation, the costs have been capitalized and reduce the carrying value of the delayed draw term loans to which they relate. At December 31, 2017, the unamortized deferred debt issuance costs relating to the Multicurrency Facilities and delayed draw term loans were $3.8 million and $4.1 million, respectively.

 

Senior unsecured notes

On December 21, 2016, we completed the offering of the Notes for an aggregate principal amount of $500.0 million. The Notes bear interest at a rate of 5.375% per annum and have a maturity date of January 15, 2025. The Notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act, and outside the United States, only to non-U.S. investors pursuant to Regulation S under the Securities Act. The Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent an effective registration statement or an applicable exemption from registration requirements or a transaction not subject to the registration requirements of the Securities Act or any state securities laws.

 

The proceeds of the offering were used to finance the Acquisition. Upon the closing of the offering, the gross proceeds from the offering together with certain additional amounts including prepaid interest were deposited in to an escrow account. The funds were held in escrow until the Acquisition was completed on May 31, 2017.

 

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Until the release of the proceeds in the escrow account, the Notes were secured by a first priority security interest in the escrow account. Upon the completion of the Acquisition, the Notes became senior unsecured obligations. The Notes are jointly and severally guaranteed on an unsecured basis, subject to certain exceptions, by each of our subsidiaries that is a borrower or guarantees indebtedness under the Credit Agreement. IronPlanet and certain of its subsidiaries were added as additional guarantors in connection with the Acquisition.

 

We incurred debt issuance costs of $13.9 million in connection with the offering of the Notes. At December 31, 2017, we had unamortized deferred debt issuance costs relating to the Notes of $12.7 million.

 

Other credit facilities

As at December 31, 2017, we also had $10.0 million in committed, revolving credit facilities, in certain foreign jurisdictions, which expire on May 31, 2018.

 

Debt covenants

The Credit Agreement contains certain covenants that could limit the ability of the Company and certain of its subsidiaries to, among other things and subject to certain significant exceptions: (i) incur, assume or guarantee additional indebtedness; (ii) declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for value, equity interests; (iii) make loans, advances or other investments; (iv) incur liens; (v) sell or otherwise dispose of assets; and (vi) enter into transactions with affiliates. The Credit Agreement also provides for certain events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Credit Agreement to be declared immediately due and payable.

 

The Notes were issued pursuant to an indenture, dated December 21, 2016, with U.S. Bank National Association, as trustee (the “Indenture”). The Indenture contains covenants that limit our ability, and the ability of certain of our subsidiaries to, among other things and subject to certain significant exceptions: (i) incur, assume or guarantee additional indebtedness; (ii) declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for value, equity interests; (iii) make any principal payment on, or redeem or repurchase, subordinated debt; (iv) make loans, advances or other investments; (v) incur liens; (vi) sell or otherwise dispose of assets; and (vii) enter into transactions with affiliates. The Indenture also provides for certain events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Notes under the applicable indenture to be declared immediately due and payable.

 

At inception of the Credit Agreement and the Indenture, all parties anticipated the increase in indebtedness that followed the Acquisition. As such, covenants pertaining to our leverage ratio provide for a six-quarter expansion of debt levels, after which the leverage ratio settles to a moderately higher tier than pre-Acquisition conditions.

 

We were in compliance with all financial and other covenants applicable to our credit facilities at December 31, 2017.

 

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Contractual obligations at December 31, 2017

 

   Payments due by period 
       Less than   1 to 3   3 to 5   More than 
(in U.S. $000's)  Total   1 year   years   years   5 years 
Long-term debt obligations:                         
Principal  $829,687   $16,907   $59,174   $253,606   $500,000 
Interest   245,475    39,740    76,831    61,716    67,188 
Capital lease obligations   11,305    3,463    5,778    2,064    - 
Operating lease obligations   97,754    14,763    21,913    13,260    47,818 
Purchase obligations   1,607    1,607    -    -    - 
Share unit liabilities   8,274    5,407    2,867    -    - 
Other non-current liabilities   6,140    -    3,698    23    2,419 
Total contractual obligations  $1,200,242   $81,887   $170,261   $330,669   $617,425 

 

Our long-term debt obligations included in the table above consist of draws under the New Facilities and our Notes. Our finance leases relate primarily to computer, automotive, and yard equipment. Our operating leases relate primarily to land on which we operate regional auction sites and administrative buildings, located in North America, Central America, Europe, the Middle East, and Asia. Other operating leases include leases of automotive, yard, and office equipment. Purchase obligations relate to capital expenditure commitments we have made with respect to property, plant and equipment and intangible assets. Share unit liabilities reflect the amounts of the future cash-settlement obligations of share units earned that, as of December 31, 2017, are expected to vest.

 

In the normal course of our business, we may guarantee a minimum level of proceeds in connection with the sale at auction of a consignor’s equipment. Our total exposure as at December 31, 2017 from these guarantee contracts was $30.9 million, compared to $15.2 million at December 31, 2016, which we anticipate will be fully covered by the proceeds that we will receive from the sale at auction of the related equipment, plus our commission. 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.

 

Going concern assessment

We believe our existing working capital and availability under our credit facilities, including the New Facilities, the Notes, and our other credit facilities, are sufficient to satisfy our present operating requirements and contractual obligations (detailed above), as well as to fund future growth including, but not limited to, mergers and acquisitions, development of our A&M, RBFS, and Mascus operating segments, as well as other growth opportunities.

 

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, financial performance, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies, Judgments, Estimates and Assumptions

In preparing our consolidated financial statements in conformity with US 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:

 

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·recognition of revenue from inventory sales net of cost of inventory sold;

 

·valuation of consignors’ equipment and other assets subject to guarantee contracts;

 

·consolidation of variable interest entities;

 

·the grant date fair value of stock option and share unit awards;

 

·the identification of reporting units and recoverability of goodwill;

 

·recoverability of long-lived assets; and

 

·recoverability of deferred income tax assets.

 

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 in the notes to our consolidated financial statements included in “Part II, Item 8: Financial Statements and Supplementary Data” presented in this Annual Report on Form 10-K, which summarize the accounting policies and methods used in the preparation of those consolidated financial statements. The policies and the estimates discussed below are included here because they require more significant judgments and estimates in the preparation and presentation of our consolidated financial statements than other policies and estimates.

 

Recognition of revenue from inventory sales net of cost of inventory sold

We record revenues from inventory sales net of costs of inventory sold within commission revenue on the consolidated income statement. This commission revenue, as well as commission revenues earned on straight commission and guarantee contracts, is classified as revenues from the rendering of services as opposed to revenues from the sale of goods.

 

Most of the equipment sold at our live on site auctions is sold to the highest bidder on an unreserved basis. Although we take title to the equipment we sell under inventory contracts, the period of direct ownership is relatively short, and the equipment is processed in the same manner as other consigned equipment such that the risks and rewards of ownership are not substantially different from those in our guarantee contracts. As such, we have determined that we are acting as an agent when we sell inventory, not as a principal. And in that capacity, we record revenue from inventory sales on a net basis, as opposed to a gross basis.

 

For inventory contracts related to online marketplace sales, revenue from the sale of inventory through our online marketplaces are recorded net of acquisition costs because the acquisition of equipment in advance of an online marketplace sale is an ancillary component of our business and, in general, the risks and rewards of ownership are not substantially different from our other guarantee contracts. Since the online marketplace sale business is a net business, gross sales proceeds are not reported as revenue in the consolidated income statement. Rather, the net commission earned from online marketplace sales is reported as revenue, which reflects our agency relationship between buyers and sellers of equipment.

 

We value each inventory contract at the lower of cost and net realizable value. In addition, we monitor the results from the sale of this inventory at auction after the balance sheet date up to the release of our financial statements and record any losses realized on inventory contracts.

 

Consolidation of variable interest entities

When we acquire a variable interest entity (“VIE”), we must determine whether we are the primary beneficiary. If we determine that we are the primary beneficiary, we are required to consolidate the VIE. The primary beneficiary determination requires us to make assumptions as to which activities most significantly impact the VIE’s economic performance, identify the existence of any de facto related parties, and make an assessment as to whether we have the power to direct the activities determined to most significantly impact the VIE’s economic performance.

 

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Valuation of performance share units subject to market conditions

We initially measure the cost of share units that are subject to market vesting conditions using a binomial model to determine the fair value of the liability incurred. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model, including the expected life of the share unit, volatility and dividend yield, as well as making assumptions about them. For cash-settled share-based payment transactions, the liability needs to be re-measured at the end of each reporting period up to the date of settlement. This requires a reassessment of the estimates used at the end of each reporting period.

 

Recoverability of goodwill

We perform 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. We determined our reporting units to be at the same level as our operating segments for A&M and Mascus.

 

On January 1, 2017, we early adopted Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, we still have the option of performing a qualitative assessment of a reporting unit to first determine whether the quantitative impairment test is necessary. We exercise judgment in performing our qualitative assessment of whether indicators of impairment exist.

 

When we determine that an annual or interim quantitative impairment test is necessary, we now only perform one step to identify potential impairment, which is to compare the reporting unit’s fair value with its carrying amount, including goodwill. The reporting unit’s fair value is determined using various valuation approaches and techniques that involve assumptions based on what we believe a hypothetical marketplace participant would use in estimating fair value on the measurement date. An impairment loss is recognized as the difference between the reporting unit’s carrying amount and its fair value to the extent the difference does not exceed the total amount of goodwill allocated to the reporting unit.

 

We measure the fair value of our reporting units using an earnings valuation approach, which employs a discounted cash flow valuation technique. In applying this valuation approach, management is required to make significant estimates and assumptions about the timing and amount of future cash flows, revenue growth rates, and discount rates, which requires a significant amount of judgment. Accordingly, actual results may differ from those used in the goodwill impairment test.

 

A&M reporting unit goodwill

Significant estimates used in the earnings approach valuation of our A&M reporting unit are our discount rate of 10%, which reflects the risk premium on this reporting unit based on assessments of risks related to projected cash flows, and our long-term growth rate of 3%, which is used to extrapolate cash flows beyond the five-year forecast.

 

Mascus reporting unit goodwill

Goodwill arising from the acquisition of Mascus forms part of the reporting unit On December 31, 2017, we performed the US GAAP goodwill impairment test.

 

Using the cash flow methodology of the earnings approach, the fair value of the Mascus reporting unit was measured based on the present value of the cash flows that we expect the reporting unit to generate. The testing was performed in Mascus’ functional currency, which is the Euro.

 

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The earnings approach valuation was most sensitive to the following assumptions:

 

(i)Revenue growth rate

Cash flow forecasts estimate an annual growth rate of 15% in fiscal 2018 and 8% in each of fiscal 2019 through 2023. The estimated growth rate used in determining the Mascus reporting unit’s future cash flows is based on our expectation of future growth rates resulting from application of our business strategy.

 

(ii)Operating margin

Cash flow forecasts estimate an operating margin of 34% in fiscal 2018, 36% in fiscal 2019, 39% in fiscal 2020, 41% in fiscal 2021, and 43% in fiscal 2022. The estimated operating margin used in determining the Mascus reporting unit’s future cash flows is based on our expectation of future growth rates resulting from application of our business strategy.

 

We applied a discount rate of 12% which reflects the risk premium on this reporting unit based on assessments of risks related to projected cash flows. Cash flows beyond the five-year period were extrapolated using a long-term growth rate estimated to be 3.5%.

 

As the fair value of the Mascus reporting unit was greater than its carrying amount, management concluded that Mascus goodwill was not impaired at December 31, 2017. We estimated that the fair value of the Mascus reporting unit exceeds its carrying amount by 7.9 million Euros ($9.5 million). Consequently, a reasonably possible decline in the revenue growth rate or operating margin may result in an impairment loss.

 

With all other assumptions remaining constant, the following changes taken individually would result in the Mascus reporting unit’s fair value being equal to its carrying amount:

 

·Revenue growth rate – decrease of five percentage points

 

·Operating margin – decrease of 10 percentage points

 

Recoverability of indefinite-lived intangible assets

We perform impairment tests on indefinite-lived intangible assets, which are certain of our trade names and trademarks, 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. We elected to bypass the qualitative assessment and performed a quantitative impairment test during our annual impairment test on December 31, 2017. The indefinite-lived intangible asset’s fair value is determined using the relief from royalty valuation approach and involves assumptions based on what we believe a hypothetical marketplace participant would use in estimating fair value on the measurement date. An impairment loss is recognized as the difference between the indefinite-lived intangible asset’s carrying amount and its fair value.

 

Indefinite-lived intangible asset impairment testing involves determination of the unit of accounting, which we determined to be at the same level as our operating segments for A&M and Mascus.

 

A&M

In making the determination that the intangible assets in the A&M segment should be combined as a single unit of accounting for impairment testing purposes, we exercised significant judgement in concluding that those assets are operated as a single asset and are, essentially, inseparable from one another.

 

Significant estimates used in the valuation of the A&M indefinite-lived intangible asset included a discount rate of 10% based on assessments of risks related to projected cash flows, and a long-term growth rate of 3%, which was used to extrapolate cash flows beyond the five-year forecast.

 

Since the fair value of the A&M indefinite-lived intangible asset was greater than its carrying amount, management concluded the asset was not impaired at December 31, 2017.

 

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Mascus

Significant estimates used in the valuation of the Mascus indefinite-lived intangible asset included a revenue growth rate projection of 15% in fiscal 2018 and 8% in each of fiscal 2019 to 2022, a discount rate of 12% based on assessments of risks related to the projected cash flows, and a long-term growth rate of 3.5%, which was used to extrapolate cash flows beyond the five-year forecast.

 

Since the fair value of the Mascus indefinite-lived intangible asset was greater than its carrying amount, management concluded that the asset was not impaired at December 31, 2017.

 

Accounting for income taxes

Income taxes are accounted for using the asset and liability method. Deferred income tax assets and liabilities are based on temporary differences (differences between the accounting basis and the tax basis of the assets and liabilities) and non-capital loss, capital loss, and tax credit carry-forwards are measured using the enacted tax rates and laws expected to apply when these differences reverse. Deferred tax benefits, including non-capital loss, capital loss, and tax credits carry-forwards, are recognized to the extent that realization of such benefits is considered more likely than not.

 

Changes in tax rates and tax law are accounted for in the period of enactment. On December 22, 2017, new federal tax reform legislation was enacted in the United States, resulting in significant changes from previous tax law. The TCJA reduces the federal corporate income tax rate to 21% from 35% effective January 1, 2018.   ASC 740, Income Taxes, requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled, which may impact the carrying values of deferred tax assets and liabilities.  The effect of a change in tax law is recorded as a discrete component of the income tax provision related to continuing operations in the period of enactment.  Changes in the valuation allowance assessment due to the TCJA would also be recorded to continuing operations in the tax provision. When realization of deferred income tax assets does not meet the more-likely-than-not criterion for recognition, a valuation allowance is provided.

 

Liabilities for uncertain tax positions are recorded based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We also continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.

 

Recent Accounting Pronouncements

Recent accounting pronouncements that significantly impact our accounting policies or the presentation of our consolidated financial position or performance have been disclosed in the notes to our consolidated financial statements included in “Part II, Item 8: Financial Statements and Supplementary Data” presented elsewhere in this Annual Report on Form 10-K.

 

Future changes in accounting policies – recent accounting standards not yet adopted

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), 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. ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We will not early adopt ASU 2014-09, and as such, the effective date will be January 1, 2018. We have decided to adopt ASU 2014-09 on a retrospective basis.

 

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While continuing to assess all potential impacts of adoption of ASU 2014-09, our current analysis indicates that the most significant change will be in the presentation of revenue from the majority of inventory, ancillary service, and RB Logistics contracts to gross as a principal instead of net as an agent. This presentation is expected to significantly increase the amount of revenue reported compared to the current presentation, as well as add volatility to revenue over comparative periods. Presenting these revenues gross as a principal versus net as an agent has no impact on operating income.

 

The following tables illustrate the expected impact on our reported results of retrospectively adopting ASU 2014-09 and, thereunder, presenting the majority of inventory, ancillary service, and RB Logistics revenues on a gross basis.

 

(in U.S. $000's)  Full Year 2017   Q4 2017   Q3 2017   Q2 2017   Q1 2017 
Total revenues:                         
As reported  $610,517   $178,785   $141,047   $166,186   $124,499 
Expected impact:                         
Sales of inventory gross up   306,498    98,895    72,476    71,726    63,401 
Ancillary service and RB Logistics gross up   54,176    14,070    13,878    14,701    11,527 
New revenue standard  $971,191   $291,750   $227,401   $252,613   $199,427 
Operating income:                         
As reported  $107,454   $40,038   $16,931   $26,888   $23,597 
New revenue standard   107,454    40,038    16,931    26,888    23,597 

 

(in U.S. $000's)  Full Year 2016   Q4 2016   Q3 2016   Q2 2016   Q1 2016 
Total revenues:                         
As reported  $566,395   $146,769   $128,876   $158,805   $131,945 
Expected impact:                         
Sales of inventory gross up   513,348    136,984    159,850    104,978    111,536 
Ancillary service and RB Logistics gross up   47,234    11,077    12,250    11,884    12,023 
New revenue standard  $1,126,977   $294,830   $300,976   $275,667   $255,504 
Operating income:                         
As reported  $135,722   $40,628   $2,285   $53,635   $39,174 
New revenue standard   135,722    40,628    2,285    53,635    39,174 

 

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(in U.S. $000's)  Full Year 2015   Q4 2015   Q3 2015   Q2 2015   Q1 2015 
Total revenues:                         
As reported  $515,875   $135,462   $109,318   $155,477   $115,618 
Expected impact:                         
Sales of inventory gross up   511,892    139,314    97,745    136,255    138,578 
Ancillary service and RB Logistics gross up   52,732    14,880    13,216    13,946    10,690 
New revenue standard  $1,080,499   $289,656   $220,279   $305,678   $264,886 
Operating income:                         
As reported  $174,840   $50,424   $28,602   $62,795   $33,019 
New revenue standard   174,840    50,424    28,602    62,795    33,019 

 

Revenue reported under current US GAAP increased 8% in 2017 compared to 2016. The expected impact of retrospectively adopting ASU 2014-09 would result in a 14% decrease in total revenues of 2017 compared to 2016.

 

Revenue reported under current US GAAP increased 10% in 2016 compared to 2015. The expected impact of retrospectively adopting ASU 2014-09 would result in a 4% increase in total revenues of 2016 compared to 2015.

 

Revenue under current US GAAP will be most comparable to total revenues less cost of inventory sold under ASU 2014-09. As such, when ASU 2014-09 takes effect, we will introduce a new non-GAAP financial measure that we are tentatively calling “Agency Proceeds”, which will be calculated as total revenues less cost of inventory sold and will replace revenues used in our key performance metrics.

 

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Non-GAAP Measures

We reference various non-GAAP measures throughout this Annual Report on Form 10-K. These measures do not have a standardized meaning and are, therefore, unlikely to be comparable to similar measures presented by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with generally accepted accounting principles.

 

The following table presents our adjusted operating income (non-GAAP measure) and adjusted operating income margin (non-GAAP measure) results for the years ended December 31, 2017, 2016 and 2015, as well as reconciles those metrics to operating income, revenues, and operating income margin, which are the most directly comparable GAAP measures in, or calculated from, our consolidated income statements:

 

   Year ended December 31, 
               Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Operating income  $107,454   $135,722   $174,840    (21)%   (22)%
Pre-tax adjusting items:                         
Accelerated vesting of assumed options   4,752    -    -    100%   - 
Acquisition and finance structure advisory   9,063    -    -    100%   - 
Severance and retention   3,613    -    -    100%   - 
Gain on sale of excess property   -    -    (8,384)   -    (100)%
Impairment loss   8,911    28,243    -    (68)%   100%
Adjusted operating income (non-GAAP measure)   133,793    163,965    166,456    (18)%   (1)%
Revenues  $610,517   $566,395   $515,875    8%   10%
                          
Operating income margin   17.6%   24.0%   33.9%   -640 bps    -990 bps 
Adjusted operating income margin (non-GAAP measure)   21.9%   28.9%   32.3%    
-700 bps
     
-340 bps
 

 

The adjusting items for the year ended December 31, 2017 were:

 

·$4.8 million ($4.8 million after tax, or $0.04 per diluted share) of stock option compensation expense related to the accelerated vesting of certain IronPlanet stock options assumed as part of the Acquisition

 

·$9.1 million ($6.6 million after tax, or $0.06 per diluted share) of acquisition and finance structure advisory costs,

 

·$3.6 million ($2.5 million after tax, or $0.02 per diluted share) of severance and retention costs in a corporate reorganization that followed the Acquisition

 

·$8.9 million ($6.6 million after tax, or $0.06 per diluted share) impairment loss recognized on various technology assets

 

The adjusting item for the year ended December 31, 2016 was a $28.2 million ($26.4 million after tax, or $0.25 per diluted share) impairment loss on EquipmentOne reporting unit goodwill and customer relationships.

 

The adjusting item for the year ended December 31, 2015 was an $8.4 million ($7.3 million after tax, or $0.07 per diluted share) gain on the sale of the excess property in Edmonton, Canada.

 

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The following table presents our adjusted net income attributable to stockholders (non-GAAP measure) and diluted adjusted EPS attributable to stockholders (non-GAAP measure) results for the years ended December 31, 2017, 2016, and 2015, as well as reconciles those metrics to net income attributable to stockholders, the effect of dilutive securities, the weighted average number of dilutive shares outstanding, and diluted EPS attributable to stockholders, which are the most directly comparable GAAP measures in our consolidated income statements:

 

   Year ended December 31, 
               Change 
(in U.S. $000's, except share and
per share data)
  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Net income attributable to stockholders  $75,027   $91,832   $136,214    (18)%   (33)%
Pre-tax adjusting items:                         
Accelerated vesting of assumed options   4,752    -    -    100%   - 
Acquisition and finance structure advisory   9,063    -    -    100%   - 
Severance and retention   3,613    -    -    100%   - 
Debt extinguishment costs   -    6,787    -    (100)%   100%
Gain on sale of excess property   -    -    (8,384)   -    (100)%
Impairment loss   8,911    28,243    -    (68)%   100%
Current income tax effect of adjusting items:                         
Acquisition and finance structure advisory   (2,447)   -    -    100%   - 
Severance and retention   (748)   -    -    100%   - 
Debt extinguishment costs   -    (1,787)   -    (100)%   100%
Gain on sale of excess property   -    -    1,090    -    (100)%
Deferred income tax effect of adjusting items:                         
Impairment loss   (2,361)   (1,798)   -    31%   100%
Severance and retention   (368)   -    -    100%   - 
Current income tax adjusting item:                         
Change in uncertain tax provision   2,290    -    -    100%   - 
Deferred tax adjusting item:                         
Remeasurement of deferred taxes   (10,070)   -    -    100%   - 
Tax loss utilization   -    -    (7,862)   -    (100)%
Adjusted net income attributable to stockholders (non-GAAP measure)  $87,662   $123,277   $121,058    (29)%   2%
Effect of dilutive securities  $(152)  $-   $-    100%   - 
Weighted average number of dilutive shares outstanding   108,113,151    107,457,794    107,432,474    1%   -%
                          
Diluted EPS attributable to stockholders  $0.69   $0.85   $1.27    (19)%   (33)%
Diluted adjusted EPS attributable to stockholders (non-GAAP measure)  $0.81   $1.15   $1.13    (30)%   2%

 

The adjusting items for the year ended December 31, 2017 were:

 

·$4.8 million ($4.8 million after tax, or $0.04 per diluted share) of stock option compensation expense related to the accelerated vesting of certain IronPlanet stock options assumed as part of the Acquisition

 

·$9.1 million ($6.6 million after tax, or $0.06 per diluted share) of acquisition and finance structure advisory costs,

 

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·$3.6 million ($2.5 million after tax, or $0.02 per diluted share) of severance and retention costs in a corporate reorganization that followed the Acquisition

 

·$8.9 million ($6.6 million after tax, or $0.06 per diluted share) impairment loss recognized on various technology assets

 

·$2.3 million (or $0.02 per diluted share) charge related to the change in uncertain tax provisions

 

·$10.1 million (or $0.10 per diluted share) benefit on remeasurement of deferred taxes as a result of the TCJA

 

The adjusting items for the year ended December 31, 2016 were:

 

·$6.8 million ($5.0 million after tax, or $0.05 per diluted share) charge related to the early termination of pre-existing debt

 

·$28.2 million ($26.4 million after tax, or $0.25 per diluted share) impairment loss on EquipmentOne reporting unit goodwill and customer relationships

 

The adjusting items for the year ended December 31, 2015 were:

 

·$8.4 million ($7.3 million before tax, or $0.07 per diluted share) gain on the sale of excess property in Edmonton, Canada

 

·$7.9 million before tax (or $0.07 per diluted share) of tax savings generated by tax loss utilization

 

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The following table presents our adjusted EBITDA (non-GAAP measure) and adjusted EBITDA margin (non-GAAP measure) results for the years ended December 31, 2017, 2016 and 2015, as well as reconciles those metrics to net income, revenues, and net income margin, which are the most directly comparable GAAP measures in, or calculated from, our consolidated income statements:

 

   Year ended December 31, 
               Change 
(in U.S. $000's)  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Net income  $75,306   $93,512   $138,575    (19)%   (33)%
Add: depreciation and amortization expenses   52,694    40,861    42,032    29%   (3)%
Less: interest income   (3,194)   (1,863)   (2,660)   71%   (30)%
Add: interest expense   38,291    5,564    4,962    588%   12%
Add: current income tax expense   19,356    40,341    42,420    (52)%   (5)%
Add: deferred income tax recovery   (17,268)   (3,359)   (4,559)   414%   (26)%
Pre-tax adjusting items:                         
Accelerated vesting of assumed options   4,752    -    -    100%   - 
Acquisition and finance structure advisory   9,063    -    -    100%   - 
Severance and retention   3,613    -    -    100%   - 
Debt extinguishment costs   -    6,787    -    (100)%   100%
Gain on sale of excess property   -    -    (8,384)   -    (100)%
Impairment loss   8,911    28,243    -    (68)%   100%
Adjusted EBITDA (non-GAAP measure)   191,524    210,086    212,386    (9)%   (1)%
Revenues  $610,517   $566,395   $515,875    8%   10%
                          
Net income margin   12.3%   16.5%   26.9%   -420 bps    -1040 bps 
Adjusted EBITDA margin (non-GAAP
measure)
   31.4%   37.1%   41.2%    
-570 bps
     
-410 bps
 

 

The adjusting items for the year ended December 31, 2017 were:

 

·$4.8 million ($4.8 million after tax, or $0.04 per diluted share) of stock option compensation expense related to the accelerated vesting of certain IronPlanet stock options assumed as part of the Acquisition

 

·$9.1 million ($6.6 million after tax, or $0.06 per diluted share) of acquisition and finance structure advisory costs

 

·$3.6 million ($2.5 million after tax, or $0.02 per diluted share) of severance and retention costs in a corporate reorganization that followed the Acquisition

 

·$8.9 million ($6.6 million after tax, or $0.06 per diluted share) impairment loss recognized on various technology assets

 

The adjusting items for the year ended December 31, 2016 were:

 

·$6.8 million ($5.0 million after tax, or $0.05 per diluted share) charge related to the early termination of pre-existing debt

 

·$28.2 million ($26.4 million after tax, or $0.25 per diluted share) impairment loss on the EquipmentOne reporting unit goodwill and customer relationships

 

The adjusting item for the year ended December 31, 2015 was an $8.4 million ($7.3 million after tax, or $0.07 per diluted share) gain on the sale of excess property in Edmonton, Canada.

 

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The following table presents our adjusted net debt/adjusted EBITDA (non-GAAP measures) results as at and for the years ended December 31, 2017, 2016, and 2015, as well as reconciles that metric to debt, cash and cash equivalents, net income, and debt as a multiple of net income, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:

 

(in U.S. $ millions)  As at and for the year ended December 31, 
               Change 
   2017   2016   2015   2017 over
2016
   2016 over
2015
 
Short-term debt  $7.0   $23.9   $12.4    (71)%   93%
Long-term debt   812.9    595.7    97.9    36%   508%
Debt   819.9    619.6    110.3    32%   462%
Less: cash and cash equivalents   (267.9)   (207.9)   (210.1)   29%   (1)%
Less: long-term debt in escrow   -    (495.8)   -    (100)%   100%
Adjusted net debt (non-GAAP measure)   552.0    (84.1)   (99.8)   756%   (16)%
                          
Net income  $75.3   $93.5   $138.6    (19)%   (33)%
Add: depreciation and amortization expenses   52.7    40.9    42.1    29%   (3)%
Less: interest income   (3.2)   (1.9)   (2.7)   68%   (30)%
Add: interest expense   38.3    5.6    5.0    584%   12%
Add: current income tax expense   19.4    40.3    42.4    (52)%   (5)%
Less: deferred income tax recovery   (17.3)   (3.4)   (4.6)   409%   (26)%
Pre-tax adjusting items:                         
Accelerated vesting of assumed options   4.8    -    -    100%   - 
Acquisition and finance structure advisory   9.1    -    -    100%   - 
Severance and retention   3.6    -    -    100%   - 
Debt extinguishment costs   -    6.8    -    (100)%   100%
Gain on sale of excess property   -    -    (8.4)   -    (100)%
Impairment loss   8.9    28.2    -    (68)%   100%
Adjusted EBITDA (non-GAAP measure)  $191.5   $210.1   $212.4    (9)%   (1)%
                          
Debt/net income   10.9x   6.6x   0.8x   65%   725%
Adjusted net debt/adjusted EBITDA (non-GAAP measure)   2.9x   -0.4x   -0.5x   825%   (20)%

 

The adjusting items for the year ended December 31, 2017 were:

 

·$4.8 million ($4.8 million after tax, or $0.04 per diluted share) of stock option compensation expense related to the accelerated vesting of certain IronPlanet stock options assumed as part of the Acquisition

 

·$9.1 million ($6.6 million after tax, or $0.06 per diluted share) of acquisition and finance structure advisory costs

 

·$3.6 million ($2.5 million after tax, or $0.02 per diluted share) of severance and retention costs in a corporate reorganization that followed the Acquisition

 

·$8.9 million ($6.6 million after tax, or $0.06 per diluted share) impairment loss recognized on various technology assets

 

The adjusting items for the year ended December 31, 2016 were:

 

·$6.8 million ($5.0 million after tax, or $0.05 per diluted share) charge related to the early termination of pre-existing debt

  

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·$28.2 million ($26.4 million after tax, or $0.25 per diluted share) impairment loss on the EquipmentOne reporting unit goodwill and customer relationships

 

The adjusting item for the year ended December 31, 2015 was an $8.4 million ($7.3 million after tax, or $0.07 per diluted share) gain on the sale of excess property in Edmonton, Canada.

 

The following table presents our OFCF (non-GAAP measure) results for the years ended December 31, 2017, 2016, and 2015, as well as reconciles that metric to cash provided by operating activities and net capital spending, which are the most directly comparable GAAP measures in, or calculated from, our consolidated statements of cash flows:

 

   Year ended December 31, 
               Change 
(in U.S. $ millions)  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Cash provided by operating activities  $146.3   $177.6   $196.5    (18%)   (10%)
Property, plant and equipment additions   10.8    18.9    22.1    (43%)   (14%)
Intangible asset additions   28.6    17.6    8.8    63%   100%
Proceeds on disposition of property   -    -                
plant and equipment   (5.0)   (6.7)   (16.7)   (25%)   (60%)
Net capital spending  $34.4   $29.8   $14.2    15%   110%
OFCF (non-GAAP measure)  $111.9   $147.8   $182.3    (24%)   (19%)

 

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The following table presents our adjusted net income attributable to stockholders (non-GAAP measure) and adjusted dividend payout ratio (non-GAAP measure) results for the years ended December 31, 2017, 2016, and 2015, as well as reconciles those metrics to dividends paid to stockholders, net income attributable to stockholders, and dividend payout ratio, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:

 

   Year ended December 31, 
               Change 
(in U.S. $ millions)  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Dividends paid to stockholders  $72.8   $70.5   $64.3    3%   10%
Net income attributable to stockholders  $75.0   $91.8   $136.2    (18%)   (33%)
Pre-tax adjusting items:                         
Accelerated vesting of assumed options   4.8    -    -    100%   - 
Acquisition and finance structure advisory   9.1    -    -    100%   - 
Severance and retention   3.6    -    -    100%   - 
Debt extinguishment costs   -    6.8    -    (100%)   100%
Gain on sale of excess property   -    -    (8.4)   -    (100%)
Impairment loss   8.9    28.2    -    (68%)   100%
Current income tax effect of adjusting items:                         
Acquisition and finance structure advisory   (2.4)   -    -    100%   - 
Severance and retention   (0.7)   -    -    100%   - 
Debt extinguishment costs   -    (1.8)   -    (100%)   100%
Gain on sale of excess property   -    -    1.1    -    (100%)
Deferred income tax effect of adjusting items:                         
Impairment loss   (2.4)   (1.8)   -    33%   100%
Severance and retention   (0.4)   -    -    100%   - 
Current income tax adjusting item:                         
Change in uncertain tax provision   2.3    -    -    100%   - 
Deferred tax adjusting item:                         
Remeasurement of deferred taxes   (10.1)   -    -    100%   - 
Tax loss utilization   -    -    (7.9)   -    (100%)
Adjusted net income attributable to stockholders (non-GAAP measure)  $87.7   $123.3   $121.1    (29%)   2%
                          
Dividend payout ratio   97.1%   76.8%   47.2%   2030 bps    2960 bps 
Adjusted dividend payout ratio (non-GAAP measure)   83.0%   57.2%   53.1%   2580 bps    410 bps 

 

The adjusting items for the year ended December 31, 2017 were:

 

·$4.8 million ($4.8 million after tax, or $0.04 per diluted share) of stock option compensation expense related to the accelerated vesting of certain IronPlanet stock options assumed as part of the Acquisition

 

·$9.1 million ($6.6 million after tax, or $0.06 per diluted share) of acquisition and finance structure advisory costs,

 

·$3.6 million ($2.5 million after tax, or $0.02 per diluted share) of severance and retention costs in a corporate reorganization that followed the Acquisition

 

·$8.9 million ($6.6 million after tax, or $0.06 per diluted share) impairment loss recognized on various technology assets

 

Ritchie Bros.77

 

 

·$2.3 million (or $0.02 per diluted share) charge related to the change in uncertain tax provisions

 

·$10.1 million (or $0.10 per diluted share) benefit on remeasurement of deferred taxes due to the TCJA

 

The adjusting items for the year ended December 31, 2016 were:

 

·$6.8 million ($5.0 million after tax, or $0.05 per diluted share) charge related to the early termination of pre-existing debt

 

·$28.2 million ($26.4 million after tax, or $0.25 per diluted share) impairment loss on EquipmentOne reporting unit goodwill and customer relationships

 

The adjusting items for the year ended December 31, 2015 were:

 

·$8.4 million ($7.3 million before tax, or $0.07 per diluted share) gain on the sale of excess property in Edmonton, Canada

 

·$7.9 million before tax (or $0.07 per diluted share) of tax savings generated by tax loss utilization

 

The following table presents our ROIC excluding escrowed debt (non-GAAP measure) results as at and for the years ended December 31, 2017, 2016, and 2015, as well as reconciles that metric to net income attributable to stockholders, long-term debt, stockholders’ equity, and return on average invested capital, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:

 

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   As at and for the year ended December 31, 
               Change 
(in U.S. $ millions)  2017   2016   2015   2017 over
2016
   2016 over
2015
 
Net income attributable to stockholders  $75.0   $91.8   $136.2    (18)%   (33)%
Pre-tax adjusting items:                         
Accelerated vesting of assumed options   4.8    -    -    100%   - 
Acquisition and finance structure advisory   9.1    -    -    100%   - 
Severance and retention   3.6    -    -    100%   - 
Debt extinguishment costs   -    6.8    -    (100)%   100%
Gain on sale of excess property   -    -    (8.4)   -    (100)%
Impairment loss   8.9    28.2    -    (68)%   100%
Current income tax effect of adjusting items:                         
Acquisition and finance structure advisory   (2.4)   -    -    100%   - 
Severance and retention   (0.7)   -    -    100%   - 
Debt extinguishment costs   -    (1.8)   -    (100)%   100%
Gain on sale of excess property   -    -    1.1    -    (100)%
Deferred income tax effect of adjusting items:                         
Impairment loss   (2.4)   (1.8)   -    33%   100%
Severance and retention   (0.4)   -    -    100%   - 
Current income tax adjusting item:                         
Change in uncertain tax provision   2.3    -    -    100%   - 
Deferred tax adjusting item:                         
Remeasurement of deferred taxes   (10.1)   -    -    100%   - 
Tax loss utilization   -    -    (7.9)   -    (100)%
Adjusted net income attributable to stockholders (non-GAAP measure)  $87.7   $123.3   $121.1    (29)%   2%
                          
Opening long-term debt  $595.7   $97.9   $110.8    508%   (12)%
Ending long-term debt   812.9    595.7    97.9    36%   508%
Less: long-term debt in escrow   -    (495.8)   -    (100)%   100%
Adjusted ending long-term debt (non-GAAP measure)   812.9    99.9    97.9    714%   2%
Average long-term debt  $704.3   $346.8   $104.4    103%   232%
                          
Adjusted average long-term debt (non-GAAP measure)   704.3    98.9    104.4    612%   (5)%
Opening stockholders' equity  $687.1   $703.2   $691.9    (2)%   2%
Ending stockholders' equity   739.7    687.1    703.2    8%   (2)%
Average stockholders' equity   713.4    695.2    697.6    3%   - 
                          
Average invested capital  $1,417.7   $1,042.0   $802.0    36%   30%
                         
Adjusted average invested capital (non-GAAP measure)   1,417.7    794.1    802.0    79%   (1)%
                          
Return on average invested capital(1)   5.3%   8.8%   17.0%   -350 bps    -820 bps 
                         
ROIC excluding escrowed debt (non-GAAP measure)(2)   6.2%   15.5%   15.1%   -930 bps    40 bps 

 

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(1)Calculated as net income attributable to stockholders divided by average invested capital.

 

(2)Calculated as adjusted net income attributable to stockholders (non-GAAP measure) divided by adjusted average invested capital (non-GAAP measure).

 

The adjusting items for the year ended December 31, 2017 were:

 

·$4.8 million ($4.8 million after tax, or $0.04 per diluted share) of stock option compensation expense related to the accelerated vesting of certain IronPlanet stock options assumed as part of the Acquisition

 

·$9.1 million ($6.6 million after tax, or $0.06 per diluted share) of acquisition and finance structure advisory costs,

 

·$3.6 million ($2.5 million after tax, or $0.02 per diluted share) of severance and retention costs in a corporate reorganization that followed the Acquisition

 

·$8.9 million ($6.6 million after tax, or $0.06 per diluted share) impairment loss recognized on various technology assets

 

·$2.3 million (or $0.02 per diluted share) charge related to the change in uncertain tax provisions

 

·$10.1 million (or $0.10 per diluted share) benefit on remeasurement of deferred taxes due to the TCJA.

 

The adjusting items for the year ended December 31, 2016 were:

 

·$6.8 million ($5.0 million after tax, or $0.05 per diluted share) charge related to the early termination of pre-existing debt

 

·$28.2 million ($26.4 million after tax, or $0.25 per diluted share) impairment loss on EquipmentOne reporting unit goodwill and customer relationships

 

The adjusting items for the year ended December 31, 2015 were:

 

·$8.4 million ($7.3 million before tax, or $0.07 per diluted share) gain on the sale of excess property in Edmonton, Canada

 

·$7.9 million before tax (or $0.07 per diluted share) of tax savings generated by tax loss utilization

 

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ITEM 7A:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Foreign Currency Exchange Rate Risk

We conduct operations in local currencies in countries around the world, but we use the U.S. dollar as our presentation currency. As a result, we are exposed to currency fluctuations and exchange rate risk. We cannot accurately predict the future effects of foreign currency fluctuations on our financial condition or results of operations, or quantify their effects on the macroeconomic environment. The proportion of revenues denominated in currencies other than the U.S. dollar in a given period will differ from the annual proportion for the year ended December 31, 2017, which was 44%, depending on the size and location of auctions held during the period. On annual basis, we expect fluctuations in revenues and operating expenses to largely offset and generally act as a natural hedge against exposure to fluctuations in the value of the U.S. dollar. As part of our debt management strategies, we continue to monitor our exposure to interest rate risk, and while we have not entered in to interest rate swaps to fix the interest rate on our variable rate debt, we may consider hedging specific borrowings if we deem it appropriate in the future.

 

During 2017, we recorded a net increase in our foreign currency translation adjustment balance of $24.7 million, compared to a net decrease of $9.8 million in 2016 and $40.8 million in 2015. Our foreign currency translation adjustment arises from the translation of our net assets denominated in currencies other than the U.S. dollar to the U.S. dollar for reporting purposes. Based on our exposures to foreign currency transactions as at December 31, 2017, and assuming all other variables remain constant, a 10% appreciation or depreciation of the Canadian dollar and Euro against the U.S. dollar would result in an increase/decrease of approximately $43.6 million in our consolidated comprehensive income, of which $41.5 million relates to our foreign currency translation adjustment and $2.1 million to our net income.

 

Interest Rate Risk

At December 31, 2017, our short-term debt and the remainder of our long-term debt consisted of loans under the Multicurrency Facilities and foreign credit facilities, which usually mature one to three months from inception. Those loans bear interest, at our option, at a rate equal to either a base rate (or Canadian prime rate for certain Canadian dollar borrowings) or LIBOR (or such floating rate customarily used by BofA for currencies other than U.S. dollars). In either case, an applicable margin is added to the rate. As at December 31, 2017, we had a total of $332.6 million in loans (short-term and those refinanced on a long-term basis) bearing floating rates of interest, as compared to $123.8 million at December 31, 2016. Based on the amount owing as of December 31, 2017, and assuming all other variables remain constant, a change in the U.S. prime rate by 100 bps would result in an increase/decrease of approximately $2.7 million in the pre-tax interest we accrue per annum.

 

Our exposure to interest rate risk increased at December 31, 2017 compared to December 31, 2016, primarily due to the delayed draw term loans borrowed in the second quarter of 2017. The Notes, which represent 60% of our long-term debt, bear interest at a fixed rate of 5.375% per annum. The proportion of fixed-to-floating interest rates is expected to increase as we make the required principal repayments on our delayed draw term loans and execute on our debt management strategies. As part of our debt management strategies, we continue to monitor our exposure to interest rate risk, and while we have not adopted a long-term hedging strategy to protect against interest rate fluctuations associated with our variable rate debt, we may consider hedging specific borrowings if we deem it appropriate in the future.

 

Inflation

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.

 

ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following financial statements and supplementary data should be read in conjunction with “Part II, Item 6: Selected Financial Data” of this Annual Report on Form 10-K.

 

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Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of Ritchie Bros. Auctioneers Incorporated

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Ritchie Bros. Auctioneers Incorporated (the “Company“) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the results of its consolidated operations and its consolidated cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with US generally accepted accounting principles.

 

Report on Internal Control over Financial Reporting

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young LLP

 

Chartered Professional Accountants


We have served as the Company‘s auditor since 2013.
Vancouver, Canada
February 26, 2018

 

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Consolidated Income Statements

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

 

Year ended December 31,  2017   2016   2015 
Revenues (note 5)  $610,517   $566,395   $515,875 
Costs of services, excluding depreciation and amortization (note 6)   79,013    66,062    56,026 
    531,504    500,333    459,849 
Selling, general and administrative expenses (note 6)   323,270    283,529    254,389 
Acquisition-related costs (note 6)   38,272    11,829    601 
Depreciation and amortization expenses (note 6)   52,694    40,861    42,032 
Gain on disposition of property, plant and equipment   (1,656)   (1,282)   (9,691)
Impairment loss (note 7)   8,911    28,243    - 
Foreign exchange loss (gain)   2,559    1,431    (2,322)
Operating income   107,454    135,722    174,840 
Other income (expense):              &