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RB GLOBAL INC. - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 001-13425

Graphic

Ritchie Bros. Auctioneers Incorporated

(Exact Name of Registrant as Specified in its Charter)

Canada

 

98-0626225

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

9500 Glenlyon Parkway

 

 

Burnaby, British Columbia, Canada

 

V5J 0C6

(Address of Principal Executive Offices)

 

(Zip Code)

(778) 331-5500

(Registrant’s Telephone Number, including Area Code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common shares

RBA

New York Stock Exchange

Common Share Purchase Rights

N/A

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes No

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.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date: 110,872,179 common shares, without par value, outstanding as of November 4, 2022.

Table of Contents

RITCHIE BROS. AUCTIONEERS INCORPORATED

FORM 10-Q

For the quarter ended September 30, 2022

INDEX

PART I – FINANCIAL INFORMATION

ITEM 1:

Consolidated Financial Statements

1

ITEM 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

ITEM 3:

Quantitative and Qualitative Disclosures About Market Risk

57

ITEM 4:

Controls and Procedures

57

PART II – OTHER INFORMATION

ITEM 1:

Legal Proceedings

58

ITEM 1A:

Risk Factors

58

ITEM 2:

Unregistered Sales of Equity Securities and Use of Proceeds

60

ITEM 3:

Defaults Upon Senior Securities

60

ITEM 4:

Mine Safety Disclosures

60

ITEM 5:

Other Information

60

ITEM 6:

Exhibits

61

SIGNATURES

62

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1:           CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Income Statements

(Expressed in thousands of U.S. dollars, except share and per share data)

(Unaudited)

Three months ended

Nine months ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Revenue:

  

  

  

  

Service revenue

$

246,696

$

214,193

$

778,059

$

672,971

Inventory sales revenue

 

164,783

 

115,489

 

511,887

 

384,627

Total revenue

 

411,479

 

329,682

 

1,289,946

 

1,057,598

Operating expenses:

 

  

 

  

 

  

 

  

Costs of services

 

41,521

 

35,108

 

125,575

 

114,275

Cost of inventory sold

 

147,253

 

102,993

 

455,006

 

344,763

Selling, general and administrative

 

133,193

 

106,508

 

404,077

 

330,307

Acquisition-related costs

 

2,031

 

10,255

 

15,067

 

16,226

Depreciation and amortization

 

24,290

 

21,907

 

72,813

 

64,912

Foreign exchange (gain) loss

 

(430)

 

360

 

(752)

 

788

Total operating expenses

 

347,858

 

277,131

 

1,071,786

 

871,271

Gain on disposition of property, plant and equipment

 

333

 

1,068

170,499

1,311

Operating income

 

63,954

 

53,619

 

388,659

 

187,638

Interest expense

 

(9,199)

 

(8,807)

 

(48,348)

 

(26,620)

Change in fair value of derivatives, net

 

 

 

1,263

 

Other income, net

 

2,866

 

602

 

5,426

 

2,800

Income before income taxes

 

57,621

 

45,414

 

347,000

 

163,818

Income tax expense

14,697

13,057

72,564

42,541

Net income

$

42,924

$

32,357

$

274,436

$

121,277

Net income attributable to:

 

  

 

  

 

  

 

  

Stockholders

$

42,909

$

32,336

$

274,368

$

121,273

Non-controlling interests

 

15

 

21

 

68

 

4

Net income

$

42,924

$

32,357

$

274,436

$

121,277

Earnings per share attributable to stockholders:

 

  

 

  

 

  

 

  

Basic

$

0.39

$

0.29

$

2.48

$

1.10

Diluted

$

0.38

$

0.29

$

2.45

$

1.09

Weighted average number of shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

110,838,237

 

110,410,172

 

110,750,021

 

110,233,851

Diluted

 

112,209,535

 

111,391,396

 

111,858,095

 

111,333,247

See accompanying notes to the condensed consolidated financial statements.

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Condensed Consolidated Statements of Comprehensive Income

(Expressed in thousands of U.S. dollars)

(Unaudited)

Three months ended

Nine months ended

    

September 30, 

September 30, 

2022

    

2021

    

2022

    

2021

Net income

$

42,924

$

32,357

$

274,436

$

121,277

Other comprehensive income (loss), net of income tax:

 

 

  

 

  

 

  

Foreign currency translation adjustment

 

(30,515)

 

(8,859)

 

(54,457)

 

(17,751)

Total comprehensive income

$

12,409

$

23,498

$

219,979

$

103,526

Total comprehensive income (loss) attributable to:

 

  

 

  

 

  

 

  

Stockholders

$

12,420

$

23,487

$

219,969

$

103,546

Non-controlling interests

 

(11)

 

11

 

10

 

(20)

$

12,409

$

23,498

$

219,979

$

103,526

See accompanying notes to the condensed consolidated financial statements.

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Condensed Consolidated Balance Sheets

(Expressed in thousands of U.S. dollars, except share data)

(Unaudited)

September 30, 

December 31, 

    

2022

    

2021

Assets

Cash and cash equivalents

$

438,771

$

326,113

Restricted cash

 

76,303

 

102,875

Trade and other receivables

 

307,409

 

150,895

Less: allowance for credit losses

(3,963)

(4,396)

Inventory

 

101,302

 

102,494

Other current assets

 

27,512

 

64,346

Income taxes receivable

 

6,523

 

19,895

Total current assets

 

953,857

 

762,222

Restricted cash

933,464

Property, plant and equipment

 

444,538

 

449,087

Other non-current assets

 

147,900

 

142,504

Intangible assets

 

323,228

 

350,516

Goodwill

 

946,770

 

947,715

Deferred tax assets

 

6,281

 

7,406

Total assets

$

2,822,574

$

3,592,914

Liabilities and Equity

 

  

 

  

Auction proceeds payable

$

441,439

$

292,789

Trade and other liabilities

 

266,139

 

280,308

Income taxes payable

 

38,678

 

5,677

Short-term debt

 

1,630

 

6,147

Current portion of long-term debt

 

4,296

 

3,498

Total current liabilities

 

752,182

 

588,419

Long-term debt

 

633,048

 

1,733,940

Other non-current liabilities

 

137,228

 

147,260

Deferred tax liabilities

 

60,916

 

52,232

Total liabilities

 

1,583,374

 

2,521,851

Commitments and Contingencies (Note 22 and Note 23 respectively)

 

Stockholders' equity:

 

  

 

  

Share capital:

 

  

 

  

Common stock; no par value, unlimited shares authorized, issued and outstanding shares: 110,870,783 (December 31, 2021: 110,618,049)

 

239,141

 

227,504

Additional paid-in capital

 

81,937

 

59,535

Retained earnings

 

1,028,096

 

839,609

Accumulated other comprehensive loss

 

(110,372)

 

(55,973)

Stockholders' equity

 

1,238,802

 

1,070,675

Non-controlling interest

 

398

 

388

Total stockholders' equity

 

1,239,200

 

1,071,063

Total liabilities and equity

$

2,822,574

$

3,592,914

See accompanying notes to the condensed consolidated financial statements.

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Condensed Consolidated Statements of Changes in Equity

(Expressed in thousands of U.S. dollars, except where noted)

(Unaudited)

Attributable to stockholders

 

    

    

Additional

Accumulated

Non-

Common stock

paid-In

other

controlling

Number of

capital

Retained

comprehensive

interest

Total

Three months ended September 30, 2022

    

shares

    

Amount

    

("APIC")

    

earnings

    

loss

    

("NCI")

    

equity

    

Balance, June 30, 2022

110,791,788

$

235,244

$

73,014

$

1,015,301

$

(79,883)

$

409

$

1,244,085

Net income

 

 

 

42,909

 

 

15

 

42,924

Other comprehensive loss

 

 

 

 

(30,489)

 

(26)

 

(30,515)

 

 

 

42,909

 

(30,489)

 

(11)

 

12,409

Stock option exercises

75,511

 

3,536

 

(636)

 

 

 

 

2,900

Issuance of common stock related to vesting of share units

3,484

 

58

 

(198)

 

 

 

 

(140)

Share-based continuing employment costs related to business combinations

 

303

 

1,560

 

 

 

 

1,863

Stock option compensation expense

3,249

3,249

Equity-classified share units expense

4,766

 

 

 

4,766

Equity-classified share units divided equivalents

182

(182)

 

 

 

Cash dividends paid

 

 

 

(29,932)

 

 

 

(29,932)

Balance, September 30, 2022

110,870,783

$

239,141

$

81,937

$

1,028,096

$

(110,372)

$

398

$

1,239,200

Three months ended September 30, 2021

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, June 30, 2021

110,366,808

$

215,666

$

51,800

$

832,037

$

(43,173)

$

5,097

$

1,061,427

Net income

 

 

 

 

32,336

 

 

21

 

32,357

Other comprehensive loss

 

 

 

 

 

(8,849)

 

(10)

 

(8,859)

 

 

 

 

32,336

 

(8,849)

 

11

 

23,498

Stock option exercises

 

100,703

3,942

(725)

 

 

3,217

Issuance of common stock related to vesting of share units

 

85

1

(7)

 

 

(6)

Acquisition of remaining interest in NCI

 

 

 

(672)

 

69

 

 

(4,692)

 

(5,295)

Share-based continuing employment costs related to business combinations

2,707

 

2,707

Stock option compensation expense

 

2,133

 

 

2,133

Equity-classified share units expense

 

 

2,283

 

 

2,283

Equity-classified share units dividend equivalents

 

 

 

76

 

(76)

 

 

 

Cash dividends paid

 

 

(27,607)

 

(27,607)

Balance, September 30, 2021

 

110,467,596

$

219,609

$

57,595

$

836,759

$

(52,022)

$

416

$

1,062,357

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Attributable to stockholders

    

    

Additional

Accumulated

Non-

Common stock

paid-In

other

controlling

Number of

capital

Retained

comprehensive

interest

Total

Nine months ended September 30, 2022

    

shares

    

Amount

    

("APIC")

    

earnings

    

loss

    

("NCI")

    

equity

    

Balance, December 31, 2021

110,618,049

$

227,504

$

59,535

$

839,609

$

(55,973)

$

388

$

1,071,063

Net income

 

 

 

274,368

 

 

68

 

274,436

Other comprehensive loss

 

 

 

 

(54,399)

 

(58)

 

(54,457)

 

 

 

274,368

 

(54,399)

 

10

 

219,979

Stock option exercises

155,694

 

7,090

 

(1,327)

 

 

 

 

5,763

Issuance of common stock related to vesting of share units

97,040

 

2,426

 

(6,143)

 

 

 

 

(3,717)

Share-based continuing employment costs related to business combinations

2,121

3,954

 

 

6,075

Stock option compensation expense

8,871

 

 

8,871

Equity-classified share units expense

 

 

16,450

 

 

 

 

16,450

Equity-classified share units dividend equivalents

 

 

597

 

(597)

 

 

 

Cash dividends paid

 

 

 

(85,284)

 

 

 

(85,284)

Balance, September 30, 2022

110,870,783

$

239,141

$

81,937

$

1,028,096

$

(110,372)

$

398

$

1,239,200

Nine months ended September 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2020

 

109,876,428

$

200,451

$

49,171

$

791,918

$

(34,295)

$

5,154

$

1,012,399

Net income

 

 

 

 

121,273

 

 

4

 

121,277

Other comprehensive loss

 

 

 

 

 

(17,727)

 

(24)

 

(17,751)

 

 

 

 

121,273

 

(17,727)

 

(20)

 

103,526

Stock option exercises

 

411,856

17,099

(3,184)

 

 

13,915

Issuance of common stock related to vesting of share units

 

234,822

2,059

(11,384)

 

 

(9,325)

Acquisition of remaining interest in NCI

 

 

 

(672)

 

70

 

 

(4,614)

 

(5,216)

Share-based continuing employment costs related to business combinations

 

(55,510)

7,938

 

7,938

Stock option compensation expense

 

 

5,903

 

 

5,903

Equity-classified share units expense

 

9,465

 

 

9,465

Equity-classified share units dividend equivalents

 

 

358

 

(358)

 

 

 

Cash dividends paid

 

(76,144)

 

(104)

(76,248)

Balance, September 30, 2021

 

110,467,596

$

219,609

$

57,595

$

836,759

$

(52,022)

$

416

$

1,062,357

See accompanying notes to the condensed consolidated financial statements.

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Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

(Unaudited)

Nine months ended September 30, 

    

2022

    

2021

Cash provided by (used in):

 

  

 

  

 

Operating activities:

 

  

 

  

 

Net income

$

274,436

$

121,277

Adjustments for items not affecting cash:

  

  

  

  

  

Depreciation and amortization

 

72,813

 

64,912

Share-based payments expense

 

31,396

 

23,306

Deferred income tax expense

 

7,887

 

2,228

Unrealized foreign exchange (gain) loss

 

(5,340)

 

(98)

Gain on disposition of property, plant and equipment

 

(170,499)

 

(1,311)

Loss on redemption of the 2021 Notes

4,792

Amortization of debt issuance costs

 

3,104

 

2,155

Amortization of right-of-use assets

13,929

9,458

Change in fair value of derivatives

(1,263)

Other, net

 

2,824

 

2,253

Net changes in operating assets and liabilities

 

29,827

 

79,938

Net cash provided by operating activities

 

263,906

 

304,118

Investing activities:

 

 

  

Acquisitions, net of cash acquired

 

(63)

 

728

Property, plant and equipment additions

 

(26,279)

 

(6,984)

Proceeds on disposition of property, plant and equipment

 

165,190

 

1,667

Intangible asset additions

 

(28,225)

 

(25,601)

Issuance of loans receivable

(7,027)

(2,622)

Repayment of loans receivable

4,744

436

Net cash provided by (used in) investing activities

 

108,340

 

(32,376)

Financing activities:

 

 

  

Dividends paid to stockholders

 

(85,284)

 

(76,144)

Acquisition of remaining interest in NCI

(5,556)

Dividends paid to NCI

 

 

(104)

Proceeds from exercise of options and share option plans

 

5,763

 

13,915

Payment of withholding taxes on issuance of shares

 

(3,860)

 

(9,160)

Net increase (decrease) in short-term debt

(4,176)

(9,271)

Repayment of long-term debt

(1,094,926)

(5,328)

Debt issue costs

 

(3,644)

 

(3,163)

Repayment of finance lease obligations

 

(7,877)

 

(8,445)

Net cash used in financing activities

 

(1,194,004)

 

(103,256)

Effect of changes in foreign currency rates on cash, cash equivalents, and restricted cash

 

(25,620)

 

(7,027)

(Decrease) Increase

 

(847,378)

 

161,459

Beginning of period

 

1,362,452

 

306,895

Cash, cash equivalents, and restricted cash, end of period

$

515,074

$

468,354

See accompanying notes to the condensed consolidated financial statements.

Ritchie Bros.

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1.    General information

Ritchie Bros. Auctioneers Incorporated and its subsidiaries (collectively referred to as the “Company”, “Ritchie Bros.”, “we”, “us”, or “our”) provide a marketplace for insights, services and transaction solutions for commercial assets. The Company offers its customers end-to-end transaction solutions for used commercial and other durable assets through its omnichannel platform, which includes auctions, online marketplaces, listing services, and private brokerage services. The Company also offers a wide array of value-added services connected to commercial assets as well as asset management software and data as a service solutions to help customers make more accurate and reliable business decisions. Ritchie Bros. Auctioneers Incorporated is a company incorporated in Canada under the Canada Business Corporations Act, whose shares are publicly traded on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”).

2.    Significant accounting policies

(a) Basis of preparation

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

Certain information and footnote disclosure required by US GAAP for complete annual financial statements have been omitted and, therefore, these unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated interim financial statements follow the same accounting policies and methods of application as our most recent annual audited consolidated financial statements except as described in Note 2(b) “New and amended accounting standards and accounting policies”. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, cash flows and changes in equity for the interim periods presented. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Unless otherwise indicated, all amounts in the following tables are in thousands except share and per share amounts.

On February 24, 2022, the geopolitical situation in Eastern Europe intensified with Russia’s invasion of Ukraine, sharply affecting economic and global financial markets. Subsequent economic sanctions of Russia have exacerbated ongoing economic challenges, including issues such as rising inflation, increasing fuel costs and global supply chain disruption. The Company does not have any direct or significant operations in Russia or Ukraine, or any material operations in neighboring countries and only has limited number of direct customers in the effected region. The extent of the ongoing impacts of the conflict on our operational and financial performance, the impact of higher fuel costs globally adding to inflationary pressures, including our ability to execute on our business strategies and initiatives and sustain our operations in Europe and globally, will depend on future developments, including the continued evolvement of military activity and sanctions imposed with Russia’s invasion of Ukraine. Given the evolving nature of the crisis, the Company cannot currently reasonably estimate the impacts of the conflict on its business operations, results of operations, cash flows or financial performance.

Reclassification

Certain amounts in the prior period financial statements have been reclassified from selling, general and administrative expenses to costs of services for certain employee costs related to equipment inspections to conform to the presentation of the current period financial statements.

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2.    Significant accounting policies (continued)

(b) New and amended accounting standards and accounting policies

New accounting policies

Sale and leaseback

The transfer of the asset shall not be accounted for as a sale if the leaseback would be classified as a finance lease or a sales-type lease. For sale and leaseback transactions, the Company applies the requirements of ASC 606 Revenue from Contracts with Customers to determine whether the transfer of the asset should be accounted for as a sale and applies ASC 842 Leases when accounting for the sale and leaseback transactions. If the transfer of the asset is a sale, the Company derecognizes the underlying asset and recognizes the gain on sale of property, plant and equipment. The Company recognizes a lease obligation arising from the leaseback and the corresponding ROU asset. If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if the payments for the lease are not at market rates, the Company will make adjustments to measure the sale proceeds at fair value. Any below-market terms are accounted for as a prepayment of lease payments and any above-market terms are accounted for as additional financing provided by the buyer-lessor. If the transaction does not qualify for sale and leaseback accounting treatment, and control of the asset has not transferred, then the asset is not derecognized, and no gain or loss is recorded as the transaction is accounted for as a financing transaction.

New and amended accounting standards

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The update primarily addresses the accounting for contract assets and contract liabilities from revenue contracts with customers acquired in a business combination. The update requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606 - Revenue from Contracts with Customers, whereas prior to the adoption of the update, contract assets acquired and contract liabilities assumed in a business combination were recognized at fair value on the acquisition date. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company has early adopted the update as of October 1, 2021 and therefore has applied the amendments to all acquisitions completed since January 1, 2021, which includes only the acquisition of SmartEquip, which was completed on November 2, 2021.

3.    Significant judgments, estimates and assumptions

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

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

Judgments, estimates and underlying assumptions are evaluated on an ongoing basis by management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, existing circumstances and assumptions about future developments may change due to market changes or circumstances and such changes are reflected in the assumptions when they occur.

Significant items subject to estimates and judgments during the nine months ended September 30, 2022 were made in accounting for the completed sale and leaseback transaction of our Bolton property (Note 15 & Note 21). The Company determined the following estimates in calculating the gain on sale: the present value of market rental payments of the Bolton property sold, the expected lease term in the leaseback arrangement and the Company’s incremental borrowing rate based on information available at the commencement date of the lease.

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4.    Seasonality

The Company’s operations are both seasonal and event driven. Revenue tends to be the highest during the second and fourth calendar quarters as the Company generally conducts more auctions during these quarters. Volumes tend to also be lower during the third quarter, as supply of used equipment is lower as it is actively being used and not available for sale. Late December through mid-February and mid-July through August are traditionally less active periods.

5.   Business combinations

(a)SmartEquip acquisition

On November 2, 2021, the Company acquired all of the issued and outstanding common shares of SmartEquip for a total cash purchase price of $173.7 million. During the first quarter of 2022, the Company finalized the net working capital adjustment under the purchase agreement and increased the purchase price by $0.1 million, resulting in a total purchase price of $173.8 million.

SmartEquip is an innovative technology platform that supports customers' management of the equipment lifecycle and integrates parts procurement with both original equipment manufacturers and dealers.

The acquisition was accounted for in accordance with ASC 805, Business Combinations. The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed.

SmartEquip purchase price allocation

Purchase price

$

173,806

 

  

Assets acquired:

 

  

Cash and cash equivalents

2,039

Trade and other receivables

 

2,926

Other current assets

486

Property, plant and equipment

 

120

Other non-current assets

 

75

Deferred tax assets

 

5,098

Intangible assets

 

71,700

 

  

Liabilities assumed:

 

  

Trade and other liabilities

 

1,239

Deferred revenue

3,565

Other non-current liabilities

119

Deferred tax liabilities

 

18,178

Fair value of identifiable net assets acquired

 

59,343

Goodwill acquired on acquisition

$

114,463

The deferred tax assets are presented net of a valuation allowance of $5.8 million. 

The following table summarizes the fair values of the identifiable intangible assets acquired:

Fair value

Weighted average

Asset

at acquisition

amortization period

Customer relationships

$

50,700

4 - 15 years

Software and technology assets

18,900

7 years

Trade names and trademarks

1,000

3 years

Backlog

1,100

2 years

Total

$

71,700

11.3 years

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5.   Business combinations (continued)

SmartEquip purchase price allocation (continued)

The amounts included in the SmartEquip provisional purchase price allocation are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed at the date of the acquisition. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date. During the quarter ended September 30, 2022, the Company decreased the deferred tax asset acquired by $3.8 million to $5.1 million, with a corresponding adjustment to goodwill, as a result of additional information obtained about the facts and circumstances that existed at the date of the acquisition.

Goodwill

Goodwill has been assigned and allocated to “Other” for segmented information purposes and is based on an analysis of the fair value of net assets acquired. Goodwill relates to benefits expected from the acquisition of SmartEquip’s business, its assembled workforce and associated technical expertise, as well as anticipated synergies from applying the Company’s auction expertise and transactional capabilities to SmartEquip’s existing customer base. The transaction is considered a non-taxable business combination and the goodwill is not deductible for tax purposes.

Transactions recognized separately from the acquisition of assets and assumptions of liabilities

At the date of acquisition, the Company issued 63,971 common shares to certain previous shareholders of SmartEquip in return for their continuing employment service. The common shares are expected to vest one third on each anniversary date of the acquisition over a three-year period as continuing employment services are provided to the Company. At the date of acquisition, the Company estimated that it will recognize a total fair value of $4.4 million of share-based continuing employment costs in acquisition-related costs over the vesting period, with an increase to additional paid-in capital, subject to continuing employment of those individuals. As and when the common shares vest, the Company will recognize the fair value of the issued common shares from additional paid-in capital to share capital (Note 19).

During the quarter ended September 30, 2022, the Company recorded $0.8 million of acquisition-related costs, of which $0.7 million related to share-based continuing employment costs.

(b)Euro Auctions acquisition

On August 9, 2021, the Company entered into a Sale and Purchase Agreement (“SPA”) pursuant to which it agreed to purchase Euro Auctions Limited, William Keys & Sons Holdings Limited, Equipment & Plant Services Ltd, and Equipment Sales Ltd. (collectively, “Euro Auctions”), each being a private limited company incorporated in Northern Ireland (the “Euro Auctions Acquisition”).

Under the terms of the SPA, the Company was to acquire all of the outstanding shares of Euro Auctions from their existing shareholders for approximately £775.0 million (approximately $1.02 billion) cash consideration, to be paid on closing. On April 29, 2022, the Company made a decision to discontinue the Phase 2 review by the United Kingdom’s Competition and Markets Authority (“CMA”). The SPA automatically terminated on June 28, 2022. In addition, in April 2022, the Company terminated, without cost, its deal contingent forward currency contracts (Note 13) and on May 4, 2022, redeemed all of the 2021 Notes (Note 17) at a redemption price equal to 100% of the original offering price of the notes, plus accrued and unpaid interest.

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6.    Segmented information

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

Auctions and Marketplaces – This is the Company’s only reportable segment, which consists of the Company’s live onsite auctions, its online auctions and marketplaces, and its brokerage service;
Other includes the results of Ritchie Bros. Financial Services (“RBFS”), Rouse, Mascus online services, SmartEquip, and the results from various value-added services and make-ready activities, including the Company’s equipment refurbishment services, and Ritchie Bros. Logistical Services (“RB Logistics”).

Three months ended September 30, 2022

Nine months ended September 30, 2022

    

A&M

    

Other

    

Consolidated

    

A&M

    

Other

    

Consolidated

Service revenue:

Commissions

$

108,238

$

$

108,238

$

361,016

$

$

361,016

Fees

85,689

52,769

138,458

268,906

148,137

417,043

Total service revenue

193,927

52,769

246,696

629,922

148,137

778,059

Inventory sales revenue

 

164,783

 

 

164,783

 

511,887

 

 

511,887

Total revenue

$

358,710

$

52,769

$

411,479

$

1,141,809

$

148,137

$

1,289,946

Costs of services

 

24,601

 

16,920

 

41,521

 

79,160

 

46,415

 

125,575

Cost of inventory sold

 

147,253

 

 

147,253

 

455,006

 

 

455,006

Selling, general and administrative

 

116,337

 

16,856

 

133,193

 

350,684

 

53,393

 

404,077

Segment profit

$

70,519

$

18,993

$

89,512

$

256,959

$

48,329

$

305,288

Acquisition-related costs

 

  

 

  

 

2,031

 

  

 

  

 

15,067

Depreciation and amortization

 

  

 

  

 

24,290

 

  

 

  

 

72,813

Foreign exchange gain

 

  

 

  

 

(430)

 

  

 

  

 

(752)

Total operating expenses

$

347,858

$

1,071,786

Gain on disposition of property, plant and equipment

 

  

 

  

 

333

 

  

 

  

 

170,499

Operating income

 

  

 

  

$

63,954

 

  

 

  

$

388,659

Interest expense

 

  

 

  

 

(9,199)

 

  

 

  

 

(48,348)

Change in fair value of derivatives

1,263

Other income, net

 

  

 

  

 

2,866

 

  

 

  

 

5,426

Income tax expense

 

  

 

  

 

(14,697)

 

  

 

  

 

(72,564)

Net income

 

  

 

  

$

42,924

 

  

 

  

$

274,436

Three months ended September 30, 2021

Nine months ended September 30, 2021

    

A&M

    

Other

    

Consolidated

    

A&M

    

Other

    

Consolidated

Service revenue:

Commissions

$

110,275

$

$

110,275

$

343,584

$

$

343,584

Fees

68,607

35,311

103,918

220,037

109,350

329,387

Total service revenue

178,882

35,311

214,193

563,621

109,350

672,971

Inventory sales revenue

 

115,489

 

 

115,489

 

384,627

 

 

384,627

Total revenue

$

294,371

$

35,311

$

329,682

$

948,248

$

109,350

$

1,057,598

Costs of services

 

22,728

 

12,380

 

35,108

 

72,208

 

42,067

 

114,275

Cost of inventory sold

 

102,993

 

 

102,993

 

344,763

 

 

344,763

Selling, general and administrative

 

94,203

 

12,305

 

106,508

 

296,199

 

34,108

 

330,307

Segment profit

$

74,447

$

10,626

$

85,073

$

235,078

$

33,175

$

268,253

Acquisition-related costs

 

 

  

 

10,255

 

  

 

  

 

16,226

Depreciation and amortization

 

  

 

 

21,907

 

  

 

  

 

64,912

Foreign exchange loss

 

 

 

360

 

  

 

  

 

788

Total operating expenses

$

277,131

$

871,271

Gain on disposition of property, plant and equipment

 

 

 

1,068

 

  

 

  

 

1,311

Operating income

 

 

$

53,619

 

  

 

  

$

187,638

Interest expense

 

 

  

 

(8,807)

 

  

 

  

 

(26,620)

Other income, net

 

 

  

 

602

 

  

 

  

 

2,800

Income tax expense

 

  

 

  

 

(13,057)

 

  

 

  

 

(42,541)

Net income

 

  

 

  

$

32,357

 

  

 

  

$

121,277

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6.    Segmented information (continued)

The Chief Operating Decision Maker does not evaluate the performance of the Company’s operating segments or assess allocation of resources based on segment assets and liabilities, nor does the Company classify liabilities on a segmented basis.

The Company’s geographic breakdown of total revenue and location is as follows:

United 

  

Total revenue for the three months ended:

States

Canada

Australia

Europe

Other

Consolidated

September 30, 2022

$

258,117

$

74,866

$

37,225

$

27,149

$

14,122

$

411,479

September 30, 2021

173,137

 

55,925

46,488

 

40,620

 

13,512

 

329,682

Total revenue for the nine months ended:

 

September 30, 2022

$

721,533

$

283,565

$

138,034

$

101,958

$

44,856

$

1,289,946

September 30, 2021

563,942

 

203,093

110,565

 

143,263

 

36,735

 

1,057,598

7.    Revenue

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

Three months ended

Nine months ended

    

September 30, 

September 30, 

 

2022

2021

2022

2021

Service revenue:

  

    

  

    

  

    

  

Commissions

$

108,238

$

110,275

$

361,016

$

343,584

Fees

 

138,458

 

103,918

 

417,043

 

329,387

 

246,696

 

214,193

 

778,059

 

672,971

Inventory sales revenue

 

164,783

 

115,489

 

511,887

 

384,627

$

411,479

$

329,682

$

1,289,946

$

1,057,598

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8.    Operating expenses

Costs of services

Three months ended

Nine months ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Employee compensation expenses

$

16,912

$

14,253

$

49,878

$

43,736

Ancillary and logistical service expenses

14,418

  

11,433

38,619

  

38,521

Travel, advertising and promotion expenses

4,351

 

3,205

16,722

 

13,022

Other costs of services

3,280

 

3,721

10,917

 

11,495

Buildings, facilities and technology expenses

2,560

 

2,496

9,439

 

7,501

$

41,521

$

35,108

$

125,575

$

114,275

Selling, general and administrative

Three months ended

Nine months ended

September 30, 

 

September 30, 

    

2022

    

2021

    

2022

    

2021

Wages, salaries and benefits

$

80,532

$

64,810

$

242,319

$

209,699

Share-based compensation expense

8,806

5,627

27,833

16,945

Buildings, facilities and technology expenses

 

22,176

 

18,213

 

65,588

 

53,035

Travel, advertising and promotion expenses

 

9,528

 

6,541

 

26,894

 

18,527

Professional fees

 

6,946

 

6,323

 

24,309

 

16,557

Other selling, general and administrative

 

5,205

 

4,994

 

17,134

 

15,544

$

133,193

 

$

106,508

$

404,077

$

330,307

Acquisition-related costs

Three months ended

Nine months ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

SmartEquip:

Share-based continuing employment costs

$

674

$

$

1,999

$

Other acquisition-related costs

90

1,101

607

1,101

Euro Auctions:

Other acquisition-related costs

25

6,133

8,037

6,133

Rouse:

Share-based continuing employment costs

1,189

2,707

4,077

7,938

Other acquisition-related costs

53

314

347

1,054

$

2,031

$

10,255

$

15,067

 

$

16,226

Depreciation and amortization

Three months ended

Nine months ended

September 30, 

    

September 30, 

    

2022

    

2021

    

2022

    

2021

Depreciation

$

7,825

$

8,127

$

23,461

$

24,309

Amortization

 

16,465

 

13,780

 

49,352

 

40,603

$

24,290

$

21,907

$

72,813

$

64,912

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9.    Income taxes

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

For the three months ended September 30, 2022, income tax expense was $14.7 million, compared to an income tax expense of $13.1 million for the same period in 2021. The effective tax rate was 26% in the third quarter of 2022, compared to 29% in the third quarter of 2021.

The effective tax rate decreased in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily due to a lower estimate of non-deductible expenses and lower income taxes related to tax uncertainties. Partially offsetting this decrease was higher estimated expenses related to the U.S. tax reform of 2017.

For the nine months ended September 30, 2022, income tax expense was $72.6 million, compared to an income tax expense of $42.5 million for the same period in 2021. The effective tax rate was 21% for the nine months ended September 30, 2022, compared to 26% for the nine months ended September 30, 2021.

The effective tax rate decreased in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to the non-taxable gain portion on the sale of a parcel of land including all buildings in Bolton, Ontario and a decrease in the estimate of non-deductible expenses. Partially offsetting this decrease was a higher estimate of income taxed in jurisdictions with higher tax rates and a lower tax deduction for performance share units (“PSUs”) and restricted share units (“RSUs”) expenses that exceeded the related compensation expense.

The Canada Revenue Agency (“CRA”) is currently conducting an audit of the Company’s 2014, 2015, 2017, 2018 and 2019 taxation years. Management believes that the Company is in full compliance with Canadian tax laws. However, the CRA could challenge the manner in which the Company has filed its income tax returns and reported its income. In the event that the CRA challenges the manner in which the Company has filed its tax returns and reported its income, the Company will have the option to appeal any such decision. If the Company is not successful, however, the CRA audit could potentially result in additional income taxes, penalties, and interest, which could have a material adverse effect on the Company.

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10.    Earnings per share attributable to stockholders

Basic earnings per share (“EPS”) attributable to stockholders was calculated by dividing the net income attributable to stockholders by the weighted average (“WA”) number of common shares outstanding during the period. Diluted EPS attributable to stockholders was calculated by dividing the net income attributable to stockholders by the weighted average number of shares of common stock outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include unvested PSUs, unvested RSUs, and outstanding stock options. The dilutive effect of potentially dilutive securities is reflected in diluted EPS by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.

Three months ended

Nine months ended

September 30, 2022

September 30, 2022

Net income

WA

Per

Net income

WA

Per

 

attributable to

 

number

 

share

attributable to

 

number

 

share

    

stockholders

    

of shares

    

amount

stockholders

    

of shares

    

amount

Basic

$

42,909

 

110,838,237

$

0.39

$

274,368

 

110,750,021

$

2.48

Effect of dilutive securities:

 

 

 

 

 

 

Share units

 

 

641,284

 

 

 

496,273

 

(0.01)

Stock options

 

 

730,014

 

(0.01)

 

 

611,801

 

(0.02)

Diluted

$

42,909

 

112,209,535

$

0.38

$

274,368

 

111,858,095

$

2.45

Three months ended

Nine months ended

September 30, 2021

September 30, 2021

Net income

WA

Per

Net income

WA

Per

 

attributable to

 

number

 

share

attributable to

 

number

 

share

    

stockholders

    

of shares

    

amount

    

stockholders

    

of shares

    

amount

Basic

$

32,336

110,410,172

$

0.29

$

121,273

 

110,233,851

$

1.10

Effect of dilutive securities:

 

 

 

Share units

324,218

 

 

408,574

 

Stock options

657,006

 

 

690,822

 

(0.01)

Diluted

$

32,336

111,391,396

$

0.29

$

121,273

 

111,333,247

$

1.09

Ritchie Bros.

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11.    Supplemental cash flow information

Net changes in operating assets and liabilities

Nine months ended September 30, 

2022

2021

Trade and other receivables

 

$

(175,690)

 

$

(120,160)

Inventory

(7,057)

16,926

Advances against auction contracts

(2,554)

3,132

Prepaid expenses and deposits

19,268

1,671

Income taxes receivable

12,456

(4,923)

Auction proceeds payable

163,265

217,423

Trade and other liabilities

(9,160)

(13,684)

Income taxes payable

32,511

(12,278)

Operating lease obligation

(9,757)

(9,000)

Other

6,545

831

Net changes in operating assets and liabilities

 

$

29,827

 

$

79,938

Interest and tax payments

Nine months ended September 30, 

2022

2021

Interest paid, net of interest capitalized

 

$

35,956

 

$

31,054

Interest received

3,242

1,010

Net income taxes paid

19,164

56,016

Non-cash purchase of property, plant and equipment under finance lease

 

7,543

 

6,173

Non-cash right of use assets obtained in exchange for new lease obligations

 

19,895

 

13,545

Cash, cash equivalents, and restricted cash

September 30, 

December 31, 

2022

2021

Cash and cash equivalents

 

$

438,771

$

326,113

Restricted cash

Current

76,303

102,875

Non-current

933,464

Cash, cash equivalents, and restricted cash

 

$

515,074

$

1,362,452

12.    Fair value measurement

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

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at measurement date;
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3: Unobservable inputs for the asset or liability.

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12.    Fair value measurement (continued)

September 30, 2022

December 31, 2021

Carrying

Carrying

    

Category

    

amount

    

Fair value

    

amount

    

Fair value

Fair values disclosed:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

Level 1

$

438,771

$

438,771

$

326,113

$

326,113

Restricted cash

 

Level 1

 

76,303

 

76,303

 

1,036,339

 

1,036,339

Loans receivable

Level 2

9,024

8,853

7,267

7,267

Derivative financial assets

Deal contingent forward contract

Level 3

751

751

Derivative financial liabilities

Deal contingent forward contract

Level 3

2,005

2,005

Forward currency contracts

Level 2

772

772

Short-term debt

 

Level 2

 

1,630

 

1,630

 

6,147

 

6,147

Long-term debt

 

  

 

  

 

 

Senior unsecured notes (as defined in Note 17)

 

 

  

 

  

 

 

2016 Notes

Level 1

495,880

490,000

494,531

508,125

2021 USD Notes

Level 2

598,052

625,125

2021 CAD Notes

Level 2

332,337

339,100

Term loan

Level 2

84,513

84,848

92,821

93,226

Long-term revolver loans

 

Level 2

 

56,951

 

57,000

 

219,699

 

219,772

The carrying value of the Company’s cash and cash equivalents, restricted cash, trade and other receivables, advances against auction contracts, loan receivables maturing within a year, auction proceeds payable, trade and other payables, and short-term debt approximate their fair values due to their short terms to maturity. The fair value of the loan receivables with a maturity date greater than one year are determined by estimating discounted cash flows using market rates. The carrying values of the term loan and long-term revolver loan, before deduction of deferred debt issue costs, approximate their fair values as the interest rates on the loans is short-term in nature. The fair values of the senior unsecured notes are determined by reference to a quoted market price of the notes traded in an over-the-counter broker market.

The Company holds derivative financial assets and liabilities that are required to be measured at fair value on a recurring basis. The fair values of the deal contingent forward contracts were determined using a probability weighted mark to market valuation and observable Level 2 inputs, including foreign currency spot exchange rates, forward pricing curves, and an unobservable Level 3 input, the expected date of settlement. The change in the valuation of the derivatives due to the range of possible expected settlement dates was not significant to the financial statements. The fair value of the forward currency contracts are determined using observable Level 2 inputs, including foreign currency spot exchange rates and forward pricing curves. The fair value considers the credit risk of the Company and its counterparties.

13. Derivative financial instruments

The Company’s derivative financial instruments are accounted for as derivatives under ASC 815, Derivatives and Hedging, and are classified in other current assets and other current liabilities. The Company has not applied hedge accounting to these instruments.

The Company enters into forward currency contracts from time to time to manage its exposure to foreign currency exchange rate fluctuations recognized by its subsidiaries on specific monetary loan receivables. During the three and nine month periods ended September 30, 2022, a loss of $4.3 million and $5.6 million respectively was recognized for the change in fair values of the forward currency contracts within foreign exchange loss (gain) in the consolidated income statement.

The Company also held two deal contingent foreign exchange forward currency contracts to manage its exposure to foreign currency exchange rate fluctuations against the U.S. and Canadian dollar on £343.0 million of the £775.0 million purchase consideration for the proposed Euro Auctions Acquisition. The notional amounts of the derivative instruments were £216.0 million (U.S. dollar forward) and £127.0 million (Canadian dollar forward). These forward contracts were terminated by the Company in April 2022 at no cost.

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14. Trade and other receivables

Trade receivables are generally secured by the equipment that they relate to as it is Company policy that equipment is not released until payment has been collected. The following table presents the activity in the allowance for expected credit losses for the period ended September 30, 2022:

Balance at December 31, 2021

    

$

(4,396)

Current period provision

 

(413)

Write-offs charged against the allowance

 

846

Balance at September 30, 2022

$

(3,963)

15.    Other current assets

September 30, 

December 31, 

    

2022

    

2021

Advances against auction contracts

$

5,580

$

4,102

Assets held for sale

 

323

 

17,538

Prepaid expenses and deposits

 

21,609

 

41,955

Derivative financial asset

751

$

27,512

$

64,346

Assets held for sale

Balance at December 31, 2021

    

$

17,538

Reclassified from (to) property, plant and equipment

 

(10,148)

Disposal

 

(7,067)

Balance at September 30, 2022

$

323

On March 17, 2022, the Company completed the sale and leaseback of a parcel of land including all buildings, in Bolton, Ontario, for a total sale consideration of $208.2 million Canadian dollars (approximately $165 million) net of closing and transaction costs, and recognized a gain on disposition of property, plant and equipment of $169.1 million. The net book value of the Bolton property was $7.1 million. The payments for the lease were not considered to be at market rates given an initial two year rent free period and, accordingly, the Company adjusted the sales proceeds and the gain to fair value. The Bolton property continues to be used for auction operations under the operating leaseback agreement until the completion of the acquisition and development of a replacement property located in Amaranth, Ontario. (Note 21)

At December 31, 2021, the Company also classified vacant land in Casa Grande, Arizona with a net book value of $10.5 million as an asset held for sale. During the quarter ended June 30, 2022, the Company assessed that the property no longer met the asset held for sale criteria and therefore reclassified the net book value of the property to property, plant and equipment.

16.    Other non-current assets

September 30, 

December 31, 

    

2022

    

2021

Right-of-use assets

$

116,566

$

114,414

Tax receivable

9,438

10,289

Loans receivable

6,082

Deferred debt issue costs

 

3,920

 

5,236

Other

 

11,894

 

12,565

$

147,900

$

142,504

The Company recognized a right-of-use asset of $16.6 million as a result of the sale and leaseback transaction on the Bolton property in March 2022 (Note 15 and 21). In June 2022, the Company also recognized a right-of-use asset of $9.0 million as a result of a new lease signed on an auction site in Maltby, United Kingdom. On September 28, 2022, the Company completed the purchase of the Maltby property for $13.5 million (12.6 million GBP) and as a result derecognized the right of use asset and recognized the asset in property, plant and equipment (Note 21).

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16.    Other non-current assets (continued)

Loans receivable

At September 30, 2022, the Company participated in certain financing lending arrangements that are fully collateralized and secured by certain equipment. These financing lending arrangements have a term of one to four years. In the event of default under these agreements, the Company will take possession of the equipment as collateral to recover its loans receivable balance. The loans receivable balance at September 30, 2022 was $9.0 million, of which $2.9 million is recorded in trade and other receivables and $6.1 million in non-current loans receivable (December 31, 2021: $7.3 million, of which $7.3 million was recorded in trade and other receivables and nil in non-current loans receivable). The expected credit loss allowance is not significant.

17.    Debt

    

Carrying amount

September 30, 

December 31, 

    

2022

    

2021

Short-term debt

$

1,630

$

6,147

Long-term debt:

 

  

 

Revolving facilities and delayed-draw term loan facility:

 

  

 

Delayed-draw term loan denominated in Canadian dollars, secured, bearing interest at a weighted average rate of 4.56%, due in monthly installments of interest only, maturing in September 2026

 

84,848

 

93,283

Long-term revolver loan denominated in Canadian dollars, secured, bearing interest at a weighted average rate of 2.29%, due in monthly installments of interest only, maturing in September 2026

 

-

 

46,206

Long-term revolver loan denominated in Canadian dollars, secured, bearing interest at a weighted average rate of 2.29%, due in monthly installments of interest only, maturing in September 2026

 

-

 

56,492

Long-term revolver loan denominated in U.S. dollars, secured, bearing interest at a weighted average rate of 3.97%, due in monthly installments of interest only, maturing in September 2026

 

57,000

 

117,000

Less: unamortized debt issue costs

 

(384)

 

(463)

Senior unsecured notes:

 

 

Bearing interest at 5.375% due in semi-annual installments, with the full amount of principal due in January 2025 (the "2016 Notes")

 

500,000

 

500,000

Less: unamortized debt issue costs

 

(4,120)

 

(5,469)

Bearing interest at 4.75% due in semi-annual installments, with the full amount of principal due in December 2031 (the "2021 USD Notes")

-

600,000

Less: unamortized debt issue costs

-

(1,948)

Bearing interest at 4.95% due in semi-annual installments, with the full amount of principal due in December 2029 (the "2021 CAD Notes")

-

333,464

Less: unamortized debt issue costs

-

(1,127)

Total long-term debt

 

637,344

 

1,737,438

Total debt

$

638,974

$

1,743,585

Long-term debt:

 

  

 

  

Current portion

$

4,296

$

3,498

Non-current portion

 

633,048

 

1,733,940

Total long-term debt

$

637,344

$

1,737,438

At September 30, 2022, the Company had unused committed revolving credit facilities aggregating $681.2 million that are available until September 2026 subject to certain covenant restrictions, unused uncommitted revolving credit facilities aggregating $5.0 million that are available until October 2023, and unused uncommitted revolving credit facilities aggregating $5.0 million with no maturity date. The Company was in compliance with all financial and other covenants applicable to the credit facilities at September 30, 2022.

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17.    Debt (continued)

Short-term debt

Short-term debt is comprised of drawings in different currencies on the Company’s committed revolving credit facilities and has a weighted average interest rate of 1.8% at September 30, 2022 (at December 31, 2021: 1.8%).

Long-term debt

a)Revolving facilities and delayed-draw term loan facility

During 2016, the Company entered into a credit agreement with a syndicate of lenders. The credit agreement is comprised of multicurrency revolving facilities (the “Revolving Facilities”) and a delayed-draw term loan facility (the “DDTL Facility”, together with the Revolving Facilities, the “Facilities”). The credit agreement was most recently amended in September 2021, which, among other things (i) extended the maturity date of the Facilities from October 27, 2023 to September 21, 2026, (ii) increased the total size of the Facilities provided under the Credit Agreement to up to $1.0 billion, including $295.0 million of commitments under the DDTL Facility, (iii) reduced the applicable margin for base rate loans and LIBOR loans at each pricing tier level, (iv) reduced the applicable percentage per annum used to calculate the commitment fee in respect of the unused commitments under the Facilities at each pricing tier level, and (v) included customary provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate.

Immediately prior to the amendment, the aggregate principal amount outstanding under the DDTL Facility was $90.0 million ($118.9 million Canadian dollars). In connection with the amendment, the Company refinanced that amount with the proceeds from a borrowing under the DDTL Facility. Under the terms of the amendment, there were no mandatory principal repayments of borrowings under the DDTL Facility until the earlier of when the remaining $205.0 million is drawn or the third quarter of 2022. The Company did not draw on the remaining $205.0 million before it expired on June 28, 2022 and, therefore, mandatory principal repayments began in the third quarter of 2022. The principal payments are subject to an annual amortization rate of 5%, payable in quarterly installments, with the balance payable at maturity. As a result of the expiry of the unused portion of the DDTL Facility in the second quarter of 2022, the Company wrote off $0.7 million of deferred debt issuance costs included in non-current assets to interest expense.

At September 30, 2022, the Company had unamortized deferred debt issue costs relating to the Facilities of $4.3 million.

b)Senior unsecured notes

2016 Notes

On December 21, 2016, the Company completed the offering of $500.0 million aggregate principal amount of 5.375% senior unsecured notes due January 15, 2025 (the “2016 Notes”). Interest on the 2016 Notes is payable semi-annually. The 2016 Notes are jointly and severally guaranteed on an unsecured basis, subject to certain exceptions, by certain of the Company’s subsidiaries. IronPlanet, Rouse, SmartEquip, and certain of their respective subsidiaries were added as additional guarantors in connection with the acquisitions of IronPlanet, Rouse and SmartEquip, respectively.

2021 Notes

On December 21, 2021, the Company completed the offering of two series of senior notes: (i) $600.0 million aggregate principal amount of 4.750% senior notes due December 15, 2031 (the “2021 USD Notes”) and (ii) $425.0 million Canadian dollar aggregate principal amount of 4.950% senior notes due December 15, 2029 (the “2021 CAD Notes”, and together with the 2021 USD Notes, the “2021 Notes”).

The gross proceeds from the 2021 Notes offering together with certain additional amounts including prepaid interest were placed into escrow accounts and were expected to be held in escrow until the completion of the proposed Euro Auctions Acquisition. On May 4, 2022, the Company redeemed all of the 2021 Notes at a redemption price equal to 100% of the original offering price of the notes, plus accrued and unpaid interest. The Company was relieved of its obligations for the 2021 Notes upon redemption and therefore recognized the difference of $4.8 million between the reacquisition price and the net carrying amount of the debt extinguished (which included unamortized deferred debt issuance costs) as a loss on redemption of the 2021 Notes in interest expense in the consolidated income statement during the second quarter of 2022.

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18.    Other non-current liabilities

September 30, 

December 31, 

    

2022

    

2021

Operating lease liability

$

103,824

$

109,882

Tax payable

16,928

18,859

Finance lease liability

 

12,732

 

13,983

Other

 

3,744

 

4,536

$

137,228

$

147,260

19.    Equity and dividends

Share capital

Common stock

Unlimited number of common shares, without par value.

Preferred stock

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

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

Shares issued for business combinations

The Company has issued the following common shares in connection with the acquisitions of Rouse and SmartEquip. These shares were issued to certain previous unitholders and shareholders of Rouse and SmartEquip, based on the fair market value of the Company’s common shares at the acquisition date. The Company records share-based continuing employment costs in acquisition-related costs over the vesting period, with an increase to additional paid-in capital. The vesting of shares issued for business combinations is subject to continuing employment with the Company over various dates over a three year period from their respective acquisition dates. As and when the common shares vest, the Company will recognize the fair value of the issued common shares from additional paid-in capital to share capital.

Rouse

SmartEquip

Total

 

Weighted average

Common

Fair value

Common

Fair value

 

Common

fair value

shares 

per common

shares 

per common

 

shares 

per common

issued

  

shares

  

issued

  

shares

 

issued

  

shares

Outstanding, December 31, 2021

189,665

$

71.09

63,971

$

68.39

253,636

$

70.41

Granted

Vested

(32,452)

71.09

(32,452)

71.09

Forfeited

Outstanding, September 30, 2022

157,213

$

71.09

63,971

$

68.39

221,184

$

70.31

Outstanding, December 31, 2020

312,193

$

71.09

$

312,193

$

71.09

Granted

Vested

Forfeited

(55,510)

71.09

(55,510)

71.09

Outstanding, September 30, 2021

256,683

$

71.09

$

256,683

$

71.09

In the three months ended September 30, 2022, the Company recognized $0.3 million of share capital from additional paid-in capital for the portion of common shares previously issued in connection with the acquisition of Rouse that have vested as of September 30, 2022.

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19.    Equity and dividends (continued)

Shares issued for business combinations (continued)

At September 30, 2022, the unrecognized share-based continuing employment cost was $4.7 million (at September 30, 2021: $9.2 million), which is expected to be recognized over a weighted average period of 1.2 years.

Change in non-controlling interest

On September 13, 2021, the Company purchased the remaining 25% membership interest of Xcira, LLC, a Delaware limited liability company, for a purchase price of $5.6 million. The transaction increased the Company’s ownership interest in Xcira, LLC to 100%.

Dividends

Declared and paid

The Company declared and paid the following dividends during the nine months ended September 30, 2022 and 2021:

    

    

Dividend  

    

    

Total

    

Declaration date

per share

Record date

dividends

Payment date

Nine months ended September 30, 2022:

 

  

 

  

 

  

 

  

 

  

Fourth quarter 2021

January 21, 2022

$

0.2500

February 11, 2022

$

27,659

March 4, 2022

First quarter 2022

May 6, 2022

0.2500

May 27, 2022

27,693

June 17, 2022

Second quarter 2022

August 3, 2022

0.2700

August 24, 2022

29,932

September 14, 2022

Nine months ended September 30, 2021:

  

 

  

  

 

  

  

Fourth quarter 2020

January 22, 2021

$

0.2200

February 12, 2021

$

24,181

March 5, 2021

First quarter 2021

May 7, 2021

0.2200

May 26, 2021

24,279

June 16, 2021

Second quarter 2021

August 4, 2021

0.2500

August 25, 2021

27,607

September 15, 2021

Declared and undistributed

Subsequent to September 30, 2022, the Company’s Board of Directors declared a quarterly dividend of $0.27 cents per common share, payable on December 14, 2022 to stockholders of record on November 23, 2022. This dividend payable has not been recognized as a liability in the consolidated financial statements. The payment of this dividend is expected to not have any tax consequences for the Company.

Foreign currency translation reserve

Foreign currency translation adjustments within other comprehensive income include intra-entity foreign currency transactions that are of a long-term investment nature, which generated a net loss of $10.2 million and $19.6 million for the three and nine months ended September 30, 2022 (three and nine months ended 2021: net loss of $3.3 million, and $5.9 million) respectively.

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20.    Share-based payments

Share-based payments consist of the following compensation costs:

Three months ended

 

Nine months ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Selling, general and administrative:

 

  

 

  

 

  

 

  

Stock option compensation expense

$

3,249

$

2,133

$

8,871

$

5,903

Equity-classified share units

4,759

2,283

16,450

9,840

Liability-classified share units

108

527

427

(862)

Employee share purchase plan - employer contributions

 

690

 

684

 

2,085

 

2,064

8,806

5,627

27,833

16,945

Acquisition-related costs:

 

 

 

Share-based continuing employment costs

 

1,863

 

2,707

 

6,075

 

7,938

 

1,863

 

2,707

 

6,075

 

7,938

$

10,669

$

8,334

$

33,908

$

24,883

Stock option plans

The Company has the following three stock option plans that provide for the award of stock options and premium-priced stock options to selected employees, directors, and officers of the Company: (i) Amended and Restated Stock Option Plan, (ii) IronPlanet 1999 Stock Plan, and (iii) IronPlanet 2015 Stock Plan.

Stock option activity for the nine months ended September 30, 2022 is presented below:

Stock options

Premium-priced stock options

WA

WA

Common

WA

remaining

Aggregate

Common

WA

remaining

Aggregate

shares under

exercise

contractual

intrinsic

shares under

exercise

contractual

intrinsic

option

  

price

  

life (in years)

  

value

  

option

  

price

  

life (in years)

  

value

Outstanding, December 31, 2021

2,208,057

$

42.55

7.7

$

41,884

1,017,064

$

91.24

5.7

$

Granted

697,536

58.14

 

 

119,157

91.37

Exercised

(155,694)

37.02

4,359

Forfeited

(20,662)

47.96

 

 

(17,789)

90.93

 

 

Outstanding, September 30, 2022

2,729,237

$

46.81

7.6

$

43,405

1,118,432

$

91.26

4.9

$

Exercisable, September 30, 2022

1,280,995

$

37.62

6.3

$

31,859

$

 

$

Stock options

The Company uses the Black Scholes option pricing model to fair value stock options. Significant assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2022 and 2021 are presented in the following table on a weighted average basis:

Nine months ended September 30, 

    

2022

    

2021

    

Risk free interest rate

 

2.2

%  

0.5

%

Expected dividend yield

 

1.74

%  

1.66

%

Expected lives of the stock options

 

4

years

4

years

Expected volatility

 

31.8

%  

32.3

%

At September 30, 2022, the unrecognized stock-based compensation cost related to the non-vested stock options was $9.4 million, which is expected to be recognized over a weighted average period of 2.2 years.

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20.    Share-based payments (continued)

Premium-priced stock options

The Company also grants premium-priced stock options to the senior executives with exercise prices above the fair market value of the Company’s common shares on grant dates. The premium-priced stock options vest and become exercisable upon the third anniversary of their grant date. The premium-priced stock options granted in August and November 2021 expire on the sixth anniversary of their grant date, and those granted in June 2022 expire in August 2027 to coincide with the expiry of the August 2021 grant. The fair values of the premium-priced stock options were calculated on the grant date using a Monte Carlo simulation model. The weighted average estimated grant date fair value of premium-priced options during the three month period ended June 30, 2022 was $8.00 per option. There were no premium-priced stock options granted during the three month period ended September 30, 2022.

The significant assumptions used to estimate the fair values were as follows:

Nine months ended September 30, 

    

2022

    

2021

Risk free interest rate

 

3.0

%  

1.00

%  

Expected dividend yield

 

1.63

%  

1.66

%  

Expected lives of the stock options

4

years

5

years

Expected volatility

 

30.2

%  

30.6

%  

At September 30, 2022, the unrecognized stock-based compensation cost related to the premium-priced stock options was $6.4 million, which is expected to be recognized over a weighted average period of 2.1 years.

Share unit plans

Share unit activity for the nine months ended September 30, 2022 is presented below:

Equity-classified awards

Liability-classified awards

PSUs

PSUs with Market Conditions

RSUs

DSUs

WA grant

WA grant

WA grant

WA grant

date fair

date fair

date fair

date fair

  

Number

  

value

  

Number

  

value

  

Number

  

value

  

Number

  

value

Outstanding at December 31, 2021

 

523,618

$

45.90

88,305

$

65.45

79,112

$

54.96

 

156,589

$

35.28

Granted

 

230,122

 

58.68

14,574

 

69.92

34,135

 

57.70

 

16,182

 

59.57

Vested and settled

 

(93,241)

 

36.42

 

(27,850)

 

44.02

 

 

Forfeited

 

(3,503)

 

50.97

 

(6,070)

 

59.67

 

 

Outstanding at September 30, 2022

 

656,996

$

51.70

102,879

$

66.08

79,327

$

59.62

 

172,771

$

37.55

The total market value of liability-classified share units vested and released during the first nine months of 2022 was nil (at December 31, 2021: nil).

Senior executive and employee PSU plans

The Company grants PSUs under a senior executive PSU plan and an employee PSU plan (the “PSU Plans”). Under the PSU Plans, the number of PSUs that vest is conditional upon specified market, service, and/or performance vesting conditions being met. The PSU Plans allow the Company to choose whether to settle the awards in cash or in shares. The Company intends to settle by issuance of shares. With respect to settling in shares, the Company has the option to either (i) arrange for the purchase of shares on the open market on the employee’s behalf based on the cash value that otherwise would be delivered, or (ii) issue a number of shares equal to the number of units that vest.

Fair values of equity-classified PSUs are estimated on grant date using the market close price of the Company's common shares listed on the NYSE, as these are not subject to market vesting conditions.

At September 30, 2022, the unrecognized share unit expense related to equity-classified PSU’s was $17.8 million, which is expected to be recognized over a weighted average period of 1.9 years.

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20.    Share-based payments (continued)

PSUs with market conditions

The Company also grants PSUs to senior executives with a market condition where vesting is conditional upon the total stockholder return performance of the Company’s stock relative to the performance of a peer group over a three year performance period from the date of grant. The PSUs granted in August and November 2021 have a three year performance period and the PSUs granted in June 2022 have approximately a 2 year performance period to coincide with the remaining performance period of the August 2021 grant. The fair value per PSU granted during the three month period ended June 30, 2022 of $69.92 was calculated on the grant date using the Monte Carlo simulation model which takes into consideration a required post-vesting holding period of one year with a discount value of $5.34 per PSU. The discount was calculated using the Chaffe Protective Put Method and an effective tax rate of 35%. There were no PSUs with market conditions granted in the three month period ended September 30, 2022.

The significant assumptions used to estimate the fair value are presented in the following table:

Nine months ended September 30, 

    

2022

    

2021

Risk free interest rate

 

2.7

%  

0.5

%  

Expected dividend yield

 

1.63

%  

1.63

%  

Expected lives of the PSUs

2

years

3

years

Expected volatility

 

33.4

%  

31.0

%  

Average expected volatility of comparable companies

34.4

%  

38.6

%  

At September 30, 2022, the unrecognized share unit expense related to equity-classified PSUs with market conditions was $4.5 million, which is expected to be recognized over a weighted average period of 1.9 years.

RSUs

The Company has restricted share unit plans (RSU plans) that are equity-settled and not subject to market vesting conditions.

Fair values of RSUs are estimated on grant date using the market close price of the Company's common shares listed on the NYSE.

At September 30, 2022, the unrecognized share unit expense related to equity-classified RSUs was $2.1 million, which is expected to be recognized over a weighted average period of 1.5 years.

DSUs

The Company has deferred share unit plans (DSU plans) that are cash-settled and not subject to market vesting conditions.

Fair values of deferred share units (“DSUs”) are estimated on grant date and at each reporting date using the market close price of the Company’s common shares listed on the NYSE. DSUs are granted under the DSU plan to members of the Board of Directors. There is no unrecognized share unit expense related to liability-classified DSUs as they vest immediately and are expensed upon grant.

At September 30, 2022, the Company had a total share unit liability of $11.3 million (at December 31, 2021: $10.1 million) in respect of share units under the DSU plans.

Employee share purchase plan

The Company has an employee share purchase plan that allows all employees that have completed two months of service to contribute funds to purchase common shares at the current market value at the time of share purchase. Employees may contribute up to 4% of their salary. The Company will match between 50% and 100% of the employee’s contributions, depending on the employee’s length of service with the Company.

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21.    Leases

The Company enters into commercial leases for various auctions sites and offices, the majority of which are non-cancellable, and additional operating leases for computer equipment, motor vehicles and small office equipment. The majority of the Company’s operating leases have a fixed term with a remaining life between one month and 18 years, with renewal options included in the contracts. The leases have varying contract terms, escalation clauses and renewal options.

The Company also enters into finance lease arrangements for certain vehicles, computer and yard equipment and office furniture, the majority of these leases have a fixed term with a remaining life of one month to six years with renewal options included in the contracts.

On March 17, 2022, the Company completed the sale and leaseback of its Bolton property, a parcel of land including all buildings, in Bolton, Ontario (Note 15). The Company intends to lease the Bolton property for a period of 28 months until such time that the replacement property is available for the relocation of the Company’s operations. The lease has an initial rent-free period of two years and an option to renew the lease for two additional one-year periods, during which time the lease is cancellable at one month’s notice. Upon completion of the sale, the Company recorded a $16.6 million ROU asset representing the right-of-use of the Bolton property for the estimated lease term and a $4.5 million long term lease liability representing the obligation to make lease payments arising from the operating lease at the end of the initial two-year period.

On June 30, 2022, the Company also recorded $9.0 million in ROU asset and a long term lease liability relating to a lease signed on its Maltby auction site in the United Kingdom. On September 28, 2022, the Company completed the purchase of the Maltby property for a purchase price of $13.5 million and as a result derecognized the ROU asset and long term lease liability (Note 16).

The Company’s breakdown of lease expense is as follows:

Three months ended

Nine months ended

September 30, 

September 30, 

2022

2021

2022

2021

Operating lease cost

$

6,135

$

4,592

$

17,075

$

13,584

Finance lease cost

 

 

Amortization of leased assets

 

2,457

2,693

 

7,705

8,096

Interest on lease liabilities

 

202

196

 

562

622

Short-term lease cost

 

2,818

2,845

 

9,182

7,428

Sublease income

 

(15)

 

(45)

$

11,612

$

10,311

$

34,524

$

29,685

22.    Commitments

Commitment for inventory purchases

The Company was awarded two new contracts with the United States Government Defense Logistics Agency (the “DLA”) on April 1, 2021. The new contracts (one for the Eastern portion of the United States and one for the Western portion of the United States) cover both surplus non-rolling and rolling stock. Both contracts commenced on June 1, 2021 and have a base term of two years with three one-year renewal options. 

During the first two years of the contracts, the Company is committed to purchase on a combined basis up to either: (i) 600,000 assets, or (ii) assets with an expected minimum value of up to $77.0 million; whichever is less. At September 30, 2022, the Company has purchased 328,685 assets with a total value of $71.6 million pursuant to the two year period of this contract, which commenced on June 1, 2021.

23.    Contingencies

Legal and other claims

The Company is subject to legal and other claims that arise in the ordinary course of its business. Management does not believe that the results of these claims will have a material effect on the Company’s consolidated balance sheet or consolidated income statement.

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23.    Contingencies (continued)

Guarantee contracts

In the normal course of business, the Company will in certain situations guarantee to a consignor a minimum level of proceeds in connection with the sale at auction of that consignor’s equipment.

At September 30, 2022, there were $41.2 million of assets guaranteed under contract, of which 80% is expected to be sold prior to December 31, 2022, with the remainder to be sold by December 31, 2023 (at December 31, 2021: $43.5 million of which 61% was expected to be sold prior to the end of March 31, 2022 with the remainder to be sold by December 31, 2022).

The outstanding guarantee amounts are undiscounted and before estimated proceeds from sale at auction.

24. Subsequent event

On November 7, 2022, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with IAA, Inc. (“IAA”), Ritchie Bros. Holdings Inc., a Washington corporation and a direct and indirect wholly owned subsidiary of the Company (“US Holdings”), Impala Merger Sub I, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdings (“Merger Sub 1”), and Impala Merger Sub II, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdings (“Merger Sub 2”), providing for our acquisition of IAA for total consideration as of the date hereof of approximately $7.3 billion, including the assumption of approximately $1.0 billion of net debt. Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub 1 will merge with and into IAA, with IAA surviving the merger as a direct wholly owned subsidiary of US Holdings (the “First Merger”) and, immediately following the consummation of the First Merger, IAA will merge with and into Merger Sub 2, with Merger Sub 2 surviving the merger as a direct wholly owned subsidiary of US Holdings (together with the First Merger, the “Mergers”). At the effective time of the First Merger (the “Effective Time”), each share of IAA’s common stock issued and outstanding immediately prior to the Effective Time (excluding any shares held by IAA as treasury stock or owned by the Company, US Holdings, Merger Sub 1 or Merger Sub 2 immediately prior to the Effective Time and shares of IAA’s common stock owned by stockholders of IAA who have validly demanded and not withdrawn appraisal rights in accordance with applicable law) will be converted automatically into the right to receive: (A) 0.5804 of a common share of the Company and (B) $10.00 in cash, without interest. At the Effective Time, all outstanding IAA equity awards (other than those that vest in accordance with their terms upon the First Merger) will be assumed by the Company. Upon completion of the Mergers, the Company’s stockholders will own approximately 59% of the common shares of the combined company on a fully diluted basis and IAA stockholders will own approximately 41%.

Consummation of the Mergers is subject to the satisfaction of various conditions, including, among other things, (1) the approval of the issuance of our common shares by the affirmative vote of a majority of the votes cast by holders of our outstanding common shares, (2) the adoption of the Merger Agreement by holders of a majority of the outstanding shares of IAA’s common stock, (3) certain approvals, clearances and/or expirations of waiting periods under applicable antitrust laws and (4) other customary closing conditions. The transaction is expected to close in the first half of 2023 subject to the satisfaction or waiver of these conditions.

In connection with the proposed Mergers, on November 7, 2022, the Company entered into (A) a commitment letter (the “Commitment Letter”) with Goldman Sachs Bank USA (acting through such of its affiliates or branches as it deems appropriate, “GS Bank”), Bank of America, N.A. (“BANA”), BofA Securities, Inc. (or any of its designated affiliates, “BofA Securities”, and, together with BANA, “BofA”), Royal Bank of Canada (“Royal Bank”), RBC Capital Markets, LLC (“RBCCM”, and, together with Royal Bank through such of its affiliates and branches as it deems appropriate, “RBC”, and, together with GS Bank and BofA, each, an “Initial Lender”, and collectively, the “Initial Lenders”), pursuant to which the Initial Lenders are committing to provide (i) a backstop senior secured revolving credit facility in an aggregate principal amount of up to $750 million (the “Backstop Revolving Facility”) and (ii) a senior secured 364-day bridge loan facility in an aggregate principal amount of up to $2.8 billion (the “Bridge Loan Facility,” and together with the Backstop Revolving Facility, the “Facilities”) and (B) an engagement letter (the “Engagement Letter”) with Goldman, Sachs & Co. (acting through such of its affiliates or branches as it deems appropriate), BofA Securities and RBCCM (collectively, the “Investment Banks”), pursuant to which the Investment Banks agree, subject to the terms and conditions set forth in the Engagement Letter, to serve as lead arrangers and bookrunners in connection with an amendment to the Company’s existing credit facility, a Term Loan A facility, a Term Loan B facility and/or any other loan facilities, credit facilities, commercial bank financings or other bank or institutional facilities, and as lead placement agents for, or lead underwriters or initial purchasers of, any senior secured or unsecured notes and any and all secured or unsecured debt, equity or equity-linked securities of the Company or any of its subsidiaries, in each case, incurred or issued to finance the proposed Mergers or refinance any amounts borrowed under the Bridge Loan Facility.

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ITEM 2:      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

Forward-looking statements may appear throughout this Quarterly Report on Form 10-Q, including the following section “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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”, “long-term”, or the negative of these terms, and similar expressions intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially, and include, among others, statements relating to:

our future strategy, objectives, targets, projections and performance;
potential growth and market opportunities;
potential future mergers and acquisitions, including the proposed acquisition of IAA, Inc. (“IAA”)
our expected indebtedness in connection with the proposed acquisition of IAA
our ability to integrate potential acquisitions;
the impact of our new initiatives, services, investments, and acquisitions on us and our customers;
our future capital expenditures and returns on those expenditures; and
financing available to us from our credit facilities or other sources, our ability to refinance borrowings, and the sufficiency of our working capital to meet our financial needs.

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 our Annual Report on Form 10-K for the year ended December 31, 2021, and in “Part II, Item 1A: Risk Factors” of our subsequent quarterly report on Form 10-Q, which are available on our website at https://investor.ritchiebros.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com, are among those that we consider may affect our performance materially or could cause our actual financial and operational results to differ significantly from our expectations. Except as required by applicable securities law and regulations of relevant securities exchanges, we do not intend to update publicly any forward-looking statements, even if our expectations have been affected by new information, future events or other developments.

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“US GAAP”). Except for Gross Transaction Value (“GTV”)1, 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.

In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial data but not presented in our financial statements prepared in accordance with US GAAP. Certain of these data are considered “non-GAAP financial measures” under the SEC rules. The definitions of and reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable US GAAP financial measures are included either with the first use thereof or in the Non-GAAP Measures section within the Management’s Discussion and Analysis of Financial Condition and Results of Operations (Please see pages 54-56).

Overview

Ritchie Bros. Auctioneers Incorporated (“Ritchie Bros.”, the “Company”, “we”, or “us”) (NYSE & TSX: RBA) was founded in 1958 in Kelowna, British Columbia, Canada and is a world leader in asset management technologies and disposition of commercial assets, selling $5.5 billion of used equipment and other assets during 2021. Our expertise, unprecedented global reach, market insights, and trusted portfolio of brands provide us with a unique position within the used equipment market.

1  GTV 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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Through our unreserved auctions, online marketplaces, listings, and private brokerage services, we sell a broad range of primarily used commercial and industrial assets as well as government surplus. Construction and commercial transportation assets comprise the majority of the equipment sold by GTV dollar value. 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 construction, commercial transportation, agriculture, energy, and natural resources.

We also provide our customers with a wide array of value added services aligned with our growth strategy to create a global marketplace for used equipment services and solutions. Our other services include access to equipment financing, asset appraisals and inspections, online equipment listing, logistical services, and ancillary services such as equipment refurbishment. We offer our customers asset technology solutions to manage the end to end disposition process of their assets and provide market data intelligence to make more accurate and reliable business decisions. Additionally, we offer our customers an innovative technology platform that supports equipment lifecycle management and parts procurement integration with both original equipment manufacturers and dealers, as well as software as a service platform for end-to-end parts procurement and digital catalogs and diagrams.

We operate globally with locations in 12 countries, including the United States, Canada, the Netherlands, Australia, and the United Arab Emirates, and maintain a presence in 48 countries where customers are able to sell from their own yards. In addition, we employ more than 2,700 full-time employees worldwide.

Proposed Acquisition of IAA

On November 7, 2022, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with IAA, Ritchie Bros. Holdings Inc., a Washington corporation and a direct and indirect wholly owned subsidiary of the Company (“US Holdings”), Impala Merger Sub I, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdings (“Merger Sub 1”), and Impala Merger Sub II, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdings (“Merger Sub 2”), providing for our acquisition of IAA for total consideration as of the date hereof of approximately $7.3 billion, including the assumption of approximately $1.0 billion of net debt. Upon completion of the acquisition, our stockholders will own approximately 59% of the common shares of the combined company on a fully diluted basis and IAA’s stockholders will own approximately 41%. During the three months and nine months ended September 30, 2022, we incurred a total of $0.9 million and $1.4 million, respectively, in acquisition-related costs related to the proposed acquisition, recognized in selling, general and administrative expenses. If completed, the acquisition of IAA will have a significant impact on our results of operations, financial condition and liquidity. For additional information regarding the proposed acquisition with IAA, see Note 24 to our condensed consolidated financial statements included in Part I – Item I of this report. Unless otherwise specifically noted, the following discussion and analysis of our results of operations and liquidity and capital resources focuses on our existing operations exclusive of the impact of the proposed acquisition of IAA, and any forward-looking statements contained herein do not take into account the impact of such proposed acquisition.

In connection with the proposed Mergers, on November 7, 2022, we entered into (A) a commitment letter (the “Commitment Letter”) with Goldman Sachs Bank USA (acting through such of its affiliates or branches as it deems appropriate, “GS Bank”), Bank of America, N.A. (“BANA”), BofA Securities, Inc. (or any of its designated affiliates, “BofA Securities”, and, together with BANA, “BofA”), Royal Bank of Canada (“Royal Bank”), RBC Capital Markets, LLC (“RBCCM”, and, together with Royal Bank through such of its affiliates and branches as it deems appropriate, “RBC”, and, together with GS Bank and BofA, each, an “Initial Lender”, and collectively, the “Initial Lenders”), pursuant to which the Initial Lenders are committing to provide (i) a backstop senior secured revolving credit facility in an aggregate principal amount of up to $750 million (the “Backstop Revolving Facility”) and (ii) a senior secured 364-day bridge loan facility in an aggregate principal amount of up to $2.8 billion (the “Bridge Loan Facility,” and together with the Backstop Revolving Facility, the “Facilities”) and (B) an engagement letter (the “Engagement Letter”) with Goldman, Sachs & Co. (acting through such of its affiliates or branches as it deems appropriate), BofA Securities and RBCCM (collectively, the “Investment Banks”), pursuant to which the Investment Banks agree, subject to the terms and conditions set forth in the Engagement Letter, to serve as lead arrangers and bookrunners in connection with an amendment to our existing credit facility, a Term Loan A facility, a Term Loan B facility and/or any other loan facilities, credit facilities, commercial bank financings or other bank or institutional facilities, and as lead placement agents for, or lead underwriters or initial purchasers of, any senior secured or unsecured

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notes and any and all secured or unsecured debt, equity or equity-linked securities of the Company or any of our subsidiaries, in each case, incurred or issued to finance the proposed Mergers or refinance any amounts borrowed under the Bridge Loan Facility.

Impact of COVID-19 to our Business

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic (“COVID-19”).

In response, we transitioned all of our traditional live onsite auctions to online bidding utilizing our existing online bidding technology. As restrictions continue to ease, the health and welfare of our employees, customers and suppliers continues to be a top priority and we continue to operate with precautionary measures in place, as appropriate.

In the first nine months of 2022, our ability to move equipment to and from our auction sites and across borders has improved as travel restrictions and quarantine requirements continue to lift, but with certain countries within Asia still continuing to experience lockdowns. In the United States and Canada, COVID-19 has not materially impacted our ability to operate our businesses and move equipment. Globally, we continue to see heightened shipping, fuel and freight costs, partly attributable to the Russia-Ukraine conflict, combined with extended lead times, making equipment transportation more costly and challenging, negatively impacting the buying and selling behaviors of our customers. Additionally, COVID-19, in combination with various macro economic factors, impacted the supply chains of new equipment production, which in turn negatively affected the supply of used equipment being sold throughout our regions, most predominantly in North America.

For a further discussion of risks to our business and operating results arising from COVID-19, please refer to the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021.

Impact of Russia-Ukraine conflict on our Business

On February 24, 2022, the geopolitical situation in Eastern Europe intensified with Russia’s invasion of Ukraine, sharply affecting economic and global financial markets. Subsequent economic sanctions on Russia have exacerbated ongoing economic challenges, including issues such as rising inflation, disruption to global supply chains and increases in hydrocarbon prices.

The rise in transportation costs, in part driven by higher fuel costs, has globally impacted both costs and timing of import and export of commercial assets between countries and has contributed to higher costs in operating our equipment. Further, increases in natural gas prices in Europe may also lead to a slowdown in its economy and as a result may negatively impact the import and export of equipment in Eastern Europe, which could affect our operations.

We do not have any operations in Russia or Ukraine, or any material operations in neighboring countries and only have a limited number of direct customers in the effected region. However, we cannot estimate the extent of the ongoing impacts of the conflict, other unforeseen conditions, future developments, including the continued evolvement of military activity and sanctions imposed with Russia’s invasion of Ukraine, which could adversely affect the domestic economy generally and our business specifically.

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Impact of Inflation on our Business

We began to see inflation impacting our business operations in early 2022 with the rise of costs in freight, fuel, supplies, non-durable goods and consumables at our yards and in our operations. Travel costs have also increased partly due to higher travel activity post COVID-19 as well as due to inflation. In addition, we have seen an increase in labor costs with the labor market remaining fairly strong. We expect inflationary pressures to continue to drive up costs for the remainder of 2022. 

The United States Federal Reserve is also continuing to raise interest rates, which has contributed to a stronger U.S. dollar, which has had an unfavorable impact on the translation of some of our operations to a U.S. dollar presentation currency, particularly in Canada, Europe and Australia.

Service Offerings

We offer our equipment seller and buyer 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. For a complete listing of channels and brand solutions available under our Auctions & Marketplace ("A&M") segment, as well as our Other Services segment, please refer to our Annual Report on Form 10-K for the year ended December 31, 2021, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com.

Contract 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, take custody, and hold used equipment and other assets before they are resold in the ordinary course of business.

We collectively refer to guarantee and inventory contracts as underwritten or “at-risk” contracts.

Value-added services

We also provide a wide array of value-added services to make the process of selling and buying equipment convenient for our customers, including repair and refurbishment services, financial services through Ritchie Bros. Financial Services (“RBFS”), logistical services through RB Logistics, end-to-end asset management and disposition services through RB Asset Solutions, as well as other services such as appraisals, insights, data intelligence and performance benchmarking solutions. We offer equipment listing services under the RitchieList brand in North America and Mascus brand in Europe to make private selling more efficient and safe for customers, including a secure transaction management service, complete with invoicing. We also provide an innovative technology platform that supports customers' management of the equipment lifecycle and integrates parts procurement with both original equipment manufacturers and dealers.

Seasonality

Our GTV and resulting A&M segment revenue are affected by the seasonal nature of our business. GTV and our A&M segment revenue 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.

Revenue Mix Fluctuations

Our revenue is comprised of service revenue and inventory sales revenue. Service revenue from A&M segment activities includes commissions earned at our auctions, online marketplaces, and private brokerage services, and various auction-related fees, including listing and buyer transaction fees. We also recognize revenue from our Other Services segment as fees within service revenue. Inventory sales revenue is recognized as part of our A&M activities and relates to revenues earned through our inventory contracts.

Inventory sales revenue can fluctuate significantly, as it changes based on whether our customers sell using a straight or guarantee commission contract, or an inventory contract at time of selling. Straight or guarantee commission contracts will result in the commission being recognized as service revenue, while inventory contracts will result in the gross transaction value of the equipment sold being recorded as inventory sales revenue with the related cost recognized in cost of inventory sold. As a result, a change in the revenue mix between service revenues and inventory sales revenue can have a significant impact on revenue growth percentages.

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Performance Overview

Net income attributable to stockholders increased 33% to $42.9 million, compared to $32.3 million in the third quarter of 2021. Diluted earnings per share (“EPS”) attributable to stockholders increased 31% to $0.38 per share in the third quarter of 2022 as compared to $0.29 per share in the third quarter of 2021. Diluted adjusted EPS attributable to stockholders increased 18% to $0.53 per share in the third quarter of 2022 compared to $0.45 per share in the third quarter of 2021.

For the third quarter of 2022 as compared to the third quarter of 2021:

Consolidated results:

Total revenue increased 25% to $411.5 million
oService revenue increased 15% to $246.7 million
oInventory sales revenue increased 43% to $164.8 million
Operating income increased 19% to $64.0 million
Adjusted operating income increased 13% to $85.4 million
Net income increased 33% to $42.9 million
Adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) increased 12% to $102.5 million
Cash provided by operating activities decreased 13% to $263.9 million for the first nine months of 2022
Cash on hand at the end of the third quarter of 2022 was $515.1 million, of which $438.8 million was unrestricted

Auctions & Marketplaces segment results:

GTV increased 7% to $1.4 billion and increased 10% when excluding the impact of foreign exchange
A&M total revenue increased 22% to $358.7 million
oService revenue increased 8% to $193.9 million
oInventory sales revenue increased 43% to $164.8 million

Other Services segment results:

Other Services total revenue increased 49% to $52.8 million
oRBFS revenue increased 47% to $16.6 million
oSmartEquip revenue of $5.2 million was recognized in the third quarter of 2022, which was its third full quarter since its acquisition in November 2021

In addition, the total number of organizations activated on our business inventory management system (“IMS”), a gateway into our marketplace, increased by 42% as compared to the second quarter of 2022.

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Results of Operations

Financial overview

Three months ended September 30, 

Nine months ended September 30, 

% Change

% Change

(in U.S. dollars $000's, except EPS and percentages)

    

2022

    

2021

    

2022 over 2021

    

2022

    

2021

    

2022 over 2021

    

Service revenue:

Commissions

$

108,238

$

110,275

(2)

%

$

361,016

$

343,584

5

%

Fees

138,458

103,918

33

%

417,043

329,387

27

%

Total service revenue

246,696

214,193

15

%

778,059

672,971

16

%

Inventory sales revenue

164,783

115,489

43

%

511,887

384,627

33

%

Total revenue

411,479

329,682

25

%

1,289,946

1,057,598

22

%

Costs of services

 

41,521

 

35,108

 

18

%

 

125,575

 

114,275

 

10

%

Cost of inventory sold

 

147,253

 

102,993

 

43

%

 

455,006

 

344,763

 

32

%

Selling, general and administrative

 

133,193

 

106,508

 

25

%

 

404,077

 

330,307

 

22

%

Total operating expenses

347,858

277,131

26

%

1,071,786

871,271

23

%

Gain on disposition of property, plant and equipment

 

333

 

1,068

(69)

%

170,499

1,311

12,905

%

Operating income

 

63,954

 

53,619

 

19

%

 

388,659

 

187,638

 

107

%

Operating income as a % of total revenue

15.5

%

16.3

%

(80)

bps

30.1

%

17.7

%

1,240

bps

Adjusted operating income

85,442

75,735

13

%

302,281

240,483

26

%

Adjusted operating income as a % of total revenue

20.8

%

23.0

%

(220)

bps

23.4

%

22.7

%

70

bps

Net income attributable to stockholders

 

42,909

 

32,336

 

33

%

 

274,368

 

121,273

 

126

%

Adjusted net income attributable to stockholders

 

59,853

 

49,780

 

20

%

 

193,889

 

160,320

 

21

%

Adjusted EBITDA

102,544

91,247

12

%

343,692

287,121

20

%

Diluted earnings per share attributable to stockholders

$

0.38

$

0.29

31

%

$

2.45

$

1.09

125

%

Diluted adjusted earnings per share attributable to stockholders

$

0.53

$

0.45

18

%

$

1.73

$

1.44

20

%

Effective tax rate

 

25.5

%

 

28.8

%

 

(330)

bps

 

20.9

%

 

26.0

%

 

(510)

bps

Total GTV

$

1,358,242

$

1,270,258

7

%

$

4,481,622

$

4,072,439

10

%

Service GTV

1,193,459

1,154,769

3

%

3,969,735

3,687,812

8

%

Service revenue as a % of total GTV

18.2

%

16.9

%

130

bps

17.4

%

16.5

%

90

bps

Inventory GTV

164,783

115,489

43

%

511,887

384,627

33

%

Inventory return

$

17,530

$

12,496

40

%

$

56,881

$

39,864

43

%

Inventory rate

10.6

%

10.8

%

(20)

bps

11.1

%

10.4

%

70

bps

Service GTV as a % of total GTV - Mix

87.9

%

90.9

%

(300)

bps

88.6

%

90.6

%

(200)

bps

Inventory sales revenue as a % of total GTV - Mix

12.1

%

9.1

%

300

bps

11.4

%

9.4

%

200

bps

Certain amounts in the prior period have been reclassified from selling, general and administrative expenses to costs of services, refer to note 2(a) of our consolidated financial statements.

Total GTV

Total GTV increased 7% to $1.4 billion in the third quarter of 2022 and increased 10% to $4.5 billion in the first nine months of 2022. Total GTV increased 10% in the third quarter of 2022 and increased 13% in the first nine months of 2022, when excluding the impact of foreign exchange.

In the third quarter of 2022, GTV increased year-over-year driven by a rebound in lot volumes and continued strong pricing, partially offset by an unfavourable impact of foreign exchange and an unfavorable asset mix. In the United States, GTV increased due to strong execution by our strategic accounts team, particularly in the finance and rental sectors, as well as positive performances at several of our auctions. These increases were partially offset by the non-repeat of a large dispersal of $99 million of pipeline construction equipment in a single-owner auction event in the third quarter of 2021. In Canada, we saw strong year-over-year performances at our auctions and agricultural events and higher GTV generated by RBFS via PurchaseSafe which provides escrow services for private brokered transactions. These increases were partially offset by the delay of our Truro, Nova Scotia auction to Q4 2022 as a result of the impact of Hurricane Fiona. In International, the decrease in GTV volume was due to an unfavourable foreign exchange impact. Excluding foreign exchange, we saw positive performance in Europe with higher activity, partially due to the shift of an auction from the second quarter of 2022 to the third quarter of 2022.

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For the first nine months of 2022, total GTV increased 10% driven by strong pricing, aided by inflation, and higher lot counts, partially offset by an unfavourable impact of foreign exchange and an unfavorable asset mix. We saw growth across all regions. In Canada, GTV growth was driven by strong performances across several agricultural and auction events, strong execution by our Canadian strategic accounts teams, higher volume from RBFS, and a higher number of inventory packages sold. In the United States, GTV volume increased primarily from positive performances across numerous auctions and strong results from our strategic accounts. We also saw growth from several of our strategic initiatives, including from our local yards and investments made by our sales teams in Texas. These increases were partially offset by the non-repeat of a large dispersal pipeline construction equipment package as discussed above. In International, Australia has driven significant growth from improved market conditions and the lifting of border restrictions, as well as from a higher mix of inventory packages and strong performances at several auction events, including a new national auction, a new event in Corio, Victoria and at two agricultural events. These increases were partially offset by softer performances in Europe and an unfavorable foreign exchange impact.

Total revenue

Total revenue increased 25% to $411.5 million in the third quarter of 2022, with total service revenue increasing by 15% and inventory sales revenue increasing by 43%. Total revenue increased 22% to $1.3 billion for the first nine months of 2022, with total service revenue increasing by 16% and inventory sales revenue increasing by 33%.

Foreign currency fluctuation also had an unfavourable impact on our revenue primarily due to the depreciation of the Euro, the Australian dollar and the Canadian dollar relative to the U.S. dollar.

Service Revenue

Service revenue is comprised of commissions that are earned on service GTV, and fees which are earned on total GTV, as well as from our other services such as Ancillary Services, RBFS, Rouse, Mascus, RB Logistics, RB Asset Solutions and SmartEquip. In the third quarter of 2022, Service GTV increased 3% to $1.2 billion mainly in Canada, and for the first nine months increased 8% to $4.0 billion across all regions with increases most notably in Canada and the United States.

In the third quarter of 2022, total service revenue increased 15% with fees revenue increasing 33%, while commissions decreased by 2%. Fees revenue increased 33% with buyer fees growing faster than the GTV increase of 7%, reflecting the increase in certain buyer fee rates implemented in early 2022. Fees revenue also increased due to higher RBFS revenues on higher funded volumes, the inclusion of fees from SmartEquip since its acquisition on November 2, 2021 and higher revenue from our Rouse business. In addition, we also saw higher fees as a result of increased activity from our Ancillary services. Commissions revenue decreased 2%, despite a 3% increase in service GTV, primarily driven by lower straight commission rate performances in the United States attributable to a higher volume sold from our strategic accounts. Canada also saw lower commissions revenue from a higher proportion of GTV contributed by RBFS from facilitating financing arrangements. These decreases were partially offset by improved guarantee rate performances in the United States.

For the first nine months of 2022, total service revenue increased 16% with fees revenue increasing 27% and commissions revenue increasing 5%. Fees revenue increased 27% with buyer fees growing faster than GTV of 10% for the same reasons as discussed above.

Commissions revenue increased 5%, slightly less than the 8% increase in service GTV, primarily for the same reason as discussed above, as well as the non-repeat of several high performing guarantee contracts in Canada.

Inventory Sales Revenue

Inventory sales revenue as a percentage of total GTV increased to 12.1% from 9.1% in the third quarter of 2022 and increased to 11.4% from 9.4% in the first nine months of 2022.

In the third quarter of 2022, inventory sales revenue increased 43% predominantly in the United States, with an increased number of inventory packages sourced from our strategic accounts group, primarily in the finance and rental sectors. We also saw increased volumes selling through our auctions as well as through our GovPlanet non-rolling and rolling stock contracts. In Canada, we saw improved year-over-year performances from inventory sold mainly in the construction sector. Partially offsetting these increases was softer year-over-year performances in International, primarily from the non-repeat of several inventory contracts in Europe and lower private treaty transactions in Australia.

For the first nine months of 2022, inventory sales revenue increased 33% predominantly in the United States partly due to a large dispersal of construction equipment in our Phoenix, Arizona auction as well as for the same reasons as discussed above. In addition, in

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both the United States and Canada, we saw and a higher dollar amount of inventory sold across a number of our auctions. In International, we saw positive performances in Australia, offset by a lower volume of inventory sold in Europe.

Underwritten Contracts

We offer our customers the opportunity to use underwritten commission contracts to serve their disposition strategy needs, entering into such contracts where the risk and reward profile of the terms are agreeable. Our underwritten contracts, as a percentage of total GTV, which include inventory and guarantee contracts, decreased to 17.0% in the third quarter of 2022 compared to 22.5% in the third quarter of 2021. For the first nine months of 2022, our underwritten contracts were 18.5% compared to 18.3% in the prior period.

Operating Income

For the third quarter of 2022, operating income increased 19% or $10.3 million to $64.0 million, primarily due to flow through from higher revenues partially offset by higher selling, general and administrative expenses. Selling, general and administrative expenses increased due to higher short-term incentive expenses driven by strong performance. Wages, salaries and benefits expenses also increased as a result of higher headcount to accelerate our growth initiatives and our transformational journey to become a trusted global marketplace and in part due to the acquisition of SmartEquip. Building, facilities and technology costs also increased mainly due to the amortization of the right-of-use asset of the Bolton property from the sale and lease back arrangement completed in the first quarter of 2022, as well as higher costs as we shift to cloud-based solutions to improve customer experiences. We also saw higher travel, advertising and promotion costs from increased activity and higher marketing costs to promote new initiatives. Share-based payments also increased as a result of higher expense relating to share-based awards issued to senior executives, and higher expense from the premium-priced options and PSU’s with market conditions granted in late 2021. Inflation also resulted in higher personnel and travel costs.

For the first nine months of 2022, operating income increased 107% due to the inclusion of a gain of $169.1 million on property, plant and equipment from the sale of the Bolton property in the first quarter of 2022. Operating income increased 17%, when excluding the impact of the gain, primarily due to flow through from higher revenue, partially offset by higher selling, general and administrative expenses mainly due the same reasons as discussed above, as well as higher professional fees primarily driven by our investment in new modern architecture to support our future marketplace and services strategy.

Income tax expense and effective tax rate

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

For the third quarter of 2022, income tax expense increased 13% to $14.7 million and our effective tax rate decreased 330 bps to 25.5% as compared to the third quarter of 2021. For the first nine months 2022, income tax expense increased 71% to $72.6 million and our effective tax rate decreased 510 bps to 20.9% as compared to the first nine months of 2021.

The decrease in the effective tax rate for the third quarter of 2022 compared to the third quarter of 2021 was primarily due to a lower estimate of non-deductible expenses and lower income taxes related to tax uncertainties. Partially offsetting this decrease was higher estimated expenses related to the U.S. tax reform of 2017.

The decrease in the effective tax rate for the first nine months of 2022 compared to the first nine months of 2021 was primarily due to the non-taxable gain portion on the sale of the Bolton property and a lower estimate of non-deductible expenses. Partially offsetting this decrease was a higher estimate of income taxed in jurisdictions with higher tax rates and a lower tax deduction for PSU and RSU share unit expenses that exceeded the related compensation expense.

Net income

In the third quarter of 2022, net income attributable to stockholders increased 33% to $42.9 million primarily due to higher operating income, higher interest income from a rise in interest rates, and a lower effective tax rate as discussed above. For the first nine months of 2022, net income attributable to stockholders increased 126% to $274.4 million, primarily for the same reasons as noted above, partially offset by a higher interest expense from our 2021 Notes which included a loss on redemption.

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Diluted EPS

Diluted EPS attributable to stockholders increased 31% to $0.38 per share for the third quarter of 2022 and increased 125% to $2.45 per share for the first nine months of 2022, in line with net income.

U.S. dollar exchange rate comparison

We conduct global operations in many different currencies, with our presentation currency being the U.S. dollar. The following table presents the variance in select foreign exchange rates over the comparative reporting periods:

  

% Change

    

2022 over

Value of one local currency to U.S. dollar

    

2022

    

2021

 

2021

Period-end exchange rate - September 30, 

 

  

 

  

 

  

 

Canadian dollar

0.7227

0.7886

 

(8)

%

Euro

 

0.9801

 

1.1581

 

(15)

%

Australian dollar

0.6398

0.7231

(12)

%

Average exchange rate - Three months ended September 30, 

 

 

 

 

Canadian dollar

0.7666

0.7942

 

(3)

%

Euro

1.0081

 

1.1793

 

(15)

%

Australian dollar

0.6837

0.7351

(7)

%

Average exchange rate - Nine months ended September 30, 

 

 

 

 

Canadian dollar

0.7798

0.7992

 

(2)

%

Euro

1.0655

 

1.1966

 

(11)

%

Australian dollar

0.7075

0.7592

(7)

%

For the third quarter of 2022, foreign exchange had an unfavourable impact on total revenue and a favourable impact on expenses. These impacts were primarily due to the fluctuations in the Euro, Australian dollar and Canadian dollar exchange rates relative to the U.S. dollar.

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Key Operating Metrics

We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, and make operating decisions. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our operational strategies.

We define our key operating metrics as follows:

Gross Transaction Value: Represents total proceeds from all items sold at the Company’s auctions and online marketplaces. GTV is not a measure of financial performance, liquidity, or revenue, and is not presented in the Company’s consolidated financial statements.

Inventory return: Inventory sales revenue less cost of inventory sold.

Inventory rate: Inventory return divided by inventory sales revenue.

Inventory Management System activations: Number of organizations activated on IMS. An organization is considered activated on IMS when a customer has signed an annual multi-channel contract and has an IMS instance setup to allow for equipment to be directed to one of our transaction solutions digitally.

Bids per lots sold: Each bid is completed electronically through our real-time online bidding system. A lot is defined as a single asset to be sold, or a group of assets bundled for sale as one unit. This metric calculates the total number of bids received for a lot divided by the total number of lots sold. GovPlanet business metrics are excluded from this metric as management reviews industrial equipment auction metrics excluding GovPlanet.

Total lots sold: A single asset to be sold, or a group of assets bundled for sale as one unit. Low value assets are sometimes bundled into a single lot, collectively referred to as “small value lots”. GovPlanet business metrics are excluded from this metric as management reviews industrial equipment auction metrics excluding GovPlanet.

Non-GAAP Measures

As part of management’s non-GAAP measures, we may eliminate the financial impact of certain items that we do not consider to be part of our normal operating results.

Adjusted net income attributed to stockholders increased 20% to $59.9 million in the third quarter of 2022 and increased 21% to $193.9 million for the first nine months of 2022.

Diluted adjusted EPS attributable to stockholders increased 18% to $0.53 per share in the third quarter of 2022 and increased 20% to $1.73 per share for the first nine months of 2022.

Adjusted EBITDA increased 12% to $102.5 million in the third quarter of 2022 and increased 20% to $343.7 million for the first nine months of 2022.

Debt at the end of the third quarter of 2022 represented 2.1 times net income at and for the twelve months ended September 30, 2022, compared to debt at the third quarter of 2021, which represented 3.8 times net income at and for the twelve months ended September 30, 2021. The adjusted net debt/adjusted EBITDA was 0.5 times at and for the twelve months ended September 30, 2022, compared to 0.7 times at and for the twelve months ended September 30, 2021.

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Segment Performance

We provide our customers with a wide array of services. The following table presents a breakdown of our consolidated results between the A&M segment and Other Services segment. A complete listing of channels and brand solutions under the A&M segment, as well as our Other Services segment, is available in our Annual Report on Form 10-K for the year ended December 31, 2021.

Three months ended September 30, 2022

Nine months ended September 30, 2022

(in U.S. dollars $000's)

    

A&M

    

Other

    

Consolidated

A&M

    

Other

    

Consolidated

Service revenue:

Commissions

$

108,238

$

$

108,238

$

361,016

$

$

361,016

Fees

85,689

52,769

138,458

268,906

148,137

417,043

Total service revenue

193,927

52,769

246,696

629,922

148,137

778,059

Inventory sales revenue

164,783

164,783

511,887

511,887

Total revenue

$

358,710

$

52,769

$

411,479

$

1,141,809

$

148,137

$

1,289,946

Ancillary and logistical service expenses

14,417

14,417

38,618

38,618

Other costs of services

24,601

2,503

27,104

79,160

7,797

86,957

Cost of inventory sold

 

147,253

 

 

147,253

 

455,006

 

 

455,006

Selling, general and administrative

 

116,337

 

16,856

 

133,193

 

350,684

 

53,393

 

404,077

Segment profit

$

70,519

$

18,993

$

89,512

$

256,959

$

48,329

$

305,288

Three months ended September 30, 2021

Nine months ended September 30, 2021

(in U.S. dollars $000's)

A&M

    

Other

    

Consolidated

A&M

    

Other

    

Consolidated

Service revenue:

Commissions

$

110,275

$

$

110,275

$

343,584

$

$

343,584

Fees

68,607

35,311

103,918

220,037

109,350

329,387

Total service revenue

178,882

35,311

214,193

563,621

109,350

672,971

Inventory sales revenue

115,489

115,489

384,627

384,627

Total revenue

$

294,371

$

35,311

$

329,682

$

948,248

$

109,350

$

1,057,598

Ancillary and logistical service expenses

11,433

11,433

38,521

38,521

Other costs of services

22,728

947

23,675

72,208

3,546

75,754

Cost of inventory sold

 

102,993

 

 

102,993

 

344,763

 

 

344,763

Selling, general and administrative

 

94,203

 

12,305

 

106,508

 

296,199

 

34,108

 

330,307

Segment profit

$

74,447

$

10,626

$

85,073

$

235,078

$

33,175

$

268,253

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Auctions and Marketplaces Segment

Results of A&M segment operations are presented below for the comparative reporting periods.

Three months ended September 30, 

Nine months ended September 30, 

% Change

% Change

    

2022 over

    

2022 over

    

(in U.S. dollars $000's, except percentages)

2022

    

2021

2021

2022

    

2021

2021

Service revenue:

Commissions

$

108,238

$

110,275

(2)

%  

$

361,016

$

343,584

5

%

Fees

85,689

68,607

25

%  

268,906

220,037

22

%

Total service revenue

 

193,927

178,882

8

%  

629,922

563,621

12

%

Inventory sales revenue

 

164,783

115,489

43

%  

511,887

384,627

33

%

Total revenue

$

358,710

$

294,371

22

%  

$

1,141,809

$

948,248

20

%

A&M service revenue as a % of total A&M revenue

54.1

%  

60.8

%  

(670)

bps

55.2

%  

59.4

%  

(420)

bps

Inventory sales revenue as a % of total A&M revenue

45.9

%  

39.2

%  

670

bps

44.8

%  

40.6

%  

420

bps

Costs of services

24,601

22,728

8

%  

79,160

72,208

10

%

Cost of inventory sold

147,253

102,993

43

%  

455,006

344,763

32

%

Selling, general and administrative

116,337

94,203

23

%  

350,684

296,199

18

%

A&M segment expenses

288,191

219,924

31

%  

884,850

713,170

24

%

Cost of inventory sold as a % of A&M expenses

51.1

%  

46.8

%

430

bps

51.4

%  

48.3

%

310

bps

A&M segment profit

$

70,519

$

74,447

(5)

%  

$

256,959

$

235,078

9

%

Total GTV

1,358,242

1,270,258

7

%  

4,481,622

4,072,439

10

%

A&M service revenue as a % of total GTV- Rate

 

14.3

%  

14.1

%

20

bps

14.1

%  

13.8

%

30

bps

Gross Transaction Value

In response to COVID-19, in March 2020, we transitioned all our traditional onsite auctions to online bidding utilizing our existing online bidding technology and simultaneously ceased almost all public attendance at our live auction theaters. Our core online auction channels (IronPlanet.com, GovPlanet.com, Marketplace-E) continued to operate as usual. In 2022, we began to return to live in-person onsite bidding at some of our auction events, offering both onsite and online bidding.

To facilitate the auction process, we have continued to enable equipment drop off at our physical yards, with buyers able to conduct inspections pre-auction and collect equipment post auction. In addition, we utilized Timed Auctioned Lots (“TAL”) solutions for nearly all our agricultural and International auctions and at several of our United States auction sites.

We believe it is meaningful to consider revenue in relation to GTV. Total GTV and Service GTV by geographical regions, as well as GTV by sector, are presented below for the comparative reporting period.

GTV by Geography

Three months ended September 30, 

Nine months ended September 30, 

% Change

% Change

(in U.S. dollars $000's, except percentages)

    

2022

    

2021

2022 over 2021

2022

    

2021

2022 over 2021

Total GTV by Geography

United States

$

855,491

$

798,725

7

%

$

2,578,946

 

$

2,421,204

7

%

Canada

314,872

266,574

18

%

1,251,029

 

1,028,260

22

%

International

187,879

204,959

(8)

%

651,647

 

622,975

5

%

Total GTV

$

1,358,242

$

1,270,258

7

%

$

4,481,622

 

$

4,072,439

10

%

  

 

  

  

Service GTV by Geography

  

  

United States

$

753,203

$

761,483

(1)

%

$

2,320,630

 

$

2,263,773

3

%

Canada

303,486

260,788

16

%

1,191,133

 

1,004,831

19

%

International

136,770

132,498

3

%

457,972

 

419,208

9

%

Total Service GTV1

$

1,193,459

$

1,154,769

3

%

$

3,969,735

$

3,687,812

8

%

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GTV by Sector

The following pie charts illustrate the breakdown of total GTV by sector for the third quarter of 2022 compared to the third quarter of 2021.

The construction sector includes heavy equipment such as trucks, excavators, cranes and dozers. The commercial transportation sector includes vehicles, buses, trailers and trucks that are used for transport. The other sector primarily includes equipment sold in the agricultural, forestry and energy industries.

In the third quarter of 2022, total GTV mix compared to the third quarter of 2021 increased by 2 percentage points in the commercial transportation sector, offset by a 2 percentage point decrease in the construction sector.

Graphic

Total Auction Metrics

Three months ended September 30, 

Nine months ended September 30, 

% Change

% Change

    

2022

    

2021

    

2022 over 2021

    

    

2022

    

2021

    

2022 over 2021

    

Bids per lot sold *

 

29

 

26

12

%  

28

 

27

4

%

Total lots sold *

 

125,661

 

107,825

17

%  

375,595

 

372,290

1

%

* Management reviews industrial equipment auction metrics excluding GovPlanet; as a result, GovPlanet business metrics are excluded from these metrics

 

The total number of bids per lot sold increased 12% to 29 in the third quarter of 2022 compared to the third quarter of 2021 and increased 4% to 28 for the first nine months of 2022, reflecting continued strong demand for used equipment from buyers in a tight supply market.

The total lots sold increased 17% to 125,661 in the third quarter of 2022 primarily driven by an increase in lot counts, as well as the shift to a higher proportion of high value lots sold in the United States. For the first nine months of 2022, the total lots sold increased 1%.

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A&M revenue

Total A&M revenue increased 22% to $358.7 million in the third quarter of 2022.

A&M revenue by geographical region are presented below:

Three months ended September 30, 

Nine months ended September 30, 

% Change

% Change

(in U.S. dollars $000's, except percentages)

    

2022

    

2021

2022 over 2021

2022

    

2021

2022 over 2021

A&M Revenue by Geography

United States

 

  

 

  

Service revenue

$

128,749

$

120,391

7

%

$

394,938

 

$

356,779

11

%

Inventory sales revenue

 

102,288

 

37,242

175

%

258,316

 

157,431

64

%

A&M revenue - United States

 

231,037

 

157,633

47

%

653,254

 

514,210

27

%

Canada

 

  

 

  

  

  

 

  

  

Service revenue

 

44,637

 

36,947

21

%

164,153

 

141,027

16

%

Inventory sales revenue

 

11,386

 

5,786

97

%

59,896

 

23,429

156

%

A&M revenue - Canada

 

56,023

 

42,733

31

%

224,049

 

164,456

36

%

International

 

  

 

  

  

  

 

  

  

Service revenue

 

20,541

 

21,544

(5)

%

70,831

 

65,815

8

%

Inventory sales revenue

 

51,109

 

72,461

(29)

%

193,675

 

203,767

(5)

%

A&M revenue - International

 

71,650

 

94,005

(24)

%

264,506

 

269,582

(2)

%

Total

 

  

 

  

  

  

 

  

  

Service revenue

 

193,927

 

178,882

8

%

629,922

 

563,621

12

%

Inventory sales revenue

 

164,783

 

115,489

43

%

511,887

 

384,627

33

%

Total A&M revenue

$

358,710

$

294,371

22

%

$

1,141,809

 

$

948,248

20

%

United States

In the third quarter of 2022, service revenue increased 7% while service GTV decreased 1%. The increase in service revenue was primarily due to higher buyer fee rates implemented in early 2022. In addition, we saw higher fees on a higher proportion of low value lots, higher document fees from the harmonization of online document fees, and positive rate performances in our guarantee commission contracts. These increases were partially offset by softer straight commission rate performance due to a higher proportion of GTV sourced from strategic accounts.

For the first nine months of 2022, service revenue increased 11% while Service GTV increased 3% primarily due to higher buyer fee rates implemented in early 2022, and higher straight commission rates on a lower proportion of GTV sourced from strategic accounts. These increases were partially offset by lower buyer fees on a lower proportion of small value lots and lower fees associated with online inspections driven by lower online lot counts.

In the third quarter of 2022, inventory sales revenue increased 175% primarily due to higher volume of inventory selling through our strategic accounts in both the finance and rental sectors, and higher volumes sold at several of our auctions. We also saw increased volumes selling through our GovPlanet business from our non-rolling and rolling stock contracts.

For the first nine months of 2022, inventory sales revenue increased 64% primarily due to the same reasons as discussed above. In addition, we saw higher inventory sales revenue, driven by a large dispersal of construction equipment in our Phoenix, Arizona auction.

Canada

In the third quarter of 2022, service revenue increased 21%, primarily due to the 16% increase in Service GTV. The remaining increase was a result of higher buyer fee rates implemented in early 2022, partially offset by lower commissions from lower rates contributed by a higher proportion of GTV in RBFS.

For the first nine months of 2022, service revenue increased 16% while Service GTV increased 19%. Service revenue growth was lower than the increase in Service GTV primarily due to the impact of lower rates on GTV generated in RBFS, the non-repeat of several high performing guarantee contracts, as well as lower buyer fees on a lower proportion of small value lots. These were partially offset by an increase in fees primarily due to higher buyer fee rates implemented in early 2022.

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In the third quarter of 2022, inventory sales revenue increased 97% primarily driven by higher performing inventory contracts mainly in the construction sector.

For the first nine months of 2022, inventory sales revenue increased 156% primarily for the same reason and from strong performances from two large inventory contracts in the commercial transportation sector.

International

In the third quarter of 2022, service revenue decreased 5% while Service GTV increased 3%. The decrease was primarily due to lower buyer fees in Europe and Australia as a result of discounts provided on fees in online transactions.

For the first nine months of 2022, service revenue increased 8% primarily in line with 9% increase in Service GTV.

In the third quarter of 2022, inventory sales revenue decreased 29% mainly due to softer year-over-year performances in Europe from the non-repeat of several contracts and a decreased number of private treaty transactions in Australia.

For the first nine months of 2022, inventory sales revenue decreased 5% primarily for the same reasons as discussed above. Offsetting these were strong performances in Australia from a higher amount of inventory sales and a few new auction events.

Costs of services

A&M costs of services increased 8% to $24.6 million in the third quarter of 2022 compared to the third quarter of 2021 in line with total GTV increase of 7%.

For the first nine months of 2022, A&M costs of services increased 10% to $79.2 million, primarily in line with total GTV increase of 10%. We incurred higher building, facilities and technology expenses to support our flagship Orlando event and other events, which returned to live in-person onsite bidding. We also incurred additional fees paid to third parties in connection with profit sharing arrangements on inventory contracts.

Cost of inventory sold

A&M cost of inventory sold increased 43% to $147.3 million in the third quarter of 2022 compared to the third quarter of 2021 primarily in line with 43% increase in inventory sales revenue.

For the first nine months of 2022, A&M cost of inventory sold increased 32% to $455.0 million primarily in line with the 33% increase in inventory sales revenue.

Selling, general and administrative

A&M selling, general and administrative increased 23% to $116.3 million in the third quarter of 2022 compared to the third quarter of 2021. This increase was primarily due to higher short-term incentive expenses driven by strong performance. Building, facilities and technology costs also increased mainly due to the amortization of the right-of-use asset of the Bolton property from the sale and lease back arrangement completed in the first quarter of 2022, as well as higher costs as we shift to cloud-based solutions to improve customer experiences. Share-based payments also increased as a result of higher expense relating to share-based awards issued to senior executives, and higher expense from the premium-priced options and PSU’s with market conditions granted in late 2021. In addition, we saw higher travel, advertising and promotion costs from increased activity in global travel, and higher marketing expenses to promote new initiatives. We also saw higher wages, salaries and benefits expenses, as well as higher headcount to accelerate our growth initiatives and our transformational journey to become a trusted global marketplace. Inflation has also driven higher personnel and travel costs. These increases were partially offset by a favourable impact of foreign exchange.

For the first nine months of 2022, A&M selling, general and administrative increased 18% to $350.7 million primarily due to higher short-term incentive expenses, higher building, facilities and technology costs, higher share-based payments, higher wages, salaries and benefits expenses and higher travel, advertising and promotion for the same reasons as discussed above. We also saw higher professional fees driven by our investment in new modern architecture to support our future marketplace and services strategy.

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Other Services Segment

Results of Other Services segment operations are presented below for the comparative reporting periods.

Three months ended September 30, 

Nine months ended September 30, 

% Change

% Change

(in U.S. dollars $000's, except percentages)

    

2022

    

2021

2022 over 2021

    

2022

    

2021

2022 over 2021

    

Service revenue

$

52,769

$

35,311

49

%  

$

148,137

$

109,350

35

%

Ancillary and logistical service expenses

 

14,417

 

11,433

26

%

 

38,618

 

38,521

0

%

Other costs of services

 

2,503

 

947

164

%  

 

7,797

 

3,546

120

%

Selling, general and administrative

 

16,856

 

12,305

37

%  

 

53,393

 

34,108

57

%

Other services profit

$

18,993

$

10,626

79

%  

$

48,329

$

33,175

46

%

In the third quarter of 2022, Other Services revenue increased 49% to $52.8 million primarily due to higher RBFS revenues of $5.3 million and SmartEquip of $5.2 million, being the third full quarter revenue recognized since the acquisition on November 2, 2021. In addition, ancillary revenue increased $4.2 million as a result of higher activity for value-added services and higher revenue from our Rouse business.

In the first nine months of 2022, Other Services revenue increased 35% to $148.1 million primarily due to higher RBFS revenues of $20.0 million, $14.9 million of revenue from SmartEquip and $3.2 million of revenue from Rouse.

Ancillary and logistical service expenses increased 26% to $14.4 million in the third quarter of 2022, in line with higher ancillary revenue, and remained flat at $38.6 million in the first nine months of 2022. Other costs of services increased 164% to $2.5 million in the third quarter of 2022 and increased 120% to $7.8 million in the first nine months of 2022 mainly due to the inclusion of SmartEquip since its acquisition on November 2, 2021. Selling, general and administrative increased 37% to $16.9 million in the third quarter of 2022 and increased 57% to $53.4 million in the first nine months of 2022, primarily due to the inclusion of SmartEquip, higher wages, salaries and benefits expenses due to the growth in our RBFS business, and higher headcount in Rouse to support our growth initiatives.

RBFS revenue increased 47% in the third quarter of 2022 and increased 62% in the first nine months of 2022, driven by higher funded volumes and improved rate on fees earned from facilitating financing arrangements. In the third quarter of 2022, our funded volume, which represents the amount of lending brokered by RBFS, increased 38% to $243.7 million, and increased 43% when excluding the impact of foreign exchange. In the first nine months of 2022, our funded volume increased 49% to $775.0 million, and increased 53% when excluding the impact of foreign exchange.

In the third quarter of 2022 and in the first nine months of 2022, Other Services profit increased 79% to $19.0 million and increased 46% to $48.3 million primarily driven by our RBFS business.

Additionally, in the first quarter of 2021, we launched a business version of our IMS, which offers our customers asset management and disposition services, data analytics, dashboards, branded e-commerce sites and multiple external sales channels to help our customers achieve optimal returns. We continue to grow the number of organizations activated on IMS. During the third quarter of 2022, the number of organizations activated on our IMS increased by 42% compared to the second quarter of 2022.

As we evolve to a marketplace, we also facilitate retail and peer-to-peer auction events and equipment sale transactions via our online technology in exchange for hosting fees. During the third quarter of 2022, customers that used this service disposed of $22.5 million of assets, which is a decrease of 33% from the third quarter of 2021 primarily driven by an unfavourable supply environment. For the first nine months of 2022, this service facilitated transactions of $90.8 million, a 19% decrease as compared to the prior year for the same reason mentioned above.

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Liquidity and Capital Resources

Our principal sources of liquidity are our cash provided by operating activities and borrowings from our revolving credit facilities, which we renewed on September 21, 2021.

We believe that our existing working capital and availability under our credit facilities are sufficient to satisfy our present operating requirements and contractual obligations. Our material short-term cash requirements include (i) inventory purchases, (ii) capital expenditures for intangible assets and property, plant and equipment (iii) payment of quarterly dividends on an as-declared basis, (iv) settlement of contracts with consignors and other suppliers, (v) personnel expenditures, with a majority of bonuses paid annually in the first quarter following each fiscal period, (vi) income tax payments, primarily paid in quarterly installments, (vii) lease payments, and (viii) principal payments on short-term and current portions of long-term debt, (ix) interest payments related to our current debt obligations, and (x) any transaction costs related to the proposed acquisition of IAA. We also have inventory purchase commitments, related to our GovPlanet business, which is described in Note 23 of our consolidated financial statements.

During the first quarter of 2022, we completed the sale and leaseback of the Bolton property for a total sale consideration and net proceeds of approximately $165.0 million. The proceeds from the sale were used to repay our revolving credit facilities. We have also leased back the Bolton property while we complete the acquisition and development of a replacement property and auction site located in Amaranth, Ontario over the next two to three years. We intend to fund the material cash requirement for the acquisition and development of the Amaranth property from cash flows from ongoing operations.

During the second quarter of 2022, as a result of the Company’s decision to discontinue the phase 2 review by the United Kingdom’s Competition and Markets Authority (“CMA”), the Company redeemed all of the 2021 Notes, which were held in escrow, at a redemption price equal to 100% of the original offering price of the notes, plus accrued and unpaid interest. As such, on May 4, 2022, the Company paid net proceeds of approximately $931 million to its bondholders.

Other long-term cash requirements include long-term debt principal repayments, which are disclosed according to maturity date in Note 21 in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as interest payments related to our non-current debt obligations. We are also committed under various letters of credit and provide certain guarantees in the normal course of business.

If we were to consider further acquisitions to deliver on our strategic growth drivers, we may seek financing through equity markets or additional debt markets. The issuance of equity securities may result in dilution to our shareholders. Issuance of preferred equity securities could provide for rights, preferences or privileges senior to those of our common stock. Further, this additional capital may not be available on reasonable terms, or at all.

We assess our liquidity based on our ability to generate cash and secure credit to fund operating, investing, and financing activities. Our liquidity is primarily affected by fluctuations in cash provided by operating activities, significant acquisitions of businesses, payment of dividends, share repurchases, our net capital spending1, and voluntary repayments of debt. We believe our principal sources of liquidity, which include cash flow from operations, our current unused capacity under our revolving credit facilities of $691 million, is sufficient to fund our current operating activities and future growth strategies.

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 inventory 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.

On November 7, 2022, we entered into the Merger Agreement providing for our acquisition of IAA. We have agreed to various covenants and agreements, including, among others, agreements to use reasonable best efforts to conduct our business in the ordinary course in all material respects between the execution of the Merger Agreement and the closing of the transaction and not to take certain actions described in the Merger Agreement. We do not believe that these provisions will prevent us from meeting our ongoing costs of operations, working capital needs or capital expenditure requirements. In addition, if the Merger Agreement is terminated in certain circumstances, we or IAA, as applicable, would be required to pay the other a termination fee of $189 million.

1We calculate net capital spending as property, plant and equipment additions plus intangible asset additions less proceeds on disposition of property, plant and equipment.

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In connection with the proposed acquisition of IAA, on November 7, 2022, we entered into a Commitment Letter pursuant to which the Initial Lenders thereunder are committing to provide (i) the Backstop Revolving Facility and (ii) the Bridge Loan Facility. We expect to replace the Bridge Loan Facility prior to the closing of the acquisition of IAA with permanent financing, which may include the issuance of debt securities and/or one or more senior term loan facilities. Taking on additional indebtedness in connection with the proposed acquisition, as a result of the borrowings under the Bridge Loan Facility and/or other permanent financing that replaces such facility, would increase the cash outlays to service our debt in future periods.

Cash flows

Nine months ended September 30, 

% Change

(in U.S. dollars $000's, except percentages)

2022

    

2021

2022 over 2021

 

Cash provided by (used in):

 

  

 

  

  

 

Operating activities

$

263,906

$

304,118

(13)

%

Investing activities

 

108,340

 

(32,376)

(435)

%

Financing activities

 

(1,194,004)

 

(103,256)

1,056

%

Effect of changes in foreign currency rates

 

(25,620)

 

(7,027)

265

%

Net (decrease) increase in cash, cash equivalents, and restricted cash

$

(847,378)

$

161,459

(625)

%

Net cash provided by operating activities decreased $40.2 million in the first nine months of 2022, mainly due to lower cash inflows from the change in operating assets and liabilities, partially offset by the increase in our net income, which contributed to an increase in cash provided by operating activities. The reduction in cash inflow from the change in operating assets and liabilities arose primarily due to the timing, size and number of auctions. We also saw a net higher outflows for inventory purchases. These outflows were offset by the deferral of cash tax relating to the taxable gain portion on the sale of our Bolton property made in the first quarter of 2022 and lower-income tax payments as a result of timing of instalments. We also saw a positive net cash flow impact from prepaying in the fourth quarter of 2021 the first quarter of 2022 interest on the 2021 Notes held in escrow and from lower bonus payments.

Net cash provided by investing activities increased $140.7 million in the first nine months of 2022. This increase was primarily due to the sale of our Bolton property for total net cash proceeds of approximately $165.0 million, offset by an increase in purchases of property plant and equipment of $19.2 million primarily as a result of the purchase of our Maltby auction site in the United Kingdom.

Net cash used in financing activities increased $1.1 billion in the first nine months of 2022, primarily due to the $931 million repayment of long-term debt as a result of the redemption of our 2021 Notes on May 4, 2022. We also made a $164.0 million repayment of debt on our long-term revolving credit facilities from the proceeds from the sale of the Bolton property in the first quarter of 2022. In addition, we also saw higher dividends of $9.1 million paid to our stockholders and lower proceeds of $8.2 million from the exercise of stock options compared to the comparative period in 2021. Offsetting these, we had lower cash outflows in the third quarter ended September 30, 2021 when we paid $5.6 million to acquire the remaining 25% membership interest in Xcria, LLC. We also saw positive impacts from lower withholding tax payments on the issuance of shares of $5.3 million and lower net draws of $5.1 million on our short-term debt compared to the comparative period in 2021.

Dividend information

We declared a dividend of $0.25 per common share for each of the quarter ended September 30, 2021, December 31, 2021, and March 31, 2022. We declared a dividend of $0.27 per common share for the quarter ended June 30, 2022. We have declared, but not yet paid, a dividend of $0.27 per common share for the quarter ended September 30, 2022. All dividends that we pay are “eligible dividends” for Canadian income tax purposes unless indicated otherwise.

Return on average invested capital

During the quarter ended September 30, 2022, we updated our calculation of return on average invested capital (“ROIC”) and adjusted ROIC. Refer to the non-GAAP measures section below, specifically our Adjusted Return and Adjusted ROIC Reconciliation, for further information.

ROIC increased 680 bps to 17.0% for the twelve months period ending September 30, 2022 from 10.2% for the twelve months period ending September 30, 2021. This increase is primarily due to an increase in net income attributable to stockholders over the comparative period, mainly driven by the gain from the sale of the Bolton property. This increase was offset by a higher average invested capital over the comparative period as a result of the senior notes issued into escrow on December 21, 2021. Adjusted return

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on average invested capital increased 100 bps to 15.8% during the twelve months ended September 30, 2022 compared to 14.8% in 2021, primarily due to a higher adjusted return as a result of higher operating income.

Credit facilities

We have a credit agreement which is comprised of multicurrency revolving facilities (the “Revolving Facilities”) and a delayed-draw term loan facility (the “DDTL Facility”, together with the Revolving Facilities, the “Facilities”). The credit agreement was most recently amended in September 2021, which, among other things (i) extended the maturity date of the Facilities from October 27, 2023 to September 21, 2026, (ii) increased the total size of the Facilities provided under the Credit Agreement to up to $1.0 billion, including $295.0 million of commitments under the DDTL Facility, (iii) reduced the applicable margin for base rate loans and LIBOR loans at each pricing tier level, (iv) reduced the applicable percentage per annum used to calculate the commitment fee in respect of the unused commitments under the Facilities at each pricing tier level, and (v) included customary provisions to provide for the eventual replacement of LIBOR as a benchmark interest rate.

Immediately prior to the amendment, the aggregate principal amount outstanding under the DDTL Facility was $90.0 million ($118.9 million CAD). In connection with the amendment, the Company refinanced that amount with the proceeds from a borrowing under the DDTL Facility. There are no mandatory principal repayments of borrowings under the DDTL Facility until the earlier of when the remaining $205.0 million is drawn or third quarter of 2022. The Company did not draw on the remaining $205.0 million before it expired on June 28, 2022 and, therefore, mandatory principal repayments began in the third quarter of 2022. The principal payments are subject to an annual amortization rate of 5%, payable in quarterly installments, with the balance payable at maturity.

Credit facilities at September 30, 2022 and December 31, 2021 were as follows:

(in U.S. dollars $000's, except percentages)

    

September 30, 2022

    

December 31, 2021

    

% Change

 

Committed

 

  

 

  

 

  

DDTL Facility

$

84,848

$

298,284

 

(72)

%

Revolving credit facilities

 

750,000

 

750,000

 

%

Uncommitted

Revolving credit facilities

10,000

10,000

%

Total credit facilities

$

844,848

$

1,058,284

 

(20)

%

Unused

 

  

 

  

 

  

DDTL Facility

$

$

205,000

 

(100)

%

Revolving credit facilities

 

691,171

 

525,581

 

32

%

Total credit facilities unused

$

691,171

$

730,581

 

(5)

%

Debt covenants

We were in compliance with all financial and other covenants applicable to our credit facilities at September 30, 2022.

Our ability to borrow under our syndicated revolving credit facility is subject to compliance with financial covenants of a consolidated leverage ratio and a consolidated interest coverage ratio. In the event of sustained deterioration of global markets and economies, we expect the covenants pertaining to our leverage ratio would be the most restrictive to our ability to access funding under our credit agreement. We continue to evaluate courses of action to maintain current levels of liquidity and compliance with our debt covenants.

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 and related circumstances. At September 30, 2022, other than the estimates in accounting for the sale and leaseback transaction related to the sale of our Bolton property in the first quarter of 2022, as described below, there were no material changes in our critical accounting policies, judgments, estimates and assumptions from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, or in the notes to our consolidated financial statements included in “Part I, Item 1: Consolidated Financial Statements” in this Quarterly Report on Form 10-Q.

Effective October 1, 2021, we early adopted ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The update primarily addresses the accounting for contract assets and contract

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liabilities from revenue contracts with customers acquired in a business combination. An entity that early adopts in an interim period should apply the amendments (i) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (ii) prospectively to all business combinations that occur on or after the date of initial application. We have applied the amendments to the SmartEquip acquisition, which was completed on November 2, 2021.

Significant items subject to estimates and judgements during the nine month period ended September 30, 2022 were made in accounting for the completed sale and leaseback transaction of our Bolton property. We determined the following estimates in calculating the gain on sale: the present value of market rental payments of the Bolton property sold, the expected lease term in the leaseback arrangement and our incremental borrowing rate based on information available at the commencement date of the lease.

For a discussion of our new and amended accounting standards, refer to Note 2(b) of the Consolidated Financial Statements, Significant Accounting Policies.

Non-GAAP Measures

We reference various non-GAAP measures throughout this Quarterly Report on Form 10-Q. 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 US GAAP.

Adjusted Operating Income Reconciliation

We believe that adjusted operating income provides useful information about the growth or decline of our operating income 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 operating income enhances our ability to evaluate and understand ongoing operations, underlying business profitability, and facilitate the allocation of resources.

Adjusted operating income eliminates the financial impact of adjusting items from operating income, which are significant recurring and non-recurring items that we do not consider to be part of our normal operating results, such as share-based payments expense, acquisition-related costs, amortization of acquired intangible assets, management reorganization costs, and certain other items, which we refer to as “adjusting items”.

In 2021, we updated the calculation of adjusted operating income to add-back share-based payments expense, all acquisition-related costs (including any share based continuing employment costs recognized in acquisition-related costs), amortization of acquired intangible assets, and gain or loss on disposition of property, plant and equipment. We have also adjusted for certain non-recurring advisory, legal and restructuring costs. These adjustments have been applied retrospectively to all periods presented, as applicable.

The following table reconciles adjusted operating income to operating income, which is the most directly comparable GAAP measure in our consolidated financial statements.

Three months ended September 30, 

Nine months ended September 30, 

% Change

% Change

(in U.S. dollars $000's, except percentages)

    

2022

2021

2022 over 2021

    

    

2022

2021

2022 over 2021

    

Operating income

$

63,954

$

53,619

19

%  

$

388,659

$

187,638

107

%

Share-based payments expense

8,806

5,627

56

%  

27,833

16,945

64

%  

Acquisition-related costs

2,031

10,255

(80)

%  

15,067

16,226

(7)

%  

Amortization of acquired intangible assets

8,227

6,622

24

%  

25,185

20,065

26

%  

Loss (Gain) on disposition of property, plant and equipment and related costs

930

(1,068)

(187)

%  

(167,737)

(1,311)

12,695

%  

Loss on redemption of the 2021 Notes and certain related interest expense

%  

9,664

100

%  

Change in fair value of derivatives

%  

(1,263)

(100)

%  

Non-recurring advisory, legal and restructuring costs

1,494

680

120

%  

4,873

920

430

%  

Adjusted operating income

$

85,442

$

75,735

13

%  

$

302,281

$

240,483

26

%

(1)Please refer to pages 54-56 for a summary of adjusting items during the three and nine months ended September 30, 2022 and September 30, 2021.
(2)Adjusted operating income represents operating income excluding the effects of adjusting items.

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Adjusted Net Income Attributable to Stockholders and Diluted Adjusted EPS Attributable to Stockholders Reconciliation

We believe that adjusted net income attributable to stockholders 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. Diluted adjusted EPS attributable to stockholders eliminates the financial impact of adjusting items from net income attributable to stockholders that we do not consider to be part of our normal operating results, such as share-based payments expense, acquisition-related costs, amortization of acquired intangible assets, management reorganization costs, and certain other items, which we refer to as “adjusting items”.

In 2021, we updated the calculation of diluted adjusted EPS attributable to stockholders to add-back certain adjustments that have been applied retrospectively to all periods presented, as applicable (refer to adjusted operating income reconciliation above).

The following table reconciles adjusted net income attributable to stockholders and diluted adjusted EPS attributable to stockholders to net income attributable to stockholders and diluted EPS attributable to stockholders, which are the most directly comparable GAAP measures in our consolidated financial statements.

(in U.S. dollars $000's, except share and per share data, and percentages)

Three months ended September 30, 

Nine months ended September 30, 

  

% Change

  

% Change

    

2022

    

2021

2022 over 2021

2022

    

2021

2022 over 2021

    

Net income attributable to stockholders

$

42,909

$

32,336

33

%  

$

274,368

$

121,273

126

%

Share-based payments expense

8,806

5,627

56

%  

27,833

16,945

64

%  

Acquisition-related costs

2,031

10,255

(80)

%  

15,067

16,226

(7)

%  

Amortization of acquired intangible assets

8,227

6,622

24

%  

25,185

20,065

26

%  

Loss (Gain) on disposition of property, plant and equipment and related costs

930

(1,068)

(187)

%  

(167,737)

(1,311)

12,695

%  

Loss on redemption of the 2021 Notes and certain related interest expense

%  

9,664

100

%  

Change in fair value of derivatives

 

 

%  

 

(1,263)

 

(100)

%

Non-recurring advisory, legal and restructuring costs

 

1,494

680

120

%  

4,873

920

430

%

Related tax effects of the above

(4,544)

(4,672)

(3)

%

5,899

(13,798)

(143)

%

Adjusted net income attributable to stockholders

$

59,853

$

49,780

20

%  

$

193,889

$

160,320

21

%

Weighted average number of dilutive shares outstanding

 

112,209,535

 

111,391,396

 

1

%  

 

111,858,095

 

111,333,247

 

0

%

Diluted earnings per share attributable to stockholders

$

0.38

$

0.29

31

%  

$

2.45

$

1.09

125

%

Diluted adjusted earnings per share attributable to stockholders

$

0.53

$

0.45

18

%  

$

1.73

$

1.44

20

%

(1)Please refer to pages 54-56 for a summary of adjusting items during the three and nine months ended September 30, 2022 and September 30, 2021.
(2)Adjusted net income attributable to stockholders represents net income attributable to stockholders excluding the effects of adjusting items.
(3)Diluted adjusted EPS attributable to stockholders is calculated by dividing adjusted net income attributable to stockholders, net of the effect of dilutive securities, by the weighted average number of dilutive shares outstanding.

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Adjusted EBITDA

We believe adjusted EBITDA provides useful information about the growth or decline of our net income when compared between different financial periods. We use adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period and it provides management with the ability to monitor its controllable incremental revenues and costs.

In 2021, we updated the calculation of adjusted EBITDA to add-back certain adjustments which have been applied retrospectively to all periods presented, as applicable (refer to adjusted operating income reconciliation above).

The following table reconciles adjusted EBITDA to net income, which is the most directly comparable GAAP measure in, or calculated from, our consolidated financial statements:

Three months ended September 30, 

Nine months ended September 30, 

  

% Change

  

% Change

    

    

2022 over

    

    

2022 over

    

(in U.S. dollars $000's, except percentages)

    

2022

    

2021

2021

    

2022

    

2021

2021

    

Net income

$

42,924

$

32,357

33

%  

$

274,436

$

121,277

126

%

Add: depreciation and amortization

 

24,290

 

21,907

 

11

%  

 

72,813

 

64,912

 

12

%

Add: interest expense

 

9,199

 

8,807

 

4

%  

 

48,348

 

26,620

 

82

%

Less: interest income

 

(1,827)

 

(375)

 

387

%  

 

(3,242)

 

(1,009)

 

221

%

Add: income tax expense

 

14,697

 

13,057

 

13

%  

 

72,564

 

42,541

 

71

%

EBITDA

 

89,283

 

75,753

 

18

%  

 

464,919

 

254,341

 

83

%

Share-based payments expense

8,806

5,627

56

%  

27,833

16,945

64

%  

Acquisition-related costs

 

2,031

 

10,255

 

(80)

%  

 

15,067

 

16,226

 

(7)

%  

Loss (Gain) on disposition of property, plant and equipment and related costs

930

(1,068)

(187)

%  

(167,737)

(1,311)

12,695

%  

Change in fair value of derivatives

 

 

 

%  

 

(1,263)

 

 

(100)

%

Non-recurring advisory, legal and restructuring costs

1,494

680

120

%  

4,873

920

430

%

Adjusted EBITDA

$

102,544

$

91,247

12

%  

$

343,692

$

287,121

20

%

(1)Please refer to pages 54-56 for a summary of adjusting items during the three and nine months ended September 30, 2022 and September 30, 2021.
(2)Adjusted EBITDA is calculated by adding back depreciation and amortization, interest expense, income tax expense, and subtracting interest income from net income, as well as adding back share-based payments expense, acquisition-related costs, loss (gain) on disposition of property, plant and equipment, terminated and ongoing transaction costs, and excluding the effects of any non-recurring or unusual adjusting items.

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Adjusted Net Debt and Adjusted Net Debt/Adjusted EBITDA Reconciliation

We believe that comparing adjusted net debt/adjusted EBITDA on a trailing twelve months 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 noted under “Liquidity and Capital Resources”.

The following table reconciles adjusted net debt to debt, adjusted EBITDA to net income, and adjusted net debt/ adjusted EBITDA to debt/ net income, respectively, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements.

As at and for the twelve months ended September 30, 

% Change

(in U.S. dollars $millions, except percentages)

2022

2021

2022 over 2021

Short-term debt

    

$

1.6

    

$

18.5

    

(91)

%

Long-term debt

 

637.3

 

633.7

1

%

Debt

 

638.9

 

652.2

(2)

%

Less: cash and cash equivalents

 

(438.8)

 

(362.6)

21

%

Adjusted net debt

 

200.1

 

289.6

(31)

%

Net income

$

305.0

$

170.2

79

%

Add: depreciation and amortization

 

95.8

 

84.3

14

%

Add: interest expense

 

58.7

 

35.4

66

%

Less: interest income

 

(3.6)

 

(1.6)

125

%

Add: income tax expense

 

83.4

 

59.3

41

%

EBITDA

 

539.3

 

347.6

55

%

Share-based payments expense

 

34.0

 

21.5

58

%

Acquisition-related costs

 

29.0

 

22.2

31

%

Loss (Gain) on disposition of property, plant and equipment and related costs

(167.9)

(1.3)

12,815

%

Change in fair value of derivatives

%

Non-recurring advisory, legal and restructuring costs

 

7.5

 

0.9

733

%

Adjusted EBITDA

$

441.9

$

390.9

13

%

Debt/net income

 

2.1

x

 

3.8

x

(45)

%

Adjusted net debt/adjusted EBITDA

 

0.5

x

 

0.7

x

(29)

%

(1)Please refer to pages 54-56 for a summary of adjusting items during the trailing twelve months ended September 30, 2022 and September 30, 2021.
(2)Adjusted EBITDA is calculated by adding back depreciation and amortization, interest expense, income tax expense, and subtracting interest income from net income, as well as adding back share-based payments expense, acquisition-related costs, loss (gain) on disposition of property, plant and equipment, terminated and ongoing transaction costs, and excluding the effects of any non-recurring or unusual adjusting items.
(3)Adjusted net debt is calculated by subtracting cash and cash equivalents from short and long-term debt.
(4)Adjusted net debt/Adjusted EBITDA is calculated by dividing adjusted net debt by adjusted EBITDA.

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Operating Free Cash Flow (“OFCF”) Reconciliation

We believe OFCF, when compared on a trailing twelve months 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 OFCF as a performance metric. OFCF is also an element of the performance criteria for certain annual short-term and long-term incentive awards.

The following table reconciles OFCF to cash provided by operating activities, which is the most directly comparable GAAP measure in, or calculated from, our consolidated statements of cash flows:

Twelve months ended September 30, 

% Change

(in U.S. dollars $millions, except percentages)

    

2022

    

2021

2022 over 2021

    

Cash provided by operating activities

$

277.4

$

296.7

(7)

%

Property, plant and equipment additions

 

29.1

 

11.4

 

155

%

Intangible asset additions

 

36.3

 

34.6

 

5

%

Proceeds on disposition of property plant and equipment

 

(165.4)

 

(1.8)

 

9,089

%

Net capital spending

$

(100.0)

$

44.2

(326)

%

OFCF

$

377.4

$

252.5

49

%

(1)OFCF is calculated by subtracting net capital spending from cash provided by operating activities.

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Adjusted Return and Adjusted ROIC Reconciliation

We believe that comparing adjusted ROIC on a trailing twelve months basis for different financial periods provides useful information about the after-tax return generated by our investments. Adjusted ROIC is a measure used by management to determine how productively the Company uses its long-term capital to gauge investment decisions.

Previously, we calculated ROIC as net income attributable to stockholders divided by average invested capital. During the quarter ended September 30, 2022, we updated our calculation of ROIC to better align to industry standards. ROIC is now calculated as reported return divided by average invested capital. Reported return is defined as net income attributable to stockholders excluding the impact of net interest expense, tax effected at the Company’s adjusted annualized effective tax rate. We also updated the calculation of average invested capital to include average short term debt.

Similarly, we updated our calculation of adjusted ROIC. Adjusted ROIC is calculated as adjusted return divided by adjusted average invested capital. Adjusted return is defined as reported return, updated as noted above, and adjusted for items that we do not consider to be part of our normal operating results, tax effected at the applicable tax rate. Adjusted average invested capital is calculated as average invested capital, updated as noted above, but excludes any long-term debt in escrow.

These changes have been applied retrospectively to all periods presented, as applicable. Accordingly, the Company will no longer report adjusted ROIC excluding escrowed debt as one of our non-GAAP measures as previously labeled.

The following table reconciles adjusted return and adjusted ROIC to net income attributable to stockholders and adjusted average invested capital to average invested capital, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:

As at and for the twelve months ended September 30, 

    

    

    

% Change

    

(in U.S. dollars $millions, except percentages)

    

2022

    

2021

    

2022 over 2021

    

Net income attributable to stockholders

$

305.0

$

170.1

79

%

Add:

Interest expense

58.7

35.4

66

%  

Interest income

(3.6)

(1.6)

125

%  

Interest, net

55.1

33.8

63

%  

Tax on interest, net

(14.6)

(8.8)

66

%  

Reported return

$

345.5

$

195.1

77

%  

Add:

Share-based payments expense

 

34.0

 

21.5

 

58

%  

Acquisition-related costs

 

29.0

 

22.2

 

31

%  

Amortization of acquired intangible assets

33.1

25.7

29

%  

Loss (Gain) on disposition of property, plant and equipment and related costs

(167.9)

(1.3)

12,815

%  

Non-recurring advisory, legal and restructuring costs

 

7.5

 

0.9

 

733

%

Related tax effects of the above

 

1.9

 

(20.0)

 

(110)

%

Change in uncertain tax provision - tax effect

 

 

1.5

 

(100)

%  

Adjusted return

$

283.1

$

245.6

15

%

Short-term debt - opening balance

$

18.5

$

20.3

(9)

%

Short-term debt - ending balance

1.6

18.5

(91)

%

Average short-term debt

10.1

19.4

(48)

%

Long-term debt - opening balance

633.7

632.6

0

%

Long-term debt - ending balance

 

637.3

 

633.7

1

%

Average long-term debt

635.5

633.2

0

%

Stockholders' equity - opening balance

1,061.9

959.5

11

%

Stockholders' equity - ending balance

 

1,238.8

 

1,061.9

17

%

Average stockholders' equity

 

1,150.4

 

1,010.7

14

%

Average invested capital

$

1,796.0

$

1,663.3

8

%

Adjusted average invested capital

$

1,796.0

$

1,663.3

8

%

ROIC

 

17.0

%  

 

10.2

%  

680

bps

Adjusted ROIC

 

15.8

%  

 

14.8

%  

100

bps

(1)Please refer to pages 54-56 for a summary of adjusting items during the trailing twelve months ended September 30, 2022 and September 30, 2021.

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(2)ROIC is calculated as net income attributable to stockholders divided by average invested capital. We calculate average invested capital as the average short-term, long-term debt and average stockholders’ equity over a trailing twelve months period.
(3)Adjusted ROIC is calculated as adjusted return divided by adjusted average invested capital.
(4)Leases (Topic 842) requires lessees to recognize almost all leases, including operating leases, on the balance sheet through a right-of-use asset and a corresponding lease liability. The lease liability is not included in the calculation of debt.

The following table reconciles adjusted return and adjusted ROIC to net income attributable to stockholders and average invested capital on a quarterly basis, which are the most directly comparable GAAP measures in, or calculated from, our consolidated financial statements:

As at and for the twelve months ended

    

September 30

    

June 30

    

March 31

    

December 31

    

September 30

    

June 30

    

March 31

December 31

    

September 30

    

(in U.S. dollars $millions, except percentages)

    

2022

    

2022

    

2022

    

2021

    

2021

    

2021

    

2021

2020

    

2020

    

Net income attributable to stockholders

$

305.0

$

294.4

$

301.8

$

151.9

$

170.1

$

183.2

$

175.7

$

170.0

$

172.8

Add:

Interest expense

58.7

58.3

48.7

37.0

35.4

35.3

35.3

35.6

37.1

Interest income

(3.6)

(2.2)

(1.6)

(1.4)

(1.6)

(1.7)

(1.8)

(2.3)

(3.1)

Interest, net

55.1

56.1

47.1

35.6

33.8

33.6

33.5

33.3

34.0

Tax on interest, net

(14.6)

(14.8)

(12.3)

(9.1)

(8.8)

(8.8)

(9.0)

(9.1)

(8.9)

Reported return

$

345.5

$

335.7

$

336.6

$

178.4

$

195.1

$

208.0

$

200.2

$

194.2

$

197.9

Add:

Share-based payments expense

 

34.0

 

30.8

 

24.7

 

23.1

 

21.5

 

24.4

23.3

21.9

17.6

Acquisition-related costs

 

29.0

 

37.3

 

36.9

 

30.2

 

22.2

 

12.0

8.9

6.0

-

Amortization of acquired intangible assets

33.1

31.5

29.9

28.0

25.7

24.1

22.2

21.1

21.0

Loss (Gain) on disposition of property, plant and equipment and related costs

(167.9)

(169.9)

(171.2)

(1.4)

(1.3)

(0.5)

(1.6)

(1.6)

(1.6)

Change in fair value of derivatives

 

 

-

 

-

 

1.2

 

-

 

-

-

-

-

Non-recurring advisory, legal and restructuring costs

 

7.5

 

6.6

 

5.8

 

3.5

 

0.9

 

4.2

3.9

3.9

3.9

Related tax effects of the above

 

1.9

 

1.8

 

3.2

 

(20.3)

 

(20.0)

 

(23.3)

(23.7)

(20.5)

(17.2)

Change in uncertain tax provision - tax effect

 

 

-

 

-

 

-

 

1.5

 

1.5

7.8

7.8

6.2

Adjusted return

$

283.1

$

273.8

$

265.9

$

242.7

$

245.6

$

250.4

$

241.0

$

232.8

$

227.8

Short-term debt - opening balance

$

18.5

$

35.2

$

25.9

$

29.1

$

20.3

$

22.0

$

33.1

$

4.7

$

5.8

Short-term debt - ending balance

1.6

8.6

22.1

6.1

18.5

35.2

25.9

29.1

20.3

Average short-term debt

10.1

21.9

24.0

17.6

19.4

28.6

29.5

16.9

13.1

Long-term debt - opening balance

633.7

636.5

636.7

636.7

632.6

632.0

630.5

645.5

689.3

Long-term debt - ending balance

 

637.3

 

644.4

 

1,582.0

 

1,737.4

 

633.7

 

636.5

636.7

636.7

632.6

Less: long-term debt in escrow

-

(939.8)

(933.5)

-

-

-

-

-

Adjusted ending long-term debt

637.3

644.4

642.2

803.9

633.7

636.5

636.7

636.7

632.6

Average long-term debt

635.5

640.5

1,109.4

1,187.1

633.2

634.3

633.6

641.1

661.0

Adjusted average long-term debt

635.5

640.5

639.5

720.3

633.2

634.3

633.6

641.1

661.0

Stockholders' equity - opening balance

1,061.9

1,056.3

1,005.5

1,007.2

959.5

899.1

839.8

901.8

838.2

Stockholders' equity - ending balance

 

1,238.8

 

1,244.1

 

1,225.0

 

1,070.7

 

1,061.9

 

1,056.3

1,005.5

1,007.2

959.5

Average stockholders' equity

 

1,150.4

 

1,150.2

 

1,115.3

 

1,039.0

 

1,010.7

 

977.7

 

922.7

 

954.5

 

898.9

Average invested capital

$

1,796.0

$

1,812.6

$

2,248.7

$

2,243.7

$

1,663.3

$

1,640.6

$

1,585.8

$

1,612.5

$

1,573.0

Adjusted average invested capital

$

1,796.0

$

1,812.6

$

1,778.8

$

1,776.9

$

1,663.3

$

1,640.6

$

1,585.8

$

1,612.5

$

1,573.0

ROIC

 

17.0

%  

 

16.2

%  

 

13.4

%  

 

6.8

%  

 

10.2

%  

11.2

%  

11.1

%  

 

10.5

%  

 

11.0

%  

Adjusted ROIC

 

15.8

%  

 

15.1

%  

 

14.9

%  

 

13.7

%  

 

14.8

%  

15.3

%  

15.2

%  

 

14.4

%  

 

14.5

%  

(1)Please refer to pages 54-56 for a summary of adjusting items during the trailing twelve months for each quarter presented above.
(2)ROIC is calculated as net income attributable to stockholders divided by average invested capital. We calculate average invested capital as the average short-term, long-term debt and average stockholders’ equity over a trailing twelve months period.
(3)Adjusted ROIC is calculated as adjusted return divided by adjusted average invested capital.
(4)Leases (Topic 842) requires lessees to recognize almost all leases, including operating leases, on the balance sheet through a right-of-use asset and a corresponding lease liability. The lease liability is not included in the calculation of debt.

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Adjusting Items Non-GAAP Measures

In 2021, we began adjusting for share-based payment expenses, amortization of acquired intangible assets and all gains or losses on disposition of property, plant and equipment, which we did not consider to be part of our normal operating results. These adjustments in 2021 have been applied retrospectively to all periods presented.

Adjusting items during the trailing twelve months ended September 30, 2022 were:

Recognized in the third quarter of 2022

$8.8 million share based payments expense.
$2.0 million of acquisition-related costs primarily relating to the share-based continuing employment costs for the acquisitions of Rouse and SmartEquip.
$8.2 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet, SmartEquip, and Rouse.
$0.9 million loss on disposition of property, plant and equipment and related costs includes a $1.3 million non-cash cost in the quarter relating to the adjustment made to recognize the Bolton property sale proceeds at fair value when calculating the $169.0 million gain on the Bolton property in the first quarter of 2022, offset by $0.3 million gain on disposition of property, plant and equipment in the quarter.
$1.5 million of non-recurring advisory, legal and restructuring costs, which include $1.1 million of terminated and ongoing transaction and legal costs relating to mergers and acquisition activity, $0.3 million of severance and retention costs in connection with the restructuring of our information technology team during the first quarter of 2022, driven by our strategy to build a new digital technology platform, and $0.1 million of advisory costs relating to a cybersecurity incident detected in the fourth quarter of 2021.

Recognized in the second quarter of 2022

$13.6 million share based payments expense.
$3.4 million of acquisition-related costs related to the proposed acquisition of Euro Auctions and the completed acquisitions of SmartEquip and Rouse.
$8.4 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet, SmartEquip, and Rouse.
$1.2 million gain on disposition of property, plant and equipment and related costs includes a $1.3 million non-cash cost in the quarter relating to the adjustment made to recognize the Bolton property sale proceeds at fair value when calculating the $169.0 million gain on the Bolton property in the first quarter of 2022, and $0.1 million gain on disposition of property, plant and equipment in the quarter.
$9.7 million loss on redemption of the 2021 Notes and certain related interest expense includes (a) $4.8 million of loss on redemption of the 2021 Notes due to a difference between the reacquisition price of the 2021 Notes and the net carrying amount of the extinguished debt (primarily the write off of the unamortized debt issuance costs), (b) $0.7 million of deferred debt issuance costs written off due to the expiry of the undrawn $205.0 million DDTL Facility in the quarter, and (c) non-recurring interest expense of $4.2 million incurred in the quarter relating to the 2021 Notes, which were redeemed as a result of the discontinued Euro Auctions acquisition in April 2022.
$1.1 million of non-recurring advisory, legal and restructuring costs, which include $0.6 million of terminated and ongoing transaction and legal costs relating to mergers and acquisition activity, $0.3 million of severance and retention costs in connection with the restructuring of our information technology team driven by our strategy to build a new digital technology platform, and $0.2 million of advisory costs relating to a cybersecurity incident detected in the fourth quarter of 2021.

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Recognized in the first quarter of 2022

$5.4 million share based payments expense.
$8.5 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet, SmartEquip, and Rouse.
$169.8 million gain recognized on the disposition of property, plant and equipment of which $169.1 million related to the sale of a property located in Bolton, Ontario.
$9.6 million of acquisition-related costs related to the proposed acquisition of Euro Auctions and the completed acquisitions of SmartEquip and Rouse.
$1.3 million gain due to the change in fair value of derivatives to manage our exposure to foreign currency exchange rate fluctuations on the purchase consideration for the proposed acquisition of Euro Auctions.
$2.3 million of non-recurring advisory, legal and restructuring costs, which include $0.9 million related to severance and retention costs in connection with the restructuring of our information technology team driven by our strategy to build a new digital technology platform, $0.5 million of terminated and ongoing transaction and legal costs relating to mergers and acquisition activity, $0.4 million of SOX remediation costs, and $0.6 million of advisory costs relating to a cybersecurity incident detected in the fourth quarter of 2021.

Recognized in the fourth quarter of 2021

$6.2 million share based payments expense.
$7.9 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet, SmartEquip, and Rouse.
$14.0 million of acquisition-related costs related to the proposed acquisition of Euro Auctions and the completed acquisitions of SmartEquip and Rouse.
$0.1 million gain recognized on the disposition of property, plant and equipment
$1.3 million loss due to the change in fair value of derivatives to manage our exposure to foreign currency exchange rate fluctuations on the purchase consideration for the proposed acquisition of Euro Auctions.
$2.6 million of non-recurring advisory, legal and restructuring costs, which include $1.4 million of terminated and ongoing transaction and legal costs relating to mergers and acquisition activity, $0.7 million of SOX remediation costs relating to our efforts to remediate the material weaknesses identified in 2020, and $0.5 million of advisory costs relating to a cybersecurity incident detected in the fourth quarter of 2021.

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Adjusting items during the trailing twelve months ended September 30, 2021 were:

Recognized in the third quarter of 2021

$5.6 million share based payments expense.
$6.6 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet and Rouse.
$10.3 million of acquisition-related costs related to the acquisitions of Rouse, and SmartEquip and proposed acquisition of Euro Auctions.
$1.1 million gain recognized on the sale of a property in Denver, Colorado.
$0.7 million of non-recurring advisory, legal and restructuring costs related to SOX remediation costs relating to our efforts to remediate the material weaknesses identified in 2020, which has been retrospectively applied to the third quarter of 2021.

Recognized in the second quarter of 2021

$7.5 million share based payments expense.
$6.8 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet and Rouse.
$3.0 million of acquisition-related costs related to the acquisition of Rouse.
$0.2 million gain recognized on the disposition of property, plant and equipment
$0.2 million of non-recurring advisory, legal and restructuring costs related to SOX remediation costs relating to our efforts to remediate the material weaknesses identified in 2020, which has been retrospectively applied to the second quarter of 2021.

Recognized in the first quarter of 2021

$3.8 million share based payments expense.
$6.6 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet and Rouse.
$2.9 million of acquisition-related costs related to the acquisition of Rouse.

Recognized in the fourth quarter of 2020

$4.6 million share based payments expense.
$5.6 million amortization of acquired intangible assets primarily from the acquisitions of Iron Planet and Rouse.
$6.0 million of acquisition-related costs related to the acquisition of Rouse.
$1.5 million of current income tax expense recognized related to an unfavourable adjustment to reflect final regulations published in the second quarter of 2020 regarding hybrid financing arrangements. 

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ITEM 3:     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risk during the nine months ended September 30, 2022 from those disclosed in Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2021, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com.

ITEM 4:     CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management of the Company, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), have evaluated the effectiveness of the Company’s disclosure controls and procedures as at September 30, 2022. The term “disclosure controls and procedures” means controls and other procedures established by the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Based upon their evaluation of the Company’s disclosure controls and procedures, the CEO and the CFO concluded that, as of September 30, 2022, the disclosure controls are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

On November 2, 2021, the Company completed the acquisition of SmartEquip. SEC guidance permits management to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition. The Company is in the process of incorporating SmartEquip into its system of internal control over financial reporting. SmartEquip’s total assets and revenues constituted 7.0% and 1.3%, respectively, of the Company’s total assets and revenues as shown in its consolidated financial statements for the three month period ended September 30, 2022.

Changes in Internal Control over Financial Reporting

Management, with the participation of the CEO and CFO, concluded that there were no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1:     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 1A:     RISK FACTORS

Our business is subject to a number of risks and uncertainties, and our past performance is no guarantee of our performance in future periods. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties discussed in “Part I, Item 1A: Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, which is available on our website at www.rbauction.com, on EDGAR at www.sec.gov, or on SEDAR at www.sedar.com, before purchasing our common shares. 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 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.

There were no material changes in risk factors during the three months or nine months ended September 30, 2022, except as outlined below.

Risks Related to the Proposed Acquisition of IAA

The pendency of our acquisition of IAA or our failure to complete such acquisition could have a material adverse effect on our business, results of operations, financial condition and stock price.

On November 7, 2022, we entered into an Agreement and Plan of Merger and Reorganization with IAA, US Holdings, Merger Sub 1 and Merger Sub 2 (the “Merger Agreement”), providing for our acquisition of IAA. Consummation of the acquisition is subject to the satisfaction of various conditions, including, among other things, (1) the approval of the issuance of our common shares by the affirmative vote of a majority of the votes cast by holders of our outstanding common shares, (2) the adoption of the Merger Agreement by holders of a majority of the outstanding shares of IAA’s common stock, (3) certain approvals, clearances and/or expirations of waiting periods under applicable antitrust laws and (4) other customary closing conditions.

The acquisition may be delayed, and may ultimately not be completed, due to a number of factors, including the failure to satisfy these conditions to the completion of the acquisition, or the possibility that a material adverse effect on our business or IAA’s business would permit IAA or us, respectively, not to close the acquisition. There is no assurance that all of the various conditions will be satisfied or waived, or that the acquisition will be completed on the proposed terms, within the expected timeframe, or at all. Also, potential litigation filed against us or IAA could prevent or delay the completion of the acquisition or result in the payment of damages following completion of the acquisition.

In the event that the proposed acquisition is not consummated or is materially delayed for any reason, we will have spent considerable time and resources, and incurred substantial costs related to the acquisition, many of which must be paid even if the acquisition is not completed. If the acquisition is not completed, our business and stockholders would be exposed to additional risks, including, but not limited to:

to the extent that the market price of our common shares reflects an assumption that the acquisition will be completed, the price of our common shares could decrease if the acquisition is not completed;

investor confidence could decline, litigation could be brought against us, relationships with existing and prospective sellers, customers, service providers, investors and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the pending acquisition; and

the requirement that we pay a termination fee of $189 million if the Merger Agreement is terminated under certain circumstances.

Also, during the period prior to the closing of the acquisition, our business will be exposed to certain inherent risks due to the potential impact of the announcement or pendency of the acquisition on our business, financial condition and operating results, including, but not limited to:

the possibility of disruption to our business and operations, including diversion of management attention and resources;

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the inability to attract and retain key personnel, and the possibility that our current employees could be distracted and their productivity decline, due to uncertainty regarding the pending acquisition;

the inability to pursue alternative business opportunities or make material changes to our business pending the completion of the acquisition;

the amount of the costs, fees, expenses and charges related to the acquisition; and

other developments beyond our control, including, but not limited to, changes in domestic or global economic conditions, capital markets and interest rates that may affect the timing or success of the proposed acquisition.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are generally required to use reasonable efforts to conduct our business in the ordinary course in all material respects, and are restricted from taking certain actions set forth in the Merger Agreement without IAA’s prior consent. These limitations include, among other things, certain restrictions on our ability to amend our organizational documents, acquire other businesses and assets that would reasonably be expected to delay or impair the consummation of the acquisition, dispose of certain assets, reclassify or issue certain securities, and pay dividends (other than our regular quarterly dividend). These restrictions could prevent us from pursuing strategic business opportunities and taking actions with respect to our business that we may consider advantageous and may, as a result, materially and adversely affect our business, results of operations and financial condition.

We may experience difficulties in integrating our operations with those of IAA and realizing the expected benefits of the acquisition.

The success of the proposed acquisition of IAA, if completed, will depend in part on our ability to realize the anticipated business opportunities and cost synergies from combining with IAA in an efficient and effective manner. We may not realize these business opportunities and cost synergies to the extent expected or at all. Further, our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures. The post-closing integration process could take longer than anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the transaction, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of IAA’s business with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the proposed transaction, and our business, results of operations and financial condition could be adversely affected.

We will incur a substantial amount of debt to complete the acquisition, which could have a material adverse effect on our business, cash flows and financial condition.

We will incur significant debt to complete the acquisition of IAA including borrowing up to $2.8 billion under the Bridge Loan Facility or pursuant to other permanent financing that replaces such facility, which may include the issuance of debt securities and/or one or more senior term loan facilities. We will also have a $750 million Backstop Revolving Facility in place immediately following the acquisition. Our ability to make payments on our debt, fund our other liquidity needs and make planned capital expenditures will depend on our ability to generate cash in the future. Our historical financial results have been, and we anticipate that our future financial results will be, subject to fluctuations. Our ability to generate cash is subject in part to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot guarantee that our business will generate sufficient cash flow from our operations or that future borrowings will be available to us in an amount sufficient to enable us to make payments of our debt, fund other liquidity needs and make planned capital expenditures. If our cash flows and capital resources are insufficient to fund debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. The degree to which we are currently leveraged and will be leveraged following the completion of the acquisition of IAA could have important consequences for stockholders. For example, it could:

limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, dividends and other corporate purposes;
increase our vulnerability to general adverse economic or industry conditions;
expose us to the risk of increased interest rates for any borrowings at variable rates of interest;

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limit our flexibility in planning for and reacting to changes in our industry; and
place us at a competitive disadvantage compared to businesses in our industry that have less debt.

Additionally, our debt agreements, including any agreements that we may enter into in connection with the proposed acquisition of IAA, may contain a number of covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests. Any failure to comply with covenants in the instruments governing our debt could result in an event of default which, if not cured or waived, would have a material adverse effect on us.

Significant costs have been incurred and are expected to be incurred in connection with the consummation of the acquisition of IAA.

We expect to incur one-time costs in connection with integrating our operations, products and personnel with those of IAA, in addition to costs related directly to completing the acquisition. Additional unanticipated costs may be incurred as we integrate our business with IAA following the closing. Although we expect the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of our operations with IAA, may offset incremental transaction and transaction-related costs over time, this net benefit may not be achieved in the near term or to the extent anticipated.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3:     DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4:     MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5:     OTHER INFORMATION

None.

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ITEM 6:     EXHIBITS

Exhibits

The exhibits listed in below are filed as part of this Quarterly Report on Form 10-Q and incorporated herein by reference.

Exhibit

Number

    

Document

10.1*

Strategic Alliance and Remarketing Agreement, entered into as of August 29, 2016, by and between the Company, IronPlanet, Inc. and Caterpillar, Inc.

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

Interactive Data Files Pursuant to Rule 405 of Regulation S-T , for the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Income Statements; (ii) Condensed Consolidated Balance Sheets; (iii) Condensed Consolidated Statements of Changes in Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to the Condensed Consolidated Financial Statements

104

Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL and contained in Exhibit 101

* Portions of this exhibit have been redacted in compliance with Item 601(b)(10) of Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RITCHIE BROS. AUCTIONEERS INCORPORATED

Dated: November 7, 2022

By:

/s/ Ann Fandozzi

Ann Fandozzi

Chief Executive Officer

Dated: November 7, 2022

By:

/s/ Eric Jacobs

Eric Jacobs

Chief Financial Officer

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