IAA, INC. The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. See "Statement Regarding Forward-Looking Statements" preceding Part I, Item 1 in this Quarterly Report on Form 10-Q. Unless the context suggests otherwise, all reference in this Quarterly Report on Form 10-Q to the "Company," "we," "us," refer toIAA, Inc. together with its subsidiaries. Executive Overview Our Business We are a leading global digital marketplace connecting vehicle buyers and sellers. Leveraging leading-edge technology and focusing on innovation, our unique platform facilitates the marketing and sale of total-loss, damaged and low-value vehicles for a full spectrum of sellers. Headquartered inWestchester, IL , we have two operating and reportable segments:United States and International. We maintain operations inthe United States , which make upthe United States segment and operations inCanada and theUnited Kingdom , which make up the International segment. We have more than 210 facilities across both business segments. We serve a global buyer base and a full spectrum of sellers, including insurance companies, dealerships, fleet lease and rental car companies, and charitable organizations. We offer sellers a comprehensive suite of services aimed at maximizing vehicle value, reducing administrative costs, shortening selling cycle time and delivering the highest economic returns. Our solutions provide global buyers with the vehicles they need to, among other things, fulfill their vehicle rebuild requirements, replacement part inventory or scrap demand. We provide global buyers with multiple digital bidding and buying channels, innovative vehicle merchandising, and efficient evaluation services, enhancing the overall purchasing experience. 23
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Sources of Revenues and Expenses
A significant portion of our revenue is derived from auction fees and related services associated with our salvage auctions. Our revenue earned from buyers represents fees charged based on a tiered structure that increases with the sales price of the vehicle, as well as fees for additional services such as storage, transportation, and vehicle condition reporting. Our revenue earned from sellers represents the combination of the inbound tow, processing, storage, titling, enhancing and auctioning of the vehicle. The majority of our business comprises auctioning vehicles on a consignment basis, meaning that our sellers continue to own their vehicles until they are sold to buyers through one of our digital marketplaces. We recognize revenue from consigned vehicles on a net basis as we have no influence on the vehicle auction selling price agreed to by the seller and the buyer at the auction. We also purchase vehicles in certain situations and resell them or, in our International segment, dismantle them and sell the vehicle parts and scrap. We recognize revenue from purchased vehicles on a gross basis, which results in lower gross margin versus vehicles sold at auction on a consignment basis. Our operating expenses consist of cost of services, cost of vehicle and parts sales, selling, general and administrative and depreciation and amortization. Cost of services is comprised of payroll and related costs, subcontract services, supplies, insurance, property taxes, utilities, service contract claims, maintenance, and lease expense related to the auction sites. Cost of vehicle and parts sales represents the cost of purchased vehicles. Cost of services and cost of vehicle and parts sales exclude depreciation and amortization. Selling, general and administrative expenses are comprised of, among other things, payroll and related costs, sales and marketing, information technology services and professional fees.
Proposed Merger
OnNovember 7, 2022 , we entered into the Agreement and Plan of Merger and Reorganization (the "Merger Agreement") with Ritchie Bros. Auctioneers Incorporated, a company organized under the federal laws ofCanada ("RBA"), Ritchie Bros. Holdings Inc., aWashington corporation and a direct and indirect wholly owned subsidiary of RBA ("US Holdings "),Impala Merger Sub I, LLC , aDelaware limited liability company and a direct wholly owned subsidiary ofUS Holdings ("Merger Sub 1"), andImpala Merger Sub II, LLC , aDelaware limited liability company and a direct wholly owned subsidiary ofUS Holdings ("Merger Sub 2"), providing for RBA's acquisition of the Company in a stock and cash transaction. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the closing of the transactions (i) Merger Sub 1 will be merged with and into us (the "First Merger"), with us surviving as an indirect wholly owned subsidiary of RBA and a direct wholly owned subsidiary ofUS Holdings (the "Surviving Corporation"), and (ii) immediately following the consummation of the First Merger, theSurviving Corporation will be merged with and into Merger Sub 2 (together with the First Merger, the "Mergers"), with Merger Sub 2 surviving as a direct wholly owned subsidiary ofUS Holdings . At the effective time of the First Merger, each issued and outstanding share of common stock of the Company (other than certain customary excluded shares) as of immediately prior to such effective time will be converted automatically into the right to receive (A) 0.5804 of a common share, without par value, of RBA ("RBA Common Shares") and (B)$10.00 in cash, without interest (together, the "Merger Consideration"). Upon completion of the Mergers, RBA stockholders will own approximately 59% of the common shares of the combined company and our stockholders will own approximately 41% of the common shares of the combined company.
The Mergers are expected to close in the first half of 2023, subject to the
satisfaction or waiver of the conditions to closing set forth in the Merger
Agreement. We currently operate, and until completion of the Mergers will
continue to operate, independently of RBA. See Note 11 - Subsequent Events in
the notes to consolidated financial statements and Item 1.01 of our Current
Report on Form 8-K filed with the
Market Trends and Uncertainties
The global economy has recently experienced extreme volatility and disruptions,
inflationary conditions, including increases in fuel prices, disruptions in the
global supply chain and uncertainty about economic stability. The higher
production costs and supply chain disruptions related to new vehicles continue
to keep new vehicle prices elevated resulting in an increase in used car prices.
This increase in used car prices has contributed to our higher average selling
prices and revenue per unit, which have been offset slightly by higher purchased
vehicle costs. As a result of macroeconomic conditions, we are continuing to
experience labor, towing and other transportation pressures, which have
increased our associated costs and adversely impacted our gross margin. In
addition, rising interest rates are increasing our interest expense related to
our variable debt obligations. We believe the foregoing direct and indirect
impacts of the current macroeconomic environment will continue to impact our
business in fiscal 2022.
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Our Recent Acquisitions
OnOctober 26, 2021 , we acquiredSYNETIQ Ltd. ("SYNETIQ"), a leading integrated salvage and vehicle dismantling company in theUnited Kingdom . The cash purchase price forSYNETIQ , including working capital and other adjustments, was$314.2 million (£228.2 million), of which$260.2 million (£189.0 million) was paid out in the fourth quarter of fiscal 2021. The remaining payment of$54.0 million (£39.2 million) was paid out in the first quarter of fiscal 2022 upon receiving required approvals from theU.K. Competition and Markets Authority ("CMA"). The results of operations ofSYNETIQ are included in our International segment from the date of the acquisition. See Note 8 - Acquisition in the notes to consolidated financial statements for additional information on this acquisition. OnJune 18, 2021 , we acquiredMarisat, Inc. d/b/a Auto Exchange ("Auto Exchange"), a salvage auction provider located inNew Jersey . The results of operations of Auto Exchange are included in ourUnited States segment from the date of the acquisition. Share Repurchase Program OnAugust 2, 2021 , our Board of Directors authorized a share repurchase program under which we can repurchase up to$400.0 million (exclusive of fees and commissions) of shares of our common stock (the "Repurchase Program"). The Repurchase Program expires onAugust 3, 2026 . During the nine months endedOctober 2, 2022 , we repurchased 751,285 shares of our common stock for an aggregate gross purchase price of approximately$27.2 million pursuant to the Repurchase Program. As ofOctober 2, 2022 , approximately$338.8 million remained available under the Repurchase Program. See Note 5 - Net Income Per Share in the notes to consolidated financial statements for additional information on the Repurchase Program. Pursuant to the Merger Agreement, we are restricted from repurchasing shares of our common stock without RBA's prior consent. 25
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Results of Operations
Three Months Ended Change Nine Months Ended Change
(Dollars in millions,
except per share data) Oct 2, 2022 Sep 26, 2021 $ % Oct 2, 2022 Sep 26, 2021 $ %
Revenues:
Service revenues $ 397.9 $ 359.0 $ 38.9 10.8 %$ 1,249.5 $ 1,101.9 $ 147.6 13.4 % Vehicle and parts sales 99.6 61.7 37.9 61.4 % 325.9 187.4 138.5 73.9 % Total revenues 497.5 420.7 76.8 18.3 % 1,575.4 1,289.3 286.1 22.2 % Operating expenses: Cost of services 244.0 198.4 45.6 23.0 % 739.0 592.4 146.6 24.7 % Cost of vehicle and parts sales 93.3 54.5 38.8 71.2 % 293.0 160.5 132.5 82.6 % Selling, general and administrative 51.0 49.8 1.2 2.4 % 152.8 136.9 15.9 11.6 % Depreciation and amortization 25.2 21.2 4.0 18.9 % 77.9 61.5 16.4 26.7 % Total operating expenses 413.5 323.9 89.6 27.7 % 1,262.7 951.3 311.4 32.7 % Operating profit 84.0 96.8 (12.8) (13.2) % 312.7 338.0 (25.3) (7.5) % Interest expense, net 13.3 11.1 2.2 19.8 % 36.0 46.0 (10.0) (21.7) % Other expense (income), net 3.0 0.2 2.8 NM* 8.2 (0.5) 8.7 NM* Income before income taxes 67.7 85.5 (17.8) (20.8) % 268.5 292.5 (24.0) (8.2) % Income taxes 17.4 19.8 (2.4) (12.1) % 54.0 71.4 (17.4) (24.4) % Net income$ 50.3 $ 65.7 $ (15.4) (23.4) %$ 214.5 $ 221.1 $ (6.6) (3.0) % Net income per share Basic$ 0.38 $ 0.49 $ (0.11) (22.4) %$ 1.60 $ 1.64 $ (0.04) (2.4) % Diluted$ 0.38 $ 0.49 $ (0.11) (22.4) %$ 1.60 $ 1.63 $ (0.03) (1.8) % ________________ * NM - Not meaningful Service Revenues Three Months Ended Change Nine Months Ended Change (Dollars in millions) Oct 2, 2022 Sep 26, 2021 $ % Oct 2, 2022 Sep 26, 2021 $ % United States$ 362.8 $ 336.5 $ 26.3 7.8 %$ 1,140.3 $ 1,027.9 $ 112.4 10.9 % International 35.1 22.5 12.6 56.0 % 109.2 74.0 35.2 47.6 % Total service revenues$ 397.9 $ 359.0 $ 38.9 10.8 %$ 1,249.5 $ 1,101.9 $ 147.6 13.4 %
Three Months Ended
United States service revenues increased by$26.3 million due to an increase in revenue per unit of 12%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings and higher used car prices. This increase was partially offset by a lower volume of vehicles sold, which decreased by 4% primarily due to the previous loss of significant volume from a single vehicle supplier, partially offset by volume gains from other vehicle suppliers. International service revenues increased by$12.6 million due to incremental revenue of$6.6 million fromSYNETIQ , and a higher volume of vehicles sold, which increased by 16% primarily due to higher miles driven inCanada and was partially offset by lower volume of vehicles sold in theU.K. International service revenues also benefited from an increase in revenue per unit of 10%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings and higher used car prices. 26
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Nine Months Ended
United States service revenues increased by$112.4 million due to an increase in revenue per unit of 13%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings and higher used car prices. This increase was partially offset by a lower volume of vehicles sold, which decreased by 2% primarily due to the previous loss of significant volume from a single vehicle supplier, partially offset by volume gains from other vehicle suppliers. International service revenues increased by$35.2 million due to incremental revenue of$19.3 million fromSYNETIQ , a higher volume of vehicles sold, which increased by 14% primarily due to higher miles driven. International service revenues also benefited from an increase in revenue per unit of 7%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings and higher used car prices. Vehicle and Parts Sales Three Months Ended Change Nine Months Ended Change (Dollars in millions) Oct 2, 2022 Sep 26, 2021 $ % Oct 2, 2022 Sep 26, 2021 $ % United States$ 43.1 $ 32.6 $ 10.5 32.2 %$ 122.9 $ 92.5 $ 30.4 32.9 % International 56.5 29.1 27.4 94.2 % 203.0 94.9 108.1 113.9 % Total vehicle and parts sales$ 99.6 $ 61.7 $ 37.9 61.4 %$ 325.9 $ 187.4 $ 138.5 73.9 %
Three Months Ended
United States vehicle sales increased by$10.5 million due to a higher volume of vehicles sold, which increased by 18% due to an increase in vehicle purchases.United States vehicle sales also benefited from an increase in revenue per unit sold of 12%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings as well as higher used car prices.
International vehicle and parts sales increased by
Nine Months Ended
International vehicle and parts sales increased by
Cost of Services
Three Months Ended Change Nine Months Ended Change
(Dollars in millions) Oct 2, 2022 Sep 26, 2021 $ % Oct 2, 2022 Sep 26, 2021 $ %
United States $ 215.1 $ 183.7 $ 31.4 17.1 % $ 648.6 $ 544.5 $ 104.1 19.1 %
International 28.9 14.7 14.2 96.6 % 90.4 47.9 42.5 88.7 %
Total cost of services $ 244.0 $ 198.4 $ 45.6 23.0 % $ 739.0 $ 592.4 $ 146.6 24.7 %
27-------------------------------------------------------------------------------- Table of Contents As a result of current macroeconomic conditions, we are continuing to experience labor, towing and other transportation pressures, which have increased our associated costs in both segments. See "Executive Overview-Market Trends and Uncertainties" for additional information.
Three Months Ended
International cost of services increased by
Nine Months Ended
International cost of services increased by
Cost of Vehicle and Parts Sales
Three Months Ended Change Nine Months Ended Change
(Dollars in millions) Oct 2, 2022 Sep 26, 2021 $ % Oct 2, 2022 Sep 26, 2021 $ %
United States $ 41.3 $ 29.2 $ 12.1 41.4 % $ 117.8 $ 76.9 $ 40.9 53.2 %
International 52.0 25.3 26.7 105.5 % 175.2 83.6 91.6 109.6 %
Total cost of vehicle
and parts sales $ 93.3 $ 54.5 $ 38.8 71.2 % $ 293.0 $ 160.5 $ 132.5 82.6 %
Three Months Ended
International cost of vehicle and parts sales increased by
Nine Months Ended
International cost of vehicle and parts sales increased by
Selling, General and Administrative
Three Months Ended Change Nine Months Ended Change
(Dollars in millions) Oct 2, 2022 Sep 26, 2021 $ % Oct 2, 2022 Sep 26, 2021 $ %
United States $ 45.8 $ 46.4 $ (0.6) (1.3) % $ 135.3 $ 127.4 $ 7.9 6.2 %
International 5.2 3.4 1.8 52.9 % 17.5 9.5 8.0 84.2 %
Total selling, general and
administrative expenses $ 51.0 $ 49.8 $ 1.2 2.4 % $ 152.8 $ 136.9 $ 15.9 11.6 %
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Three Months Ended
United States selling, general and administrative expenses decreased by$0.6 million primarily due to lower incentive compensation costs, partially offset by higher costs relating to headcount and a$1.9 million fair value adjustment relating to contingent consideration.
International selling, general and administrative expenses increased by
Nine Months Ended
United States selling, general and administrative expenses increased by$7.9 million primarily due to a$4.9 million fair value adjustment relating to contingent consideration and higher costs relating to headcount, professional services and information technology, partially offset by lower incentive compensation and a$2.7 million non-income, tax related accrual in the prior year period.
International selling, general and administrative expenses increased by
Depreciation and Amortization
Three Months Ended Change Nine Months Ended Change
(Dollars in millions) Oct 2, 2022 Sep 26, 2021 $ % Oct 2, 2022 Sep 26, 2021 $ %
United States $ 20.3 $ 19.1 $ 1.2 6.3 % $ 62.5 $ 55.4 $ 7.1 12.8 %
International 4.9 2.1 2.8 133.3 % 15.4 6.1 9.3 152.5 %
Total depreciation and
amortization $ 25.2 $ 21.2 $ 4.0 18.9 % $ 77.9 $ 61.5 $ 16.4 26.7 %
Three Months Ended
Depreciation and amortization increased by
Nine Months Ended
Depreciation and amortization increased by
Interest Expense
Three Months Ended
Interest expense increased by
Nine Months Ended
Interest expense decreased by$10.0 million as compared to the prior year period due to a$10.3 million loss on early extinguishment of debt recognized in the second quarter of fiscal 2021 partially offset by higher interest rates on our floating rate debt. Other expense (income) net
Three Months Ended
Other expense increased by
Nine Months Ended
Other expense increased by
Income Taxes
Three Months Ended
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The effective tax rate was 25.7% for the three months ended October 2, 2022 as
compared to 23.2% for the three months ended September 26, 2021 . The effective
tax rate for the three months ended October 2, 2022 was adversely affected from
a change in the estimate related to forecasted global income and state income
taxes.
Nine Months Ended
The effective tax rate was 20.1% for the nine endedOctober 2, 2022 as compared to 24.4% for the nine months endedSeptember 26, 2021 . The effective tax rate for the nine months endedOctober 2, 2022 benefited from favorable adjustments of$12.7 million resulting from a change in the estimate for Foreign Derived Intangible Income.
Liquidity and Capital Resources
We believe that the significant indicators of liquidity for our business are cash on hand, cash flow from operations and working capital. Our principal source of liquidity consists of cash generated by operations. Our Revolving Credit Facility (as defined below) provides another source of liquidity as needed.
Our cash flow is used to invest in new products and services, fund capital expenditures and working capital requirements and, coupled with borrowings under our Revolving Credit Facility, is expected to be adequate to satisfy our cash requirements, including those listed below, fund future acquisitions, and repurchase shares of our common stock, if any. Our ability to fund our cash requirements will depend on our ongoing ability to generate cash from operations and to access borrowings under our Revolving Credit Facility. We believe that our cash on hand, future cash from operations, borrowings available under our Revolving Credit Facility and access to the debt and capital markets will provide adequate resources to fund our operating and financing needs for the next twelve months and beyond.
Approximately
There have been no material changes to our cash requirements from known contractual and other obligations reported in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2022 filed with theSecurities and Exchange Commission (the "SEC") onFebruary 28, 2022 .
Debt Service Obligations
OnApril 30, 2021 , we entered into a credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent, and the other lenders from time to time party thereto (the "Credit Agreement"). The Credit Agreement provides for, among other things: (i) a senior secured term loan in an aggregate principal amount of$650 million (the "Term Loan") and (ii) a senior secured revolving credit facility with revolving commitments in an aggregate principal amount of$525 million (the "Revolving Credit Facility" and, together with the Term Loan, the "Credit Facility"). Borrowing availability under the Revolving Credit Facility is subject to no default or event of default under the Credit Agreement having occurred at the time of borrowing. The Credit Facility matures onApril 30, 2026 . As ofOctober 2, 2022 ,$641.9 million was outstanding under the Term Loan and no borrowings were outstanding under the Revolving Credit Facility. As ofOctober 2, 2022 , the interest rate per annum for the Term Loan was 4.49%. We were in compliance with the covenants in the Credit Agreement atOctober 2, 2022 . OnJune 6, 2019 , we issued$500.0 million aggregate principal amount of 5.500% Senior Notes due 2027. We must pay interest on the Notes in cash onJune 15 andDecember 15 of each year at a rate of 5.500% per annum. The Notes will mature onJune 15, 2027 . We were in compliance with the covenants in the indenture governing the Notes atOctober 2, 2022 .
See Note 5 - Debt in the notes to consolidated financial statements for additional information on our outstanding indebtedness.
Capital Expenditures
Capital expenditures for the nine months endedOctober 2, 2022 andSeptember 26, 2021 were$135.9 million and$80.0 million , respectively. Our capital expenditures during the nine months endedOctober 2, 2022 primarily related to real estate purchases and development and technology-based investments, including improvements in information technology systems and infrastructure. Capital expenditures were funded primarily from cash flow from operations. We continue to invest in our core information technology capabilities and capacity expansion. Future capital expenditures could vary substantially based on capital project timing, the opening of new auction facilities, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies. Pursuant to the Merger Agreement, we are restricted from engaging in capital expenditures beyond certain levels without RBA's prior consent. Acquisitions
Some of our prior years' acquisitions included contingent payments based on
certain conditions and future performance. As of
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inputs), of which$2.6 million is reported in current liabilities, Other accrued expenses line, and$2.9 million is reported in non-current liabilities, Other liabilities line, within the accompanying consolidated balance sheet. These contingent consideration payments will be made over the next 4 years, subject to satisfaction of the relevant conditions and future performance.
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