IAA, Inc. - Quarter Report: 2021 June (Form 10-Q)
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 June 27, 2021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number: 001-38580
IAA, Inc.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 83-1030538 (I.R.S. Employer Identification No.) | |||||||
Two Westbrook Corporate Center, Suite 500, Westchester, Illinois, 60154
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (708) 492-7000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | IAA | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 Act). Yes ☐ No ☒
As of July 27, 2021, 134,796,790 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
IAA, Inc.
Table of Contents
| Page | ||||||||
2
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts may be forward-looking statements. Words such as "should," "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions identify forward- looking statements. Such statements include statements regarding the impact of COVID-19 on our business; our future growth; expectations regarding vehicle volume sales, results of operations and capital expenditures; and our continued investment in information technology. Such statements are based on management’s current expectations, are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to: uncertainties regarding ongoing surges of COVID-19 infections, including new more contagious and/or vaccine resistant variants, and the impact on the duration and severity of the COVID-19 pandemic and measures intended to reduce its spread, including the availability, rate of public acceptance and efficacy of COVID-19 vaccines; the loss of one or more significant vehicle suppliers or a reduction in significant volume from such suppliers; our ability to meet or exceed customers’ demand and expectations; significant current competition and the introduction of new competitors or other disruptive entrants in our industry; the risk that our facilities lack the capacity to accept additional vehicles and our ability to obtain land or renew/enter into new leases at commercially reasonable rates; our ability to effectively maintain or update information and technology systems; our ability to implement and maintain measures to protect against cyberattacks and comply with applicable privacy and data security requirements; our ability to successfully implement our business strategies or realize expected cost savings and revenue enhancements, including from our margin expansion plan; business development activities, including acquisitions and integration of acquired businesses; our expansion into markets outside the U.S. and the operational, competitive and regulatory risks facing our non-U.S. based operations; our reliance on subhaulers and trucking fleet operations; changes in used-vehicle prices and the volume of damaged and total loss vehicles we purchase; economic conditions, including fuel prices, commodity prices, foreign exchange rates and interest rate fluctuations; trends in new- and used-vehicle sales and incentives; and other risks and uncertainties identified in our filings with the Securities and Exchange Commission (the “SEC”), including under Item 1A “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on February 22, 2021, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the SEC, including subsequent Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
IAA, Inc.
Consolidated Statements of Income
(In millions, except per share data)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Service revenues | $ | 382.5 | $ | 264.8 | $ | 742.9 | $ | 598.8 | |||||||||||||||
| Vehicle sales | 62.6 | 32.0 | 125.7 | 64.6 | |||||||||||||||||||
| Total revenues | 445.1 | 296.8 | 868.6 | 663.4 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | 197.6 | 158.9 | 394.0 | 362.1 | |||||||||||||||||||
| Cost of vehicle sales | 51.6 | 26.2 | 106.0 | 54.0 | |||||||||||||||||||
| Selling, general and administrative | 43.7 | 34.3 | 87.1 | 72.3 | |||||||||||||||||||
| Depreciation and amortization | 20.5 | 19.6 | 40.3 | 42.1 | |||||||||||||||||||
| Total operating expenses | 313.4 | 239.0 | 627.4 | 530.5 | |||||||||||||||||||
| Operating profit | 131.7 | 57.8 | 241.2 | 132.9 | |||||||||||||||||||
| Interest expense, net | 21.9 | 13.8 | 34.9 | 29.8 | |||||||||||||||||||
| Other (income) expense, net | (0.3) | 0.1 | (0.7) | (0.6) | |||||||||||||||||||
| Income before income taxes | 110.1 | 43.9 | 207.0 | 103.7 | |||||||||||||||||||
| Income taxes | 27.2 | 10.7 | 51.6 | 25.8 | |||||||||||||||||||
| Net income | $ | 82.9 | $ | 33.2 | $ | 155.4 | $ | 77.9 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 0.61 | $ | 0.25 | $ | 1.15 | $ | 0.58 | |||||||||||||||
| Diluted | $ | 0.61 | $ | 0.25 | $ | 1.15 | $ | 0.58 | |||||||||||||||
See accompanying condensed notes to consolidated financial statements
4
IAA, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | ||||||||||||||||||||
| Net income | $ | 82.9 | $ | 33.2 | $ | 155.4 | $ | 77.9 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation gain (loss) | 3.0 | 1.9 | 6.0 | (5.7) | |||||||||||||||||||
| Comprehensive income | $ | 85.9 | $ | 35.1 | $ | 161.4 | $ | 72.2 | |||||||||||||||
See accompanying condensed notes to consolidated financial statements
5
IAA, Inc.
Consolidated Balance Sheets
(in millions, except per share amounts)
| June 27, 2021 | December 27, 2020 | ||||||||||
| (Unaudited) | (Audited) | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 282.1 | $ | 232.8 | |||||||
| Accounts receivable, net of allowances of $7.6 and $8.0 | 338.0 | 374.8 | |||||||||
| Prepaid consigned vehicle charges | 50.7 | 53.3 | |||||||||
| Other current assets | 30.9 | 31.1 | |||||||||
| Total current assets | 701.7 | 692.0 | |||||||||
| Non-current assets | |||||||||||
| Operating lease right-of-use assets, net of accumulated amortization of $210.8 and $163.9 | 962.9 | 866.8 | |||||||||
| Property and equipment, net of accumulated depreciation of $503.2 and $481.9 | 281.0 | 259.8 | |||||||||
| Goodwill | 546.7 | 542.3 | |||||||||
| Intangible assets, net of accumulated amortization of $525.9 and $504.3 | 154.4 | 150.6 | |||||||||
| Other assets | 26.0 | 17.4 | |||||||||
| Total non-current assets | 1,971.0 | 1,836.9 | |||||||||
| Total assets | $ | 2,672.7 | $ | 2,528.9 | |||||||
| Liabilities and Stockholders' Deficit | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 98.6 | $ | 122.6 | |||||||
| Short-term right-of-use operating lease liability | 86.3 | 78.1 | |||||||||
| Accrued employee benefits and compensation expenses | 31.3 | 23.4 | |||||||||
| Current maturities of long-term debt | — | 4.0 | |||||||||
| Other accrued expenses | 63.4 | 54.4 | |||||||||
| Total current liabilities | 279.6 | 282.5 | |||||||||
| Non-current liabilities | |||||||||||
| Long-term debt | 1,135.6 | 1,248.0 | |||||||||
| Long-term right-of-use operating lease liability | 927.8 | 836.6 | |||||||||
| Deferred income tax liabilities | 71.3 | 65.7 | |||||||||
| Other liabilities | 28.2 | 26.7 | |||||||||
| Total non-current liabilities | 2,162.9 | 2,177.0 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders' equity | |||||||||||
| Preferred stock, $0.01 par value: authorized, 150.0 shares; issued and outstanding, none | — | — | |||||||||
| Common stock, $0.01 par value: authorized, 750.0 shares; issued and outstanding, 134.8 shares at June 27, 2021 and 134.5 shares at December 27, 2020 | 1.3 | 1.3 | |||||||||
| Additional paid-in capital | 11.4 | 12.0 | |||||||||
| Retained earnings | 223.1 | 67.7 | |||||||||
| Accumulated other comprehensive loss | (5.6) | (11.6) | |||||||||
| Total stockholders' equity | 230.2 | 69.4 | |||||||||
| Total liabilities and stockholders' equity | $ | 2,672.7 | $ | 2,528.9 | |||||||
See accompanying condensed notes to consolidated financial statements
6
IAA, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In millions)
(Unaudited)
| Three Months Ended June 27, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive (Loss) Income | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance at March 28, 2021 | 134.8 | $ | 1.3 | $ | 9.3 | $ | 140.2 | $ | (8.6) | $ | 142.2 | ||||||||||||||||||||||||
| Net income | — | — | — | 82.9 | — | 82.9 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | 3.0 | 3.0 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2.6 | — | — | 2.6 | |||||||||||||||||||||||||||||
| Common stock issued for the exercise and vesting of stock-based awards | — | — | 0.3 | — | — | 0.3 | |||||||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | — | — | 0.4 | — | — | 0.4 | |||||||||||||||||||||||||||||
| Withholding taxes on stock-based awards | — | — | (1.2) | — | — | (1.2) | |||||||||||||||||||||||||||||
| Balance at June 27, 2021 | 134.8 | $ | 1.3 | $ | 11.4 | $ | 223.1 | $ | (5.6) | $ | 230.2 | ||||||||||||||||||||||||
| Three Months Ended June 28, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||
| Balance at March 29, 2020 | 133.9 | $ | 1.3 | $ | — | $ | (82.4) | $ | (22.5) | $ | (103.6) | ||||||||||||||||||||||||
| Net income | — | — | — | 33.2 | — | 33.2 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | 1.9 | 1.9 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2.4 | — | — | 2.4 | |||||||||||||||||||||||||||||
| Common stock issued for the exercise and vesting of stock-based awards | 0.1 | — | 0.3 | — | — | 0.3 | |||||||||||||||||||||||||||||
| Withholding taxes on stock-based awards | — | — | (1.6) | — | — | (1.6) | |||||||||||||||||||||||||||||
| Balance at June 28, 2020 | 134.0 | $ | 1.3 | $ | 1.1 | $ | (49.2) | $ | (20.6) | $ | (67.4) | ||||||||||||||||||||||||
See accompanying condensed notes to consolidated financial statements
7
IAA, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In millions)
(Unaudited)
| Six Months Ended June 27, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance at December 27, 2020 | 134.5 | $ | 1.3 | $ | 12.0 | $ | 67.7 | $ | (11.6) | $ | 69.4 | ||||||||||||||||||||||||
| Net income | — | — | — | 155.4 | — | 155.4 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | 6.0 | 6.0 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 5.4 | — | — | 5.4 | |||||||||||||||||||||||||||||
| Common stock issued for the exercise and vesting of stock-based awards | 0.4 | — | 0.4 | — | — | 0.4 | |||||||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | — | — | 0.8 | — | — | 0.8 | |||||||||||||||||||||||||||||
| Withholding taxes on stock-based awards | (0.1) | — | (7.2) | — | — | (7.2) | |||||||||||||||||||||||||||||
| Balance at June 27, 2021 | 134.8 | $ | 1.3 | $ | 11.4 | $ | 223.1 | $ | (5.6) | $ | 230.2 | ||||||||||||||||||||||||
| Six Months Ended June 28, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Deficit | ||||||||||||||||||||||||||||||
| Balance at December 29, 2019 | 133.6 | $ | 1.3 | $ | 3.5 | $ | (127.1) | $ | (14.9) | $ | (137.2) | ||||||||||||||||||||||||
| Net income | — | — | — | 77.9 | — | 77.9 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | (5.7) | (5.7) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 4.5 | — | — | 4.5 | |||||||||||||||||||||||||||||
| Common stock issued for the exercise and vesting of stock-based awards | 0.6 | — | 1.1 | — | — | 1.1 | |||||||||||||||||||||||||||||
| Withholding taxes on stock-based awards | (0.2) | — | (8.0) | — | — | (8.0) | |||||||||||||||||||||||||||||
| Balance at June 28, 2020 | 134.0 | $ | 1.3 | $ | 1.1 | $ | (49.2) | $ | (20.6) | $ | (67.4) | ||||||||||||||||||||||||
See accompanying condensed notes to consolidated financial statements
8
IAA, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
| Six Months Ended | ||||||||||||||
| June 27, 2021 | June 28, 2020 | |||||||||||||
| Operating activities | ||||||||||||||
| Net income | $ | 155.4 | $ | 77.9 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 40.3 | 42.1 | ||||||||||||
| Operating lease expense | 73.3 | 66.3 | ||||||||||||
| Stock-based compensation | 5.4 | 4.5 | ||||||||||||
| Provision for credit losses | (0.2) | 3.6 | ||||||||||||
| Loss on extinguishment of debt | 10.3 | — | ||||||||||||
| Amortization of debt issuance costs | 1.9 | 2.0 | ||||||||||||
| Deferred income taxes | 5.6 | (1.5) | ||||||||||||
| Gain on disposal of fixed assets | (0.2) | (0.1) | ||||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||||
| Operating lease payments | (69.7) | (63.8) | ||||||||||||
| Accounts receivable and other assets | 32.2 | 65.8 | ||||||||||||
| Accounts payable and accrued expenses | (3.6) | 20.5 | ||||||||||||
| Net cash provided by operating activities | 250.7 | 217.3 | ||||||||||||
| Investing activities | ||||||||||||||
| Acquisition of business, net of cash acquired | (4.0) | — | ||||||||||||
| Purchases of property, equipment and computer software | (57.8) | (22.1) | ||||||||||||
| Proceeds from the sale of property and equipment | 0.4 | 0.1 | ||||||||||||
| Other | (1.3) | — | ||||||||||||
| Net cash used by investing activities | (62.7) | (22.0) | ||||||||||||
| Financing activities | ||||||||||||||
| Net decrease in book overdrafts | — | (33.6) | ||||||||||||
| Proceeds from debt issuance | 650.0 | — | ||||||||||||
| Payments of long-term debt | (774.0) | (4.0) | ||||||||||||
| Deferred financing costs | (4.6) | (2.7) | ||||||||||||
| Finance lease payments | (5.9) | (7.5) | ||||||||||||
| Issuance of common stock under stock plans | 0.4 | 1.1 | ||||||||||||
| Proceeds from issuance of employee stock purchase plan shares | 0.8 | — | ||||||||||||
| Tax withholding payments for vested RSUs | (7.2) | (8.0) | ||||||||||||
| Net cash used by financing activities | (140.5) | (54.7) | ||||||||||||
| Effect of exchange rate changes on cash | 1.8 | (0.7) | ||||||||||||
| Net increase in cash and cash equivalents | 49.3 | 139.9 | ||||||||||||
| Cash and cash equivalents at beginning of period | 232.8 | 47.1 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 282.1 | $ | 187.0 | ||||||||||
| Cash paid for interest, net | $ | 23.5 | $ | 28.9 | ||||||||||
| Cash paid for taxes, net | $ | 44.7 | $ | 6.2 | ||||||||||
See accompanying condensed notes to consolidated financial statements
9
IAA, Inc.
Condensed Notes to Consolidated Financial Statements
(Unaudited)
Note 1—Basis of Presentation and Nature of Operations
Description of Business
IAA, Inc., together with its subsidiaries (collectively referred to herein as “IAA” and "the Company") is a leading global digital marketplace connecting vehicle buyers and sellers. Leveraging leading-edge technology and focusing on innovation, IAA's unique platform facilitates the marketing and sale of total loss, damaged and low-value vehicles for a full spectrum of sellers. Headquartered in Westchester, Illinois, the Company has more than 200 facilities throughout the United States, Canada and the United Kingdom. The Company serves a global buyer base and a full spectrum of sellers, including insurance companies, dealerships, fleet lease and rental car companies, and charitable organizations. The Company offers sellers a comprehensive suite of services aimed at maximizing vehicle value, reducing administrative costs, shortening selling cycle time and delivering the highest economic returns. The Company's solutions provide global buyers with the vehicles they need to, among other things, fulfill their vehicle rebuild requirements, replacement part inventory or scrap demand. IAA provides global buyers multiple bidding/buying digital channels, innovative vehicle merchandising, efficient evaluation services and online bidding tools, enhancing the overall purchasing experience.
The Company operates in two reportable segments: United States and International. The Company earns fees for its services from both buyers and sellers of vehicles sold through its channels.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, generally consisting of normal recurring accruals, necessary for a fair statement of our financial results for the periods presented. Financial results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. These unaudited consolidated financial statements and condensed notes thereto are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 27, 2020 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 22, 2021.
The Company's fiscal year consists of 52 weeks with every fifth year consisting of 53 weeks and ending either the last Sunday in December or the first Sunday in January. Fiscal 2021 contains 53 weeks and fiscal 2020 contained 52 weeks.
Use of Estimates
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates based in part on assumptions about current, and for some estimates, future economic and market conditions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Although the current estimates contemplate current conditions and expected future changes, as appropriate, it is reasonably possible that future conditions could differ from these estimates, which could materially affect the Company's results of operations and financial position. Among other effects, such changes could result in future impairments of goodwill, intangible assets and long-lived assets, additional allowances on accounts receivable and deferred tax assets and changes in litigation and other loss contingencies.
Reclassification
"Revenues" reported in the consolidated statements of income and segment information footnote in the prior period financial statements for the three and six months ended June 28, 2020 has been reclassified between "Service revenues" and "Vehicle sales" to conform to the current year's presentation.
"Cost of services" reported in the consolidated statements of income and segment information footnote in the prior period financial statements for the three and six months ended June 28, 2020 has been reclassified between "Cost of services" and "Cost of vehicle sales" to conform to the current year's presentation.
10
Recent Accounting Pronouncements
Recently Issued and Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes in various areas. The adoption of ASU 2019-12 on December 28, 2020 did not have any impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
The Company does not believe that any recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material impact on its unaudited consolidated financial statements or disclosures.
Note 2—Revenue Recognition
The Company generates its revenues from contracts with customers. The Company recognizes revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company identifies each performance obligation and evaluates whether the performance obligations are distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. The Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation. The Company then determines how the goods or services are transferred to the customer in order to determine the timing of revenue recognition.
The Company has disaggregated revenue at the product level by Services and Vehicle Sales, as well as geographically by the United States and International. See Note 12 - Segment Information for disaggregated revenue.
Service Revenues
Service revenues consist of auction and auction related fees for vehicles consigned to the Company by the seller and held at the Company's facilities. The Company does not take title to these consigned vehicles and records auction fees as revenue on a net basis because it has no influence on the vehicle auction selling price agreed to by the seller and the buyer at the auction. The buyer fees are typically based on a tiered structure with fees increasing with the sale price of the vehicle, while the seller fees are typically fixed. The Company generally enforces its rights to payment for seller transactions through net settlement provisions following the sale of a vehicle. Greater than 90% of the Company’s revenue is generated at the time of auction as a result of the satisfaction of the seller and buyer performance obligations as described below.
The Company’s contracts with sellers are short-term in nature. The performance obligation contained within the Company's auction contracts for sellers is to facilitate the remarketing of salvage vehicles, including the inbound tow, processing, storage, titling, enhancing and sale at auction. These services are related to facilitating the sale of vehicles and are not distinct within the context of the contract. Accordingly, revenue for these services is recognized when the single performance obligation is satisfied at the point in time when the vehicle is sold through the auction process. Related costs are deferred and recognized at the time of sale.
The Company's contracts with buyers are short-term in nature and are generally established via purchase at auction, subject to standard terms and conditions. These contracts contain a single performance obligation, which is satisfied at the point in time when the vehicle is purchased through the auction process. Buyers also pay a fixed registration fee to access the auctions for a one-year term in addition to the fees paid upon purchase of a vehicle. The performance obligation to provide access to the auctions, associated with the registration, is satisfied ratably over the one-year contractual term of the buyer agreement. Accordingly, registration fee revenue is recognized ratably over the one-year contract term. The Company also offers other services to buyers such as transportation, storage, vehicle condition reporting, and other ancillary services. Revenue from such services is recognized in the period in which such services are provided.
11
Vehicle Sales
Vehicle sales consist of revenue relating to vehicles that are purchased by the Company and then resold. The Company's performance obligation for these purchased vehicles is the completion of the online auction process and is satisfied at the point in time when the vehicle is sold through the auction process. As the Company acts as a principal, the vehicle sales price is recorded as revenue on a gross basis when the vehicle is sold.
There were no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets as of June 27, 2021 and December 27, 2020. For each of the Company's primary revenue streams, cash flows are consistent with the timing of revenue recognition.
For the three and six months ended June 27, 2021 and June 28, 2020, revenue recognized from performance obligations related to prior periods was not material. Revenue expected to be recognized in any future period related to remaining performance obligations is not material.
Note 3—Relationship with KAR and Related Entities
Prior to June 28, 2019, the Company was a subsidiary of KAR Auto Action Services, Inc. ("KAR"). On June 28, 2019, KAR completed the distribution of 100% of the issued and outstanding shares of common stock of IAA and IAA became an independent publicly-traded company.
In connection with the separation (the "Separation") from KAR on June 28, 2019, the Company entered into a non-compete and various other ancillary agreements to effect the Separation and provide a framework for the Company's relationship with KAR after the Separation, including a transition services agreement, a tax matters agreement and an employee matters agreement. See Note 3 - Relationship with KAR and Related Entities in the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 27, 2020 for additional information.
The Company’s transactions with KAR were not material for the three and six months ended June 27, 2021 and June 28, 2020.
Note 4—Stock-Based Compensation Plans
Prior to the Separation, KAR issued equity awards from time to time to select employees and non-employee directors
of IAA. In connection with the Separation, IAA created its own equity plan, the 2019 Omnibus Stock and Incentive Plan (as amended, the "2019 OSIP"), as described below under 2019 Omnibus Stock and Incentive Plan.
The employee matters agreement entered into with KAR in connection with the Separation required that the outstanding KAR equity awards held by IAA employees and non-employee directors be converted into adjusted awards of IAA pursuant to the 2019 OSIP. The awards were adjusted based on the following principles:
•For each award recipient, the intent was to maintain the economic value of those awards before and after June 28, 2019, the date of the Separation; and
•The terms of the equity awards, such as the vesting schedule, will generally continue unchanged, except that the performance criteria for certain performance-based restricted stock units ("PRSUs") granted in 2019 were subject to adjusted performance criteria. Such PRSUs were converted into time-based restricted stock units ("RSUs") with two-year cliff vesting in February 2020, since the adjusted performance criteria were determined to have been met.
2019 Omnibus Stock and Incentive Plan
On June 27, 2019, the Company's board of directors approved the 2019 OSIP. The purpose of the 2019 OSIP is to provide an additional incentive to selected management employees, directors, independent contractors, and consultants of the Company whose contributions are essential to the growth and success of the Company, in order to strengthen the commitment of such persons, motivate such persons to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in the long-term growth and profitability for the Company.
Benefits granted under the 2019 OSIP may be granted in any one or a combination of (i) options to purchase IAA common stock; (ii) IAA share appreciation rights (“SARs”); (iii) restricted shares of IAA common stock; (iv) other IAA stock-based awards; or (v) other cash-based awards. Options, restricted shares, and other share-based awards or cash awards may constitute performance-based awards. The granting or vesting of any performance-based awards will be based on achievement of performance objectives that are based on one or more financial or business criteria, with respect to one or more business units of IAA and its subsidiaries as a whole. Such financial or business criteria may be adjusted to account for unusual or infrequently occurring items or changes in accounting.
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Participants include any employee, director, independent contractor or consultant of IAA or any affiliate of IAA selected to receive awards under the 2019 OSIP, and, upon his or her death, his or her successors, heirs, executors and administrators, as the case may be. As of June 27, 2021, the number of common shares reserved and available for awards under the 2019 OSIP is 4,644,720, subject to adjustment made in accordance with the 2019 OSIP. Upon the occurrence of certain corporate events that affect the common stock, including but not limited to any extraordinary cash dividend, stock split, reorganization or other relevant change in capitalization, appropriate adjustments may be made with respect to the number of shares available for grants under the 2019 OSIP, the number of shares covered by outstanding awards and the maximum number of shares that may be granted to any participant.
The aggregate awards granted during any calendar year to any single individual will not exceed: (i) 1,000,000 shares subject to options or SARs, (ii) 500,000 shares subject to restricted shares or other share-based awards and (iii) $5,000,000 with respect to any cash-based award. A non-employee director of IAA may not be granted awards under the 2019 OSIP during any calendar year that, when aggregated with such non-employee director’s cash fees received with respect to such calendar year, exceed $750,000 in total value.
The following table summarizes the Company's stock-based compensation expense by type of award granted under both the KAR plans and the 2019 OSIP (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | ||||||||||||||||||||
| Performance-based Restricted Stock Units | $ | 0.8 | $ | 0.4 | $ | 1.2 | $ | 0.6 | |||||||||||||||
| Restricted Stock Units and Awards | 1.6 | 1.8 | 3.8 | 3.5 | |||||||||||||||||||
| Stock Options | 0.2 | 0.2 | 0.4 | 0.4 | |||||||||||||||||||
| Total Stock-based Compensation Expense | $ | 2.6 | $ | 2.4 | $ | 5.4 | $ | 4.5 | |||||||||||||||
The following table summarizes the stock-based awards granted by the Company to certain employees and non-employee directors in accordance with the 2019 OSIP during the three and six months ended June 27, 2021:
| Three Months Ended June 27, 2021 | Six Months Ended June 27, 2021 | ||||||||||||||||||||||
| Number of Awards Granted | Weighted Average Grant Date Fair Value | Number of Awards Granted | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Performance-based Restricted Stock Units | 229 | $ | 63.09 | 75,414 | $ | 63.71 | |||||||||||||||||
| Restricted Stock Awards | 20,503 | $ | 63.09 | 20,503 | $ | 63.09 | |||||||||||||||||
| Restricted Stock Units | 2,624 | $ | 63.09 | 101,867 | $ | 62.37 | |||||||||||||||||
The PRSUs granted to certain executive officers and management of the Company vest at the end of a three-year performance period if and to the extent that the Company's three year average return on invested capital achieves certain specified goals. The Restricted Stock Awards granted by the Company to non-employee directors vest in four equal installments over a one year vesting term. The RSUs granted to certain executive officers and management of the Company are contingent upon continued employment and vest in three equal annual installments.
Note 5—Net Income Per Share
Basic net income per share was calculated by dividing net income by the weighted average number of outstanding common shares for the period. Diluted net income per share was calculated consistent with basic net income per share including the effect of dilutive unissued common shares related to the Company's stock-based employee compensation program. The effect of stock options and RSUs on net income per share-diluted is determined through the application of the treasury stock method, whereby net proceeds received by the Company based on assumed exercises are hypothetically used to repurchase the Company's common stock at the average market price during the period.
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The following table sets forth the computation of net income per share (in millions except per share amounts):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||||||||||||
| Net income | $ | 82.9 | $ | 33.2 | $ | 155.4 | $ | 77.9 | ||||||||||||||||||
| Weighted average common shares outstanding | 134.8 | 133.8 | 134.7 | 133.9 | ||||||||||||||||||||||
| Effect of dilutive stock awards | 0.5 | 0.8 | 0.6 | 1.0 | ||||||||||||||||||||||
| Weighted average common shares outstanding and potential common shares | 135.3 | 134.6 | 135.3 | 134.9 | ||||||||||||||||||||||
| Net income per share | ||||||||||||||||||||||||||
| Basic | $ | 0.61 | $ | 0.25 | $ | 1.15 | $ | 0.58 | ||||||||||||||||||
| Diluted | $ | 0.61 | $ | 0.25 | $ | 1.15 | $ | 0.58 | ||||||||||||||||||
The weighted number of shares outstanding used in the calculation of diluted earnings per share does not include the effect of the following anti-dilutive securities and awards subject to performance conditions which have not been fully satisfied at the end of the respective reporting periods:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | |||||||||||||||||||||||
| Anti-dilutive awards | 0.1 | 0.4 | 0.1 | 0.3 | ||||||||||||||||||||||
| Awards subject to performance conditions not fully satisfied | 0.2 | — | 0.2 | — | ||||||||||||||||||||||
| Total | 0.3 | 0.4 | 0.3 | 0.3 | ||||||||||||||||||||||
Note 6—Long-Term Debt
Long-term debt consisted of the following (in millions):
| June 27, 2021 | December 27, 2020 | |||||||||||||
| 2021 Term Loan | $ | 650.0 | $ | — | ||||||||||
| 2019 Term Loan | — | 774.0 | ||||||||||||
| Notes | 500.0 | 500.0 | ||||||||||||
| Total debt | 1,150.0 | 1,274.0 | ||||||||||||
| Unamortized debt issuance costs | (14.4) | (22.0) | ||||||||||||
| Current maturities of long-term debt | — | (4.0) | ||||||||||||
| Long-term debt | $ | 1,135.6 | $ | 1,248.0 | ||||||||||
Credit Facility
On June 28, 2019, the Company entered into a credit agreement (the “2019 Credit Agreement”), which provided for, among other things: (i) a seven-year senior secured term loan in an aggregate principal amount of $800 million (the "2019 Term Loan") and (ii) a five-year revolving credit facility in an aggregate principal amount of $225 million (the "2019 Revolving Credit Facility"). On May 1, 2020, the Company entered into an amendment to its 2019 Credit Agreement to increase the aggregate principal amount able to be borrowed under the 2019 Revolving Credit Facility by $136.0 million to $361.0 million. As of December 27, 2020, the interest rate per annum for the 2019 Term Loan was 2.44% and no borrowings were outstanding under the 2019 Revolving Credit Facility. The 2019 Credit Agreement was terminated on April 30, 2021.
On April 30, 2021, the Company entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders from time to time party thereto (the “2021 Credit Agreement”). The 2021 Credit Agreement provides for, among other things: (i) a senior secured term loan in an aggregate principal amount of $650 million (the "2021 Term Loan") and (ii) a senior secured revolving credit facility with revolving commitments in an aggregate principal amount of $525 million (the "2021 Revolving Credit Facility" and, together with the 2021 Term Loan, the "2021 Credit Facility"). Borrowing availability under the 2021 Revolving Credit Facility is subject to no default or event of default under the 2021 Credit Agreement having occurred at the time of borrowing. The proceeds of the 2021 Credit Facility were used, along with cash on hand, to repay in full all outstanding borrowings under the Company’s 2019 Term Loan under its 2019 Credit
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Agreement. Future borrowings under the 2021 Revolving Credit Facility are expected to be used for the Company's ongoing working capital needs and general corporate purposes. The 2021 Credit Facility matures on April 30, 2026.
Borrowings under the 2021 Credit Agreement bear interest (i) from April 30, 2021 until the date the Company delivers its compliance certificate for the quarter ended September 26, 2021, at a rate equal to either, (A) at the Company’s option, the highest of the prime rate, the Federal Funds Rate plus 0.5%, or one-month LIBOR plus 1.00% (the “Base Rate”) for base rate borrowings, or (B) one-month LIBOR for eurodollar borrowings, in each case, plus an applicable margin of 0.75% with respect to Base Rate borrowings and 1.75% with respect to eurodollar borrowings and (ii) at all other times, (A) the Base Rate or (B) LIBOR, in each case plus an applicable margin ranging from 0.375% to 1.25% with respect to Base Rate borrowings and 1.375% to 2.25% with respect to eurodollar borrowings, in each case, depending on the Company’s Consolidated Net Leverage Ratio (as defined in the 2021 Credit Agreement). The 2021 Credit Agreement contains additional procedures for transition to a benchmark rate other than one-month LIBOR for eurodollar borrowings. The unused amount of the 2021 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% and 0.30% depending on the Company’s Consolidated Net Leverage Ratio.
As of June 27, 2021, the interest rate per annum for the 2021 Term Loan was 1.84%. As of June 27, 2021, no borrowings were outstanding under the 2021 Revolving Credit Facility.
The 2021 Credit Agreement requires the Company to comply with certain financial covenants, including a requirement that the Company’s Consolidated Net Leverage Ratio not exceed 4:00 to 1:00 as of the last day of any fiscal quarter, subject to certain exceptions for qualifying material acquisitions. Consolidated Net Leverage Ratio is defined as the ratio of Consolidated Total Debt (as defined in the 2021 Credit Agreement) to Consolidated EBITDA (as defined in the 2021 Credit Agreement). The 2021 Credit Agreement also contains other affirmative and negative covenants that are usual and customary for a senior secured credit agreement. The negative covenants include limitations on (i) the disposition of assets, (ii) mergers and acquisitions, (iii) restricted payments, including payment of future dividends, distributions and stock repurchases by the Company, (iv) the incurrence of additional indebtedness, (v) permitted acquisitions and investments and (vi) the incurrence of additional liens on property. The 2021 Credit Agreement includes customary events of default. The Company was in compliance with the covenants in the 2021 Credit Agreement at June 27, 2021.
During the three months ended June 27, 2021, the Company incurred debt issuance costs of $4.6 million in relation to the 2021 Credit Agreement which is included within the long-term debt line of the consolidated balance sheets, and recognized a loss of $10.3 million on early extinguishment of the 2019 Credit Facility which is included within the interest expense, net line of the consolidated statements of income.
Notes
On June 6, 2019, the Company issued $500.0 million aggregate principal amount of 5.500% Senior Notes due 2027 (the “Notes”). The Notes mature on June 15, 2027. Interest on the Notes is due on June 15 and December 15 of each year and accrues at a rate of 5.500% per annum.
The Notes contain covenants which, among other things, limit the Company and its restricted subsidiaries’ ability to pay dividends on or make other distributions in respect of equity interests or make other restricted payments, make certain investments, incur liens on certain assets to secure debt, sell certain assets, consummate certain mergers or consolidations or sell all or substantially all assets, or designate subsidiaries as unrestricted. The Company was in compliance with the covenants at June 27, 2021.
Canadian Credit Facility
On July 7, 2020, the Company entered into a credit agreement which provided for a revolving credit facility in an aggregate principal amount of $10.0 million Canadian dollars (the "Canadian Credit Facility"). As of December 27, 2020, no amounts were outstanding under the Canadian Credit Facility. The Canadian Credit Facility was terminated on May 5, 2021.
Other
At June 27, 2021, the Company had outstanding letters of credit in the aggregate amount of $5.6 million which reduced the amount available for borrowings under the 2021 Revolving Credit Facility.
At December 27, 2020, the Company had outstanding letters of credit in the aggregate amount of $6.1 million which reduced the amount available for borrowings under the 2019 Revolving Credit Facility.
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Fair Value of Debt
The estimated fair value of the Company's 2021 Term Loan approximated book value at June 27, 2021 as the interest rate on the 2021 Term Loan is variable in nature.
The estimated fair value of the Company's 2019 Term Loan as of December 27, 2020 was $770.1 million. The estimate of fair value was based on broker-dealer quotes and is considered a Level 2 fair value measurement in the fair value hierarchy.
The estimated fair value of the Company's Notes as of June 27, 2021 and December 27, 2020 was $523.2 million and $532.5 million, respectively. The estimates of fair value were based on broker-dealer quotes as of the respective dates and are considered Level 2 fair value measurements in the fair value hierarchy.
Note 7—Accounts Receivable
Components of accounts receivable, net were as follows (in millions):
| June 27, 2021 | December 27, 2020 | |||||||||||||
| Advanced charges receivable | $ | 245.2 | $ | 239.5 | ||||||||||
| Trade accounts receivable | 97.6 | 126.5 | ||||||||||||
| Other receivable | 2.8 | 16.8 | ||||||||||||
| Accounts receivable, gross | 345.6 | 382.8 | ||||||||||||
| Less: Allowance for credit losses | (7.6) | (8.0) | ||||||||||||
| Accounts receivable, net | $ | 338.0 | $ | 374.8 | ||||||||||
Note 8—Leases
The Company leases property, software, automobiles, trucks and trailers, pursuant to operating lease agreements. The Company also leases furniture, fixtures and equipment under finance leases. The leases have varying remaining lease terms with leases expiring through 2041, some of which include options to extend the leases.
The components of leases expense were as follows (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 27, 2021 | June 28, 2020 | June 27, 2021 | June 28, 2020 | ||||||||||||||||||||
| Operating lease cost | $ | 37.5 | $ | 33.6 | $ | 73.3 | $ | 66.3 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 2.9 | $ | 3.6 | $ | 6.2 | $ | 7.3 | |||||||||||||||
| Interest on lease liabilities | 0.2 | 0.3 | 0.4 | 0.5 | |||||||||||||||||||
| Total finance lease cost | $ | 3.1 | $ | 3.9 | $ | 6.6 | $ | 7.8 | |||||||||||||||
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Supplemental cash flow information related to leases was as follows (in millions):
| Six Months Ended | |||||||||||
| June 27, 2021 | June 28, 2020 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows related to operating leases | $ | 69.7 | $ | 63.8 | |||||||
| Operating cash flows related to finance leases | $ | 0.4 | $ | 0.5 | |||||||
| Financing cash flows related to finance leases | $ | 5.9 | $ | 7.5 | |||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 143.0 | $ | 116.7 | |||||||
| Finance leases | $ | 4.8 | $ | 8.3 | |||||||
Note 9—Acquisition
On June 18, 2021, the Company acquired Marisat, Inc. d/b/a Auto Exchange ("Auto Exchange"), a salvage auction provider located in New Jersey. The estimated acquisition date fair value of the total consideration was $7.3 million, which consisted of $2.0 million of cash, and the fair value of contingent consideration of $5.3 million, $2.0 million of which was paid at closing. The remaining $3.3 million of contingent consideration is payable over five years subject to the achievement of certain performance targets.
The Company has recorded provisional amounts for the fair value of contingent consideration and the acquired net assets associated with the transaction as the determination of their respective fair values has not been finalized. The purchase price was provisionally allocated to acquired customer relationships of $4.1 million and other acquired net assets of $0.7 million. The $2.5 million excess of the purchase price consideration over the estimated fair value of the acquired net assets was recognized as goodwill which reflects expected synergies resulting from adding Auto Exchange's products and processes to the Company's products and processes. The acquired goodwill is allocated to the United States segment and is deductible for tax purposes.
The results of Auto Exchange are included in the Company's financial statements since the date of acquisition and did not have a material impact on the Company's financial statements and related disclosures for the three and six months ended June 27, 2021. The costs incurred by the Company in connection with the Auto Exchange acquisition were not material.
Note 10—Fair Value Measurements
Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
• Level 1: Inputs that are based upon quoted prices in active markets for identical assets or liabilities.
• Level 2: Inputs, other than quoted prices included within Level 1, which are observable either directly or indirectly.
• Level 3: Unobservable inputs where there is little or no market activity for the asset or liability. These inputs reflect management's best estimate of what market participants would use to price the assets or liabilities at the measurement date.
The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities approximate fair value because of the short-term nature of those instruments.
In November 2020, the Company entered into an agreement which grants the owner a right during fiscal years 2023 and 2024 to cause the Company to acquire certain assets (the "Put Option") for a price based on a pre-defined formula. The carrying value of this Put Option is reported at fair value each reporting period. The Company measured the fair value of the Put Option using a Monte Carlo simulation. Key assumptions used in the valuation include discount rate, volume volatility, risk-free interest rate, cash flow projections and other details specific to the Put Option. The estimated fair value of the Put Option was zero at both June 27, 2021 and December 27, 2020 and was categorized within Level 3 of the fair value hierarchy.
See Note 6 - Debt for fair value of debt.
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Note 11—Commitments and Contingencies
The Company is and may from time to time become involved in litigation and disputes arising in the ordinary course of business, such as actions related to injuries; property damage; handling, storage or disposal of vehicles; environmental laws and regulations; and other litigation incidental to the business. Management considers the likelihood of loss or the incurrence of a liability, as well as the ability to reasonably estimate the amount of loss, in determining loss contingencies. The Company accrues an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss (or range of possible losses) can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. Accruals for contingencies, including litigation and environmental matters, are included in “Other accrued expenses” at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information becomes available. If the amount of an actual loss is greater than the amount accrued, this could have an adverse impact on the Company's operating results in that period. Such matters are generally not, in the opinion of management, likely to have a material adverse effect on the Company's financial condition, results of operations or cash flows. Legal fees are expensed as incurred.
Pyrite Canyon
In the fourth quarter of fiscal 2020, the Company’s wholly owned subsidiary, Insurance Auto Auctions, Inc. (hereafter “IAAI”), received a letter from the California Department of Toxic Substances Control (the “DTSC”) styled “Draft Imminent and Substantial Endangerment Determination and Consent Order” (the “Draft Order”) in which the DTSC states that IAAI, along with nine other respondents named in the Draft Order, has been named as a potential responsible party for the release of hazardous substances at the former Universal Propulsion Company site (the “Former UPCo Site”). The Draft Order states that the Former UPCo Site has been identified as contributing to the Pyrite Canyon Plume by the U.S. Environmental Protection Agency and prescribes initial steps and a schedule for responding to the release of hazardous substances at the Former UPCo Site. The Draft Order further states that IAAI has been identified as a potential responsible party because it is either the company or the successor of a company responsible for a release of hazardous substances at the Former UPCo Site. The Draft Order is currently unsigned and has not been issued by DTSC.
On January 26, 2021, DTSC hosted an informational teleconference for the respondents named in the Draft Order. At the meeting, DTSC described the background and current status at the Former UPCo Site, but did not provide any information related to possible response actions, associated cost estimates or financial liability determinations. DTSC directed the Respondents to provide comments upon the Draft Order by March 1, 2021. DTSC subsequently extended the response deadline to April 30, 2021 pursuant to respondent requests. On March 30, 2021, IAAI provided DTSC with its response to the Draft Order.
The Company does not believe that IAAI should bear any financial liability for actions taken pursuant to the Draft Order because it does not believe that IAAI is the company or a successor of a company responsible for a release of hazardous substances at the Former UPCo Site. IAAI currently leases 50 gross acres of the Former UPCo Site, having commenced a sublease at the location on or about March 1, 2016. At all times since, IAAI has used the site for vehicle storage and
general operations. The most significant contaminants at the Former UPCo Site, and the Pyrite Canyon Plume are perchlorate, NDMA and PCBs. These contaminants pre-date IAAI’s occupancy and operations at the Former UPCo Site and are inconsistent with any chemicals stored at the location or used in its operations.
IAAI has tendered this matter to its landlord pursuant to indemnity provisions in its sublease, and to its environmental insurance carrier. IAAI's landlord has responded by tendering its own indemnification demand to IAAI, and IAAI has notified its environmental insurance carrier of the same. At this time, the Company does not have adequate information to determine IAAI’s liability, if any, for contamination at the Former UPCo Site.
Lower Duwamish Waterway
Since June 2004, IAAI operated a branch on property it leased in Tukwila, Washington just south of Seattle. The property is located adjacent to a Superfund site known as the Lower Duwamish Waterway Superfund Site ("LDW Site"). The LDW Site had been designated a Superfund site in 2001, three years prior to IAAI’s tenancy. On March 25, 2008, the United States Environmental Protection Agency (the "EPA") issued IAAI a General Notice of Potential Liability, or "General Notice," pursuant to Section 107(a), and a Request for Information pursuant to Section 104(e) of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") related to the LDW Site. On November 7, 2012, the EPA issued IAAI a Second General Notice of Potential Liability (the "Second General Notice") for the LDW Site. The EPA's website indicates that the EPA has issued general notice letters to approximately 116 entities, and has issued Section 104(e) Requests to more than 300 entities related to the LDW Site. In the General Notice and Second General Notice, the EPA informed IAAI that the
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EPA believed IAAI may be a Potentially Responsible Party ("PRP"), but the EPA did not specify the factual basis for this assertion. At this time, the EPA still has not specified the factual basis for this assertion and has not demanded that IAAI pay any funds or take any action apart from responding to the Section 104(e) Information Request. Four PRPs, The Boeing Company, the City of Seattle, the Port of Seattle and King County - the Lower Duwamish Waterway Group ("LDWG"), have funded a remedial investigation and feasibility study related to the cleanup of the LDW Site. In December 2014, the EPA issued a Record of Decision ("ROD"), detailing the final cleanup plan for the LDW Site. The ROD estimated the cost of cleanup to be $342 million, with the plan involving dredging of 105 acres, capping 24 acres, and enhanced natural recovery of 48 acres. The estimated length of the cleanup was 17 years, including 7 years of active remediation, and 10 years of monitored natural recovery. IAAI is aware that certain authorities may bring natural resource damage claims against PRPs. On February 11, 2016, IAAI received a Notice of Intent letter from the United States National Oceanic and Atmospheric Administration informing IAAI that the Elliott Bay Trustee Council were beginning to conduct an injury assessment for natural resource damages in the LDW. The Notice of Intent indicated that the decision of the trustees to proceed with this natural resources injury assessment followed a pre-assessment screen performed by the trustees. Shortly thereafter, in a letter dated August 16, 2016, EPA issued a status update to the PRPs at the LDW Site. The letter stated that EPA expected the bulk of the pre-remedial design work currently being performed by the LDWG to be completed by the beginning of 2018, with the Remedial Design/Remedial Action ("RD/RA") phase to follow. The EPA previously anticipated that the pre-design work would be completed sometime during 2018, and the Company is not aware of any further information regarding that schedule. Accordingly, the Company is unable to predict when RD/RA negotiations with all PRPs might begin.
In addition, the Washington State Department of Ecology ("Ecology") is working with the EPA in relation to the LDW Site, primarily to investigate and address sources of potential contamination contributing to the LDW Site. In 2007, IAA installed a stormwater capture and filtration system designed to treat sources of potential contamination before discharge to the LDW Site. The immediate-past property owner, the former property owner and IAA have had discussions with Ecology concerning possible source control measures, including an investigation of the water and soils entering the stormwater system, an analysis of the source of contamination identified within the system, if any, and possible repairs and upgrades to the stormwater system if required. As of May 31, 2020, IAAI ceased all operations at the site and terminated its remaining lease of the property in June 2020. Accordingly, IAAI submitted a Notice of Termination of its stormwater permit to Ecology, discontinuing IAA’s ongoing obligations around the stormwater system maintenance and any additional source control measures.
At this time, the Company has not received any further notices from the EPA and still does not have adequate information to determine IAAI's liability, if any, for contamination at this site, or to estimate the Company's loss as a result of this potential liability which might have been incurred during IAAI’s occupancy.
Note 12—Segment Information
The Company has two operating segments: United States and International. The Company's two operating segments represent its two reportable segments. These segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results.
Intercompany income (expense) related to charges for services provided by the United States segment to the International segment are based on the benefits received. Such services are related to technology and other business support services.
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Financial information regarding the Company's reportable segments is set forth below as of and for the three and six months ended June 27, 2021 (in millions):
| Three Months Ended June 27, 2021 | Six Months Ended June 27, 2021 | ||||||||||||||||||||||||||||||||||
| United States | International | Total | United States | International | Total | ||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Service revenues | 359.0 | 23.5 | 382.5 | $ | 691.4 | $ | 51.5 | $ | 742.9 | ||||||||||||||||||||||||||
| Vehicle sales | 34.0 | 28.6 | 62.6 | 59.9 | 65.8 | 125.7 | |||||||||||||||||||||||||||||
| Total revenues | 393.0 | 52.1 | 445.1 | 751.3 | 117.3 | 868.6 | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Cost of services | 182.7 | 14.9 | 197.6 | 360.8 | 33.2 | 394.0 | |||||||||||||||||||||||||||||
| Cost of vehicle sales | 26.7 | 24.9 | 51.6 | 47.7 | 58.3 | 106.0 | |||||||||||||||||||||||||||||
| Selling, general and administrative | 40.5 | 3.2 | 43.7 | 81.0 | 6.1 | 87.1 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 18.4 | 2.1 | 20.5 | 36.3 | 4.0 | 40.3 | |||||||||||||||||||||||||||||
| Total operating expenses | 268.3 | 45.1 | 313.4 | 525.8 | 101.6 | 627.4 | |||||||||||||||||||||||||||||
| Operating profit | 124.7 | 7.0 | 131.7 | 225.5 | 15.7 | 241.2 | |||||||||||||||||||||||||||||
| Interest expense, net | 22.0 | (0.1) | 21.9 | 35.0 | (0.1) | 34.9 | |||||||||||||||||||||||||||||
| Other (income), net | (0.1) | (0.2) | (0.3) | (0.3) | (0.4) | (0.7) | |||||||||||||||||||||||||||||
| Intercompany (income) expense | (2.1) | 2.1 | — | (4.4) | 4.4 | — | |||||||||||||||||||||||||||||
| Income before income taxes | 104.9 | 5.2 | 110.1 | 195.2 | 11.8 | 207.0 | |||||||||||||||||||||||||||||
| Income taxes | 25.5 | 1.7 | 27.2 | 48.2 | 3.4 | 51.6 | |||||||||||||||||||||||||||||
| Net income | $ | 79.4 | $ | 3.5 | $ | 82.9 | $ | 147.0 | $ | 8.4 | $ | 155.4 | |||||||||||||||||||||||
| Total assets | $ | 2,434.6 | $ | 238.1 | $ | 2,672.7 | $ | 2,434.6 | $ | 238.1 | $ | 2,672.7 | |||||||||||||||||||||||
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Financial information regarding the Company's reportable segments is set forth below as of and for the three and six months ended June 28, 2020 (in millions):
| Three Months Ended June 28, 2020 | Six Months Ended June 28, 2020 | ||||||||||||||||||||||||||||||||||
| United States | International | Total | United States | International | Total | ||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| Service revenues | 246.5 | 18.3 | 264.8 | 551.5 | 47.3 | 598.8 | |||||||||||||||||||||||||||||
| Vehicle sales | 19.4 | 12.6 | 32.0 | 35.5 | 29.1 | 64.6 | |||||||||||||||||||||||||||||
| Total revenues | 265.9 | 30.9 | 296.8 | 587.0 | 76.4 | 663.4 | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Cost of services | 146.6 | 12.3 | 158.9 | 331.6 | 30.5 | 362.1 | |||||||||||||||||||||||||||||
| Cost of vehicle sales | 15.8 | 10.4 | 26.2 | 28.8 | 25.2 | 54.0 | |||||||||||||||||||||||||||||
| Selling, general and administrative | 32.9 | 1.4 | 34.3 | 68.0 | 4.3 | 72.3 | |||||||||||||||||||||||||||||
| Depreciation and amortization | 18.0 | 1.6 | 19.6 | 38.8 | 3.3 | 42.1 | |||||||||||||||||||||||||||||
| Total operating expenses | 213.3 | 25.7 | 239.0 | 467.2 | 63.3 | 530.5 | |||||||||||||||||||||||||||||
| Operating profit | 52.6 | 5.2 | 57.8 | 119.8 | 13.1 | 132.9 | |||||||||||||||||||||||||||||
| Interest expense, net | 13.8 | — | 13.8 | 29.9 | (0.1) | 29.8 | |||||||||||||||||||||||||||||
| Other expense (income), net | — | 0.1 | 0.1 | (0.1) | (0.5) | (0.6) | |||||||||||||||||||||||||||||
| Income before income taxes | 38.8 | 5.1 | 43.9 | 90.0 | 13.7 | 103.7 | |||||||||||||||||||||||||||||
| Income taxes | 11.0 | (0.3) | 10.7 | 23.8 | 2.0 | 25.8 | |||||||||||||||||||||||||||||
| Net income | $ | 27.8 | $ | 5.4 | $ | 33.2 | $ | 66.2 | $ | 11.7 | $ | 77.9 | |||||||||||||||||||||||
| Total assets | $ | 2,084.7 | $ | 188.8 | $ | 2,273.5 | $ | 2,084.7 | $ | 188.8 | $ | 2,273.5 | |||||||||||||||||||||||
Note 13—Subsequent Events
On August 2, 2021, the Company’s Board of Directors authorized a share repurchase program under which the Company can repurchase up to $400.0 million (exclusive of fees and commissions) of shares of its common stock (the “Repurchase Program”). The Repurchase Program expires on August 3, 2026. The shares under the Repurchase Program may be repurchased through open market, privately negotiated transactions, accelerated share repurchase transactions or other means, including under plans complying with the provisions of Rule 10b5-1 of the Securities Exchange Act of 1934. The timing and amount of common stock to be repurchased under this Repurchase Program will be subject to the discretion of the Company based upon market conditions and other opportunities the Company may have to deploy capital. The Repurchase Program does not obligate the Company to acquire any specific number of shares of its common stock, and the Repurchase Program may be suspended or discontinued at any time.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 to IAA, 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 in Westchester, IL, we have two operating segments: United States and International. We maintain operations in the United States, which make up the United States segment and operations in Canada and the United Kingdom, which make up the International segment. We have more than 200 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 bidding/buying digital channels, innovative vehicle merchandising, efficient evaluation services and digital bidding tools, enhancing the overall purchasing experience.
We completed the roll-out of our buyer digital transformation in the United States in April 2020 and in Canada in July 2020. IAA UK has operated an online, digital only auction since 2005. As a result, we have shifted to a fully online, digital auction model, resulting in a reduction of costs previously associated with the physical auctions.
COVID-19 Impact on our Business
The outbreak of the coronavirus pandemic (COVID-19) has severely impacted, and continues to impact worldwide economic activities. Although many of the governmental restrictions that were imposed in 2020 to contain and combat the spread of COVID-19 have since been lifted or scaled back, ongoing surges of COVID-19 infections, including new more contagious and/or vaccine resistant variants, have resulted in the re-imposition of certain restrictions from time to time, and may lead to other restrictions being re-implemented in response to efforts to reduce the spread of COVID-19.
Given the nature of our operations, we are deemed “essential” and have remained open for business. We continue to follow strict health and sanitization protocols across all of our locations aimed at keeping our employees, customers, and other business partners safe.
Our business in fiscal 2020 was significantly impacted due to lower vehicle assignment volume, primarily during the first half of fiscal 2020, as the stay-at-home orders executed in March 2020 significantly reduced the number of car accidents. Beginning in the second half of fiscal 2020, as certain economies began to re-open, we saw a gradual recovery in miles driven that has resulted in improved vehicle assignments. While improving through the first half of fiscal 2021, vehicles assignments continue to remain below pre-COVID-19 levels.
The extent to which the COVID-19 outbreak impacts our business and results of operations will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the actions to contain its impact, resurgences of COVID-19 or variants thereof that may continue to occur, the availability and public acceptance of vaccines for COVID-19, any delays or complications in vaccine production and distribution, the efficacy of vaccines for COVID-19 and how quickly and to what extent normal economic and operating conditions resume. However, we expect COVID-19 and the efforts taken to reduce its spread will continue to have a negative impact on our vehicle assignments in fiscal 2021, the impact of which could be material.
Acquisition
On June 18, 2021, we acquired Marisat, Inc. d/b/a Auto Exchange ("Auto Exchange"), a salvage auction provider located in New Jersey. The estimated acquisition date fair value of the total consideration was $7.3 million, which consisted of $2.0 million of cash, and the fair value of contingent consideration of $5.3 million, $2.0 million of which was paid at closing. The
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remaining $3.3 million of contingent consideration is payable over five years subject to the achievement of certain performance targets. See Note 9 - Acquisition in the notes to consolidated financial statements for additional information on this acquisition.
Share Repurchase Program
On August 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 on August 3, 2026. The shares under the Repurchase Program may be repurchased through open market, privately negotiated transactions, accelerated share repurchase transactions or other means, including under plans complying with the provisions of Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The timing and amount of common stock to be repurchased under this Repurchase Program will be subject to the discretion of the Company based upon market conditions and other opportunities the Company may have to deploy capital. The Repurchase Program does not obligate us to acquire any specific number of shares, and the Repurchase Program may be suspended or discontinued at any time.
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 service 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 record revenue for 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. When we purchase vehicles for reselling, we record the entire sale price as revenue and the purchase price as cost of services, which results in lower gross margin than we recognize for vehicles sold at an auction on a consignment basis.
Our operating expenses consist of cost of services, cost of vehicle 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 sales is comprised of the cost of purchased vehicles. Cost of services and vehicle 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.
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Results of Operations
| Three Months Ended | Change | Six Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share data) | Jun 27, 2021 | Jun 28, 2020 | $ | % | Jun 27, 2021 | Jun 28, 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Service revenues | $ | 382.5 | $ | 264.8 | $ | 117.7 | 44.4 | % | $ | 742.9 | $ | 598.8 | $ | 144.1 | 24.1 | % | ||||||||||||||||||||||||||||||||||
| Vehicle sales | 62.6 | 32.0 | 30.6 | 95.6 | % | 125.7 | 64.6 | 61.1 | 94.6 | % | ||||||||||||||||||||||||||||||||||||||||
| Total revenues | 445.1 | 296.8 | 148.3 | 50.0 | % | 868.6 | 663.4 | 205.2 | 30.9 | % | ||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of services | 197.6 | 158.9 | 38.7 | 24.4 | % | 394.0 | 362.1 | 31.9 | 8.8 | % | ||||||||||||||||||||||||||||||||||||||||
| Cost of vehicle sales | 51.6 | 26.2 | 25.4 | 96.9 | % | 106.0 | 54.0 | 52.0 | 96.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 43.7 | 34.3 | 9.4 | 27.4 | % | 87.1 | 72.3 | 14.8 | 20.5 | % | ||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 20.5 | 19.6 | 0.9 | 4.6 | % | 40.3 | 42.1 | (1.8) | (4.3) | % | ||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 313.4 | 239.0 | 74.4 | 31.1 | % | 627.4 | 530.5 | 96.9 | 18.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Operating profit | 131.7 | 57.8 | 73.9 | 127.9 | % | 241.2 | 132.9 | 108.3 | 81.5 | % | ||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 21.9 | 13.8 | 8.1 | 58.7 | % | 34.9 | 29.8 | 5.1 | 17.1 | % | ||||||||||||||||||||||||||||||||||||||||
| Other (income) expense, net | (0.3) | 0.1 | (0.4) | NM* | (0.7) | (0.6) | (0.1) | NM* | ||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 110.1 | 43.9 | 66.2 | 150.8 | % | 207.0 | 103.7 | 103.3 | 99.6 | % | ||||||||||||||||||||||||||||||||||||||||
| Income taxes | 27.2 | 10.7 | 16.5 | 154.2 | % | 51.6 | 25.8 | 25.8 | 100.0 | % | ||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 82.9 | $ | 33.2 | $ | 49.7 | 149.7 | % | $ | 155.4 | $ | 77.9 | $ | 77.5 | 99.5 | % | ||||||||||||||||||||||||||||||||||
| Net income per share | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 0.61 | $ | 0.25 | $ | 0.36 | 144.0 | % | $ | 1.15 | $ | 0.58 | $ | 0.57 | 98.3 | % | ||||||||||||||||||||||||||||||||||
| Diluted | $ | 0.61 | $ | 0.25 | $ | 0.36 | 144.0 | % | $ | 1.15 | $ | 0.58 | $ | 0.57 | 98.3 | % | ||||||||||||||||||||||||||||||||||
________________
* NM - Not meaningful
Service Revenues
| Three Months Ended | Change | Six Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Jun 27, 2021 | Jun 28, 2020 | $ | % | Jun 27, 2021 | Jun 28, 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 359.0 | $ | 246.5 | $ | 112.5 | 45.6 | % | $ | 691.4 | $ | 551.5 | $ | 139.9 | 25.4 | % | ||||||||||||||||||||||||||||||||||
| International | 23.5 | 18.3 | 5.2 | 28.4 | % | 51.5 | 47.3 | 4.2 | 8.9 | % | ||||||||||||||||||||||||||||||||||||||||
| Total service revenues | $ | 382.5 | $ | 264.8 | $ | 117.7 | 44.4 | % | $ | 742.9 | $ | 598.8 | $ | 144.1 | 24.1 | % | ||||||||||||||||||||||||||||||||||
Three Months Ended June 27, 2021 versus June 28, 2020
United States service revenues increased by $112.5 million due to a higher volume of vehicles sold, which increased by 24% due to higher miles driven as the United States segment is gradually recovering from the impact of the COVID-19 pandemic. In addition, United States service revenues also benefited from an increase in revenue per unit of 17%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics.
International service revenues increased by $5.2 million due to a higher volume of vehicles sold, which increased by 5%, and an increase in revenue per unit of 23%, which resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics.
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Six Months Ended June 27, 2021 versus June 28, 2020
United States service revenues increased by $139.9 million due to a higher volume of vehicles sold, which increased by 5% due to higher miles driven as the United States segment is gradually recovering from the impact of the COVID-19 pandemic. In addition, United States service revenues also benefited from an increase in revenue per unit of 19%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics.
International service revenues increased by $4.2 million due to an increase in revenue per unit of 25%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics. This increase was partially offset by a lower volume of vehicles sold, which decreased by 13% as the International segment continues to be impacted by the COVID-19 pandemic.
Vehicle Sales
| Three Months Ended | Change | Six Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Jun 27, 2021 | Jun 28, 2020 | $ | % | Jun 27, 2021 | Jun 28, 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 34.0 | $ | 19.4 | $ | 14.6 | 75.3 | % | $ | 59.9 | $ | 35.5 | $ | 24.4 | 68.7 | % | ||||||||||||||||||||||||||||||||||
| International | 28.6 | 12.6 | 16.0 | 127.0 | % | 65.8 | 29.1 | 36.7 | 126.1 | % | ||||||||||||||||||||||||||||||||||||||||
| Total vehicle sales | $ | 62.6 | $ | 32.0 | $ | 30.6 | 95.6 | % | $ | 125.7 | $ | 64.6 | $ | 61.1 | 94.6 | % | ||||||||||||||||||||||||||||||||||
Three Months Ended June 27, 2021 versus June 28, 2020
United States vehicle sales increased by $14.6 million due to a higher volume of vehicles sold, which increased by 43%, primarily due to higher miles driven as the United States segment is gradually recovering from the impact of the COVID-19 pandemic. In addition, United States vehicle sales also benefited from an increase in revenue per unit sold of 22%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics.
International vehicle sales increased by $16.0 million due to a higher volume of vehicles sold, which increased by 53% primarily due to the impact of a provider switching from a consignment model to a purchase vehicle model, and an increase in revenue per unit sold of 48%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics.
Six Months Ended June 27, 2021 versus June 28, 2020
United States vehicle sales increased by $24.4 million due to a higher volume of vehicles sold, which increased by 24%, primarily due to higher miles driven as the United States segment is gradually recovering from the impact of the COVID-19 pandemic. In addition, United States vehicle sales also benefited from an increase in revenue per unit sold of 36%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics.
International vehicle sales increased by $36.7 million due to higher volume of vehicles sold, which increased by 34% primarily due to the impact of a provider switching from a consignment model to a purchased vehicle model, and an increase in revenue per unit sold of 69%, which mainly resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and favorable industry dynamics.
Cost of Services
| Three Months Ended | Change | Six Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Jun 27, 2021 | Jun 28, 2020 | $ | % | Jun 27, 2021 | Jun 28, 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 182.7 | $ | 146.6 | $ | 36.1 | 24.6 | % | $ | 360.8 | $ | 331.6 | $ | 29.2 | 8.8 | % | ||||||||||||||||||||||||||||||||||
| International | 14.9 | 12.3 | 2.6 | 21.1 | % | 33.2 | 30.5 | 2.7 | 8.9 | % | ||||||||||||||||||||||||||||||||||||||||
| Total cost of services | $ | 197.6 | $ | 158.9 | $ | 38.7 | 24.4 | % | $ | 394.0 | $ | 362.1 | $ | 31.9 | 8.8 | % | ||||||||||||||||||||||||||||||||||
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Three Months Ended June 27, 2021 versus June 28, 2020
United States cost of services increased by $36.1 million primarily due to a higher volume of vehicles sold, higher incentive-based compensation costs and higher occupancy costs.
International cost of services increased by $2.6 million due to a higher volume of vehicles sold, higher incentive-based compensation costs and higher occupancy costs.
Six Months Ended June 27, 2021 versus June 28, 2020
United States cost of services increased by $29.2 million primarily due to a higher volume of vehicles sold, higher incentive-based compensation costs and higher occupancy costs, partially offset by cost savings from adopting a fully-digital
auction model.
International cost of services increased by $2.7 million due to higher incentive-based compensation costs and higher occupancy costs, partially offset by a lower volume of vehicles sold.
Cost of Vehicle Sales
| Three Months Ended | Change | Six Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Jun 27, 2021 | Jun 28, 2020 | $ | % | Jun 27, 2021 | Jun 28, 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 26.7 | $ | 15.8 | $ | 10.9 | 69.0 | % | $ | 47.7 | $ | 28.8 | $ | 18.9 | 65.6 | % | ||||||||||||||||||||||||||||||||||
| International | 24.9 | 10.4 | 14.5 | 139.4 | % | 58.3 | 25.2 | 33.1 | 131.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Total cost of vehicle sales | $ | 51.6 | $ | 26.2 | $ | 25.4 | 96.9 | % | $ | 106.0 | $ | 54.0 | $ | 52.0 | 96.3 | % | ||||||||||||||||||||||||||||||||||
Three Months Ended June 27, 2021 versus June 28, 2020
United States cost of vehicle sales increased by $10.9 million due to higher volume and higher average purchase prices.
International cost of vehicle sales increased by $14.5 million primarily due to the impact of an international provider switching from a consignment model to a purchase vehicle model and higher average purchase prices.
Six Months Ended June 27, 2021 versus June 28, 2020
United States cost of vehicle sales increased by $18.9 million due to higher volume and higher average purchase prices.
International cost of vehicle sales increased by $33.1 million primarily due to the impact of an international provider switching from a consignment model to a purchase vehicle model and higher average purchase prices.
Selling, General and Administrative
| Three Months Ended | Change | Six Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Jun 27, 2021 | Jun 28, 2020 | $ | % | Jun 27, 2021 | Jun 28, 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 40.5 | $ | 32.9 | $ | 7.6 | 23.1 | % | $ | 81.0 | $ | 68.0 | $ | 13.0 | 19.1 | % | ||||||||||||||||||||||||||||||||||
| International | 3.2 | 1.4 | 1.8 | 128.6 | % | 6.1 | 4.3 | 1.8 | 41.9 | % | ||||||||||||||||||||||||||||||||||||||||
| Total selling, general and administrative expenses | $ | 43.7 | $ | 34.3 | $ | 9.4 | 27.4 | % | $ | 87.1 | $ | 72.3 | $ | 14.8 | 20.5 | % | ||||||||||||||||||||||||||||||||||
Three Months Ended June 27, 2021 versus June 28, 2020
United States selling, general and administrative expenses increased by $7.6 million primarily due to higher incentive-based compensation costs. These increases were partially offset by a $3.6 million decrease in bad debt expense in the second quarter of fiscal 2021.
International selling, general and administrative expenses increased by $1.8 million primarily due to higher compensation costs.
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Six Months Ended June 27, 2021 versus June 28, 2020
United States selling, general and administrative expenses increased by $13.0 million primarily due to higher incentive-based compensation costs, a $2.7 million non-income, tax related accrual and a $3.8 million decrease in bad debt expense in the first half of fiscal 2021.
International selling, general and administrative expenses increased by $1.8 million primarily due to higher compensation costs.
Depreciation and Amortization
| Three Months Ended | Change | Six Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Jun 27, 2021 | Jun 28, 2020 | $ | % | Jun 27, 2021 | Jun 28, 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 18.4 | $ | 18.0 | $ | 0.4 | 2.2 | % | $ | 36.3 | $ | 38.8 | $ | (2.5) | (6.4) | % | ||||||||||||||||||||||||||||||||||
| International | 2.1 | 1.6 | 0.5 | 31.3 | % | 4.0 | 3.3 | 0.7 | 21.2 | % | ||||||||||||||||||||||||||||||||||||||||
| Total depreciation and amortization | $ | 20.5 | $ | 19.6 | $ | 0.9 | 4.6 | % | $ | 40.3 | $ | 42.1 | $ | (1.8) | (4.3) | % | ||||||||||||||||||||||||||||||||||
Three Months Ended June 27, 2021 versus June 28, 2020
Depreciation and amortization increased by $0.9 million as there were more intangible assets to amortize in both segments in the second quarter of fiscal 2021 compared to the prior year comparable period.
Six Months Ended June 27, 2021 versus June 28, 2020
Depreciation and amortization decreased by $1.8 million as there were fewer fixed assets to depreciate within the United States segment during the first six months of fiscal 2021.
Interest Expense
Three Months Ended June 27, 2021 versus June 28, 2020
Interest expense increased by $8.1 million as compared to the prior year period primarily due to the $10.3 million loss on early extinguishment of debt in conjunction with the refinancing of our credit facilities in April 2021, partially offset by lower interest rates on our floating rate debt.
Six Months Ended June 27, 2021 versus June 28, 2020
Interest expense increased by $5.1 million as compared to the prior year period primarily due to the $10.3 million loss on early extinguishment of debt in conjunction with the refinancing of our credit facilities in April 2021, partially offset by lower interest rates on our floating rate debt.
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 2021 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 2021 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 2021 Revolving Credit Facility. We believe that our cash on hand, future cash from operations, borrowings available under our 2021 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 $74.1 million of available cash was held by our foreign subsidiaries as of June 27, 2021. We do not currently expect to incur significant additional tax liabilities if funds held by our foreign subsidiaries were to be repatriated.
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 ended December 27, 2020 filed with the Securities and Exchange Commission (the "SEC") on February 22, 2021 other than those described below:
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Debt Service Obligations
On April 30, 2021, we entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders from time to time party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for, among other things: (i) a senior secured term loan in an aggregate principal amount of $650 million (the "2021 Term Loan") and (ii) a senior secured revolving credit facility with revolving commitments in an aggregate principal amount of $525 million (the "2021 Revolving Credit Facility" and, together with the 2021 Term Loan, the “2021 Credit Facility”). Borrowing availability under the 2021 Revolving Credit Facility is subject to no default or event of default under the 2021 Credit Agreement having occurred at the time of borrowing. The proceeds of the 2021 Credit Facility, along with cash on hand, were used to repay in full the $774.0 million in outstanding borrowings under our prior seven-year senior secured term loan. The 2021 Credit Facility matures on April 30, 2026.
As of June 27, 2021, $650.0 million was outstanding under the 2021 Term Loan and no borrowings were outstanding under the 2021 Revolving Credit Facility. See Note 6 - Long-term Debt in the notes to consolidated financial statements for additional information on the 2021 Credit Facility and our outstanding indebtedness.
Capital Expenditures
Capital expenditures for the six months ended June 27, 2021 and June 28, 2020 were $57.8 million and $22.1 million, respectively. The increase in capital expenditures during the six months ended June 27, 2021 as compared to the prior year period was due to the timing of projects and a higher level of spend on real estate expansion and technology-based investments. Our capital expenditures during the six months ended June 27, 2021 primarily related to real estate 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.
Acquisition
On June 18, 2021, we acquired Auto Exchange, a salvage auction provider located in New Jersey. The estimated acquisition date fair value of the total consideration was $7.3 million, which consisted of $2.0 million of cash, and the fair value of contingent consideration of $5.3 million, $2.0 million of which was paid at closing. The remaining $3.3 million of contingent consideration is payable over five years subject to the achievement of certain performance targets. See Note 9 - Acquisition in the notes to consolidated financial statements for additional information on this acquisition.
Summary of Cash Flows
| Six Months Ended | ||||||||||||||||||||
| (in millions) | June 27, 2021 | June 28, 2020 | Change | |||||||||||||||||
| Net cash provided by (used by): | ||||||||||||||||||||
| Operating activities | $ | 250.7 | $ | 217.3 | $ | 33.4 | ||||||||||||||
| Investing activities | (62.7) | (22.0) | (40.7) | |||||||||||||||||
| Financing activities | (140.5) | (54.7) | (85.8) | |||||||||||||||||
| Effect of exchange rate on cash | 1.8 | (0.7) | 2.5 | |||||||||||||||||
| Net increase in cash and cash equivalents | $ | 49.3 | $ | 139.9 | $ | (90.6) | ||||||||||||||
Net cash flow provided by operating activities during the six months ended June 27, 2021 increased by $33.4 million as compared to the six months ended June 28, 2020. The increase in operating cash flow was primarily attributable to an increase in profitability, net of non-cash adjustments of $97.0 million and higher incentive-based compensation accruals. These increases were partially offset by changes in operating assets and liabilities as a result of the timing of collections from customers and other parties and the disbursement of funds to vehicle consignors, vendors and tax authorities.
Net cash used by investing activities was $62.7 million for the six months ended June 27, 2021 as compared to $22.0 million for the six months ended June 28, 2020. The increase in net cash used by investing activities was primarily due to an increase in cash used for capital expenditures during the six months ended June 27, 2021 and the acquisition of Auto Exchange in the second quarter of 2021. See "Capital Expenditures" and "Acquisition" above for additional information.
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Net cash used by financing activities was $140.5 million for the six months ended June 27, 2021 as compared to $54.7 million for the six months ended June 28, 2020. The increase in net cash used by financing activities was primarily attributable to a $124.0 million net debt payment in connection with the refinancing of our credit facilities in the second quarter of 2021, partially offset by book overdrafts of $33.6 million in the prior year comparable period.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. If these estimates differ significantly from actual results, the impact to the consolidated financial statements may be material. There have been no material changes in our critical accounting policies disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 27, 2020 filed with the SEC on February 22, 2021.
For further information about recently issued accounting pronouncements, see Note 1 - Summary of Significant Accounting Policies in the condensed notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to market risks and related disclosures from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosures About Market Risks” in our Annual Report on Form 10-K filed with the SEC on February 22, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of June 27, 2021.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended June 27, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 - Commitments and Contingencies in the condensed notes to the unaudited consolidated financial statements for information regarding legal proceedings, which information is incorporated by reference in this Item 1.
Item 1A. Risk Factors
In addition to the information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the "Risk Factors" disclosed under "Item 1A. Risk Factors" in our Annual Report on Form 10-K which was filed with the SEC on February 22, 2021. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes from the risk factors previously disclosed in "Item 1A. Risk Factors" in our Annual Report on Form 10-K filed with the SEC on February 22, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 27, 2021, we acquired shares of our common stock held by one of our directors who tendered shares to satisfy tax withholding obligations upon the vesting of previously issued restricted stock awards. Specifically, the number of shares of common stock acquired from the director and the average price paid per share for each month in the second quarter ended June 27, 2021 are as shown in the table below.
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | ||||||||||||
| March 29, 2021 - May 2, 2021 | — | $ | — | |||||||||||
| May 3, 2021 - May 30, 2021 | — | — | ||||||||||||
| May 31, 2021 - June 27, 2021 | 227 | 53.95 | ||||||||||||
| Total | 227 | $ | 53.95 | |||||||||||
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Item 6. Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith | ||||||||||||||||||||||||||||||||
| 2.1 | 8-K | 001-38580 | 2.1 | 6/28/2019 | ||||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-38580 | 3.1 | 6/28/2019 | ||||||||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-38580 | 3.2 | 6/28/2019 | ||||||||||||||||||||||||||||||||||
| 10.1 | 10-Q | 001-38580 | 10.1 | 5/4/2021 | ||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
| 32.1 | X* | |||||||||||||||||||||||||||||||||||||
| 32.2 | X* | |||||||||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2021, formatted in Inline XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Condensed Notes to Consolidated Financial Statements | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
_______________________________________________________________________________
* Furnished herewith.
† Certain information has been excluded from this exhibit because it is not material and would likely cause competitive harm to the registrant if publicly disclosed.
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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.
| IAA, Inc. | ||||||||
| (Registrant) | ||||||||
| Date: | August 3, 2021 | /s/ John W. Kett | ||||||
John W. Kett President and Chief Executive Officer (Principal Executive Officer) | ||||||||
| Date: | August 3, 2021 | /s/ Vance C. Johnston | ||||||
Vance C. Johnston Executive Vice President, Chief Financial Officer (Principal Financial Officer) | ||||||||
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