IAA, Inc. - Quarter Report: 2022 April (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 April 3, 2022
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 May 2, 2022, 134,007,185 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
IAA, Inc.
Table of Contents
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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: 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 the integration of acquired businesses, and the risks that the anticipated benefits of any acquisitions may not be fully realized or take longer to realize than expected; changes to our preliminary purchase price allocation for SYNETIQ Ltd. to be finalized during 2022; 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; 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; 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 28, 2022 and Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q, 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 | |||||||||||
| April 3, 2022 | March 28, 2021 | ||||||||||
| Revenues: | |||||||||||
| Service revenues | $ | 435.0 | $ | 360.4 | |||||||
| Vehicle and parts sales | 122.6 | 63.1 | |||||||||
| Total revenues | 557.6 | 423.5 | |||||||||
| Operating expenses: | |||||||||||
| Cost of services | 252.3 | 196.4 | |||||||||
| Cost of vehicle and parts sales | 104.1 | 54.4 | |||||||||
| Selling, general and administrative | 54.3 | 43.4 | |||||||||
| Depreciation and amortization | 26.1 | 19.8 | |||||||||
| Total operating expenses | 436.8 | 314.0 | |||||||||
| Operating profit | 120.8 | 109.5 | |||||||||
| Interest expense, net | 11.2 | 13.0 | |||||||||
| Other expense (income), net | 1.6 | (0.4) | |||||||||
| Income before income taxes | 108.0 | 96.9 | |||||||||
| Income taxes | 26.5 | 24.4 | |||||||||
| Net income | $ | 81.5 | $ | 72.5 | |||||||
| Net income per share: | |||||||||||
| Basic | $ | 0.61 | $ | 0.54 | |||||||
| Diluted | $ | 0.61 | $ | 0.54 | |||||||
See accompanying condensed notes to consolidated financial statements
4
IAA, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
| Three Months Ended | |||||||||||
| April 3, 2022 | March 28, 2021 | ||||||||||
| Net income | $ | 81.5 | $ | 72.5 | |||||||
| Other comprehensive (loss) income: | |||||||||||
| Foreign currency translation (loss) gain | (7.1) | 3.0 | |||||||||
| Comprehensive income | $ | 74.4 | $ | 75.5 | |||||||
See accompanying condensed notes to consolidated financial statements
5
IAA, Inc.
Consolidated Balance Sheets
(in millions, except per share amounts)
| April 3, 2022 | January 2, 2022 | ||||||||||
| (Unaudited) | (Audited) | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 136.2 | $ | 109.4 | |||||||
| Restricted cash | — | 53.0 | |||||||||
Accounts receivable, net of allowances of $9.3 and $9.1 | 448.1 | 465.7 | |||||||||
| Prepaid consigned vehicle charges | 66.4 | 72.2 | |||||||||
| Other current assets | 81.0 | 69.6 | |||||||||
| Total current assets | 731.7 | 769.9 | |||||||||
| Non-current assets | |||||||||||
Operating lease right-of-use assets, net of accumulated amortization of $261.4 and $238.3 | 1,102.1 | 1,024.4 | |||||||||
Property and equipment, net of accumulated depreciation of $578.8 and $531.9 | 305.2 | 338.1 | |||||||||
| Goodwill | 790.7 | 797.5 | |||||||||
Intangible assets, net of accumulated amortization of $579.6 and $549.6 | 195.1 | 197.5 | |||||||||
| Other assets | 30.7 | 26.9 | |||||||||
| Total non-current assets | 2,423.8 | 2,384.4 | |||||||||
| Total assets | $ | 3,155.5 | $ | 3,154.3 | |||||||
| Liabilities and Stockholders' Deficit | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 130.2 | $ | 163.5 | |||||||
| Short-term right-of-use operating lease liability | 83.5 | 94.3 | |||||||||
| Accrued employee benefits and compensation expenses | 20.1 | 44.2 | |||||||||
| Other accrued expenses | 101.4 | 124.6 | |||||||||
| Current maturities of long-term debt | 145.4 | 181.3 | |||||||||
| Total current liabilities | 480.6 | 607.9 | |||||||||
| Non-current liabilities | |||||||||||
| Long-term debt | 1,113.1 | 1,120.6 | |||||||||
| Long-term right-of-use operating lease liability | 1,061.5 | 984.8 | |||||||||
| Deferred income tax liabilities | 74.0 | 74.8 | |||||||||
| Other liabilities | 30.3 | 32.6 | |||||||||
| Total non-current liabilities | 2,278.9 | 2,212.8 | |||||||||
| Commitments and contingencies (Note 9) | |||||||||||
| 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: 134.2 shares at April 3, 2022 and 134.2 shares at January 2, 2022 | 1.3 | 1.3 | |||||||||
Treasury stock at cost: 0.9 shares at April 3, 2022 and 0.7 shares at January 2, 2022 | (42.4) | (34.0) | |||||||||
| Additional paid-in capital | 15.0 | 18.6 | |||||||||
| Retained earnings | 443.6 | 362.1 | |||||||||
| Accumulated other comprehensive loss | (21.5) | (14.4) | |||||||||
| Total stockholders' equity | 396.0 | 333.6 | |||||||||
| Total liabilities and stockholders' equity | $ | 3,155.5 | $ | 3,154.3 | |||||||
See accompanying condensed notes to consolidated financial statements
6
IAA, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
| Three Months Ended April 3, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||
| Balance at January 2, 2022 | 134.2 | $ | 1.3 | 0.7 | $ | (34.0) | $ | 18.6 | $ | 362.1 | $ | (14.4) | $ | 333.6 | ||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 81.5 | — | 81.5 | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | (7.1) | (7.1) | ||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | (0.2) | — | 0.2 | (8.4) | — | — | — | (8.4) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 2.9 | — | — | 2.9 | ||||||||||||||||||||||||||||||||||||
| Common stock issued for the exercise and vesting of stock-based awards | 0.3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | — | — | — | — | 0.3 | — | — | 0.3 | ||||||||||||||||||||||||||||||||||||
| Withholding taxes on stock-based awards | (0.1) | — | — | — | (6.8) | — | — | (6.8) | ||||||||||||||||||||||||||||||||||||
| Balance at April 3, 2022 | 134.2 | $ | 1.3 | 0.9 | $ | (42.4) | $ | 15.0 | $ | 443.6 | $ | (21.5) | $ | 396.0 | ||||||||||||||||||||||||||||||
| Three Months Ended March 28, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock Shares | Common Stock Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| Balance at December 27, 2020 | 134.5 | $ | 1.3 | $ | 12.0 | $ | 67.7 | $ | (11.6) | $ | 69.4 | ||||||||||||||||||||||||
| Net income | — | — | — | 72.5 | — | 72.5 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | 3.0 | 3.0 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2.8 | — | — | 2.8 | |||||||||||||||||||||||||||||
| Common stock issued for the exercise and vesting of stock-based awards | 0.4 | — | 0.1 | — | — | 0.1 | |||||||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | — | — | 0.4 | — | — | 0.4 | |||||||||||||||||||||||||||||
| Withholding taxes on stock-based awards | (0.1) | — | (6.0) | — | — | (6.0) | |||||||||||||||||||||||||||||
| Balance at March 28, 2021 | 134.8 | $ | 1.3 | $ | 9.3 | $ | 140.2 | $ | (8.6) | $ | 142.2 | ||||||||||||||||||||||||
See accompanying condensed notes to consolidated financial statements
7
IAA, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
| Three Months Ended | ||||||||||||||
| April 3, 2022 | March 28, 2021 | |||||||||||||
| Operating activities | ||||||||||||||
| Net income | $ | 81.5 | $ | 72.5 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 26.1 | 19.8 | ||||||||||||
| Operating lease expense | 42.3 | 35.8 | ||||||||||||
| Stock-based compensation | 2.9 | 2.8 | ||||||||||||
| Provision for credit losses | 0.3 | 0.3 | ||||||||||||
| Amortization of debt issuance costs | 0.7 | 1.1 | ||||||||||||
| Deferred income taxes | (0.7) | 3.3 | ||||||||||||
| Change in contingent consideration liabilities | 1.8 | — | ||||||||||||
| Other | 2.2 | (0.2) | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Operating lease payments | (54.3) | (34.1) | ||||||||||||
| Accounts receivable and other assets | 7.9 | 8.1 | ||||||||||||
| Accounts payable and accrued expenses | (13.0) | 11.9 | ||||||||||||
| Net cash provided by operating activities | 97.7 | 121.3 | ||||||||||||
| Investing activities | ||||||||||||||
| Purchases of property, equipment and computer software | (30.9) | (30.3) | ||||||||||||
| Proceeds from the sale of property and equipment | 37.1 | 0.2 | ||||||||||||
| Other | (1.0) | (1.0) | ||||||||||||
| Net cash provided by (used by) investing activities | 5.2 | (31.1) | ||||||||||||
| Financing activities | ||||||||||||||
| Net decrease in book overdrafts | (15.4) | — | ||||||||||||
| Payments of long-term debt | (44.0) | — | ||||||||||||
| Deferred financing costs | (0.1) | — | ||||||||||||
| Finance lease payments | (3.0) | (3.1) | ||||||||||||
| Purchase of treasury stock | (8.4) | — | ||||||||||||
| Issuance of common stock under stock plans | — | 0.1 | ||||||||||||
| Proceeds from issuance of employee stock purchase plan shares | 0.3 | 0.4 | ||||||||||||
| Tax withholding payments for vested RSUs | (6.8) | (6.0) | ||||||||||||
| Payment of contingent consideration | (51.4) | — | ||||||||||||
| Net cash used by financing activities | (128.8) | (8.6) | ||||||||||||
| Effect of exchange rate changes on cash | (0.3) | 0.5 | ||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (26.2) | 82.1 | ||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 162.4 | 232.8 | ||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 136.2 | $ | 314.9 | ||||||||||
| Cash paid for interest, net | $ | 3.6 | $ | 5.1 | ||||||||||
| Cash paid for taxes, net | $ | 3.2 | $ | 1.0 | ||||||||||
See accompanying condensed notes to consolidated financial statements
8
| Period Ended | ||||||||||||||
| April 3, 2022 | January 2, 2022 | |||||||||||||
| Reconciliation of cash, cash equivalents and restricted cash reported in balance sheets | ||||||||||||||
| Cash and cash equivalents | $ | 136.2 | $ | 109.4 | ||||||||||
| Restricted cash | — | 53.0 | ||||||||||||
| Total cash, cash equivalents and restricted cash shown in statements of cash flows | 136.2 | 162.4 | ||||||||||||
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 and vehicle parts 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 and parts sold through its channels.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("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 January 2, 2022 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 28, 2022.
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 2022 contains 52 weeks and fiscal 2021 contained 53 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.
Recent Accounting Pronouncements
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
10
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 and Parts Sales, as well as geographically by the United States and International. See Note 10 - Segment Information for disaggregated revenue.
Service Revenues
Service revenues include auction and auction related fees for all vehicles sold by the Company. The Company does not take title to vehicles that are consigned to the Company by the seller and records auction fees on those vehicles 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 dollar or a fixed percent of the selling price at auction. 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 - or two-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 - or two-year contractual term of the buyer agreement. Accordingly, registration fee revenue is recognized ratably over the 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.
Vehicle and Parts Sales
Vehicle and parts sales represent the selling price of vehicles, vehicle parts and scrap associated with vehicles purchased by the Company. The Company's performance obligation is the completion of the sale process. Revenue is recognized at the point in time when control of the vehicle, vehicle parts or scrap is transferred to the customer, which generally occurs upon delivery to the carrier or the customer. Since the Company acts as principal in the sale process, the sales price for the vehicle or vehicle parts and scrap is recorded as revenue on a gross basis. Buyer fees associated with these sales are recorded in service revenues in the Company's consolidated statements of income.
There were no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets as of April 3, 2022 and January 2, 2022. For each of the Company's primary revenue streams, cash flows are consistent with the timing of revenue recognition.
For the three months ended April 3, 2022 and March 28, 2021, 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.
11
Note 3—Stock-Based Compensation Plans
2019 Omnibus Stock and Incentive Plan ("2019 OSIP")
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.
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 April 3, 2022, the number of common shares reserved and available for awards under the 2019 OSIP is 4,323,465, 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 Company recorded stock-based compensation expense of $2.9 million and $2.8 million during the three months ended April 3, 2022 and March 28, 2021, respectively.
The following table summarizes the PRSUs and RSUs granted by the Company to certain employees in accordance with the 2019 OSIP during the three months ended April 3, 2022:
| Three Months Ended April 3, 2022 | ||||||||||||||
| Number of Awards Granted | Weighted Average Grant Date Fair Value | |||||||||||||
| PRSUs - Performance Condition | 114,830 | $ | 38.37 | |||||||||||
| PRSUs - Market Condition | 32,825 | $ | 42.18 | |||||||||||
| RSUs | 193,568 | $ | 38.37 | |||||||||||
PRSUs - Performance Condition: 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.
PRSUs - Market Condition: The PRSUs granted to certain senior executives vest based upon the Company's total stockholder return relative to the performance of a peer group over a three year performance period ending December 31, 2024. The grant date fair value of $42.18 per share underlying each PRSU award was calculated using a Monte Carlo simulation. The significant assumptions used to estimate the fair value were: grant date stock price of $38.37; term of 2.76 years; risk-free
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interest rate of 2.49%; expected volatility of IAA's common stock of 45.48% and the average expected volatility of the common stock of the peer group of 45.18%; correlation coefficients of IAA of 0.60 and the peer group's average of 0.72; and a dividend yield of 0.00%.
RSUs - 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 4—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.
The following table sets forth the computation of net income per share (in millions except per share amounts):
| Three Months Ended | ||||||||||||||
| April 3, 2022 | March 28, 2021 | |||||||||||||
| Net income | $ | 81.5 | $ | 72.5 | ||||||||||
| Weighted average common shares outstanding | 134.3 | 134.6 | ||||||||||||
| Effect of dilutive stock awards | 0.2 | 0.7 | ||||||||||||
| Weighted average common shares outstanding and potential common shares | 134.5 | 135.3 | ||||||||||||
| Net income per share | ||||||||||||||
| Basic | $ | 0.61 | $ | 0.54 | ||||||||||
| Diluted | $ | 0.61 | $ | 0.54 | ||||||||||
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 and market conditions which have not been fully satisfied at the end of the respective reporting periods (in millions):
| Three Months Ended | ||||||||||||||
| April 3, 2022 | March 28, 2021 | |||||||||||||
| Anti-dilutive awards | 0.3 | — | ||||||||||||
| Awards subject to conditions not fully satisfied | 0.2 | 0.1 | ||||||||||||
| Total | 0.5 | 0.1 | ||||||||||||
Share Repurchase Program
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.
During the first quarter of fiscal 2022, the Company repurchased 230,229 shares of its common stock for an aggregate gross purchase price of approximately $8.4 million pursuant to the Repurchase Program. As of April 3, 2022, approximately $357.6 million remained available under the Repurchase Program.
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Note 5—Debt
Long-term debt consisted of the following (in millions):
| April 3, 2022 | January 2, 2022 | |||||||||||||
| Term Loan | $ | 650.0 | $ | 650.0 | ||||||||||
| Notes | 500.0 | 500.0 | ||||||||||||
| Revolving Credit Facility | 121.0 | 165.0 | ||||||||||||
| Total debt | 1,271.0 | 1,315.0 | ||||||||||||
| Unamortized debt issuance costs | (12.5) | (13.1) | ||||||||||||
| Current maturities of long-term debt | (145.4) | (181.3) | ||||||||||||
| Long-term debt | $ | 1,113.1 | $ | 1,120.6 | ||||||||||
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. 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 “Credit Agreement”). The Credit Agreement provides for, among other things: (i) a senior secured term loan in an aggregate principal amount of $650 million (the "Term Loan") and (ii) a senior secured revolving credit facility with revolving commitments in an aggregate principal amount of $525 million (the "Revolving Credit Facility" and, together with the Term Loan, the "Credit Facility"). Borrowing availability under the Revolving Credit Facility is subject to no default or event of default under the Credit Agreement having occurred at the time of borrowing. The proceeds of the 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 Agreement. Future borrowings under the Revolving Credit Facility are expected to be used for the Company's ongoing working capital needs and general corporate purposes. The Credit Facility matures on April 30, 2026.
Subsequent to November 2, 2021, borrowings under the Credit Agreement bear interest at (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) 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 Credit Agreement). The Credit Agreement contains additional procedures for transition to a benchmark rate other than one-month LIBOR for eurodollar borrowings. The unused amount of the 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 April 3, 2022, the interest rate per annum for the Term Loan and the Revolving Credit Facility was 1.96%.
The 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 Credit Agreement) to Consolidated EBITDA (as defined in the Credit Agreement). The 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 Credit Agreement includes customary events of default.
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.
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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.
Other
At April 3, 2022 and January 2, 2022, the Company had outstanding letters of credit in the aggregate amount of $5.6 million which reduced the amount available for borrowings under the Revolving Credit Facility.
Fair Value of Debt
The estimated fair value of the Company's Term Loan and Revolving Credit Facility as of April 3, 2022 and January 2, 2022 approximated book value as the interest rate is variable in nature.
The estimated fair value of the Company's Notes as of April 3, 2022 and January 2, 2022 was $500.6 million and $517.5 million, respectively. These estimates 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 6—Accounts Receivable
Components of accounts receivable, net were as follows (in millions):
| April 3, 2022 | January 2, 2022 | |||||||||||||
| Advanced charges receivable | $ | 312.4 | $ | 322.7 | ||||||||||
| Trade accounts receivable | 140.5 | 139.8 | ||||||||||||
| Other receivable | 4.5 | 12.3 | ||||||||||||
| Accounts receivable, gross | 457.4 | 474.8 | ||||||||||||
| Less: Allowance for credit losses | (9.3) | (9.1) | ||||||||||||
| Accounts receivable, net | $ | 448.1 | $ | 465.7 | ||||||||||
Note 7—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 2092, some of which include options to extend the leases.
The components of leases expense were as follows (in millions):
| Three Months Ended | |||||||||||
| April 3, 2022 | March 28, 2021 | ||||||||||
| Operating lease cost | $ | 42.3 | $ | 35.8 | |||||||
| Finance lease cost: | |||||||||||
| Amortization of right-of-use assets | $ | 3.0 | $ | 3.3 | |||||||
| Interest on lease liabilities | 0.2 | 0.2 | |||||||||
| Total finance lease cost | $ | 3.2 | $ | 3.5 | |||||||
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Supplemental cash flow information related to leases was as follows (in millions):
| Three Months Ended | |||||||||||
| April 3, 2022 | March 28, 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows related to operating leases | $ | 54.3 | $ | 34.1 | |||||||
| Operating cash flows related to finance leases | $ | 0.2 | $ | 0.2 | |||||||
| Financing cash flows related to finance leases | $ | 3.0 | $ | 3.1 | |||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 100.7 | $ | 35.1 | |||||||
| Finance leases | $ | 0.4 | $ | 0.3 | |||||||
Note 8—Acquisition
SYNETIQ Ltd.
On October 26, 2021, IAA, through its indirect wholly owned subsidiary, IAA International Holdings Limited, acquired 100% of SYNETIQ Ltd. ("SYNETIQ"), a leading integrated salvage and vehicle dismantling company in the United Kingdom, to expand its footprint in the United Kingdom. The cash purchase price for SYNETIQ, including working capital and other adjustments, was $314.2 million (£228.2 million), of which $260.2 million (£189.0 million) was paid out in the fourth quarter of fiscal 2021. The remaining payment of $54.0 million (£39.2 million), which was held in an escrow account and presented as Restricted cash on the consolidated balance sheets as of January 2, 2022, was paid out during the first quarter of fiscal 2022 upon receipt of required approvals from the U.K. Competition and Markets Authority. The Company funded the acquisition with cash on hand and $100.0 million in borrowings under its Revolving Credit Facility.
The following table summarizes the fair value of consideration transferred and the fair values of assets acquired and liabilities assumed as of the date of acquisition (in millions):
| October 26, 2021 | |||||
| Cash | $ | 260.2 | |||
| Fair value of contingent consideration* | 51.4 | ||||
| Total fair value of consideration transferred | $ | 311.6 | |||
*Recorded in Other accrued expenses line within the consolidated balance sheets as of January 2, 2022.
| October 26, 2021 | |||||
| Cash | $ | 7.1 | |||
| Accounts receivable | 4.7 | ||||
| Inventory | 17.4 | ||||
| ROU assets | 39.0 | ||||
| Property and equipment | 12.5 | ||||
| Goodwill | 257.1 | ||||
| Intangible assets | 41.3 | ||||
| Other assets | 1.4 | ||||
| Accounts payable and other accrued expenses | (18.9) | ||||
| Operating lease liabilities | (39.0) | ||||
| Other long-term liabilities | (11.0) | ||||
| Net assets acquired | $ | 311.6 | |||
The Company did not record any material measurement period adjustments during the quarter ended April 3, 2022. The Company has not completed its determination of the fair value of tax related assets and liabilities as of April 3, 2022. The tax
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related amounts included in the table above are preliminary amounts and subject to change if additional information, which existed as of the acquisition date, becomes known to the Company. Accordingly, there could be material adjustments to the preliminary tax related fair values recorded during the measurement period.
The intangible assets acquired related to developed technology (useful life 4 years) and tradename (useful life 5 years), which will be amortized over a weighted average-useful life of approximately 4 years. The relief from royalty method was used to value the developed technology and tradename. This method requires forward looking estimates to determine fair value, including among other assumptions, forecasted revenue growth, obsolescence, and estimated discount and royalty rates. The goodwill recognized from this acquisition reflects expected synergies resulting from adding SYNETIQ's products and processes to the Company's products and processes. The acquired goodwill has been allocated to the International segment and is deductible for tax purposes.
The following unaudited pro forma financial information summarizes the combined results of operations for the Company and SYNETIQ, as though the companies were combined as of the beginning of fiscal 2021 (in millions):
| Three Months Ended | ||||||||
| March 28, 2021 | ||||||||
| Net revenue | $ | 478.4 | ||||||
| Net income | 71.8 | |||||||
These pro forma results are based on estimates and assumptions, which the Company believes are reasonable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2021, and are not necessarily indicative of the Company's consolidated results of operations in future periods.
The pro forma results include adjustments related to purchase accounting, primarily amortization of intangible assets, and interest expense related to the borrowings under the Company's Revolving Credit Facility in connection with the acquisition of SYNETIQ.
Note 9—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
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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 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.
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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 10—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.
Financial information regarding the Company's reportable segments is set forth below as of and for the three months ended April 3, 2022 (in millions):
| Three Months Ended April 3, 2022 | |||||||||||||||||
| United States | International | Total | |||||||||||||||
| Revenues: | |||||||||||||||||
| Service revenues | $ | 396.6 | $ | 38.4 | $ | 435.0 | |||||||||||
| Vehicle and parts sales | 42.2 | 80.4 | 122.6 | ||||||||||||||
| Total revenues | 438.8 | 118.8 | 557.6 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Cost of services | 221.7 | 30.6 | 252.3 | ||||||||||||||
| Cost of vehicle and parts sales | 37.3 | 66.8 | 104.1 | ||||||||||||||
| Selling, general and administrative | 47.2 | 7.1 | 54.3 | ||||||||||||||
| Depreciation and amortization | 20.7 | 5.4 | 26.1 | ||||||||||||||
| Total operating expenses | 326.9 | 109.9 | 436.8 | ||||||||||||||
| Operating profit | 111.9 | 8.9 | 120.8 | ||||||||||||||
| Interest expense, net | 11.2 | — | 11.2 | ||||||||||||||
| Other expense, net | 1.1 | 0.5 | 1.6 | ||||||||||||||
| Intercompany (income) expense | (1.8) | 1.8 | — | ||||||||||||||
| Income before income taxes | 101.4 | 6.6 | 108.0 | ||||||||||||||
| Income taxes | 24.3 | 2.2 | 26.5 | ||||||||||||||
| Net income | $ | 77.1 | $ | 4.4 | $ | 81.5 | |||||||||||
| Total assets | $ | 2,576.2 | $ | 579.3 | $ | 3,155.5 | |||||||||||
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Financial information regarding the Company's reportable segments is set forth below as of and for the three months ended March 28, 2021 (in millions):
| Three Months Ended March 28, 2021 | |||||||||||||||||
| United States | International | Total | |||||||||||||||
| Revenues: | |||||||||||||||||
| Service revenues | $ | 332.4 | $ | 28.0 | $ | 360.4 | |||||||||||
| Vehicle and parts sales | 25.9 | 37.2 | 63.1 | ||||||||||||||
| Total revenues | 358.3 | 65.2 | 423.5 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Cost of services | 178.1 | 18.3 | 196.4 | ||||||||||||||
| Cost of vehicle and parts sales | 21.0 | 33.4 | 54.4 | ||||||||||||||
| Selling, general and administrative | 40.5 | 2.9 | 43.4 | ||||||||||||||
| Depreciation and amortization | 17.9 | 1.9 | 19.8 | ||||||||||||||
| Total operating expenses | 257.5 | 56.5 | 314.0 | ||||||||||||||
| Operating profit | 100.8 | 8.7 | 109.5 | ||||||||||||||
| Interest expense, net | 13.0 | — | 13.0 | ||||||||||||||
| Other income, net | (0.2) | (0.2) | (0.4) | ||||||||||||||
| Intercompany (income) expense | (2.3) | 2.3 | — | ||||||||||||||
| Income before income taxes | 90.3 | 6.6 | 96.9 | ||||||||||||||
| Income taxes | 22.7 | 1.7 | 24.4 | ||||||||||||||
| Net income | $ | 67.6 | $ | 4.9 | $ | 72.5 | |||||||||||
| Total assets | $ | 2,392.9 | $ | 232.9 | $ | 2,625.8 | |||||||||||
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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 products 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.
Sources of Revenues and Expenses
A significant portion of our revenue is derived from auction fees and related services associated with our salvage auctions. Our revenue earned from buyers represents fees charged based on a tiered structure that increases with the sales price of the vehicle as well as fees for additional services such as storage, transportation, and vehicle condition reporting. Our revenue earned from sellers represents the combination of the inbound tow, processing, storage, titling, enhancing and auctioning of the vehicle. The majority of our business comprises auctioning vehicles on a consignment basis, meaning that our sellers continue to own their vehicles until they are sold to buyers through one of our digital marketplaces. We recognize revenue from consigned vehicles on a net basis as we have no influence on the vehicle auction selling price agreed to by the seller and the buyer at the auction. We also purchase vehicles in certain situations and resell them or dismantle them and sell the vehicle parts and scrap. We recognize revenue from purchased vehicles on a gross basis, which results in lower gross margin versus vehicles sold at auction on a consignment basis.
Our operating expenses consist of cost of services, cost of vehicle and parts sales, selling, general and administrative and depreciation and amortization. Cost of services is comprised of payroll and related costs, subcontract services, supplies, insurance, property taxes, utilities, service contract claims, maintenance, and lease expense related to the auction sites. Cost of vehicle and parts sales represents the cost of purchased vehicles. Cost of services and cost of vehicle and parts sales exclude depreciation and amortization. Selling, general and administrative expenses are comprised of, among other things, payroll and related costs, sales and marketing, information technology services and professional fees.
COVID-19 Impact on our Business
The coronavirus pandemic ("COVID-19") has severely impacted, and continues to impact, worldwide economic activities. Following the reopening of the economy, miles driven continued to improve through fiscal 2021 and the first quarter of fiscal 2022 but remain slightly lower than pre-COVID-19 levels. We are continuing to experience labor, towing and other transportation pressures, which have increased our associated costs and we expect they will continue to do so at least in the near term. We believe the foregoing direct and indirect impacts of the COVID-19 pandemic may continue to have a negative impact on our business in fiscal 2022.
Acquisitions
On October 26, 2021, we acquired SYNETIQ Ltd. (“SYNETIQ”), a leading integrated salvage and vehicle dismantling company in the United Kingdom. The cash purchase price for SYNETIQ, including working capital and other adjustments, was $314.2 million (£228.2 million), of which $260.2 million (£189.0 million) was paid out in the fourth quarter of fiscal 2021. The remaining payment of $54.0 million (£39.2 million) was paid out in the first quarter of fiscal 2022 upon receiving required approvals from the U.K. Competition and Markets Authority (“CMA”). The results of operations of SYNETIQ are included in
21
our International segment from the date of the acquisition. See Note 8 – Acquisition in the notes to consolidated financial statements for additional information on this acquisition.
On June 18, 2021, we acquired Marisat, Inc. d/b/a Auto Exchange ("Auto Exchange"), a salvage auction provider located in New Jersey. The results of operations of Auto Exchange are included in our United States segment from the date of the 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. During the first quarter of fiscal 2022, the Company repurchased 230,229 shares for a gross purchase price of approximately $8.4 million pursuant to the Repurchase Program. As of April 3, 2022, approximately $357.6 million remained available under the Repurchase Program. See Note 5 - Net Income Per Share in the notes to consolidated financial statements for additional information on the Repurchase Program.
Results of Operations
| Three Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in millions, except per share data) | Apr 3, 2022 | Mar 28, 2021 | $ | % | ||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Service revenues | $ | 435.0 | $ | 360.4 | $ | 74.6 | 20.7 | % | ||||||||||||||||||
| Vehicle and parts sales | 122.6 | 63.1 | 59.5 | 94.3 | % | |||||||||||||||||||||
| Total revenues | 557.6 | 423.5 | 134.1 | 31.7 | % | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Cost of services | 252.3 | 196.4 | 55.9 | 28.5 | % | |||||||||||||||||||||
| Cost of vehicle and parts sales | 104.1 | 54.4 | 49.7 | 91.4 | % | |||||||||||||||||||||
| Selling, general and administrative | 54.3 | 43.4 | 10.9 | 25.1 | % | |||||||||||||||||||||
| Depreciation and amortization | 26.1 | 19.8 | 6.3 | 31.8 | % | |||||||||||||||||||||
| Total operating expenses | 436.8 | 314.0 | 122.8 | 39.1 | % | |||||||||||||||||||||
| Operating profit | 120.8 | 109.5 | 11.3 | 10.3 | % | |||||||||||||||||||||
| Interest expense, net | 11.2 | 13.0 | (1.8) | (13.8) | % | |||||||||||||||||||||
| Other expense (income), net | 1.6 | (0.4) | 2.0 | NM* | ||||||||||||||||||||||
| Income before income taxes | 108.0 | 96.9 | 11.1 | 11.5 | % | |||||||||||||||||||||
| Income taxes | 26.5 | 24.4 | 2.1 | 8.6 | % | |||||||||||||||||||||
| Net income | $ | 81.5 | $ | 72.5 | $ | 9.0 | 12.4 | % | ||||||||||||||||||
| Net income per share | ||||||||||||||||||||||||||
| Basic | $ | 0.61 | $ | 0.54 | $ | 0.07 | 13.0 | % | ||||||||||||||||||
| Diluted | $ | 0.61 | $ | 0.54 | $ | 0.07 | 13.0 | % | ||||||||||||||||||
________________
* NM - Not meaningful
Service Revenues
| Three Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in millions) | Apr 3, 2022 | Mar 28, 2021 | $ | % | ||||||||||||||||||||||
| United States | $ | 396.6 | $ | 332.4 | $ | 64.2 | 19.3 | % | ||||||||||||||||||
| International | 38.4 | 28.0 | 10.4 | 37.1 | % | |||||||||||||||||||||
| Total service revenues | $ | 435.0 | $ | 360.4 | $ | 74.6 | 20.7 | % | ||||||||||||||||||
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United States service revenues increased by $64.2 million due to an increase in revenue per unit of 18%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings and higher used car prices. United States service revenues also benefited from a higher volume of vehicles sold, which increased by 4% primarily due to higher miles driven.
International service revenues increased by $10.4 million due to incremental revenue of $7.0 million from the SYNETIQ acquisition, an increase in revenue per unit of 4%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings and higher used car prices. International service revenues also benefited from a higher volume of vehicles sold, which increased by 5% primarily due to higher miles driven.
Vehicle and Parts Sales
| Three Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in millions) | Apr 3, 2022 | Mar 28, 2021 | $ | % | ||||||||||||||||||||||
| United States | $ | 42.2 | $ | 25.9 | $ | 16.3 | 62.9 | % | ||||||||||||||||||
| International | 80.4 | 37.2 | 43.2 | 116.1 | % | |||||||||||||||||||||
| Total vehicle and parts sales | $ | 122.6 | $ | 63.1 | $ | 59.5 | 94.3 | % | ||||||||||||||||||
United States vehicle sales increased by $16.3 million due to a higher volume of vehicles sold, which increased by 29% mainly due to an increase in vehicle purchases, and an increase in revenue per unit sold of 27%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings as well as higher used car prices.
International vehicle and parts sales increased by $43.2 million due to incremental revenue of $40.7 million from the SYNETIQ acquisition, and an increase in revenue per unit sold of 12%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings as well as higher used car prices.
Cost of Services
| Three Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in millions) | Apr 3, 2022 | Mar 28, 2021 | $ | % | ||||||||||||||||||||||
| United States | $ | 221.7 | $ | 178.1 | $ | 43.6 | 24.5 | % | ||||||||||||||||||
| International | 30.6 | 18.3 | 12.3 | 67.2 | % | |||||||||||||||||||||
| Total cost of services | $ | 252.3 | $ | 196.4 | $ | 55.9 | 28.5 | % | ||||||||||||||||||
United States cost of services increased by $43.6 million primarily due to a higher volume of vehicles sold and higher costs
relating to towing, wages, occupancy and vehicle processing.
International cost of services increased by $12.3 million primarily due to incremental costs of $9.8 million from the SYNETIQ acquisition, a higher volume of vehicles sold and higher towing costs.
Recent increases in the cost of fuel have led to increased prices charged by our independent subhaulers and trucking fleet operators, which has resulted in an increase in our associated costs in both segments.
Cost of Vehicle and Parts Sales
| Three Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in millions) | Apr 3, 2022 | Mar 28, 2021 | $ | % | ||||||||||||||||||||||
| United States | $ | 37.3 | $ | 21.0 | $ | 16.3 | 77.6 | % | ||||||||||||||||||
| International | 66.8 | 33.4 | 33.4 | 100.0 | % | |||||||||||||||||||||
| Total cost of vehicle and parts sales | $ | 104.1 | $ | 54.4 | $ | 49.7 | 91.4 | % | ||||||||||||||||||
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United States cost of vehicle sales increased by $16.3 million due to a higher volume of vehicles sold and higher average purchase prices.
International cost of vehicle and parts sales increased by $33.4 million primarily due to incremental costs of $30.2 million from the SYNETIQ acquisition and higher average purchase prices.
Selling, General and Administrative
| Three Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in millions) | Apr 3, 2022 | Mar 28, 2021 | $ | % | ||||||||||||||||||||||
| United States | $ | 47.2 | $ | 40.5 | $ | 6.7 | 16.5 | % | ||||||||||||||||||
| International | 7.1 | 2.9 | 4.2 | 144.8 | % | |||||||||||||||||||||
| Total selling, general and administrative expenses | $ | 54.3 | $ | 43.4 | $ | 10.9 | 25.1 | % | ||||||||||||||||||
United States selling, general and administrative expenses increased by $6.7 million primarily due to higher costs
relating to increased headcount and higher professional services and information technology costs, partially offset by a $2.7 million non-income, tax related accrual in the prior year period.
International selling, general and administrative expenses increased by $4.2 million primarily due to incremental costs from the SYNETIQ acquisition.
Depreciation and Amortization
| Three Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in millions) | Apr 3, 2022 | Mar 28, 2021 | $ | % | ||||||||||||||||||||||
| United States | $ | 20.7 | $ | 17.9 | $ | 2.8 | 15.6 | % | ||||||||||||||||||
| International | 5.4 | 1.9 | 3.5 | 184.2 | % | |||||||||||||||||||||
| Total depreciation and amortization | $ | 26.1 | $ | 19.8 | $ | 6.3 | 31.8 | % | ||||||||||||||||||
Depreciation and amortization increased by $6.3 million as there were more intangible assets to amortize in both segments, including amortization related to intangible assets acquired in recent acquisitions.
Interest Expense
Interest expense decreased by $1.8 million as compared to the prior year period due to 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 Revolving Credit Facility (as defined below) provides another source of liquidity as needed.
Our cash flow is used to invest in new products and services, fund capital expenditures and working capital requirements and, coupled with borrowings under our Revolving Credit Facility, is expected to be adequate to satisfy our cash requirements, including those listed below, fund future acquisitions, and repurchase shares of our common stock, if any. Our ability to fund our cash requirements will depend on our ongoing ability to generate cash from operations and to access borrowings under our Revolving Credit Facility. We believe that our cash on hand, future cash from operations, borrowings available under our Revolving Credit Facility and access to the debt and capital markets will provide adequate resources to fund our operating and financing needs for the next twelve months and beyond.
Approximately $31.1 million of available cash was held by our foreign subsidiaries as of April 3, 2022. 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 January 2, 2022 filed with the Securities and Exchange Commission (the "SEC") on February 28, 2022.
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Debt Service Obligations
On April 30, 2021, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders from time to time party thereto (the "Credit Agreement"). The Credit Agreement provides for, among other things: (i) a senior secured term loan in an aggregate principal amount of $650 million (the "Term Loan") and (ii) a senior secured revolving credit facility with revolving commitments in an aggregate principal amount of $525 million (the "Revolving Credit Facility" and, together with the Term Loan, the “Credit Facility”). Borrowing availability under the Revolving Credit Facility is subject to no default or event of default under the Credit Agreement having occurred at the time of borrowing. The Credit Facility matures on April 30, 2026. As of April 3, 2022, $650.0 million was outstanding under the Term Loan and $121.0 million was outstanding under the Revolving Credit Facility. We were in compliance with the covenants in the Credit Agreement at April 3, 2022.
On June 6, 2019, we issued $500.0 million aggregate principal amount of 5.500% Senior Notes due 2027. We must pay interest on the Notes in cash on June 15 and December 15 of each year at a rate of 5.500% per annum, with the first interest payment date being December 15, 2019. The Notes will mature on June 15, 2027. The net proceeds from the Notes offering, together with borrowings under our prior senior credit facility, were used to make a cash distribution to KAR Auto Auction Services, Inc. ("KAR") and to pay fees and expenses related to the separation from KAR in June 2019. We were in compliance with the covenants in the indenture governing the Notes at April 3, 2022.
See Note 5 - Debt in the notes to consolidated financial statements for additional information on our outstanding indebtedness.
Capital Expenditures
Capital expenditures for the three months ended April 3, 2022 and March 28, 2021 were $30.9 million and $30.3 million, respectively. Our capital expenditures during the three months ended April 3, 2022 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.
Acquisitions
On October 26, 2021, we acquired SYNETIQ, a leading integrated salvage and vehicle dismantling company in the United
Kingdom. The cash purchase price for SYNETIQ, including working capital and other adjustments, was $314.2 million (£228.2
million), of which $260.2 million (£189.0 million) was paid out in the fourth quarter of fiscal 2021. The remaining payment of
$54.0 million (£39.2 million) was contingent upon receipt of required approvals from the CMA and held in an escrow account at January 2, 2022. During the first quarter of fiscal 2022, we received the required approval from CMA and made the remaining payment of $54.0 million (£39.2 million). We funded the acquisition with cash on hand and $100.0 million in borrowings under our Revolving Credit Facility. See Note 8 – Acquisition in the notes to consolidated financial statements for additional information on this acquisition.
Some of our prior years' acquisitions included contingent payments based on certain conditions and future performance. As of April 3, 2022, we had estimated contingent consideration with a fair value of approximately $5.7 million (based on Level 3 inputs), of which $2.7 million is reported in Other accrued expenses line and $3.0 million is reported in Other liabilities line within the accompanying consolidated balance sheet.
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Summary of Cash Flows
| Three Months Ended | ||||||||||||||||||||
| (in millions) | April 3, 2022 | March 28, 2021 | Change | |||||||||||||||||
| Net cash provided by (used by): | ||||||||||||||||||||
| Operating activities | $ | 97.7 | $ | 121.3 | $ | (23.6) | ||||||||||||||
| Investing activities | 5.2 | (31.1) | 36.3 | |||||||||||||||||
| Financing activities | (128.8) | (8.6) | (120.2) | |||||||||||||||||
| Effect of exchange rate on cash | (0.3) | 0.5 | (0.8) | |||||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (26.2) | $ | 82.1 | $ | (108.3) | ||||||||||||||
Net cash provided by operating activities during the three months ended April 3, 2022 decreased by $23.6 million as compared to the three months ended March 28, 2021. The decrease in operating cash flow was primarily attributable to a decrease in incentive-based compensation accruals and an increase in operating lease payments. This decrease was partially offset by an increase in profitability, net of non-cash adjustments of $21.7 million.
Net cash provided by investing activities during the three months ended April 3, 2022 increased by $36.3 million as compared to the three months ended March 28, 2021. The increase was primarily relating to the proceeds from the sale of a property in South Carolina which was simultaneously leased back to the Company.
Net cash used by financing activities was $128.8 million for the three months ended April 3, 2022 as compared to $8.6 million for the three months ended March 28, 2021. The increase in net cash used by financing activities was primarily attributable to the remaining payment of $51.4 million relating to the SYNETIQ acquisition, payments of our debt of $44.0 million, a decrease in book overdrafts of $15.4 million and $8.4 million in repurchases of our common stock under our Repurchase Program..
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 January 2, 2022 filed with the SEC on February 28, 2022.
For further information about recently issued accounting pronouncements, see Note 1 - Summary of Significant Accounting Policies in the notes to 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 “Quantitative and Qualitative Disclosures About Market Risks” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 filed with the SEC on February 28, 2022.
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
26
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 April 3, 2022.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended April 3, 2022, 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 9 - Commitments and Contingencies in the condensed notes to 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 28, 2022. 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. Other than as set forth below, 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 28, 2022.
Macroeconomic factors, including high fuel prices, high labor costs, rising inflation and changes in used car prices, may have an adverse effect on our revenues, gross profit and operating results.
Macroeconomic factors that affect oil prices and the vehicle and commodity markets can have adverse effects on our revenues and operating results. Significant increases in the cost of fuel, whether due to inflationary pressures, the current war between
Ukraine and Russia or otherwise, could lead to a reduction in miles driven per car and a reduction in accident rates. A material reduction in accident rates, whether due to a reduction in miles driven or other factors, could reduce our vehicle assignment volumes which, in turn, could have a material adverse impact on our revenues. In addition, significant increases in the cost of fuel have resulted and could continue to result in an increase in the prices charged to us by our independent subhaulers and trucking fleet operators. Further, we have recently experienced labor shortages, which have resulted in an increase in associated costs, such as increased overtime to meet demand and increased wages to attract and retain employees. If these conditions or other inflationary pressures continue, our costs for towing and branch labor may continue to rise. To the extent we are unable to pass these costs on to our customers, the increase in prices charged by our independent subhaulers and trucking fleet operators and the increase in labor costs have negatively impacted and could continue to negatively impact our profitability.
Volatility in used car prices could have a material adverse effect on our revenues in future periods. While increased used vehicle prices have recently resulted in an increase in our revenue per unit, a sustained increase in used vehicle prices may result in vehicle owners holding on to their vehicles for longer periods of time, which could negatively impact our vehicle assignment volumes. See “A significant change in used-vehicle prices could impact the proceeds and revenue from the sale of damaged and total loss vehicles” in our Annual Report on Form 10-K filed with the SEC on February 28, 2022 for additional information.
In addition, we continue to invest in capacity expansion, including the opening of new auction facilities. Adverse economic conditions, including increases in interest rates and lease rates, real estate values and real estate development and construction costs, may increase the costs required to invest in capacity expansion or delay our ability to open new facilities, both of which could have a material impact on our consolidated results of operations and financial position.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 2, 2021, the Company’s Board of Directors authorized the 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 expires on August 3, 2026. See Note 4 – Net Income per Share in the notes to consolidated financial statements for additional information on the Repurchase Program.
The following table presents a summary of common stock repurchases made during the three months ended April 3, 2022:
28
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares as Part of Publicly Announced Program | Maximum Approximate Dollar Value of Shares That May Yet Be Purchased Under the Repurchase Program | ||||||||||||||||||||||
| January 3, 2022 - February 6, 2022 | — | $ | — | — | $ | 365,993,529 | ||||||||||||||||||||
| February 7, 2022 - March 6, 2022 | 27,206 | 35.40 | 27,206 | 365,030,453 | ||||||||||||||||||||||
| March 7, 2022 - April 3, 2022 | 203,023 | 36.52 | 203,023 | 357,615,154 | ||||||||||||||||||||||
| Total | 230,229 | 230,229 | ||||||||||||||||||||||||
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Item 6. Exhibits
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith | ||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-38580 | 3.1 | 6/28/2019 | ||||||||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-38580 | 3.2 | 6/28/2019 | ||||||||||||||||||||||||||||||||||
| 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 April 3, 2022, 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.
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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: | May 10, 2022 | /s/ John W. Kett | ||||||
John W. Kett President and Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) | ||||||||
| Date: | May 10, 2022 | /s/ Susan Healy | ||||||
Susan Healy Executive Vice President, Chief Financial Officer (Principal Financial Officer) | ||||||||
31