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IAA, Inc. Announces Third Quarter Fiscal 2020 Financial Results

Increased Year-Over-Year Profitability Driven By Record Revenue Per Unit And Margin Expansion Plan

Sequential Improvement In Assignments And Sales Volumes

WESTCHESTER, Ill.--(BUSINESS WIRE)--IAA, Inc. (NYSE: IAA) today announced its financial results for the third quarter of fiscal 2020, which ended September 27, 2020.

John Kett, Chief Executive Officer and President, stated, “We delivered stronger than anticipated third quarter results driven primarily by record revenue per unit trends and also higher than expected sales volumes. Assignments continued to improve throughout the quarter and ended the period at a run rate only slightly below pre-COVID-19 levels. In addition to these industry tailwinds, our results also benefited from our margin expansion plan and enhanced service offering.”

Mr. Kett continued, “As we look to the balance of the year, while the macro environment remains somewhat uncertain, we are focused on the elements of our business that we can control, and our teams are dedicated to continuing to drive results and execute against our strategic initiatives.”

Key Third Quarter and Year-to-Date Measures:

(Dollars in millions, except per share amounts)

 

Quarter Ended
September 27,
2020

Quarter Ended
September 29,
2019

%

Change

Year to Date Ended
September 27,
2020

Year to Date Ended
September 29,
2019

%

Change

Revenues

$338.0

$357.3

(5.4)%

$1,001.4

$1,080.9

(7.4)%

Net Income

$52.8

$41.8

26.3%

$130.7

$147.6

(11.4)%

Adjusted Net Income

$55.7

$47.6

17.0%

$142.2

$166.6

(14.6)%

Diluted EPS

$0.39

$0.31

25.8%

$0.97

$1.10

(11.8)%

Adjusted Diluted EPS

$0.41

$0.35

17.1%

$1.05

$1.24

(15.3)%

Adjusted EBITDA

$103.8

$99.1

4.7%

$282.7

$312.3

(9.5)%

Highlights for the Third Quarter Ended September 27, 2020:

  • Consolidated revenues decreased 5.4% to $338.0 million from $357.3 million in the third quarter of fiscal 2019. Foreign currency movements had a positive impact of less than $0.1 million on revenue for the third quarter of fiscal 2020. Third quarter revenue through July 2020 includes $1.1 million of revenue from DDI, which was acquired on July 31, 2019. Prior year revenue included $3.6 million related to a non-cash adjustment for certain revenue agreements. Excluding the impact of these items, organic revenue decreased 4.7% to $336.9 million, consisting of lower volume of 20.4% primarily due to reduced vehicle miles traveled as a result of COVID-19, partially offset by higher revenue per unit of 19.6%. Total purchased vehicle revenue increased by $6.1 million, or 20.1%, to $36.4 million, compared to $30.3 million in the prior year period. U.S. segment revenues decreased 6.2% to $298.4 million from $318.1 million in the prior year period. U.S. revenues were negatively impacted by lower volume, partially offset by higher revenue per unit. International segment revenues increased 1.0% to $39.6 million from $39.2 million in the prior year period. International revenues benefited from higher revenue per unit, which was partially offset by lower volume.
  • Gross profit, which is defined as total consolidated revenues minus cost of services, and exclusive of depreciation and amortization, increased by 1.7% to $138.3 million from $136.0 million in the third quarter of fiscal 2019. The increase in gross profit was primarily due to higher revenue per unit as well as cost reductions achieved, partially offset by lower volume and higher occupancy costs. Gross margin in the quarter increased by 280 basis points versus the prior year to 40.9% from 38.1% in the prior year.
  • Selling, general and administrative (“SG&A”) expenses decreased by 10.3% to $34.9 million from $38.9 million in the third quarter of fiscal 2019. Adjusted SG&A expenses in the third quarter of 2020 were $34.5 million, a decrease of 6.8% compared to Adjusted SG&A expenses of $37.0 million in the prior year period. Adjusted SG&A expenses decreased primarily due to reduced discretionary spending.
  • Interest expense was $13.3 million compared to $17.5 million in the third quarter of fiscal 2019, with the decline primarily driven by lower interest rates on floating rate debt, as well as a slightly lower average debt balance.
  • The effective tax rate was 25.5% versus 27.3% in the third quarter of fiscal 2019. The lower effective rate in 2020 was primarily due to the benefit from the implementation of certain tax optimization initiatives.
  • Net income increased by 26.3% to $52.8 million, or $0.39 per diluted share, compared to $41.8 million, or $0.31 per diluted share, in the third quarter of fiscal 2019. Adjusted net income increased by 17.0% to $55.7 million, or $0.41 per diluted share, compared to $47.6 million, or $0.35 per diluted share, in the third quarter of fiscal 2019.
  • Adjusted EBITDA increased by 4.7% to $103.8 from $99.1 million in the third quarter of fiscal 2019, primarily due to higher revenue per unit and the benefits from our margin expansion plan, as well as the reduction in discretionary spending. Adjusted EBITDA includes unfavorable foreign currency movements for the quarter of $0.1 million and a loss from DDI in July 2020 of less than $0.1 million. Prior year organic Adjusted EBITDA excludes $3.6 million related to a non-cash adjustment for certain revenue agreements. Excluding the above items, organic Adjusted EBITDA was $103.9 million, an increase of 8.8% over the prior year.

Highlights for the Year-to-Date Ended September 27, 2020:

  • Consolidated revenues decreased 7.4% to $1,001.4 million from $1,080.9 million in the prior year period. Year-to-date revenue through July 2020 includes $6.0 million of revenue from DDI, which was acquired on July 31, 2019. Foreign currency movements had a negative impact of $1.6 million on revenue for the period. Prior year revenue included $3.6 million related to a non-cash adjustment for certain revenue agreements. Excluding the impact of these items, organic revenue decreased 7.4% to $997.0 million, consisting of lower volume of 16.8% primarily due to reduced vehicle miles traveled as a result of COVID-19, partially offset by higher revenue per unit of 11.3%. Total purchased vehicle revenue increased by $2.5 million, or 2.5%, to $101.1 million, compared to $98.6 million in the prior year period. U.S. segment revenues decreased 7.1% to $885.4 million from $952.9 million in the prior year period. International segment revenues decreased 9.4% to $116.0 million from $128.0 million in the prior year period. For both the U.S. and International segments, the decrease in revenue was primarily due to a decrease in volume, partially offset by higher revenue per unit.
  • Gross profit, which is defined as total consolidated revenues minus cost of services, and exclusive of depreciation and amortization, decreased by 6.7% to $385.6 million from $413.5 million in the prior year period. The decrease in gross profit was primarily due to lower volume and an increase in occupancy costs, partially offset by higher revenue per unit and cost reductions achieved. Gross margin increased by 20 basis points versus the prior year to 38.5%.
  • SG&A expenses increased by 0.9% to $107.2 million from $106.2 million in the prior year period. Adjusted SG&A expenses were $102.9 million, an increase of 1.5% compared to Adjusted SG&A expenses of $101.4 million in the prior year period. Adjusted SG&A expenses increased primarily due to additional public company costs in the first half of the year, an increase in the provision for credit losses, and SG&A associated with DDI, partially offset by reduced discretionary spending and a lower accrual for incentive compensation.
  • Interest expense was $43.1 million compared to $39.1 million in the prior year period, with the increase primarily driven by a higher average outstanding debt balance in 2020 relative to 2019, resulting from the new capital structure following the separation from KAR Auction Services.
  • The effective tax rate was 25.1% versus 27.0% in the prior year period. The lower effective tax rate in 2020 was due to discrete tax items associated with the spin-off from KAR Auction Services in the prior year that did not occur in 2020, as well as the benefit from the implementation of certain tax optimization initiatives.
  • Net income decreased by 11.4% to $130.7 million, or $0.97 per diluted share, compared to $147.6 million, or $1.10 per diluted share, in the prior year period. Adjusted net income decreased by 14.6% to $142.2 million, or $1.05 per diluted share, compared to $166.6 million, or $1.24 per diluted share, in the prior year period.
  • Adjusted EBITDA decreased by 9.5% to $282.7 million from $312.3 million in the prior year period, primarily due to the decline in revenue. Adjusted EBITDA includes unfavorable foreign currency movements year-to-date of $0.4 million and a loss from DDI through July 2020 of $0.2 million. Prior year organic Adjusted EBITDA excludes $3.6 million related to a non-cash adjustment for certain revenue agreements. Excluding the above items, for the year-to-date period organic Adjusted EBITDA was $283.3 million, a decrease of 8.2% over the prior year.

Other Financial Highlights as of September 27, 2020:

  • Net Debt: $1,083.8 million
  • Leverage Ratio: 2.8x
  • Year-to-date Net Cash Provided by Operating Activities: $265.2 million
  • Year-to-date Free Cash Flow: $223.3 million
  • Liquidity: $578.3 million
  • Q3 2020 year-over-year vehicle inventory change: 1.2%

Please refer to the accompanying financial tables for a reconciliation of Net Debt, Leverage Ratio and Free Cash Flow to U.S. GAAP.

Outlook:

Given the continued uncertainties regarding the duration and severity of the COVID-19 pandemic, the Company is not providing a 2020 or long-term outlook at this time.

Conference Call Information:

A conference call to discuss the third quarter fiscal 2020 financial results is scheduled for today, November 2 , 2020, at 9:00 a.m. Eastern Time. Investors and analysts interested in participating in the call are invited to join a live audio webcast of the conference call. The webcast is available online at https://investors.iaai.com/.

A recorded replay of the conference call will be available within two hours of the conclusion of the call and can be accessed online at https://investors.iaai.com/ for one year.

About IAA, Inc.

IAA, Inc. (NYSE: IAA) is a leading global 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. Headquartered near Chicago in Westchester, Illinois, IAA has nearly 4,000 employees and more than 200 facilities throughout the U.S., Canada and the United Kingdom. IAA serves a global buyer base - located throughout over 170 countries - and a full spectrum of sellers, including insurers, dealerships, fleet lease and rental car companies, and charitable organizations. Buyers have access to multiple digital bidding and buying channels, innovative vehicle merchandising, and efficient evaluation services, enhancing the overall purchasing experience. IAA 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. For more information, visit IAAI.com and follow IAA on Facebook, Twitter, Instagram, YouTube and LinkedIn.

Forward-Looking Statements: Certain statements contained in this release include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements made that are not historical facts may be forward-looking statements and can be identified by words such as “should,” “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. In this release, such forward-looking statements include statements regarding expectations with respect to the COVID-19 pandemic on our business and plans regarding our growth strategies and margin expansion plan. 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: uncertainties regarding the duration and severity of the COVID-19 pandemic, and the measures taken to reduce its spread, on our business and the economy generally; the loss of one or more significant vehicle seller customers or a reduction in significant volume from such sellers; 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 "Risk Factors" in our Form 10-K for the year ended December 29, 2019 filed with the SEC on March 18, 2020 and in our Form 10-Q for the quarter ended March 29, 2020 filed with the SEC on May 6, 2020. Additional information regarding risks and uncertainties will also be contained in subsequent annual and quarterly reports we file with the SEC. The forward-looking statements included in this release are made as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement to reflect new information or events, except as required by law.

Non-GAAP Financial Information

We refer to certain financial measures that are not recognized under United States generally accepted accounting principles (“GAAP”). Please see “Note Regarding Non-GAAP Financial Information" and “Reconciliation of GAAP to Non-GAAP Financial Information” for additional information and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures.

IAA, Inc.

Consolidated Statements of Income

(Amounts in Millions, Except Per Share)

(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

September 27,
2020

 

September 29,
2019

 

September 27,
2020

 

September 29,
2019

 

 

 

 

 

 

 

 

Revenues

$

338.0

 

 

$

357.3

 

 

$

1,001.4

 

 

$

1,080.9

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization)

199.7

 

 

221.3

 

 

615.8

 

 

667.4

 

Selling, general and administrative

34.9

 

 

38.9

 

 

107.2

 

 

106.2

 

Depreciation and amortization

19.4

 

 

22.1

 

 

61.5

 

 

66.0

 

Total operating expenses

254.0

 

 

282.3

 

 

784.5

 

 

839.6

 

Operating profit

84.0

 

 

75.0

 

 

216.9

 

 

241.3

 

Interest expense, net

13.3

 

 

17.5

 

 

43.1

 

 

39.1

 

Other income, net

(0.2)

 

 

 

 

(0.8)

 

 

(0.1)

 

Income before income taxes

70.9

 

 

57.5

 

 

174.6

 

 

202.3

 

Income taxes

18.1

 

 

15.7

 

 

43.9

 

 

54.7

 

Net income

$

52.8

 

 

$

41.8

 

 

$

130.7

 

 

$

147.6

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

Basic

$

0.39

 

 

$

0.31

 

 

$

0.98

 

 

$

1.11

 

Diluted

$

0.39

 

 

$

0.31

 

 

$

0.97

 

 

$

1.10

 

IAA, Inc.

Consolidated Balance Sheets

(Amounts in Millions)

(Unaudited)

 

 

September 27,
2020

 

December 29,
2019

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

Cash and cash equivalents

$

216.2

 

 

$

47.1

 

Accounts receivable, net of allowances of $7.5 and $4.2

323.5

 

 

335.9

 

Prepaid consigned vehicle charges

49.3

 

 

50.1

 

Other current assets

29.8

 

 

26.9

 

Total current assets

618.8

 

 

460.0

 

 

 

 

 

Non-current assets

 

 

 

Operating lease right-of-use assets, net of accumulated amortization of $140.4 and $75.2

823.7

 

 

735.9

 

Property and equipment, net of accumulated depreciation of $470.6 and $438.3

242.6

 

 

246.9

 

Goodwill

540.3

 

 

541.3

 

Intangible assets, net of accumulated amortization of $493.4 and $465.9

146.7

 

 

151.7

 

Other assets

16.7

 

 

15.4

 

Total non-current assets

1,770.0

 

 

1,691.2

 

Total assets

$

2,388.8

 

 

$

2,151.2

 

 

 

 

 

Liabilities and Stockholders' Deficit

 

 

 

 

 

 

 

Current liabilities

 

 

 

Accounts payable

$

101.3

 

 

$

96.4

 

Short-term right-of-use operating lease liability

75.6

 

 

68.6

 

Accrued employee benefits and compensation expenses

27.6

 

 

29.4

 

Other accrued expenses

61.9

 

 

49.3

 

Total current liabilities

266.4

 

 

243.7

 

 

 

 

 

Non-current liabilities

 

 

 

Long-term debt

1,250.9

 

 

1,254.7

 

Long-term right-of-use operating lease liability

794.1

 

 

709.5

 

Deferred income tax liabilities

63.1

 

 

63.7

 

Other liabilities

17.9

 

 

16.8

 

Total non-current liabilities

2,126.0

 

 

2,044.7

 

 

 

 

 

Stockholders' deficit

 

 

 

Total stockholders' deficit

(3.6)

 

 

(137.2)

 

Total liabilities and stockholders' deficit

$

2,388.8

 

 

$

2,151.2

 

IAA, Inc.

Consolidated Statements of Cash Flows

(Amounts in Millions)

(Unaudited)

 

 

Nine Months Ended

 

September 27,
2020

 

September 29,
2019

Operating activities

 

 

 

Net income

$

130.7

 

 

$

147.6

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

Depreciation and amortization

61.5

 

 

66.0

 

Operating lease expense

100.7

 

 

86.7

 

Stock-based compensation

6.5

 

 

3.2

 

Provision for credit losses

3.8

 

 

2.0

 

Amortization of debt issuance costs

3.1

 

 

1.1

 

Deferred income taxes

(0.6)

 

 

0.2

 

Gain on disposal of fixed assets

(0.5)

 

 

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

Operating lease payments

(96.7)

 

 

(94.5)

 

Accounts receivable and other assets

1.4

 

 

11.5

 

Accounts payable and accrued expenses

55.3

 

 

20.8

 

Net cash provided by operating activities

265.2

 

 

244.6

 

 

 

 

 

Investing activities

 

 

 

Acquisition of businesses (net of cash acquired)

 

 

(16.8)

 

Purchases of property, equipment and computer software

(41.9)

 

 

(56.4)

 

Proceeds from the sale of property and equipment

0.5

 

 

0.1

 

Net cash used by investing activities

(41.4)

 

 

(73.1)

 

 

 

 

 

Financing activities

 

 

 

Net decrease in book overdrafts

(33.6)

 

 

(51.4)

 

Proceeds from debt issuance

 

 

1,300.0

 

Dividend paid to KAR

 

 

(1,278.0)

 

Payments of long-term debt

(4.0)

 

 

 

Deferred financing costs

(2.9)

 

 

(25.2)

 

Finance lease payments

(11.4)

 

 

(10.9)

 

Payments of contingent consideration

(1.5)

 

 

 

Net cash transfers to parent and affiliates

 

 

(117.7)

 

Issuance of common stock under stock plans

7.2

 

 

0.7

 

Proceeds from issuance of employee stock purchase plan shares

0.7

 

 

 

Tax withholding payments for vested RSUs

(8.9)

 

 

(0.1)

 

Net cash used by financing activities

(54.4)

 

 

(182.6)

 

Effect of exchange rate changes on cash

(0.3)

 

 

(4.1)

 

Net increase (decrease) in cash and cash equivalents

169.1

 

 

(15.2)

 

Cash and cash equivalents at beginning of period

47.1

 

 

48.3

 

Cash and cash equivalents at end of period

$

216.2

 

 

$

33.1

 

Cash paid for interest, net

$

34.5

 

 

$

0.3

 

Cash paid for taxes, net

$

44.3

 

 

$

57.7

 

Note Regarding Non-GAAP Financial Information

This press release includes the following non-GAAP financial measures: Organic revenue growth, Adjusted SG&A expenses, Adjusted net income, Adjusted earnings per share (“Adjusted EPS”), Adjusted earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA"), organic Adjusted EBITDA, free cash flow, and leverage ratio (defined as Net Debt divided by LTM Adjusted EBITDA). These measures are reconciled to their most directly comparable GAAP financial measures as provided in “Reconciliation of GAAP to Non-GAAP Financial Information” below.

Each of the non-GAAP measures disclosed in this press release should be considered in addition to, and not as a replacement for or superior to, the comparable GAAP measure, and may not be comparable to similarly titled measures reported by other companies. Management uses these financial measures and key performance indicators to assess the Company’s financial operating performance, and we believe that these measures provide useful information to investors by offering additional ways of viewing the Company’s results, as noted below.

  • Organic revenue growth is growth in GAAP revenue adjusted to exclude (a) non-cash adjustments to certain revenue agreements, (b) sales from acquired businesses recorded prior to the first anniversary of the acquisition, and (c) the impact of foreign currency movements. We believe that this measure helps investors analyze revenue on a comparable basis versus the prior year.
  • Adjusted SG&A expense is a non-GAAP financial measure calculated as GAAP SG&A expenses further adjusted for items that management believes are not representative of ongoing operations, including, but not limited to, (a) one-time transaction and other costs related to the spin-off from KAR Auction Services in the second quarter of 2019, (b) severance, restructuring and other retention expenses, (c) incremental costs and expenses associated with COVID-19, including cleaning services, cleaning supplies and personal protective equipment, and (d) certain professional fees. We believe this measure helps investors understand the Company’s ongoing cost and expense structure and compare it to prior and future periods.
  • Adjusted net income and Adjusted EPS are non-GAAP financial measures calculated as net income further adjusted for items that management believes are not representative of ongoing operations including, but not limited to, (a) one-time transaction and other costs related to the spin-off from KAR Auction Services in the second quarter of 2019, (b) severance, restructuring and other retention expenses, (c) incremental costs and expenses associated with COVID-19, including cleaning services, cleaning supplies and personal protective equipment, (d) the net loss or gain on the sale of assets or expenses associated with certain M&A, financing and other transactions, (e) acquisition costs, and (f) certain professional fees, as well as (g) gains and losses related to foreign currency exchange rates, and (h) the amortization of acquired intangible assets, and further adjusted to reflect the tax impact of these items. We believe that these measures help investors understand the long-term profitability of our Company and compare our profitability to prior and future periods.
  • Adjusted EBITDA is a non-GAAP financial measure calculated as net income before income taxes, interest expense, and depreciation and amortization (“EBITDA”) and further adjusted for items that management believes are not representative of ongoing operations including, but not limited to, (a) one-time transaction and other costs related to the spin-off from KAR Auction Services in the second quarter of 2019, (b) severance, restructuring and other retention expenses, (c) incremental costs and expenses associated with COVID-19, including cleaning services, cleaning supplies and personal protective equipment, (d) the net loss or gain on the sale of assets or expenses associated with certain M&A, financing and other transactions, (e) acquisition costs, and (f) certain professional fees, as well as (g) gains and losses related to foreign currency exchange rates.

Contacts

Media Inquiries:
Jeanene O’Brien
SVP Marketing and Communications
jobrien@iaai.com | (708) 492-7328

Investor Inquiries:
Farah Soi/Caitlin Churchill
ICR
IAA_ICR@icrinc.com | (203) 682-8200

Arif Ahmed
Vice President, Treasury
arif.ahmed@iaai.com | (708) 492-7257


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