UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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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. ¨
EXPLANATORY NOTE
On March 20, 2023, Ritchie Bros. Auctioneers Incorporated (the “Company”) completed its previously announced acquisition of IAA, Inc. (“IAA”) pursuant to the terms of that certain Agreement and Plan of Merger, dated as of November 7, 2022 and amended as of January 22, 2023 (the “Merger Agreement”), by and among the Company, Ritchie Bros. Holdings Inc., a Washington corporation and a direct and indirect wholly owned subsidiary of the Company (“US Holdings”), Impala Merger Sub I, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdings (“Merger Sub 1”), Impala Merger Sub II, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of US Holdings (“Merger Sub 2”), and IAA. Pursuant to the terms of the Merger Agreement, (i) Merger Sub 1 merged with and into IAA (the “First Merger”), with IAA surviving as an indirect wholly owned subsidiary of the Company and a direct wholly owned subsidiary of US Holdings (the “Surviving Corporation”) and (ii) immediately following the consummation of the First Merger, the Surviving Corporation merged with and into Merger Sub 2 (together with the First Merger, the “Mergers”), with Merger Sub 2 surviving as a direct wholly owned subsidiary of US Holdings. Upon consummation of the Mergers, the Company issued approximately 70,339,723 common shares, without par value, of RBA (the “RBA Common Shares”) and paid approximately $1.7 billion in cash in the Mergers. As of the close of business on March 29, 2023, there were 181,788,431 RBA Common Shares outstanding.
On March 21, 2023, the Company filed a Current Report on Form 8-K (the “Initial 8-K”) with the U.S. Securities and Exchange Commission to report the completion of the transactions contemplated by the Merger Agreement and other related matters. This amendment to the Initial 8-K amends Item 9.01 of the Initial 8-K and provides the historical financial information required pursuant to Item 9.01(a) of Form 8-K and the pro forma financial information required pursuant to Item 9.01(b) of Form 8-K. Except for the foregoing, no other changes have been made to the Initial 8-K.
The unaudited pro forma condensed combined financial information included in this amendment to the Initial 8-K are presented for illustrative purposes only, contain a variety of adjustments, assumptions and estimates, and are not necessarily indicative of what the combined company’s actual financial position or results of operations would have been had the Mergers been completed on the dates indicated. The combined company’s actual results and financial position after the Mergers may differ materially and adversely from the unaudited pro forma condensed combined financial information included in this amendment to the Initial Form 8-K. Important factors that may affect actual results include, but are not limited to, risks and uncertainties relating to the Company’s or IAA’s business, as applicable (including each company’s ability to achieve strategic goals, objectives and targets over applicable periods), industry performance, and general business and economic conditions.
Item 9.01 Financial Statements and Exhibits.
| (a) | Financial Statements of Business Acquired |
The audited consolidated financial statements of IAA as of and for the fiscal years ended January 1, 2023 and January 2, 2022 and accompanying notes are included as Exhibit 99.1 hereto and are incorporated herein by reference.
| (b) | Pro Forma Financial Information |
The following Unaudited Pro Forma Condensed Combined Financial Information required pursuant to Item 9.01(b) of Form 8-K are included as Exhibit 99.2 hereto and are incorporated herein by reference:
| (i) | Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2022. |
| (ii) | Unaudited Pro Forma Condensed Combined Income Statement for the year ended December 31, 2022. |
| (iii) | Notes to the Unaudited Pro Forma Condensed Combined Financial Statements. |
(c) Exhibits.
| Exhibit No. |
Description | |
| 23.1 | Consent of KPMG LLP | |
| 99.1 | Audited consolidated financial statements of IAA as of and for the fiscal years ended January 1, 2023 and January 2, 2022 and the related notes thereto | |
| 99.2 | Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2022, Unaudited Pro Forma Condensed Combined Income Statement for the year ended December 31, 2022 and related notes thereto | |
| 104 | Cover Page Interactive Data File, formatted in Inline Extensible Business Reporting Language (iXBRL) |
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 hereunto duly authorized.
| Date: April 4, 2023 | RITCHIE BROS. AUCTIONEERS INCORPORATED | |
|
By: |
/s/ Darren Watt | |
| Darren Watt | ||
| Senior Vice President & General Counsel | ||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statements (Nos. 333-65533, 333-188350, 333-202636, 333-211112, 333-213114, 333-218398, 333-221439 and 333-231330) on Form S-8 and registration statement on Form S-3 (No. 333-270559) of Ritchie Bros. Auctioneers Incorporated of our report dated February 24, 2023, with respect to the consolidated financial statements of IAA, Inc., which report appears in the Form 8-K/A of Ritchie Bros. Auctioneers Incorporated filed April 4, 2023.
/s/ KPMG LLP
Chicago, Illinois
April 4, 2023
Exhibit 99.1
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
IAA, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of IAA, Inc. and subsidiaries (the Company) as of January 1, 2023 and January 2, 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity (deficit), and cash flows for each of the fiscal years in the three-year period ended January 1, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2023 and January 2, 2022, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended January 1, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Sufficiency of audit evidence over U.S. service revenues from buyer and seller fees
As discussed in Note 2 and 15 to the consolidated financial statements, the Company’s U.S. segment recorded service revenues of $1,539.7 million, which included revenues from buyer and seller fees.
| 2 |
The Company enters into revenue contracts with sellers of salvage vehicles to facilitate the remarketing of salvage vehicles, including inbound tow, processing, storage, titling, enhancing and selling of such vehicles at auction. The Company also enters into revenue contracts with buyers of salvage vehicles that are generally established via purchase at auction, subject to applicable terms and conditions.
We identified the evaluation of the sufficiency of audit evidence over U.S. service revenues from buyer and seller fees as a critical audit matter. The Company’s use of its proprietary information technology (IT) system to capture and process data to recognize U.S. service revenues from buyer and seller fees required a higher degree of auditor judgment due to the extent and complexity of automation involved in the process. In addition, the nature and extent of audit effort associated with the evaluation of the proprietary IT system and related internal controls relevant to the determination of U.S. service revenues from buyer and seller fees, required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the revenue process, including controls related to the recording of U.S. service revenues from buyer and seller fees. We involved IT professionals with specialized skills and knowledge who assisted in (1) obtaining an understanding of the relevant IT system and processes, and (2) testing general IT and IT application controls related to the system used by the Company in its revenue recognition processes for U.S. service revenues from buyer and seller fees. In addition, we:
| ● | observed a selection of U.S. auction sites to gain an understanding of the revenue related activities, including the use of the IT system. |
| ● | evaluated the Company’s revenue recognition policies by examining the Company’s applicable published terms and conditions as they relate to U.S. buyer service fees. |
| ● | analyzed a selection of customer contracts to understand the contractual terms and conditions as they relate to U.S. seller service fees. |
| ● | selected a sample of both U.S. buyer and seller service revenue transactions and compared the amounts recognized for consistency with underlying documentation. |
We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of audit effort.
Goodwill impairment assessment of the International reporting unit
As discussed in Notes 2 and 8 to the consolidated financial statements, the carrying value of goodwill as of January 1, 2023 was $767.5 million, of which $268.9 million related to the International reporting unit. The Company assesses goodwill for impairment annually during the fourth quarter or more frequently when events or changes in circumstances indicate that impairment may exist. Reporting units are tested for impairment by comparing the fair value of each reporting unit with its carrying amount. Management uses a combination of both an income approach (discounted cash flows) and a market approach (market multiples of companies in similar lines of business) to estimate the fair value of reporting units. During the third quarter of fiscal 2022, the Company identified a triggering event for the International reporting unit. The Company performed an impairment test of the International reporting unit as of October 2, 2022 and concluded that no impairment existed.
We identified the evaluation of the goodwill impairment assessment of the International reporting unit during the third quarter of fiscal 2022 as a critical audit matter. A high degree of subjective auditor judgment was required to evaluate certain assumptions used in the Company’s estimate of the fair value of the International reporting unit. Specifically, the Company’s determination of the forecasted revenue growth rates and the discount rate required subjective and challenging auditor judgment.
| 3 |
Changes in these assumptions could have had a significant effect on the Company’s assessment of the fair value of the International reporting unit. Additionally, the audit effort associated with the forecasted revenue growth rates and discount rate required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill impairment assessment process, including controls related to the forecasted revenue growth rates and the discount rate used to estimate the fair value of the International reporting unit. We evaluated the Company’s forecasted revenue growth rates for the International reporting unit, by comparing them to the Company’s historical growth rates, arrangements with customers and forecasted revenue growth rates of peer companies based on publicly available market data. We involved valuation professionals with specialized skills and knowledge, who assisted in (1) evaluating the appropriateness of the selected guideline public companies and providing revenue growth rate ranges for those companies, and (2) evaluating the Company’s selection of the discount rate by comparing it to discount rate ranges that were independently developed using publicly available market data.
/s/ KPMG LLP
We have served as the Company’s auditor since 2018.
Chicago, Illinois
February 24, 2023
| 4 |
IAA, Inc.
Consolidated Statements of Income
(In millions, except per share data)
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Revenues: | ||||||||||||
| Service revenues | $ | 1,686.4 | $ | 1,537.7 | $ | 1,233.1 | ||||||
| Vehicle and parts sales | 412.5 | 299.7 | 151.8 | |||||||||
| Total revenues | 2,098.9 | 1,837.4 | 1,384.9 | |||||||||
| Operating expenses: | ||||||||||||
| Cost of services | 996.5 | 851.5 | 721.7 | |||||||||
| Cost of vehicle and parts sales | 367.7 | 261.2 | 125.2 | |||||||||
| Selling, general and administrative | 212.1 | 192.3 | 144.9 | |||||||||
| Depreciation and amortization | 105.6 | 86.5 | 81.1 | |||||||||
| Total operating expenses | 1,681.9 | 1,391.5 | 1,072.9 | |||||||||
| Operating profit | 417.0 | 445.9 | 312.0 | |||||||||
| Interest expense, net | 51.0 | 57.7 | 56.0 | |||||||||
| Other expense (income), net | 4.6 | 0.2 | (1.0 | ) | ||||||||
| Income before income taxes | 361.4 | 388.0 | 257.0 | |||||||||
| Income taxes | 69.0 | 93.6 | 62.2 | |||||||||
| Net income | $ | 292.4 | $ | 294.4 | $ | 194.8 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 2.18 | $ | 2.18 | $ | 1.45 | ||||||
| Diluted | $ | 2.18 | $ | 2.18 | $ | 1.44 | ||||||
See accompanying notes to consolidated financial statements
| 5 |
IAA, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Net income | $ | 292.4 | $ | 294.4 | $ | 194.8 | ||||||
| Other comprehensive (loss) income | ||||||||||||
| Foreign currency translation (loss) gain | (39.1 | ) | (2.8 | ) | 3.3 | |||||||
| Comprehensive income | $ | 253.3 | $ | 291.6 | $ | 198.1 | ||||||
See accompanying notes to consolidated financial statements
| 6 |
IAA, Inc.
(In millions, except per share amounts)
| January 1, 2023 | January 2, 2022 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 195.9 | $ | 109.4 | ||||
| Restricted cash | — | 53.0 | ||||||
| Accounts receivable, net | 445.2 | 465.7 | ||||||
| Prepaid consigned vehicle charges | 68.1 | 72.2 | ||||||
| Other current assets | 79.2 | 69.6 | ||||||
| Total current assets | 788.4 | 769.9 | ||||||
| Non-current assets | ||||||||
| Operating lease right-of-use assets, net | 1,203.9 | 1,024.4 | ||||||
| Property and equipment, net | 383.8 | 338.1 | ||||||
| Goodwill | 767.5 | 797.5 | ||||||
| Intangible assets, net | 185.2 | 197.5 | ||||||
| Other assets | 34.1 | 26.9 | ||||||
| Total non-current assets | 2,574.5 | 2,384.4 | ||||||
| Total assets | $ | 3,362.9 | $ | 3,154.3 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 231.0 | $ | 163.5 | ||||
| Short-term right-of-use operating lease liability | 87.6 | 94.3 | ||||||
| Accrued employee benefits and compensation expenses | 34.0 | 44.2 | ||||||
| Other accrued expenses | 64.9 | 124.6 | ||||||
| Current maturities of long-term debt | 32.5 | 181.3 | ||||||
| Total current liabilities | 450.0 | 607.9 | ||||||
| Non-current liabilities | ||||||||
| Long-term debt | 1,090.8 | 1,120.6 | ||||||
| Long-term right-of-use operating lease liability | 1,165.0 | 984.8 | ||||||
| Deferred income tax liabilities | 66.9 | 74.8 | ||||||
| Other liabilities | 22.9 | 32.6 | ||||||
| Total non-current liabilities | 2,345.6 | 2,212.8 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| 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: 133.8 shares at January 1, 2023 and 134.2 shares at January 2, 2022 | 1.3 | 1.3 | ||||||
| Treasury stock, at cost: 1.4 shares at January 1, 2023 and 0.7 shares at January 2, 2022 | (61.2 | ) | (34.0 | ) | ||||
| Additional paid-in capital | 26.2 | 18.6 | ||||||
| Retained earnings | 654.5 | 362.1 | ||||||
| Accumulated other comprehensive loss | (53.5 | ) | (14.4 | ) | ||||
| Total stockholders' equity | 567.3 | 333.6 | ||||||
| Total liabilities and stockholders' equity | $ | 3,362.9 | $ | 3,154.3 | ||||
See accompanying notes to consolidated financial statements
| 7 |
IAA, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In millions)
Common Stock | Treasury Stock | Additional Paid-In | Retained Earnings | Accumulated Other Comprehensive | Total Stockholders' Equity | |||||||||||||||||||||||||||
| Shares | Amt | Shares | Amt | Capital | (Deficit) | Loss | (Deficit) | |||||||||||||||||||||||||
| Balance at December 29, 2019 | 133.6 | $ | 1.3 | — | $ | — | $ | 3.5 | $ | (127.1 | ) | $ | (14.9 | ) | $ | (137.2 | ) | |||||||||||||||
| Net income | — | — | — | — | — | 194.8 | — | 194.8 | ||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | 3.3 | 3.3 | ||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 8.5 | — | — | 8.5 | ||||||||||||||||||||||||
| Common stock issued for exercise and vesting of stock-based awards | 1.1 | — | — | — | 8.1 | — | — | 8.1 | ||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | — | — | — | — | 1.0 | — | — | 1.0 | ||||||||||||||||||||||||
| Withholding taxes on stock-based awards | (0.2 | ) | — | — | — | (9.1 | ) | — | — | (9.1 | ) | |||||||||||||||||||||
| Balance at December 27, 2020 | 134.5 | 1.3 | — | — | 12.0 | 67.7 | (11.6 | ) | 69.4 | |||||||||||||||||||||||
| Net income | — | — | — | — | — | 294.4 | — | 294.4 | ||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | (2.8 | ) | (2.8 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | (0.7 | ) | — | 0.7 | (34.0 | ) | — | — | — | (34.0 | ) | |||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 11.4 | — | — | 11.4 | ||||||||||||||||||||||||
| Common stock issued for exercise and vesting of stock-based awards | — | — | — | — | 1.0 | — | — | 1.0 | ||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | 0.5 | — | — | — | 1.6 | — | — | 1.6 | ||||||||||||||||||||||||
| Withholding taxes on stock-based awards | (0.1 | ) | — | — | — | (7.4 | ) | — | — | (7.4 | ) | |||||||||||||||||||||
| Balance at January 2, 2022 | 134.2 | 1.3 | 0.7 | (34.0 | ) | 18.6 | 362.1 | (14.4 | ) | 333.6 | ||||||||||||||||||||||
| Net income | — | — | — | — | 292.4 | — | 292.4 | |||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | — | — | — | — | — | — | (39.1 | ) | (39.1 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | (0.7 | ) | — | 0.7 | (27.2 | ) | — | — | — | (27.2 | ) | |||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 13.0 | — | — | 13.0 | ||||||||||||||||||||||||
| Common stock issued for exercise and vesting of stock-based awards | 0.4 | — | — | — | 0.4 | — | — | 0.4 | ||||||||||||||||||||||||
| Common stock issued for employee stock purchase plan | 0.1 | — | — | — | 1.3 | — | — | 1.3 | ||||||||||||||||||||||||
| Withholding taxes on stock-based awards | (0.2 | ) | — | — | — | (7.1 | ) | — | — | (7.1 | ) | |||||||||||||||||||||
| Balance at January 1, 2023 | 133.8 | 1.3 | 1.4 | (61.2 | ) | 26.2 | 654.5 | (53.5 | ) | 567.3 | ||||||||||||||||||||||
See accompanying notes to consolidated financial statements
| 8 |
IAA, Inc.
Consolidated Statements of Cash Flows
(In millions)
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 292.4 | $ | 294.4 | $ | 194.8 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 105.6 | 86.5 | 81.1 | |||||||||
| Operating lease expense | 178.3 | 153.9 | 136.7 | |||||||||
| Provision for credit losses | 1.4 | 1.4 | 4.4 | |||||||||
| Deferred income taxes | (5.8 | ) | (0.7 | ) | 2.0 | |||||||
| Loss on extinguishment of debt | — | 10.3 | — | |||||||||
| Amortization of debt issuance costs | 2.8 | 3.4 | 4.2 | |||||||||
| Stock-based compensation | 13.0 | 11.4 | 8.5 | |||||||||
| Change in contingent consideration liabilities | 5.0 | 2.3 | — | |||||||||
| Other non-cash, net | 3.2 | 0.2 | (0.7 | ) | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
| Operating lease payments | (182.6 | ) | (147.0 | ) | (130.9 | ) | ||||||
| Accounts receivable and other assets | 18.0 | (134.4 | ) | (54.3 | ) | |||||||
| Accounts payable and accrued expenses | (32.0 | ) | 29.4 | 64.2 | ||||||||
| Net cash provided by operating activities | 399.3 | 311.1 | 310.0 | |||||||||
| Investing activities | ||||||||||||
| Acquisition of businesses (net of cash acquired) | — | (257.1 | ) | — | ||||||||
| Purchases of property, equipment and computer software | (178.3 | ) | (135.6 | ) | (69.8 | ) | ||||||
| Proceeds from the sale of property and equipment | 39.0 | 0.8 | 0.8 | |||||||||
| Other | (3.7 | ) | (2.0 | ) | — | |||||||
| Net cash used by investing activities | (143.0 | ) | (393.9 | ) | (69.0 | ) | ||||||
| Financing activities | ||||||||||||
| Net increase (decrease) in book overdrafts | 67.9 | 28.8 | (33.6 | ) | ||||||||
| Proceeds from debt issuance | — | 815.0 | — | |||||||||
| Payments on long-term debt | (181.3 | ) | (774.0 | ) | (4.0 | ) | ||||||
| Deferred financing costs | (0.1 | ) | (4.8 | ) | (2.9 | ) | ||||||
| Payments on finance leases | (11.3 | ) | (12.7 | ) | (14.3 | ) | ||||||
| Purchase of treasury stock | (27.2 | ) | (34.0 | ) | — | |||||||
| Issuance of common stock under stock plans | 0.4 | 1.0 | 8.1 | |||||||||
| Proceeds from issuance of employee stock purchase plan shares | 1.3 | 1.6 | 1.0 | |||||||||
| Tax withholding payments for vested RSUs | (7.1 | ) | (7.4 | ) | (9.1 | ) | ||||||
| Payment of contingent consideration | (54.7 | ) | (1.3 | ) | (1.5 | ) | ||||||
| Net cash (used) provided by financing activities | (212.1 | ) | 12.2 | (56.3 | ) | |||||||
| Effect of exchange rate changes on cash and restricted cash | (10.7 | ) | 0.2 | 1.0 | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 33.5 | (70.4 | ) | 185.7 | ||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 162.4 | 232.8 | 47.1 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 195.9 | $ | 162.4 | $ | 232.8 | ||||||
| Cash paid for interest, net | $ | 50.1 | $ | 45.2 | $ | 53.7 | ||||||
| Cash paid for taxes, net | $ | 84.6 | $ | 90.0 | $ | 59.7 | ||||||
See accompanying notes to consolidated financial statements
| 9 |
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash reported in balance sheets | ||||||||||||
| Cash and cash equivalents | $ | 195.9 | $ | 109.4 | $ | 232.8 | ||||||
| Restricted cash | — | 53.0 | — | |||||||||
| Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 195.9 | $ | 162.4 | $ | 232.8 | ||||||
See accompanying notes to consolidated financial statements
| 10 |
IAA, Inc.
Notes to Consolidated Financial Statements
Note 1—Basis of Presentation
Description of Business
IAA, Inc., together with its subsidiaries (collectively referred to herein as “IAA” and “the Company”) is a leading global digital marketplace connecting vehicle buyers and sellers. Leveraging leading-edge technology and focusing on innovation, IAA’s unique platform facilitates the marketing and sale of total loss, damaged and low-value vehicles for a full spectrum of sellers. Headquartered in Westchester, Illinois, the Company has more than 210 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 products provide global buyers with the vehicles they need to, among other things, fulfill their vehicle rebuild requirements, replacement part inventory or scrap demand. IAA provides global buyers multiple bidding/buying digital channels, innovative vehicle merchandising, efficient evaluation services and online bidding tools, enhancing the overall purchasing experience.
The Company operates in two reportable segments: United States and International. The Company earns fees for its services from both buyers and sellers of vehicles sold through its channels.
Separation from KAR Auction Services, Inc. ("KAR")
On February 27, 2018, KAR announced a plan to pursue the separation and spin-off (the “Separation”) of IAA (its salvage auction business) into a separate public company. On June 28, 2019 (the “Separation Date”), KAR completed the distribution of 100% of the issued and outstanding shares of common stock of IAA to the holders of record of KAR's common stock on June 18, 2019, on a pro rata basis (the “Distribution”). Following the Distribution, IAA became an independent publicly-traded company and is listed on the New York Stock Exchange under the symbol “IAA.”
In connection with the Separation, the Company also entered into various ancillary agreements to effect the Separation and provide a framework for the Company's relationship with KAR after the Separation. For further information regarding these agreements, see Note 3 - Relationship with KAR and Related Entities.
Proposed Merger
On November 7, 2022, the Company entered into the Agreement and Plan of Merger and Reorganization (as amended or otherwise modified prior to January 22, 2023, the “Original Merger Agreement”) with Ritchie Bros. Auctioneers Incorporated, a company organized under the federal laws of Canada and its subsidiaries (collectively referred to as “RBA”). On January 22, 2023, the Company, RBA and the other parties to the Original Merger Agreement entered into the Amendment to the Agreement and Plan of Merger and Reorganization (such amendment, the “Merger Agreement Amendment” and, together with the Original Merger Agreement, as it may be further amended or modified from time to time, the “Merger Agreement”). Per the terms and conditions set forth in the Merger Agreement, at the effective time of the merger, each issued and outstanding share of common stock of the Company (other than certain customary excluded shares) as of immediately prior to such effective time will be converted automatically into the right to receive (A) 0.5252 of a common share, without par value, of RBA (“RBA Common Shares”) and (B) $12.80 in cash, without interest and less any applicable withholding taxes (together, the “Merger Consideration”). The Company's stockholders will receive cash in lieu of any fractional RBA Common Shares to which they would otherwise be entitled. In connection with the Merger Agreement Amendment, the Company also entered into a cooperation agreement (the “Cooperation Agreement”) with Ancora Holdings Group, LLC and/or its applicable affiliates (“Ancora”) regarding the mergers, the membership and composition of the Company’s Board of Directors in certain circumstances and related matters, as well as Ancora’s commitment to appear and vote its shares, representing approximately 4% of the Company’s voting power as of the date of the Cooperation Agreement, in favor of the mergers and related proposals at the special meeting of Company’s stockholders to consider and vote on the adoption of the Merger Agreement and approval of the transactions contemplated thereby and certain other matters.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Consummation of the mergers is subject to the satisfaction of various conditions, including, among other things, (1) the approval of the issuance of RBA Common Shares by the affirmative vote of a majority of the votes cast by holders of outstanding RBA Common Shares, (2) the adoption of the Merger Agreement by holders of a majority of the outstanding shares of the Company’s common stock and (3) other customary closing conditions. The Company currently operates, and until completion of the mergers will continue to operate, independently of RBA.
In connection with the mergers, the Company has agreed to pay J.P. Morgan a transaction fee of 0.65% of the transaction value (which is generally defined as the enterprise value of the transaction based on the consideration RBA has agreed to provide in the mergers), less $0.5 million, of which $3.0 million became payable by IAA to J.P. Morgan in connection with J.P. Morgan’s delivery of a prior opinion, dated November 6, 2022, $1.5 million of which became payable by IAA to J.P. Morgan in connection with J.P. Morgan’s delivery of its opinion dated January 22, 2023 in connection with the mergers, and the balance of which becomes payable upon closing of the mergers. IAA has also agreed to reimburse J.P. Morgan for its expenses incurred in connection with the mergers, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities arising out of J.P. Morgan’s engagement. In addition, in connection with the mergers, IAA is also responsible for the fees and expenses of its own counsel and other advisors.
In addition, under the Merger Agreement, the Company is permitted to establish a transaction bonus program for employees, including certain executive officers, providing for cash payments of up to $6.0 million that will become payable on the closing of the mergers, subject to the employee’s continued employment through such date. The Company is also permitted under the Merger Agreement to establish a retention bonus program for employees, including certain executive officers, providing for cash retention bonuses of up to $19.0 million that will be payable subject to continued employment for at least a period of time after closing of the mergers.
The consolidated financial statements of the Company were prepared without consideration of the pending mergers.
Basis of Presentation
The consolidated financial statements of the Company include the accounts of the parent company and its wholly-owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.
Note 2—Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of IAA and all of its wholly owned subsidiaries. Intercompany transactions and balances between consolidated IAA businesses have been eliminated. The financial results of acquired businesses have been included in the Company’s consolidated financial statements from the date of acquisition.
Fiscal Periods
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 contained 52 weeks, fiscal 2021 contained 53 weeks, and fiscal 2020 contained 52 weeks.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of the consolidated financial statements in conformity with 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.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Business Segments
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. See Note - 15 - Segment Information for additional information.
Foreign Currency
The local currency is the functional currency for each of the Company’s foreign entities. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at average exchange rates in effect during the period. Assets and liabilities of foreign operations are translated using the exchange rates in effect at year end. Foreign currency transaction gains and losses are included in the consolidated statements of income within “Other (expense) income, net” and resulted in a loss of $5.1 million for the year ended January 1, 2023, a loss of $0.3 million for the year ended January 2, 2022, and a gain of $0.3 million for the year ended December 27, 2020. Adjustments arising from the translation of net assets located outside the U.S. (gains and losses) are included in the consolidated balance sheets within “Accumulated other comprehensive loss”.
Cash Equivalents
All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. These investments are valued at cost, which approximates fair value. The Company did not have a cash equivalents balance at January 1, 2023 or January 2, 2022.
Restricted Cash
Restricted cash as of January 2, 2022 related to the amount held in an escrow account to fund the remaining purchase price of the Company’s acquisition of SYNETIQ Ltd. (“SYNETIQ”), and was paid out during the first quarter of fiscal 2022 upon receipt of required approvals from the U.K. Competition and Markets Authority. See Note - 4 - Acquisitions for additional information related to the SYNETIQ acquisition.
Accounts Receivable
Accounts receivable primarily include the unremitted purchase price of vehicles purchased by third parties at the auctions, fees to be collected from those buyers and amounts due for services provided by the Company related to certain consigned vehicles in the Company’s possession, including advance charges paid on the seller’s behalf. The amounts due with respect to the consigned vehicles are generally deducted from the sales proceeds upon the eventual auction or other disposition of the related vehicles. Due to the nature of the Company’s business, substantially all accounts receivable are due from salvage buyers and insurance companies. The Company has possession of vehicles or vehicle titles collateralizing a significant portion of the accounts receivable.
In addition, accounts receivable include amounts to be collected from landlords of certain leased facilities for reimbursement of leasehold improvements.
Accounts receivable are reported net of an allowance for credit losses. The allowance for credit losses is based on management’s evaluation of the accounts receivable portfolio under current conditions, the volume of the portfolio, overall portfolio credit quality, review of specific collection issues and such other factors which in management’s judgment merit recognition in estimating losses.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Prepaid Consigned Vehicle Charges
Prepaid consigned vehicle charges include the inbound tow, titling costs and enhancement charges associated with a consigned vehicle. These prepaid charges are recorded in cost of services at the date the vehicle is sold and revenue is recognized.
Other Current Assets
Other current assets consist of inventories, prepaid expenses, taxes receivable and other miscellaneous assets. The inventories, which consist of vehicles acquired under purchase agreement contracts, are accounted for on the specific identification method and are stated at the lower of cost or net realizable value. Inventories included in Other current assets were $51.4 million and $49.7 million at January 1, 2023 and January 2, 2022, respectively.
Leases
The Company has entered into lease arrangements mainly for property, software, vehicles, furniture and fixtures. The Company determines if an arrangement is a lease at inception. The Company classifies leases as finance leases when there is either a transfer of ownership of the underlying asset by the end of the lease term, the lease contains an option to purchase the asset that the Company is reasonably certain will be exercised, the lease term is for the major part of the remaining economic life of the asset, the present value of the lease payments and any residual value guarantee equals or substantially exceeds all the fair value of the asset, or the asset is of such a specialized nature that it will have no alternative use to the lessor at the end of the lease term. When none of these criteria are met, the Company classifies leases as operating leases.
The Company includes options to extend or terminate the lease in its determination of lease term when it is reasonably certain that the Company will exercise that option. The Company considers leases with an initial term of 12 months or less as short-term in nature and does not record such leases on the balance sheet. The Company records all other leases on the balance sheet with right of use (“ROU”) assets representing the right to use the underlying asset for the lease term and lease liabilities representing the obligation to make lease payments arising from the lease. The Company recognizes ROU assets and lease liabilities at the commencement date based on the present value of the lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments as the implicit rate within the leases is generally not determinable. The ROU assets include present value of lease payments to be made, initial direct costs incurred and prepaid lease payments and exclude lease incentives. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, such as fixed maintenance costs, which are accounted for separately. For certain equipment leases, the Company accounts for the lease and non-lease components as a single lease component in calculating ROU assets and lease liabilities.
Goodwill
Goodwill is calculated as the excess of consideration paid over fair value of identifiable net assets of businesses acquired. Goodwill is tested for impairment annually in the fourth quarter, or more frequently as impairment indicators arise.
ASC 350, Intangibles—Goodwill and Other, permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the quantitative assessment would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment.
Under the quantitative assessment, the fair value of each reporting unit is compared with its carrying value (including goodwill). The fair value of the reporting unit is determined using income approach (discounted cash flows) and market approach (market multiples of companies in similar lines of business). If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired. If the carrying value of the reporting unit exceeds its fair value, the difference, up to the amount of goodwill recorded for the reporting unit, is recognized as an impairment.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Intangible Assets
Intangible assets generally consist of customer relationships, tradenames, computer software and technology, and non-compete agreements which, if finite-lived, are amortized over their estimated useful lives using the straight-line method. Tradenames with indefinite lives are not amortized. Costs incurred related to software and technology developed or obtained for internal use are capitalized during the application development stage of software development. The amortization periods of finite-lived intangible assets are re-evaluated periodically when facts and circumstances indicate that revised estimates of useful lives may be warranted. Indefinite-lived tradenames are assessed for impairment, in accordance with ASC 350, annually in the fourth quarter or more frequently as impairment indicators arise. At the end of each assessment, a determination is also made as to whether the tradenames still have an indefinite life.
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method at rates intended to depreciate the costs of assets over their estimated useful lives. Upon retirement or sale of property and equipment, the cost of the disposed assets and related accumulated depreciation is removed from the accounts and any resulting gain or loss is credited or charged to selling, general and administrative expenses. Expenditures for normal repairs and maintenance are charged to expense as incurred. Additions and expenditures for improving or rebuilding existing assets that extend the useful life are capitalized. Leasehold improvements made either at the inception of the lease or during the lease term are amortized over the shorter of their economic lives or the lease term including any renewals that are reasonably assured.
Other Assets
Other assets consist of deposits and other miscellaneous long-term assets.
Impairment of Long-Lived Assets
Management reviews right-of-use assets, property and equipment, customer relationships and other intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The determination includes evaluation of factors such as current market value, future asset utilization, business climate, and future cash flows expected to result from the use of the related assets. If the carrying amount of a long-lived asset exceeds the total amount of the estimated undiscounted future cash flows from that asset, a loss is recognized in the period to the extent that the carrying amount exceeds the fair value of the asset. The impairment analysis is based on the Company’s current business strategy, expected growth rates and estimated future economic and regulatory conditions.
During the third quarter of fiscal 2022, the Company updated its forecasts which resulted in a decline in the International reporting unit’s operating results and projections. The Company identified this as a triggering event and determined that the carrying amount of certain long-lived assets should be evaluated for impairment at October 2, 2022. The Company compared the undiscounted cash flows of these long-lived assets with the carrying value and determined that their fair value exceeded the carrying value by a significant amount and, therefore, no impairment was recorded.
Accounts Payable
Accounts payable include amounts due to sellers from the proceeds of the sale of their consigned vehicles less any fees, as well as book overdrafts. Book overdrafts represent outstanding checks in excess of funds on deposit. The Company had $96.7 million book overdrafts at January 1, 2023, and $28.8 million book overdrafts at January 2, 2022.
Self-Insurance Reserves
The Company self-insures a portion of employee medical benefits, as well as a portion of its automobile, general liability and workers’ compensation claims. The Company has insurance coverage that limits the exposure on individual claims. The cost of the insurance is expensed over the contract periods. Utilizing historical claims experience, the Company records an accrual for the claims related to its employee medical benefits, automobile, general liability and workers’ compensation claims based upon the expected amount of all such claims, which includes the cost of claims that have been incurred but not reported. Accrued medical benefits and worker’s compensation expense are recorded in “Accrued employee benefits and compensation expenses” and was $6.8 million and $6.2 million at January 1, 2023 and January 2, 2022, respectively. Accrued automobile and general liability expenses are recorded in “Other accrued expenses” and amounted to $1.1 million and $1.5 million at January 1, 2023 and January 2, 2022, respectively.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Environmental Liabilities
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in "Other accrued expenses" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties.
Unamortized Debt Issuance Costs
Debt issuance costs reflect the expenditures incurred in conjunction with the term loan facility, the revolving credit facility, and the senior notes. The debt issuance costs are amortized to interest expense using the effective interest method or the straight-line method, as applicable, over the lives of the related debt issues. Debt issuance costs are presented as a reduction from the carrying amount of the related debt liability.
Revenue Recognition
The Company generates its revenues from contracts with customers. The Company recognizes revenue when control of the promised goods or services are transferred to customers in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company identifies each performance obligation and evaluates whether the performance obligations are distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. The Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for each performance obligation. The Company then determines when the goods or services are transferred to the customer in order to determine the timing of revenue recognition.
The Company has disaggregated revenue at the product level by Services and Vehicle Sales, as well as geographically by the United States and International. See Note 15 - 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. 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.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
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 a point in time when the vehicle is purchased through the auction process. Buyers also pay a fixed registration fee to access the auctions for a one-year term in addition to the fees paid upon purchase of a vehicle. The performance obligation to provide access to the auctions, associated with the registration, is satisfied ratably over the one- or two-year contractual term of the buyer agreement. Accordingly, registration fee revenue is recognized ratably over the one- or two-year contract term. The Company also offers other services to buyers such as transportation, storage, vehicle condition reporting, and other ancillary services. Revenue from such services is recognized in the period in which such services are provided.
Vehicle and Parts Sales
Vehicle and parts sales represent the selling price of the 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 the 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 a 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 vehicle sales are recorded in Service Revenue.
There were no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets as of January 1, 2023 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 years ended January 1, 2023 and January 2, 2022, revenue recognized from performance obligations related to prior periods was not material. Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less and contracts where revenue is recognized as invoiced, is not material.
Income Taxes
The Company files federal, state and foreign income tax returns in accordance with the applicable rules of each jurisdiction. The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes. The provision for income taxes includes federal, foreign, state and local income taxes payable, as well as deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
In accordance with ASC 740, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation under ASC 718, Compensation—Stock Compensation. The Company recognizes all stock-based compensation as expense in the financial statements over the vesting period and that cost is measured as the fair value of the award at the grant date for equity-classified awards. The Company also recognizes the impact of forfeitures as they occur and excess tax benefits and tax deficiencies related to employee stock-based compensation within income tax expense.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Customer Concentration
The auction of each salvage vehicle includes a sell fee paid by the provider and a buy fee paid by the purchaser of the vehicle. No single provider customer or buyer customer accounted for more than 10% of consolidated revenues in any period presented. During fiscal 2022, approximately 40% of consolidated revenues were associated with vehicles supplied by the Company’s four largest provider customers in the United States segment.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of accounts receivable. The Company maintains cash and cash equivalents with various major financial institutions. The Company performs periodic evaluations of the relative credit standing of these financial institutions and companies and limits the amount of credit exposure with any one institution. The Company maintains its cash in accounts which may at times exceed Federal Deposit Insurance Corporation insured limits. The Company has not experienced any losses in such accounts. Due to the nature of our business, substantially all of the Company’s accounts receivable are due from vehicle dealers, salvage buyers and insurance companies. The Company has possession of vehicles or vehicle titles collateralizing a significant portion of the trade receivables. The risk associated with this concentration is limited due to the large number of accounts and their geographic dispersion.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
• Level 1: Inputs that are based upon quoted prices in active markets for identical assets or liabilities.
• Level 2: Inputs, other than quoted prices included within Level 1, which are observable either directly or indirectly.
• Level 3: Unobservable inputs where there is little or no market activity for the asset or liability. These inputs reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and accrued liabilities approximate fair value because of the short-term nature of those instruments.
In November 2020, the Company entered into an agreement which grants the owner a right during fiscal years 2023 and 2024 to cause the Company to acquire certain assets (the “Put Option”) for a price based on a pre-defined formula. The carrying value of this Put Option is reported at fair value each reporting period. The Company measured and recognized the fair value of the Put Option using a Monte Carlo simulation. Key assumptions used in the valuation include discount rate, volume volatility, risk-free interest rate, cash flow projections and other details specific to the Put Option. The estimated fair value of the Put Option at January 1, 2023 and January 2, 2022 was zero and was categorized within Level 3 of the fair value hierarchy.
See Note 10 - Debt for fair value of debt.
New Accounting Standards
The Company does not believe that any recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material impact on its consolidated financial statements or disclosures.
Note 3—Relationship with KAR and Related Entities
In connection with the Separation, the Company entered into a non-compete and various other ancillary agreements to effect the Separation and provide a framework for the Company's relationship with KAR after the Separation. These agreements noted below govern certain relationships between the Company and KAR after the Separation.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Non-Compete Agreement
Pursuant to the Separation and Distribution Agreement, the Company agreed not to compete with KAR in certain non-salvage activities for a period of five years following the Separation Date in certain jurisdictions, subject to certain exceptions. The Company is expressly permitted to continue to conduct its salvage auction business as conducted immediately prior to the Separation Date. The exceptions also permit the Company to conduct certain non-salvage business, in some cases subject to a revenue sharing mechanism in the event such business exceeds specified volume limits or other thresholds. The Company’s transactions with KAR relating to these non-compete provisions were not material for fiscal years 2022, 2021, and 2020.
Transition Services Agreement
Under the transition services agreement, KAR and its subsidiaries provided, on an interim, transitional basis, various services to the Company for a period of up to two years from the Separation Date. The services provided included information technology, accounts payable, payroll, and other financial functions and administrative services. From time to time, the Company also provided similar services to KAR under the transition services agreement. As of June 28, 2021, the Transition Service Agreement terminated in accordance with its term, and neither party is providing services to the other.
Tax Matters Agreement
The tax matters agreement generally governs the Company’s and KAR’s respective rights, responsibilities and obligations with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the Separation, the Distribution or certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes for any tax period ended on or before the Separation Date, as well as tax periods beginning after the date of the Distribution.
In addition, the tax matters agreement imposes certain restrictions on the Company and its subsidiaries (including restrictions on share issuances, business combinations, sales of assets and similar transactions) designed to preserve the tax-free status of the Separation, the Distribution and certain related transactions. The tax matters agreement also provides special rules that allocate tax liabilities in the event the Separation, the Distribution, or certain related transactions fail to qualify as tax-free for U.S. federal income tax purposes.
Employee Matters Agreement
The employee matters agreement allocated liabilities and responsibilities relating to employment matters, employee compensation and benefits plans and programs and other related matters. The employee matters agreement governs certain compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company. The employee matters agreement provides that, unless otherwise specified, KAR will be responsible for liabilities associated with employees who are employed by KAR following the Separation, former employees whose last employment was with the KAR businesses and certain specified current and former corporate employees, and the Company is responsible for liabilities associated with employees who are employed by it following the Separation, former employees whose last employment was with the Company’s businesses and certain specified current and former corporate employees.
Note 4—Acquisitions
2021 Acquisitions
SYNETIQ Ltd.
On October 26, 2021, IAA, through its indirect wholly owned subsidiary, IAA International Holdings Limited, acquired 100% of 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 2021 Revolving Credit Facility (as defined in Note 10 - Debt). The transaction costs associated with the acquisition were approximately $6.5 million and were recorded in general and administrative expense during fiscal 2021.
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IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company finalized the purchase price allocation for the SYNETIQ acquisition during the three months ended July 3, 2022. Measurement period adjustments were not material. 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 Adjusted October 26, 2021 | ||||
| Cash | $ | 7.1 | ||
| Accounts receivable | 4.7 | |||
| Inventory | 17.4 | |||
| ROU assets | 39.0 | |||
| Property and equipment | 12.5 | |||
| Goodwill | 256.4 | |||
| 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 | (10.3 | ) | ||
| Net assets acquired | $ | 311.6 | ||
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 the Company’s fiscal 2020 (in millions):
| Fiscal Year Ended | ||||||||
| January 2, 2022 | December 27, 2020 | |||||||
| Net revenue | $ | 2,011.1 | $ | 1,575.4 | ||||
| Net income | 297.9 | 179.3 | ||||||
| 20 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
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 2020, 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, accretion of contingent consideration and interest expense related to the borrowings under the Company’s 2021 Revolver Facility in connection with the acquisition of SYNETIQ. In addition, fiscal 2021 pro forma net income was adjusted to exclude $6.5 million of acquisition-related costs incurred in fiscal 2021 and fiscal 2020 pro forma net income was adjusted to include these costs.
Auto Exchange
On June 18, 2021, the Company acquired Marisat, Inc. d/b/a Auto Exchange (“Auto Exchange”), a salvage auction provider located in New Jersey. The estimated acquisition date fair value of the total consideration was $7.3 million, which consisted of $2.0 million of cash, and the fair value of contingent consideration of $5.3 million, $2.0 million of which was paid at closing and is subject to clawback provisions. The remaining contingent consideration with a fair value of $3.3 million is payable over 5 years subject to the achievement of certain performance targets.
The Company finalized the purchase price allocation for the Auto Exchange acquisition. The fair value of acquired customer relationships and other net assets was $4.1 million and $0.6 million, respectively. The $2.6 million excess of the purchase price consideration over the estimated fair value of the acquired net assets was recognized as goodwill and reflects expected synergies resulting from adding Auto Exchange’s products and processes to the Company’s products and processes. The acquired goodwill is allocated to the United States segment and is deductible for tax purposes.
The results of Auto Exchange are included in the Company’s financial statements since the date of acquisition and did not have a material impact on the Company’s financial statements and related disclosures for the periods presented. The costs incurred by the Company in connection with this acquisition were not material.
During fiscal 2022 and fiscal 2021, the Company recorded a charge of $1.9 million and $1.5 million, respectively, in selling, general and administrative expenses to reflect an increase in the fair value of the contingent consideration liability.
Note 5—Stock and Stock-Based Compensation Plans
2019 Omnibus Stock and Incentive Plan
On June 27, 2019, the Company’s board of directors approved the 2019 OSIP. The purpose of the 2019 OSIP is to provide an additional incentive to selected management employees, directors, independent contractors, and consultants of the Company whose contributions are essential to the growth and success of the Company, in order to strengthen the commitment of such persons, motivate such persons to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose efforts will result in the long-term growth and profitability for the Company.
Benefits granted under the 2019 OSIP may be granted in any one or a combination of (i) options to purchase IAA common stock; (ii) IAA share appreciation rights (“SARs”); (iii) restricted shares of IAA common stock; (iv) other IAA stock-based awards; or (v) other cash-based awards. Options, restricted shares and other share-based awards or cash awards may constitute performance-based awards. The granting or vesting of any performance-based awards will be based on achievement of performance objectives that are based on one or more business criteria, with respect to one or more business units or IAA and its subsidiaries as a whole. Such business criteria may be adjusted to account for unusual or infrequently occurring items or changes in accounting.
| 21 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
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 January 1, 2023, the number of common shares reserved and available for awards under the 2019 OSIP is 4,354,169 shares, 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 extraordinary cash dividend, stock split, reorganization or other relevant changes 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 issues new shares to satisfy issuances of common stock upon exercise or vesting of stock awards.
The Company recorded stock-based compensation expense of $13.0 million, $11.4 million and $8.5 million, respectively, during fiscal 2022, fiscal 2021 and fiscal 2020. As of January 1, 2023, an estimated $14.4 million of unrecognized expense related to non-vested awards is expected to be recognized over a weighted average term of approximately 1.6 years.
Performance-based Restricted Stock Units (PRSU)
During fiscal 2022, the Company granted 117,832 PRSUs to certain executive officers and certain other employees of the Company that will 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.
During fiscal 2022, the Company also granted 33,105 PRSUs to certain executive officers and certain other employees. The vesting of such awards is based upon the Company’s total stockholder return relative to the performance of a peer group over a three years 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 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%.
The following table summarizes the Company’s PRSU activity:
| Performance-based Restricted Stock Units | Awards | Weighted Average Grant
Date Fair Value | ||||||
| Outstanding at January 2, 2022 | 168,463 | $ | 55.13 | |||||
| Granted | 150,937 | 38.79 | ||||||
| Forfeited | (7,228 | ) | 49.37 | |||||
| Outstanding at January 1, 2023 | 312,172 | 47.36 | ||||||
| 22 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Restricted Stock Units (RSU)
The RSUs granted by the Company to certain executive officers and management of the Company are contingent upon continued employment and generally vest in three equal annual installments. The following table summarizes the Company’s RSU activity:
| Restricted Stock Units* | Awards | Weighted Average Grant
Date Fair Value | ||||||
| Outstanding at January 2, 2022 | 496,571 | $ | 40.46 | |||||
| Granted | 235,933 | 38.18 | ||||||
| Vested | (381,009 | ) | 43.45 | |||||
| Forfeited | (16,602 | ) | 47.95 | |||||
| Outstanding at January 1, 2023 | 334,893 | 44.82 | ||||||
* IAA awards, including those held by KAR employees
The total grant date fair value of shares that vested during fiscal 2022 was $13.3 million.
Restricted Stock Awards (RSA)
The RSAs granted by the Company to non-employee directors prior to fiscal 2021 vest in four equal installments over a one year vesting term. The RSAs granted by the Company to non-employee directors during and after fiscal 2021 vest in one installment on the earlier of the one-year anniversary date of the grant date or the day preceding the Company’s next annual meeting of stockholders following the date of grant. The following table summarizes the Company’s RSA activity:
| Restricted Stock Awards | Awards | Weighted Average Grant Date Fair Value
| ||||||
| Outstanding at January 2, 2022 | 17,609 | $ | 53.88 | |||||
| Granted | 30,826 | 35.00 | ||||||
| Forfeited | (2,971 | ) | 35.00 | |||||
| Vested | (17,609 | ) | 52.88 | |||||
| Outstanding at January 1, 2023 | 27,855 | 35.00 | ||||||
The total grant date fair value of shares that vested during fiscal 2022 was $0.9 million.
Stock Options
The following table summarizes stock option activity:
| Stock Options * | Number of Awards | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in Years) |
Average Intrinsic Value (in millions) | ||||||||||||
| Outstanding at January 2, 2022 | 280,232 | $ | 35.63 | |||||||||||||
| Exercised | (25,169 | ) | 11.55 | |||||||||||||
| Canceled/Expired | (2,000 | ) | ||||||||||||||
| Outstanding at January 1, 2023 | 253,063 | 38.20 | 4.9 | $ | 1.7 | |||||||||||
| Exercisable at January 1, 2023 | 253,063 | 38.20 | 5.0 | $ | 1.7 | |||||||||||
* IAA awards, including those held by KAR employees.
| 23 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The total intrinsic value of stock options exercised during fiscal 2022 was $0.6 million. The following table summarizes the activity of non-vested stock options:
| Stock Options | Number of Awards | Weighted Average Grant-Date Fair Value | ||||||
| Outstanding at January 2, 2022 | 59,018 | $ | 46.97 | |||||
| Vested | (59,018 | ) | 46.97 | |||||
| Outstanding at January 1, 2023 | — | — | ||||||
Employee Stock Purchase Plan
The Company adopted the IAA, Inc. Employee Stock Purchase Plan (“ESPP”) on August 1, 2019. The ESPP was suspended in December 2022 pursuant to the Merger Agreement. The ESPP was designed to provide an incentive to attract, retain and reward eligible employees and was intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP provided for one month offering periods with a 15% discount from the fair market value of the Company’s share on the date of purchase. A participant’s annual contribution to the ESPP could not exceed $25,000 per year. In accordance with ASC 718, Compensation—Stock Compensation, the entire 15% purchase discount was recorded as compensation expense in the period of purchase. The Company’s stock purchased through the ESPP was considered outstanding and was included in the weighted-average outstanding shares for purposes of computing basic and diluted earnings per share. Stock-based compensation expense recorded during fiscal 2022, 2021 and 2020, in connection with the compensatory elements of the Company’s employee stock purchase plan, was not significant.
Note 6—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 and includes the effect of dilutive unissued common shares related to the Company’s stock-based employee compensation program. The effect of stock options and restricted stock 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 summarizes the components of basic and diluted net income per share (in millions except per share amounts):
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Net income | $ | 292.4 | $ | 294.4 | $ | 194.8 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 133.9 | 134.7 | 134.1 | |||||||||
| Effect of dilutive stock options and restricted stock awards | 0.2 | 0.6 | 1.0 | |||||||||
| Diluted | 134.1 | 135.3 | 135.1 | |||||||||
| Net income per share: | ||||||||||||
| Basic | $ | 2.18 | $ | 2.18 | $ | 1.45 | ||||||
| Diluted | $ | 2.18 | $ | 2.18 | $ | 1.44 | ||||||
| 24 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The weighted number of shares outstanding used in the calculation of diluted earnings per share does not include the effect of the following anti-dilutive securities and awards subject to performance conditions which have not been fully satisfied at the end of respective reporting periods:
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Anti-dilutive awards | 0.3 | — | 0.2 | |||||||||
| Awards subject to performance conditions not fully satisfied | 0.3 | 0.2 | 0.1 | |||||||||
| 0.6 | 0.2 | 0.3 | ||||||||||
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.
Pursuant to the Repurchase Program, the Company repurchased 751,285 shares of its common stock for an aggregate gross purchase price of approximately $27.2 million during fiscal 2022 and 677,854 shares for a gross purchase price of approximately $34.0 during fiscal 2021. As of January 1, 2023, approximately $338.8 million remained available under the Repurchase Program. Pursuant to the Merger Agreement, the Company is restricted from repurchasing shares of its common stock without RBA’s prior consent.
Note 7—Accounts Receivable and Allowance for Credit Losses
Components of accounts receivable, net were as follows (in millions):
| Fiscal Years Ended | ||||||||
| January 1, 2023 | January 2, 2022 | |||||||
| Advance charges receivable | $ | 319.6 | $ | 322.7 | ||||
| Trade accounts receivable | 131.2 | 139.8 | ||||||
| Other receivable | 4.2 | 12.3 | ||||||
| Accounts receivable, gross | 455.0 | 474.8 | ||||||
| Less: Allowance for credit losses | (9.8 | ) | (9.1 | ) | ||||
| Accounts receivable, net | $ | 445.2 | $ | 465.7 | ||||
| 25 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The following is a summary of changes in the allowance for credit losses related to accounts receivable (in millions):
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Allowance for Credit Losses | ||||||||||||
| Balance at beginning of period | $ | 9.1 | $ | 8.0 | $ | 4.2 | ||||||
| Provision for credit losses | 1.4 | 1.4 | 4.4 | |||||||||
| Less net charge-offs | (0.7 | ) | (0.3 | ) | (0.6 | ) | ||||||
| Balance at end of period | $ | 9.8 | $ | 9.1 | $ | 8.0 | ||||||
Recoveries of accounts receivable were netted with charge-offs, as they were not material. Changes in exchange rates did not have a material effect on the allowance for credit losses.
Note 8—Goodwill and Other Intangible Assets
Goodwill represents the excess cost over fair value of identifiable net assets of businesses acquired. Changes in goodwill were as follows (in millions):
| United States | International | Total | ||||||||||
| Balance at December 27, 2020 | $ | 496.0 | $ | 46.3 | $ | 542.3 | ||||||
| Increase for acquisition activities (Note 4) | 2.6 | 256.6 | 259.2 | |||||||||
| Currency translation adjustments | — | (4.0 | ) | (4.0 | ) | |||||||
| Balance at January 2, 2022 | $ | 498.6 | $ | 298.9 | $ | 797.5 | ||||||
| Measurement period adjustments (Note 4) | — | 0.2 | 0.2 | |||||||||
| Currency translation adjustments | — | (30.2 | ) | (30.2 | ) | |||||||
| Balance at January 1, 2023 | $ | 498.6 | $ | 268.9 | $ | 767.5 | ||||||
During the third quarter of fiscal 2022, the Company updated its forecasts which resulted in a decline in the International reporting unit’s operating results and projections. The Company identified this as a triggering event and determined that the carrying amount of the International reporting unit’s goodwill should be evaluated for impairment at October 2, 2022. The impairment test indicated that the fair value of the International reporting unit exceeded its carrying value and therefore no goodwill impairment was recorded.
During the fourth quarter of fiscal 2022, the Company performed a qualitative assessment for both the United States reporting unit and the International reporting unit. Based on this assessment, the Company concluded no impairment was required.
Components of intangible assets, net were as follows (in millions):
| January 1, 2023 | January 2, 2022 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Carrying Value | Gross Carrying Amount | Accumulated Amortization | Carrying Value | |||||||||||||||||||
| Customer relationships | $ | 373.4 | $ | (351.3 | ) | $ | 22.1 | $ | 376.3 | $ | (341.5 | ) | $ | 34.8 | ||||||||||
| Tradenames | 68.5 | (4.2 | ) | 64.3 | 69.1 | (2.2 | ) | 66.9 | ||||||||||||||||
| Computer software & technology | 352.7 | (253.9 | ) | 98.8 | 301.7 | (205.9 | ) | 95.8 | ||||||||||||||||
| Total | $ | 794.6 | $ | (609.4 | ) | $ | 185.2 | $ | 747.1 | $ | (549.6 | ) | $ | 197.5 | ||||||||||
The table above includes the carrying amount of tradenames with an indefinite life, which was $56.0 million at each of January 1, 2023 and January 2, 2022. The weighted-average remaining useful life of intangible assets with a finite life was 2.7 years (3.7 years for customer relationships, 4.5 years for amortizable tradenames, and 2.3 years for computer software and technology) at January 1, 2023.
| 26 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Amortization expense for intangibles assets was $62.5 million, $44.9 million and $38.1 million for the years ended January 1, 2023, January 2, 2022 and December 27, 2020, respectively. Future estimated amortization expense of the existing intangible assets with finite life is as follows:
| Amount | ||||
| Fiscal year 2023 | $ | 60.8 | ||
| Fiscal year 2024 | 41.3 | |||
| Fiscal year 2025 | 20.3 | |||
| Fiscal year 2026 | 3.2 | |||
| Fiscal year 2027 | 0.8 | |||
| Thereafter | 2.8 | |||
| Total | $ | 129.2 | ||
Note 9—Property and Equipment
Property and equipment consisted of the following (in millions):
Useful Lives (in years) | January 1, 2023 | January 2, 2022 | ||||||||
| Land | $ | 177.0 | $ | 168.4 | ||||||
| Building and leasehold improvements | 1 - 30 | 354.0 | 328.2 | |||||||
| Furniture, fixtures, equipment and vehicles | 3 - 5 | 372.5 | 349.5 | |||||||
| Construction in progress | 51.0 | 23.9 | ||||||||
| 954.5 | 870.0 | |||||||||
| Accumulated depreciation | (570.7 | ) | (531.9 | ) | ||||||
| Property and equipment, net | $ | 383.8 | $ | 338.1 | ||||||
Depreciation expense for the years ended January 1, 2023, January 2, 2022 and December 27, 2020 was $43.1 million, $41.6 million and $42.9 million, respectively.
| 27 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 10—Debt
Debt consisted of the following (in millions):
| January 1, 2023 | January 2, 2022 | |||||||
| 2021 Term Loan Facility | 633.8 | $ | 650.0 | |||||
| 2021 Revolving Credit Facility | — | 165.0 | ||||||
| Notes | 500.0 | 500.0 | ||||||
| Total debt | 1,133.8 | 1,315.0 | ||||||
| Unamortized debt issuance costs | (10.5 | ) | (13.1 | ) | ||||
| Current portion of long-term debt | (32.5 | ) | (181.3 | ) | ||||
| Long-term debt | $ | 1,090.8 | $ | 1,120.6 | ||||
Credit Facility
In connection with the Separation, on June 28, 2019, the Company, as borrower, entered into a credit agreement (the “2019 Credit Agreement”) which provided for, among other things: (i) a seven-year senior secured term loan facility in an aggregate principal amount of $800 million (the “2019 Term Loan Facility”) and (ii) a five-year revolving credit facility in an aggregate principal amount of $225.0 million (the “2019 Revolving Credit Facility,” and together with the Term Loan Facility, the “2019 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 “2021 Credit Agreement”). The 2021 Credit Agreement provides for, among other things: (i) a senior secured term loan in an aggregate principal amount of $650 million (the “2021 Term Loan Facility”) and (ii) a senior secured revolving credit facility with revolving commitments in an aggregate principal amount of $525 million (the “2021 Revolving Credit Facility” and, together with the 2021 Term Loan Facility, the “2021 Credit Facility”). Borrowing availability under the 2021 Revolving Credit Facility is subject to no default or event of default under the 2021 Credit Agreement having occurred at the time of borrowing. The proceeds of the 2021 Credit Facility were used, along with cash on hand, to repay in full all outstanding borrowings under the Company’s 2019 Term Loan Facility under its 2019 Credit Agreement. Future borrowings under the 2021 Revolving Credit Facility are expected to be used for the Company’s ongoing working capital needs and general corporate purposes. The 2021 Credit Facility matures on April 30, 2026.
Borrowings under the 2021 Credit Agreement bore interest from April 30, 2021 until November 2, 2021, at a rate equal to either, (A) at the Company’s option, the highest of the prime rate, the Federal Funds Rate plus 0.5%, or one-month LIBOR plus 1.00% (the “Base Rate”) for base rate borrowings, or (B) one-month LIBOR for eurodollar borrowings, in each case, plus an applicable margin of 0.75% with respect to Base Rate borrowings and 1.75% with respect to eurodollar borrowings. Subsequent to November 2, 2021, borrowings under the 2021 Credit Agreement bear interest at (A) the Base Rate or (B) LIBOR, in each case plus an applicable margin ranging from 0.375% to 1.25% with respect to Base Rate borrowings and 1.375% to 2.25% with respect to eurodollar borrowings, in each case, depending on the Company’s Consolidated Net Leverage Ratio (as defined in the 2021 Credit Agreement). The 2021 Credit Agreement contains additional procedures for transition to a benchmark rate other than one-month LIBOR for eurodollar borrowings. The unused amount of the 2021 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% and 0.30% depending on the Company’s Consolidated Net Leverage Ratio.
As of January 1, 2023, the interest rate per annum for the 2021 Term Loan Facility and 2021 Revolving Credit Facility was 5.76%.
| 28 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The 2021 Credit Agreement requires the Company to comply with certain financial covenants, including a requirement that the Company’s Consolidated Net Leverage Ratio not exceed 4:00 to 1:00 as of the last day of any fiscal quarter, subject to certain exceptions for qualifying material acquisitions. Consolidated Net Leverage Ratio is defined as the ratio of Consolidated Total Debt (as defined in the 2021 Credit Agreement) to Consolidated EBITDA (as defined in the 2021 Credit Agreement). The 2021 Credit Agreement also contains other affirmative and negative covenants that are usual and customary for a senior secured credit agreement. The negative covenants include limitations on (i) the disposition of assets, (ii) mergers and acquisitions, (iii) restricted payments, including payment of future dividends, distributions and stock repurchases by the Company, (iv) the incurrence of additional indebtedness, (v) permitted acquisitions and investments and (vi) the incurrence of additional liens on property. The 2021 Credit Agreement includes customary events of default.
During the fiscal year 2021, the Company incurred debt issuance costs of $4.8 million in relation to the 2021 Credit Agreement which are included within the long-term debt line of the consolidated balance sheets, and recognized a loss of $10.3 million on early extinguishment of the 2019 Credit Facility which is included within the interest expense, net line of the consolidated statements of income.
Notes
In connection with the Separation, the Company issued $500.0 million aggregate principal amount of 5.500% Senior Notes due 2027 (the “Notes”) on June 6, 2019 (the “Closing Date”) in a private offering exempt from the registration requirements of the Securities Act. The Notes were issued pursuant to an indenture, dates as of the Closing Date (“the Indenture”). Interest on the Notes is due in cash on June 15 and December 15 of each year at a rate of 5.500% per annum. The Notes mature on June 15, 2027. The net proceeds from the Notes offering, together with borrowings under the 2019 Term Loan Facility, were used to make a cash distribution to KAR and to pay fees and expenses related to the Separation and Distribution.
Under certain circumstances, the Indenture permits the Company to designate certain of the Company’s subsidiaries as unrestricted subsidiaries, which subsidiaries will not be subject to the covenants in the Indenture and will not guarantee the Notes. The Notes are the general unsecured senior obligations of the Company and such obligations are guaranteed by the Subsidiary Guarantors. Each guarantee is the general unsecured senior obligation of each Subsidiary Guarantor. The Notes and the related guarantees rank equal in right of payment with all of the Company’s and the Subsidiary Guarantors’ unsubordinated indebtedness. The Notes are structurally subordinated in right of payment to all indebtedness and other liabilities of the Company’s subsidiaries that will not be Subsidiary Guarantors and effectively junior in right of payment to all of the Company’s and the Guarantors’ secured indebtedness to the extent of the value of the collateral securing such indebtedness, including indebtedness under the Credit Facility.
At any time on or after June 15, 2022, the Company may, at its option, redeem the Notes in whole or in part at the prices set forth in the Indenture.
In the event of a Change of Control Repurchase Event (as defined in the Indenture), unless the Company has previously or concurrently delivered a redemption notice with respect to all the outstanding Notes, the Company is required to make an offer to repurchase all of the Notes at 101% of their aggregate principal amount, plus accrued and unpaid interest to, but excluding, the repurchase date. If the Company sells assets outside the ordinary course of business and does not use the net proceeds for specified purposes under the Indenture, the Company may be required to use such net proceeds to make an offer to repurchase the Notes at 100% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
The Indenture contains covenants which, among other things, limit the Company and its restricted subsidiaries’ ability to pay dividends on or make other distributions in respect of equity interests or make other restricted payments, make certain investments, incur liens on certain assets to secure debt, sell certain assets, consummate certain mergers or consolidations or sell all or substantially all assets, or designate subsidiaries as unrestricted. The Indenture also provides for customary events of default, including non-payment of principal, interest or premium, failure to comply with covenants, and certain bankruptcy or insolvency events.
| 29 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Canadian Credit Facility
On July 7, 2020, the Company entered into a credit agreement which provides for a revolving credit facility in an aggregate principal amount of $10.0 million Canadian dollars (the “Canadian Credit Facility”). The Canadian Credit Facility was terminated on May 5, 2021.
Other
At January 1, 2023, the Company had outstanding letters of credit in the aggregate amount of $5.5 million, all of which reduce the amount available for borrowings under the 2021 Revolving Credit Facility.
Fair Value of Debt
The estimated fair value of the Company’s 2021 Term Loan Facility and 2021 Revolving Credit Facility approximated book value as the interest rate is variable in nature.
The estimated fair value of the Company’s Notes as of January 1, 2023 and January 1, 2022 was $485.0 million and $517.5 million, respectively. The estimate of fair value of the Company’s Notes was based on broker-dealer quotes and is considered Level 2 fair value measurements in the fair value hierarchy.
Future Principal Payments
At January 1, 2023, aggregate future principal payments on long-term debt are as follows (in millions):
| Amount | ||||
| Fiscal year 2023 | $ | 32.5 | ||
| Fiscal year 2024 | 28.4 | |||
| Fiscal year 2025 | 48.8 | |||
| Fiscal year 2026 | 524.1 | |||
| Fiscal year 2027 | 500.0 | |||
| Total | $ | 1,133.8 | ||
Note 11—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.
| 30 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The components of leases expense were as follows (in millions):
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Operating lease cost | $ | 178.3 | $ | 153.9 | $ | 136.7 | ||||||
| Finance lease cost: | ||||||||||||
| Amortization of right-of-use assets | 11.4 | 12.3 | 14.5 | |||||||||
| Interest on lease liabilities | 0.7 | 0.8 | 0.9 | |||||||||
| Short-term lease cost | 4.3 | 6.9 | 4.7 | |||||||||
| Total lease cost | $ | 194.7 | $ | 173.9 | $ | 156.8 | ||||||
Supplemental cash flow information related to leases was as follows (in millions):
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Cash paid for amounts included in measurement of lease liabilities: | ||||||||||||
| Operating cash flows related to operating leases | $ | 182.6 | $ | 147.0 | $ | 130.9 | ||||||
| Operating cash flows related to finance leases | $ | 0.7 | $ | 0.8 | $ | 1.0 | ||||||
| Financing cash flows related to finance leases | $ | 11.3 | $ | 12.7 | $ | 14.3 | ||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||
| Operating leases | $ | 280.8 | $ | 256.6 | $ | 291.7 | ||||||
| Finance leases | $ | 12.5 | $ | 17.6 | $ | 18.1 | ||||||
| 31 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
| January 1, 2023 | January 2, 2022 | |||||||
| Operating Leases | ||||||||
| Operating lease right-of-use assets | $ | 1,543.5 | $ | 1,262.7 | ||||
| Accumulated amortization | (339.6 | ) | (238.3 | ) | ||||
| Operating lease right-of-use assets, net | $ | 1,203.9 | $ | 1,024.4 | ||||
| Other accrued expenses | $ | 87.6 | $ | 94.3 | ||||
| Operating lease liabilities | 1,165.0 | 984.8 | ||||||
| Total operating lease liabilities | $ | 1,252.6 | $ | 1,079.1 | ||||
| Finance Leases | ||||||||
| Property and equipment, gross | $ | 156.6 | $ | 157.6 | ||||
| Accumulated depreciation | (133.5 | ) | (120.6 | ) | ||||
| Property and equipment, net | $ | 23.1 | $ | 37.0 | ||||
| Other accrued expenses | $ | 9.1 | $ | 10.9 | ||||
| Other liabilities | 13.8 | 23.5 | ||||||
| Total finance lease liabilities | $ | 22.9 | $ | 34.4 | ||||
| Weighted Average Remaining Lease Term (Years) | ||||||||
| Operating leases | 12.53 | 11.89 | ||||||
| Finance leases | 2.81 | 3.52 | ||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | 5.6 | % | 5.4 | % | ||||
| Finance leases | 2.4 | % | 2.5 | % | ||||
| 32 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Maturities of lease liabilities as of January 1, 2023 are as follows (in millions):
Operating Leases | Finance Leases | |||||||
| 2023 | $ | 156.1 | $ | 9.1 | ||||
| 2024 | 157.1 | 8.4 | ||||||
| 2025 | 148.5 | 4.2 | ||||||
| 2026 | 143.2 | 2.0 | ||||||
| 2027 | 135.5 | — | ||||||
| Thereafter | 1,057.1 | — | ||||||
| $ | 1,797.5 | $ | 23.7 | |||||
| Less: imputed interest | 544.9 | 0.8 | ||||||
| Total | $ | 1,252.6 | $ | 22.9 | ||||
Note 12—Income Taxes
The components of income before income taxes and the provision for income taxes are as follows (in millions):
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Income before income taxes: | ||||||||||||
| Domestic | $ | 352.0 | $ | 364.4 | $ | 233.9 | ||||||
| Foreign | 9.4 | 23.6 | 23.1 | |||||||||
| Total | $ | 361.4 | $ | 388.0 | $ | 257.0 | ||||||
| Income tax expense (benefit): | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 61.3 | $ | 73.2 | $ | 45.0 | ||||||
| Foreign | 6.3 | 6.1 | 5.1 | |||||||||
| State | 7.2 | 15.0 | 10.1 | |||||||||
| Total current provision | 74.8 | 94.3 | 60.2 | |||||||||
| Deferred: | ||||||||||||
| Federal | (2.4 | ) | 0.2 | 2.1 | ||||||||
| Foreign | (2.3 | ) | (0.1 | ) | 0.2 | |||||||
| State | (1.1 | ) | (0.8 | ) | (0.3 | ) | ||||||
| Total deferred (benefit) provision | (5.8 | ) | (0.7 | ) | 2.0 | |||||||
| Income tax expense | $ | 69.0 | $ | 93.6 | $ | 62.2 | ||||||
| 33 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The provision for income taxes was different from the U.S. federal statutory rate applied to income before taxes and is reconciled as follows:
| Fiscal Years Ended | ||||||||||||
| January 1, 2023 | January 2, 2022 | December 27, 2020 | ||||||||||
| Statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| State and local income taxes, net | 2.6 | % | 3.0 | % | 3.2 | % | ||||||
| Reserves for tax exposures | 0.2 | % | 0.4 | % | 0.2 | % | ||||||
| International operations | 0.6 | % | 0.2 | % | 0.6 | % | ||||||
| FDII, GILTI | (4.4 | )% | (0.2 | )% | (0.1 | )% | ||||||
| Non deductible executive compensation | 0.1 | % | 0.3 | % | 0.1 | % | ||||||
| Stock-based compensation | 0.1 | % | (0.1 | )% | (0.2 | )% | ||||||
| Impact of law and rate change | (0.4 | )% | (0.2 | )% | — | % | ||||||
| Other, net | (0.7 | )% | (0.3 | )% | (0.6 | )% | ||||||
| Effective rate | 19.1 | % | 24.1 | % | 24.2 | % | ||||||
The effective tax rate for fiscal 2022 was favorably impacted by a $15.1 million adjustment for Foreign Derived Intangible Income (“FDII”), of which $9.4 million was recorded discretely, which was partially offset by the net Global Intangible Low-Taxed Income (“GILTI”).
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.
The Company offsets all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and presents them as a single non-current deferred income tax liability. Deferred tax assets and deferred tax liabilities are comprised of the following: (in millions):
| 34 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
| January 1, 2023 | January 2, 2022 | |||||||
| Gross deferred tax assets: | ||||||||
| Right-of-use liabilities | $ | 312.6 | $ | 271.5 | ||||
| Allowances for accounts receivable | 2.1 | 2.0 | ||||||
| Accruals and liabilities | 7.2 | 10.0 | ||||||
| Employee benefits and compensation | 4.1 | 4.6 | ||||||
| Losses carried forward | 0.7 | 0.1 | ||||||
| Other | 3.4 | 3.9 | ||||||
| Total gross deferred tax assets | 330.1 | 292.1 | ||||||
| Deferred tax asset valuation allowance | (0.2 | ) | (0.1 | ) | ||||
| Net deferred tax assets | 329.9 | 292.0 | ||||||
| Gross deferred tax liabilities: | ||||||||
| Right-of-use assets | (296.1 | ) | (256.7 | ) | ||||
| Property and equipment | (17.4 | ) | (22.4 | ) | ||||
| Goodwill and intangible assets | (68.1 | ) | (72.9 | ) | ||||
| Other | (15.2 | ) | (14.8 | ) | ||||
| Total | (396.8 | ) | (366.8 | ) | ||||
| Net deferred tax liabilities | $ | (66.9 | ) | $ | (74.8 | ) | ||
Permanently reinvested undistributed earnings of the Company’s foreign subsidiaries were approximately $144.7 million for the year ended January 1, 2023. Because these amounts have been or are expected to be permanently reinvested in properties and working capital, the Company has not recorded the deferred taxes associated with these earnings. If the undistributed earnings of foreign subsidiaries were to be remitted, state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits. It is not practical for the Company to determine the additional tax that would be incurred upon remittance of these earnings.
Tax payments for fiscal years ended January 1, 2023, January 2, 2022, and December 27, 2020, were $84.6 million, $90.0 million, and $59.7 million, respectively.
The Company applies the provisions of ASC 740, Income Taxes. ASC 740 clarifies the accounting and reporting for uncertainty in income taxes recognized in an enterprise’s financial statements. These provisions prescribe a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken on income tax returns.
A reconciliation of the beginning and ending amount of unrecognized tax benefits from uncertain tax positions is as follows (in millions):
| January 1, 2023 | January 2, 2022 | |||||||
| Balance at beginning of period | $ | 6.0 | $ | 4.1 | ||||
| Increase in prior year tax positions | — | 0.6 | ||||||
| Decrease in prior year tax positions | (0.2 | ) | — | |||||
| Increase in current year tax positions | 2.4 | 1.9 | ||||||
| Decrease in current year tax positions | (0.3 | ) | — | |||||
| Lapse in statute of limitations | (1.0 | ) | (0.6 | ) | ||||
| Balance at end of period | $ | 6.9 | $ | 6.0 | ||||
| 35 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was $5.9 million and $5.1 million at January 1, 2023, and January 2, 2022, respectively.
The Company records interest and penalties associated with the uncertain tax positions within the Company’s provision for income taxes on the consolidated statements of income. The Company had reserves totaling $0.2 million at each of January 1, 2023 and January 2, 2022 associated with interest and penalties, net of tax.
The provision for income taxes involves management judgment regarding the interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income, and tax planning could change the effective tax rate and tax balances recorded by us. In addition, U.S. and non-U.S. tax authorities periodically review income tax returns filed by us and can raise issues regarding the Company’s filing positions, timing and amount of income or deductions, and the allocation of income among the jurisdictions in which the Company operates. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business, the Company is subject to examination by taxing authorities in the U.S., Canada, and the United Kingdom. In general, the examination of our material tax returns is complete for the years prior to 2019.
Based on the potential outcome of the Company’s tax examinations and the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the currently remaining unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the reserve balance is estimated to be in the range of a $1.0 million to $1.5 million decrease.
Note 13—Employee Benefit Plans
401(k) Plan
The Company maintains a defined contribution 401(k) plan that covers substantially all U.S. employees. Participants are generally allowed to make non-forfeitable contributions up to the annual IRS limits. The Company matches 100 percent of the amounts contributed by each individual participant up to 4 percent of the participant’s compensation. Participants are 100 percent vested immediately in the Company’s contributions. The Company’s defined contribution 401(k) plan has been effective since June 2019. For the years ended January 1, 2023, January 2, 2022, and December 27, 2020, amounts contributed to the 401(k) plan were $6.7 million, $5.3 million and $4.8 million, respectively.
Note 14—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.
| 36 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
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 Order and Remedial Action 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 of hazardous substances by the U.S. Environmental Protection Agency and prescribes initial steps and a schedule for responding to the release of hazardous substances at the Former UPCo Site. The Draft Order further states that IAAI has been identified as a potential responsible party because it is either the company or the successor of a company responsible for a release of hazardous substances at the Former UPCo Site. The Draft Order is currently unsigned and has not been issued by DTSC.
On January 26, 2021, DTSC hosted an informational teleconference for the respondents named in the Draft Order. At the meeting, DTSC described the background and current status at the Former UPCo Site, but did not provide any information related to possible response actions, associated cost estimates or financial liability determinations. DTSC directed the Respondents to provide comments upon the Draft Order. On March 31, 2021, IAAI provided comments to the Draft Order by the deadline imposed upon it by the DTSC, and subsequently made a technical presentation to the DTSC, asking, among other things, that IAAI be removed from the Draft Order. No additional actions regarding IAAI have been taken by DTSC in this matter. The matter remains pending.
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 also tendered this matter to its landlord pursuant to indemnity provisions in its sublease, and to its environmental insurance carrier. IAAI’s landlord responded by tendering its own indemnification demand to IAAI, and IAAI in turn 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 has operated a branch on property it leases 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, or 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, or “CERCLA,” related to the LDW Site. On November 7, 2012, the EPA issued IAAI a Second General Notice of Potential Liability, or “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, or “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. The Company 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.
| 37 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
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 IAAI 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 IAAI’s ongoing obligations around the stormwater system maintenance and any additional source control measures.
At this time, IAAI 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.
| 38 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 15—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. Both segments earn fees by providing services to buyers and sellers of vehicles sold through its channels.
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 year ended January 1, 2023 (in millions):
| United States | International | Consolidated | ||||||||||
| Revenues: | ||||||||||||
| Service revenues | $ | 1,539.7 | $ | 146.7 | $ | 1,686.4 | ||||||
| Vehicle sales | 161.1 | 251.4 | 412.5 | |||||||||
| Total revenues | 1,700.8 | 398.1 | 2,098.9 | |||||||||
| Operating expenses: | ||||||||||||
| Cost of services | 874.8 | 121.7 | 996.5 | |||||||||
| Cost of vehicle sales | 151.9 | 215.8 | 367.7 | |||||||||
| Selling, general and administrative | 189.4 | 22.7 | 212.1 | |||||||||
| Depreciation and amortization | 85.3 | 20.3 | 105.6 | |||||||||
| Total operating expenses | 1,301.4 | 380.5 | 1,681.9 | |||||||||
| Operating profit | 399.4 | 17.6 | 417.0 | |||||||||
| Interest expense, net | 51.7 | (0.7 | ) | 51.0 | ||||||||
| Other expense (income), net | 5.8 | (1.2 | ) | 4.6 | ||||||||
| Intercompany (income) expense | (10.3 | ) | 10.3 | — | ||||||||
| Income before income taxes | 352.2 | 9.2 | 361.4 | |||||||||
| Income taxes | 65.0 | 4.0 | 69.0 | |||||||||
| Net income | $ | 287.2 | $ | 5.2 | $ | 292.4 | ||||||
| Total assets | $ | 2,775.8 | $ | 587.1 | $ | 3,362.9 | ||||||
| Capital expenditures | $ | 166.3 | $ | 12.0 | $ | 178.3 | ||||||
| 39 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Financial information regarding the Company’s reportable segments is set forth below as of and for the year ended January 2, 2022 (in millions):
| United States | International | Consolidated | ||||||||||
| Revenues: | ||||||||||||
| Service revenues | $ | 1,429.2 | $ | 108.5 | $ | 1,537.7 | ||||||
| Vehicle sales | 134.1 | 165.6 | 299.7 | |||||||||
| Total revenues | 1,563.3 | 274.1 | 1,837.4 | |||||||||
| Operating expenses: | ||||||||||||
| Cost of services | 776.3 | 75.2 | 851.5 | |||||||||
| Cost of vehicle sales | 118.1 | 143.1 | 261.2 | |||||||||
| Selling, general and administrative | 178.6 | 13.7 | 192.3 | |||||||||
| Depreciation and amortization | 75.9 | 10.6 | 86.5 | |||||||||
| Total operating expenses | 1,148.9 | 242.6 | 1,391.5 | |||||||||
| Operating profit | 414.4 | 31.5 | 445.9 | |||||||||
| Interest expense, net | 58.0 | (0.3 | ) | 57.7 | ||||||||
| Other expense (income), net | 0.5 | (0.3 | ) | 0.2 | ||||||||
| Intercompany (income) expense | (8.5 | ) | 8.5 | — | ||||||||
| Income before income taxes | 364.4 | 23.6 | 388.0 | |||||||||
| Income taxes | 87.6 | 6.0 | 93.6 | |||||||||
| Net income | $ | 276.8 | $ | 17.6 | $ | 294.4 | ||||||
| Total assets | $ | 2,510.1 | $ | 644.2 | $ | 3,154.3 | ||||||
| Capital expenditures | $ | 124.9 | $ | 10.7 | $ | 135.6 | ||||||
| 40 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Financial information regarding the Company’s reportable segments is set forth below as of and for the year ended December 27, 2020 (in millions):
| United States | International | Consolidated | ||||||||||
| Revenues: | ||||||||||||
| Service revenues | $ | 1,134.4 | $ | 98.7 | $ | 1,233.1 | ||||||
| Vehicle sales | 80.7 | 71.1 | 151.8 | |||||||||
| Total revenues | 1215.1 | 169.8 | 1384.9 | |||||||||
| Operating expenses: | ||||||||||||
| Cost of services | 659.8 | 61.9 | 721.7 | |||||||||
| Cost of vehicle sales | 64.6 | 60.6 | 125.2 | |||||||||
| Selling, general and administrative | 135.0 | 9.9 | 144.9 | |||||||||
| Depreciation and amortization | 74.3 | 6.8 | 81.1 | |||||||||
| Total operating expenses | 933.7 | 139.2 | 1,072.9 | |||||||||
| Operating profit | 281.4 | 30.6 | 312.0 | |||||||||
| Interest expense | 56.2 | (0.2 | ) | 56.0 | ||||||||
| Other income, net | (0.7 | ) | (0.3 | ) | (1.0 | ) | ||||||
| Intercompany (income) expense | (8.0 | ) | 8.0 | — | ||||||||
| Income before income taxes | 233.9 | 23.1 | 257.0 | |||||||||
| Income taxes | 56.9 | 5.3 | 62.2 | |||||||||
| Net income | $ | 177.0 | $ | 17.8 | $ | 194.8 | ||||||
| Total assets | $ | 2,341.1 | $ | 187.8 | $ | 2,528.9 | ||||||
| Capital expenditures | $ | 52.3 | $ | 17.5 | $ | 69.8 | ||||||
Geographic Information
The Company’s international operations include Canada and the U.K. Information regarding the geographic areas of the Company’s operations is set forth below (in millions):
| January 1, 2023 | January 2, 2022 | |||||||
| Long-lived assets | ||||||||
| U.S. | $ | 1,439.1 | $ | 1,205.5 | ||||
| Foreign | 148.6 | 157.0 | ||||||
| $ | 1,587.7 | $ | 1,362.5 | |||||
| 41 |
IAA, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 16—Subsequent Events
On February 17, 2023, the Company gave conditional notice of optional full redemption pursuant to the Indenture that, subject to the satisfaction or waiver of specified conditions precedent, the Company has elected to redeem (the “Redemption”) on March 20, 2023 or, at the Company’s option, such later date as such conditions are satisfied (the “Redemption Date”) all $500.0 million aggregate principal amount of the Notes.
The redemption is subject to the satisfaction (or waiver by the Company in its sole discretion) of each of the following conditions precedent: (i) the consummation (as and when determined by the Company in its sole and absolute discretion) on or prior (if applicable) to March 20, 2023 (or such later date as may be determined by the Company in its sole and absolute discretion) of the proposed merger discussed in Note 1 - Basis of Presentation on terms and conditions satisfactory in all respects to the Company in its sole and absolute discretion and (ii) the delivery by the Company to U.S. Bank National Association, as trustee (as successor in interest to U.S. Bank National Association, the “Trustee”) of written notice confirming that the condition in the foregoing clause (i) has been satisfied and stating the final Redemption Date and the exact redemption price. In the event that such conditions precedent will not have been so satisfied (or waived by the Company in its sole discretion) by the Redemption Date, the Company will so notify the Trustee and the holders of the Notes, and upon any such notice, the redemption notice shall be rescinded and of no force or effect for any purpose.
| 42 |
Exhibit 99.2
Unaudited Pro Forma Condensed Combined Financial Information
The unaudited pro forma condensed combined financial information of Ritchie Bros. Auctioneers Incorporated (“RBA”) has been prepared in accordance with Article 11 of Regulation S-X, and presents the combination of the historical financial information of RBA and IAA, Inc. (“IAA”) adjusted to give effect to the Mergers and the other events contemplated by the Merger Agreement. The unaudited pro forma condensed combined financial information of RBA also gives effect to other financing events completed by RBA that have occurred but are not yet reflected in the historical financial information of RBA and are considered material transactions separate from the Mergers.
Description of the Mergers
On November 7, 2022, RBA and IAA entered into the Merger Agreement, which was subsequently amended on January 22, 2023. The closing of the Mergers occurred on March 20, 2023. Pursuant to the Merger Agreement upon the closing of the Mergers, Merger Sub 1 merged with and into IAA, with IAA as the surviving entity and, immediately thereafter, IAA merged with and into Merger Sub 2, with Merger Sub 2 surviving the Mergers as the successor company of IAA and an indirect wholly owned subsidiary of RBA. Upon consummation of the Mergers:
Each share of IAA Common Stock issued and outstanding immediately prior to the Effective Time (excluding shares held by IAA and its subsidiaries and stockholders exercising their appraisal rights) was surrendered and exchanged into the right to receive:
| · | $12.80 in cash, without interest and less any applicable withholding taxes (“cash consideration”); and |
| · | 0.5252 RBA common shares (“share consideration”). |
Each outstanding IAA Stock Option, whether vested or unvested, each outstanding unvested IAA RSU Award that was subject solely to time-based vesting, and each outstanding unvested IAA PRSU Award that was subject to performance-based vesting at the Mergers closing date was cancelled and exchanged into equivalent outstanding equity awards covering RBA common shares based on the equity award exchange ratio of 0.763139.
Expected Accounting Treatment of the Mergers
The Mergers will be accounted for as a business combination in accordance with the acquisition method of accounting under GAAP. RBA is determined to be the accounting acquirer and IAA is determined to be the accounting acquiree. This determination was primarily based on the transfer of cash consideration by RBA to the former economic interest holders of IAA and the relative share ownership, voting rights, composition of the governing body, and the designation of certain senior management positions of the combined entity. Under this method of accounting, the purchase price of the Mergers will be allocated to the assets acquired and liabilities assumed based on their preliminary fair values at the Mergers closing date. Any excess of the estimated fair value of the consideration transferred over the estimated fair value of identifiable assets and liabilities will be recorded as goodwill.
Other Financing Events
Debt Financing
RBA funded the cash portion of the merger consideration through a combination of (i) cash from its balance sheet, (ii) borrowings under the term loan A facility, and (iii) the proceeds from the sale of the Notes (defined below) offered on March 15, 2023 .
In connection with the Merger Agreement, RBA entered into a debt commitment letter with certain financial institutions that committed to provide, subject to the terms and conditions set forth therein, the bridge loan facility in an aggregate principal amount of up to $2.8 billion and the backstop revolving facility in an aggregate principal amount of up to $750.0 million. RBA subsequently obtained the sixth amendment to its existing credit agreement which, among other things, permitted the Mergers and served to terminate the backstop commitments (including the revolving backstop facility and $88.9 million of bridge commitments that served as a backstop for its existing term loans under the existing credit agreement) and replace an additional $1.825 billion of bridge commitments with the new term loan A facility. The applicable interest rate on the term loan A facility is at the adjusted term SOFR rate under the Sixth Amendment, and was determined to be 7.5% upon closing.
On March 15, 2023, RBA completed its previously announced offering of the following two series of senior notes issued at par:
| · | $550 million aggregate principal amount of 6.750% senior secured notes due 2028 (the “Secured Notes”) |
| · | $800 million aggregate principal amount of 7.750% senior notes due 2031 (the “Unsecured Notes” and, together with the Secured Notes, the “Notes”) |
RBA borrowed a total of $3.3 billion, including the term loan A facility and the Notes, that was used to (a) finance the Mergers, (b) pay transaction costs, (c) repay certain existing indebtedness of IAA, (d) repay or refinance all existing indebtedness of RBA and (e) pay the RBA Special Dividend (as described below).
Debt issuance costs were incurred for the New term loan A facility, the secured notes and the unsecured notes and will be amortized over the respective terms of the debt.
Investment Transaction
On January 22, 2023, RBA entered into the securities purchase agreement (the “SPA”) with the Starboard purchasers and, for certain purposes, Starboard Value LP and Jeffrey C. Smith, pursuant to which RBA agreed to issue and sell to the Starboard purchasers (a) 485,000,000 of RBA’s series A senior preferred shares (the “Series A Senior Preferred Shares”) at a purchase price of $1.00 per share and (b) 251,163 common shares at a purchase price of $59.722 per share, (referred to as the “Investment Transaction”). The closing of the Investment Transaction occurred on February 1, 2023.
Holders of the Series A Senior Preferred Shares will receive annual dividends on a cumulative basis initially equal to 5.5% of the aggregate principal amount of $485.0 million and will be payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each calendar year in cash or in common shares at RBA’s election. The Series A Senior Preferred Shares are participating securities and will also participate on an as-converted basis in any regular dividends paid to common shareholders, subject to a $0.27 per share per quarter floor.
Pursuant to the articles of amendment of RBA governing the Series A Senior Preferred Shares, holders of the Series A Senior Preferred Shares have redemption rights upon consummation of a change of control of RBA to require RBA to repurchase the Series A Senior Preferred Shares at an amount in cash equal to the applicable conversion price plus accrued and unpaid dividends thereon, plus a make whole premium. Holders of the Series A Senior Preferred Shares also have non-contingent rights to convert the Series A Senior Preferred Shares into RBA common shares. The conversion rate was initially 0.0136986 RBA common shares per $1.00 conversion amount, subject to customary anti-dilution adjustment provisions, including an adjustment for the RBA Special Dividend to be paid in connection with the Mergers.
RBA Special Dividend
RBA’s board of directors declared a special cash dividend (the “Special Dividend”) on RBA’s outstanding common shares of $1.08 per share, payable to shareholders of record at the close of business on March 17, 2023. Payment of the dividend was made to eligible RBA shareholders on March 28, 2023. IAA stockholders were not entitled to receive Special Dividend with respect to any RBA common shares received as consideration in the Mergers.
Other Information
The unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with the following historical financial statements and the accompanying notes:
| · | the historical audited consolidated financial statements of RBA as of and for the year ended December 31, 2022, included in RBA’s Annual Report on Form 10-K filed with the SEC on February 21, 2023; and |
| · | the historical audited consolidated financial statements of IAA as of and for the fiscal year ended January 1, 2023, included in IAA’s Annual Report on Form 10-K filed with the SEC on February 24, 2023, which are included as Exhibit 99.1 in this current report. |
The unaudited pro forma condensed combined financial information should also be read together with the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of RBA’s and IAA’s respective annual reports. The unaudited pro forma condensed combined financial information should also be read together with other financial information related to the Mergers included elsewhere in this current report.
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2022
(in millions)
| Historical | |||||||||||||||||||||||||||||||||
Ritchie Bros. Auctioneers Incorporated |
IAA, Inc | ||||||||||||||||||||||||||||||||
As of December 31, 2022 |
As of January 1, 2023 |
Transaction Accounting Adjustments - Reclassification |
Notes | Transaction Accounting Adjustments- Financing |
Notes | Transaction Accounting Adjustments Acquisition |
Notes | Pro Forma Combined |
|||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 494 | $ | 196 | $ | — | $ | 3,223 | 4(a) | $ | (2,920 | ) | 5(a) | $ | 624 | ||||||||||||||||||
| (627 | ) | 4(b) | (122 | ) | 5 (b) | ||||||||||||||||||||||||||||
| 500 | 4 (c) | (120 | ) | 5 (c) | |||||||||||||||||||||||||||||
| Restricted cash | 132 | — | — | — | — | 132 | |||||||||||||||||||||||||||
| Trade and other receivables | 186 | 455 | — | — | — | 641 | |||||||||||||||||||||||||||
| Less: allowance for credit losses | (3 | ) | (10 | ) | — | — | — | (13) | |||||||||||||||||||||||||
| Prepaid consigned vehicle charges | — | 68 | — | — | (68 | ) | 5 (a) | — | |||||||||||||||||||||||||
| Inventory | 103 | — | 51 | 2(a) | — | — | 154 | ||||||||||||||||||||||||||
| Other current assets | 48 | 79 | (51 | ) | 2(a) | — | — | 69 | |||||||||||||||||||||||||
| (7 | ) | 2(b) | |||||||||||||||||||||||||||||||
| Income taxes receivable | 3 | — | 7 | 2(b) | — | — | 10 | ||||||||||||||||||||||||||
| Total current assets | 963 | 788 | — | 3,096 | (3,230 | ) | 1,617 | ||||||||||||||||||||||||||
| Non-current assets: | |||||||||||||||||||||||||||||||||
| Property, plant and equipment | 459 | 384 | — | — | 232 | 5 (a) | 1,075 | ||||||||||||||||||||||||||
| Operating lease right-of-use assets | — | 1,204 | 123 | 2(c) | — | 30 | 5 (a) | 1,357 | |||||||||||||||||||||||||
| Other non-current assets | 163 | 34 | (123 | ) | 2(c) | — | — | 74 | |||||||||||||||||||||||||
| Intangible assets | 323 | 185 | — | — | 2,155 | 5(a) | 2,663 | ||||||||||||||||||||||||||
| Goodwill | 949 | 768 | — | — | 3,163 | 5(a) | 4,880 | ||||||||||||||||||||||||||
| Deferred tax assets | 7 | — | — | — | — | 7 | |||||||||||||||||||||||||||
| Total assets | $ | 2,864 | $ | 3,363 | $ | — | $ | 3,096 | $ | 2,350 | $ | 11,673 | |||||||||||||||||||||
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET - (continued)
AS OF DECEMBER 31, 2022
(in millions)
| Historical | |||||||||||||||||||||||||||||||||
Ritchie Bros. Auctioneers |
IAA, Inc | ||||||||||||||||||||||||||||||||
As of December 31, 2022 |
As of January 1, 2023 |
Transaction Accounting Adjustments |
Notes | Transaction Accounting Adjustments |
Notes | Transaction Accounting Adjustments |
Notes | Pro Forma |
|||||||||||||||||||||||||
| LIABILITIES, SERIES A SENIOR PREFERRED SHARES AND EQUITY | |||||||||||||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||||||||||
| Auction proceeds payable | $ | 426 | $ | — | $ | 8 | 2(d) | $ | — | $ | — | $ | 434 | ||||||||||||||||||||
| Trade and other liabilities | 295 | 231 | (13 | ) | 2 (c) | (13 | ) | 4(b) | 10 | 5(a) | 593 | ||||||||||||||||||||||
| (8 | ) | 2(d) | (8 | ) | 5(b) | ||||||||||||||||||||||||||||
| 99 | 2 (e) | ||||||||||||||||||||||||||||||||
| Short-term right-of-use operating lease liabilities | — | 88 | 13 | 2(c) | — | 67 | 5(a) | 168 | |||||||||||||||||||||||||
| Accrued employee benefits and compensation expenses | — | 34 | (34 | ) | 2(e) | — | — | — | |||||||||||||||||||||||||
| Other accrued expenses | — | 65 | (65 | ) | 2(e) | — | — | — | |||||||||||||||||||||||||
| Income taxes payable | 41 | — | — | — | — | 41 | |||||||||||||||||||||||||||
| Short-term debt | 29 | — | — | (29 | ) | 4(b) | — | — | |||||||||||||||||||||||||
| Current portion of long-term debt | 4 | 32 | — | 96 | 4(a) | (32 | ) | 5(a) | 96 | ||||||||||||||||||||||||
| (4 | ) | 4(b) | |||||||||||||||||||||||||||||||
| Total current liabilities | 795 | 450 | — | 50 | 37 | 1,332 | |||||||||||||||||||||||||||
| Non-current liabilities: | |||||||||||||||||||||||||||||||||
| Long-term debt | 577 | 1,091 | — | 3,127 | 4 (a) | (1,091 | ) | 5(a) | 3,127 | ||||||||||||||||||||||||
| (577 | ) | 4 (b) | |||||||||||||||||||||||||||||||
| Long-term right-of-use operating lease liabilities | — | 1,165 | 112 | 2 (c) | — | (86 | ) | 5(a) | 1,191 | ||||||||||||||||||||||||
| Other non-current liabilities | 148 | 23 | (112 | ) | 2(c) | — | (1 | ) | 5(a) | 58 | |||||||||||||||||||||||
| Deferred tax liabilities | 54 | 67 | — | — | 566 | 5(a) | 687 | ||||||||||||||||||||||||||
| Total liabilities | 1,574 | 2,796 | — | 2,600 | (575 | ) | 6,395 | ||||||||||||||||||||||||||
| Commitments and contingencies | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Series A Senior Preferred Shares | — | — | — | 485 | 4(c) | — | 485 | ||||||||||||||||||||||||||
| Stockholder’s Equity: | |||||||||||||||||||||||||||||||||
| Preferred stock | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock | 246 | 1 | — | 15 | 4(c) | (1 | ) | 5(a) | 261 | ||||||||||||||||||||||||
| Treasury stock | — | (61 | ) | — | — | 61 | 5(a) | — | |||||||||||||||||||||||||
| Additional paid-in capital | 86 | 26 | — | — | 3,700 | 5(a) | 3,817 | ||||||||||||||||||||||||||
| 5 | 5(d) | ||||||||||||||||||||||||||||||||
| Retained earnings | 1,043 | 655 | — | (4 | ) | 4 (b) | (655 | ) | 5(a) | 800 | |||||||||||||||||||||||
| (114 | ) | 5(b) | |||||||||||||||||||||||||||||||
| (120 | ) | 5(c) | |||||||||||||||||||||||||||||||
| (5 | ) | 5(d) | |||||||||||||||||||||||||||||||
| Accumulated other comprehensive loss | (85 | ) | (54 | ) | — | — | 54 | 5(a) | (85 | ) | |||||||||||||||||||||||
| Non-controlling interest | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Total stockholder’s equity | 1,290 | 567 | — | 11 | 2,925 | 4,793 | |||||||||||||||||||||||||||
| Total liabilities, Series A Senior Preferred Shares, and stockholder’s equity | $ | 2,864 | $ | 3,363 | $ | — | $ | 3,096 | $ | 2,350 | $ | 11,673 | |||||||||||||||||||||
UNAUDITED
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2022
(in millions, except share and per share amounts)
| Historical | ||||||||||||||||||||||||||||||
Ritchie Bros. Auctioneers Incorporated |
IAA, Inc. | |||||||||||||||||||||||||||||
Year ended December 31, 2022 |
Year ended January 1, 2023 |
Transaction Accounting Adjustments - Reclassification |
Notes | Transaction Accounting Adjustments - Financing |
Notes | Transaction Accounting Adjustments - Acquisition |
Notes | Pro Forma Combined |
||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||
| Service revenue | $ | 1,051 | $ | 1,686 | $ | — | $ | — | $ | — | $ | 2,737 | ||||||||||||||||||
| Inventory sales revenue | 683 | 413 | — | — | — | 1,096 | ||||||||||||||||||||||||
| Total revenue | 1,734 | 2,099 | — | — | — | 3,833 | ||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||
| Cost of services | 168 | 996 | — | — | — | 1,164 | ||||||||||||||||||||||||
| Cost of inventory sold | 609 | 368 | — | — | — | 977 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 540 | 212 | (9 | ) | 2(f) | — | (13 | ) | 6(e) | 738 | ||||||||||||||||||||
| 8 | 6(f) | |||||||||||||||||||||||||||||
| Acquisition-related costs | 37 | — | 9 | 2(f) | — | 115 | 6(d) | 187 | ||||||||||||||||||||||
| 26 | 6(g) | |||||||||||||||||||||||||||||
| Depreciation and amortization expenses | 97 | 106 | — | — | (62 | ) | 6(a) | 393 | ||||||||||||||||||||||
| 252 | 6(b) | |||||||||||||||||||||||||||||
| Foreign exchange loss (gain) | (1 | ) | — | 5 | 2(g) | — | — | 4 | ||||||||||||||||||||||
| Total operating expenses, net | 1,450 | 1,682 | 5 | — | 326 | 3,463 | ||||||||||||||||||||||||
| Gain on disposition of property, plant and equipment | 171 | — | 2 | 2(h) | — | — | 173 | |||||||||||||||||||||||
| Operating income | 455 | 417 | (3 | ) | — | (326 | ) | 543 | ||||||||||||||||||||||
| Interest expense | (58 | ) | (52 | ) | — | (249 | ) | 4(d) | 52 | 6(c) | (278 | ) | ||||||||||||||||||
| 29 | 4(e) | |||||||||||||||||||||||||||||
| Interest income | 7 | 1 | — | — | — | 8 | ||||||||||||||||||||||||
| Change in fair value of derivatives, net | 1 | — | — | — | — | 1 | ||||||||||||||||||||||||
| Other income (expense), net | 1 | (5 | ) | (2 | ) | 2(h) | — | — | (1 | ) | ||||||||||||||||||||
| 5 | 2(g) | |||||||||||||||||||||||||||||
| Income before income taxes | 406 | 361 | — | (220 | ) | (274 | ) | 273 | ||||||||||||||||||||||
| Income tax expense (benefit) | 86 | 69 | — | (53 | ) | 4(f) | (59 | ) | 4(f) | 43 | ||||||||||||||||||||
| Net income (loss) | $ | 320 | $ | 292 | $ | — | $ | (167 | ) | $ | (215 | ) | $ | 230 | ||||||||||||||||
| Cumulative dividends on Series A Senior Preferred Shares | — | — | — | (27 | ) | 4(g) | — | (27 | ) | |||||||||||||||||||||
| Allocated earnings to participating securities | — | — | — | (7 | ) | 4(g) | — | (7 | ) | |||||||||||||||||||||
| Net income (loss) attributable to: | ||||||||||||||||||||||||||||||
| Common Stockholders | $ | 320 | $ | 292 | $ | — | $ | (201 | ) | $ | (215 | ) | $ | 196 | ||||||||||||||||
| Non-controlling interests | — | — | — | — | — | — | ||||||||||||||||||||||||
| Earnings per share attributable to common stockholders: | ||||||||||||||||||||||||||||||
| Basic | $ | 2.89 | 6(h) | $ | 1.08 | |||||||||||||||||||||||||
| Diluted | $ | 2.86 | 6(h) | $ | 1.07 | |||||||||||||||||||||||||
| Weighted average number of shares outstanding | ||||||||||||||||||||||||||||||
| Basic | 110,781,282 | 6(h) | 181,616,319 | |||||||||||||||||||||||||||
| Diluted | 111,886,025 | 6(h) | 182,843,684 | |||||||||||||||||||||||||||
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
The Mergers will be accounted for as a business combination in accordance with the acquisition method of accounting under GAAP. RBA is determined to be the accounting acquirer and IAA is determined to be the accounting acquiree.
The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X. The adjustments in the unaudited pro forma condensed combined financial information have been identified and presented to provide relevant information in accordance with GAAP necessary for an illustrative understanding of RBA upon consummation of the Mergers and the other related events contemplated by the Merger Agreement and this current report. Assumptions and estimates underlying the unaudited pro forma adjustments set forth in the unaudited pro forma condensed combined financial information are described in the accompanying notes.
The unaudited pro forma condensed combined balance sheet as of December 31, 2022 is prepared on a combined basis using the historical audited consolidated balance sheets of RBA and IAA as of December 31, 2022, and January 1, 2023, respectively, giving pro forma effect to the Mergers and the other related events contemplated by the Merger Agreement as if each had been consummated on December 31, 2022 based on the assumptions and adjustments described in the accompanying notes.
The unaudited pro forma condensed combined income statement for the year ended December 31, 2022 gives pro forma effect to the Mergers and the other related events contemplated by the Merger Agreement as if each had been consummated on January 1, 2022, the beginning of the earliest period presented, based on the assumptions and adjustments described in the accompanying notes. As the difference between RBA’s and IAA’s fiscal year-end dates is less than one fiscal quarter, the unaudited pro forma condensed combined income statement for the year ended December 31, 2022 combines the historical audited consolidated income statements of RBA and IAA for the fiscal year ended December 31, 2022, and for the fiscal year ended January 1, 2023, respectively.
The unaudited pro forma condensed combined financial information has been presented for informational purposes only and is not necessarily indicative of the operating results that would have been achieved had the Mergers occurred on the dates indicated, and does not reflect adjustments for any anticipated synergies, operating efficiencies, tax savings or integration costs. The unaudited pro forma condensed combined financial information does not purport to project the future operating results or financial position of RBA following the completion of the Mergers. RBA and IAA have not had any historical relationship prior to the Mergers. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
The unaudited pro forma adjustments represent RBA management’s estimates based on information available as of the date of this current report and are subject to change as additional information becomes available and analyses are performed. If the actual facts are different than these assumptions, then the amounts and shares outstanding in the unaudited pro forma condensed combined financial information will be different and those changes could be material.
2. Significant Accounting Policies
The accounting policies used in the preparation of the unaudited pro forma condensed combined financial information are those set out in RBA’s audited annual financial statements as of and for the year ended December 31, 2022. The Series A Senior Preferred Shares are classified outside of stockholder’s equity on the condensed combined pro forma balance sheet because the holders of such shares have redemption rights in the event of a change in control, which is deemed outside of RBA’s control. RBA management is currently evaluating for significant accounting policy differences between the two entities. RBA management is performing a comprehensive review of the accounting policies between the two entities and may identify differences in accounting policies between the two entities which, when conformed, could be material.
Certain reclassifications are reflected in the unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined income statement to conform presentation between IAA and RBA These reclassifications have no effect on previously reported total assets, total liabilities and shareholders’ equity, or net income of RBA or IAA. The unaudited pro forma condensed combined financial information may not reflect all reclassifications necessary to conform IAA’s presentation to that of RBA due to limitations on the availability of information as of the date of this current report. Additional reclassification adjustments may be identified as more information becomes available.
The following reclassification adjustments were made to conform presentation between IAA and RBA:
| (a) | Represents the reclassification of inventory assets from other current assets to inventory. |
| (b) | Represents the reclassification of income taxes receivable from other current assets to income taxes receivable. |
| (c) | Represents the reclassification of operating lease right-of-use assets from other non-current assets to operating lease right-of-use assets, and the reclassification of operating lease liabilities from trade and other liabilities to short-term right-of-use operating lease liabilities, and other non-current liabilities to long-term right-of-use operating lease liabilities. |
| (d) | Represents the reclassification of certain payables to sellers from trade and other liabilities to auction proceeds payable. |
| (e) | Represents the reclassification of certain current liabilities from accrued employee benefits and compensation expenses and other accrued expenses to trade and other liabilities. |
| (f) | Represents the reclassification of certain acquisition-related costs from selling, general and administrative expenses to acquisition-related costs. |
| (g) | Represents the reclassification of foreign exchange losses from other income (expense), net to foreign exchange loss (gain). |
| (h) | Represents the reclassification of gain on disposition of property, plant and equipment from other income (expense), net to gain on disposition of property, plant and equipment. |
3. Calculation of Merger Consideration and Preliminary Purchase Price Allocation of the Mergers
Upon the consummation of the Mergers, holders of the 133,864,518 issued and outstanding shares of IAA Common Stock, in addition to holders of IAA RSAs and holders of IAA Phantom Stock Awards, based on the capitalization of IAA as of March 20, 2023, received $12.80 per share in cash, plus an aggregate of 70,339,723 newly issued RBA common shares as calculated based on the exchange ratio. Holders of the issued and outstanding IAA equity awards as of March 20, 2023 received RBA equity awards or shares covering 554,626 RBA common shares after giving effect to the equity award exchange ratio, based on the following events contemplated by the Merger Agreement:
| · | the cancellation and exchange of all 133,864,518 issued and outstanding shares of IAA Common Stock, in addition to 27,855 shares underlying IAA RSAs and 37,049 shares underlying IAA Phantom Stock Awards granted to non-employee directors, for $12.80 per share in cash plus an aggregate of 70,339,723 newly issued RBA common shares as calculated based on the exchange ratio; |
| · | the cancellation and exchange of all 246,009 granted and outstanding vested and unvested IAA Stock Options into RBA options for the purchase of 187,727 RBA common shares with the same terms and vesting conditions except for the number of underlying shares and the exercise price, each of which was adjusted by the equity award exchange ratio; |
| · | the cancellation and exchange of all 268,291 granted and outstanding unvested IAA RSU Awards into 204,547 RBA RSUs for RBA common shares with the same terms and vesting conditions except for the number of underlying shares, which was adjusted by the equity award exchange ratio; and |
| · | the cancellation and exchange of all 212,979 granted and outstanding unvested IAA PRSU Awards into 162,352 RBA RSUs for RBA common shares with similar terms except for having time-only vesting conditions and for the underlying number of shares, which was adjusted by the equity award exchange ratio. |
Preliminary Merger Consideration
The preliminary fair value of the Merger Consideration transferred on the Mergers closing date included the cash consideration, the fair value of approximately 70,339,723 RBA common shares issued, the fair value of assumed IAA equity awards attributable to pre-combination services, and the amount of cash paid for the repayment of certain existing indebtedness of IAA. The preliminary merger consideration is as follows:
| (dollars in millions) | ||||
| Cash consideration(1) | $ | 1,714 | ||
| Fair value of RBA common shares issued(2) | 3,713 | |||
| Fair value of assumed IAA equity awards attributable to pre-combination service(3) | 13 | |||
| Repayment of certain existing indebtedness of IAA(4) | 1,157 | |||
| Estimated reimbursement of sell side acquisition costs(5) | 49 | |||
| Total Preliminary Merger Consideration | $ | 6,646 | ||
| (1) | Represents the cash consideration paid to IAA stockholders pursuant to the Merger Agreement based on the capitalization of IAA as of March 20, 2023. |
| (2) | Represents the fair value of RBA common shares issued to IAA stockholders pursuant to the Merger Agreement based on the capitalization of IAA as of March 20, 2023, at a $52.79 closing price of RBA common shares as of March 17, 2023. |
| (3) | Represents the preliminary portion of the fair value of stock options, restricted stock units and performance-based restricted stock units cancelled and exchanged by RBA upon completion of the Mergers that is attributable to pre-combination service. |
| (4) | Represents the total cash consideration paid concurrent with the closing of the Mergers to retire certain existing indebtedness of IAA with an outstanding balance of approximately $1,157.1 million as of March 20, 2023, including accrued interest and prepayment penalties. |
| (5) | Represents the total cash consideration paid concurrent with the closing of the Mergers by RBA for IAA transaction costs. |
Preliminary Purchase Price Allocation
Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed will be recorded by RBA at their acquisition date fair values. The excess purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill.
The preliminary estimate of fair values of assets acquired and liabilities assumed have been determined by management of RBA using publicly available benchmarking information and other assumptions, including market participant assumptions. The purchase price allocation is preliminary and subject to change, as additional information becomes available and as additional analyses are performed. The differences that may occur between the preliminary estimates and the final purchase price allocation when the valuation and other studies are finalized could be material.
The fair value assigned to intangible assets has been estimated based on third-party preliminary valuation studies utilizing income-based methodologies and corroborated with publicly available market benchmarks. The preliminary land fair value estimation was based on broker valuations, tax appraisals and other information provided by IAA management. The estimated fair values of land are preliminary and subject to a valuation assessment post-close. Other property, plant and equipment and working capital amounts are assumed to have fair values equal to historical book values. Real and personal property will be valued as of the acquisition date but were not included in the preliminary valuation assessment. The final purchase price allocation will be based on appraisals subsequent to the consummation of the Mergers and may result in materially different allocations for assets than those presented in this unaudited pro forma condensed combined balance sheet. The intangible assets identified in the preliminary purchase price allocation are subject to further examination which may result in additional assets identified, excluded or further segmented. Any change in the amount of the final purchase price allocated to amortizable, finite lived intangible assets as well as property, plant and equipment could materially affect the amount of amortization and depreciation expense. The preliminary purchase price and purchase price allocation are presented as follows:
| (dollars in millions) | ||||
| Cash consideration | $ | 1,714 | ||
| Fair value of RBA common shares issued | 3,713 | |||
| Fair value of assumed IAA equity awards attributable to pre-combination service | 13 | |||
| Repayment of certain existing indebtedness of IAA | 1,157 | |||
| Estimated reimbursement of sell side acquisition cost | 49 | |||
| Total preliminary merger consideration | $ | 6,646 | ||
| Cash and cash equivalents | $ | 196 | ||
| Trade and other receivables | 445 | |||
| Inventory | 51 | |||
| Income taxes receivable | 7 | |||
| Other current assets | 21 | |||
| Property, plant and equipment | 616 | |||
| Operating lease right-of-use assets | 1,234 | |||
| Other non-current assets | 34 | |||
| Intangible assets | 2,340 | |||
| Total assets | $ | 4,944 | ||
| Auction proceeds payable | $ | 8 | ||
| Trade and other liabilities | 332 | |||
| Short-term right-of-use operating lease liability | 155 | |||
| Long-term right-of-use operating lease liability | 1,079 | |||
| Other non-current liabilities | 22 | |||
| Deferred tax liabilities | 633 | |||
| Total liabilities | $ | 2,229 | ||
| Preliminary fair value of net assets acquired | $ | 2,715 | ||
| Preliminary allocation of goodwill | 3,931 | |||
| Historical goodwill of IAA | 768 | |||
| Adjustment to goodwill | $ | 3,163 | ||
Goodwill will not be amortized but instead will be reviewed for impairment at the reporting unit level at least annually, and more often if indicators of impairment are identified. Goodwill represents future economic benefits including going concern value, the value of future buyer and provider relationships, the opportunity to scale and expand market offerings, and other expected synergies. Goodwill recognized in the Mergers is not expected to be deductible for tax purposes.
4. Transaction Accounting Adjustments - Financing
| (a) | Reflects the newly raised term loan A facility, Secured notes and Unsecured notes with a total principal amount of $3,260.0 million to fund the Mergers as described in the other financing events section above, net of a total $37.1 million in estimated deferred financing costs. |
| (dollars in millions) | ||||
| Term loan A facility | $ | 1,910 | ||
| Deferred financing costs | (18 | ) | ||
| Current portion of long-term debt | (96 | ) | ||
| Long-term debt | $ | 1,796 | ||
| Secured notes | $ | 550 | ||
| Estimated deferred financing costs | (8 | ) | ||
| Current portion of long-term debt | — | |||
| Long-term debt | $ | 542 | ||
| Unsecured notes | $ | 800 | ||
| Estimated deferred financing costs | (11 | ) | ||
| Current portion of long-term debt | — | |||
| Long-term debt | $ | 789 | ||
| (b) | Represents the repayment or refinancing of RBA existing debt using the proceeds from the newly raised borrowings, including the repayment or refinancing of all of our outstanding short-term debt, redemption of the 2016 Notes and repayment or refinancing of the delayed-draw term loan, and the associated write-off of unamortized deferred debt issuance costs. |
| (c) | Represents the proceeds from Investment Transaction in aggregated amount of $500.0 million in connection with the sale and issuance of (i) 485,000,000 of RBA Series A Senior Preferred Shares at a purchase price of $1.00 per share, and (ii) 251,163 shares of RBA common shares at a purchase price of $59.722 per share, pursuant to the SPA. |
| (d) | Represents the total interest expense and amortization of deferred issuance costs for the term loan A facility, secured notes offered hereby and unsecured notes to be incurred by RBA to fund the Mergers as described in “—Other Financing Events.” Interest expense is calculated using an effective interest rate. The effective interest rates for the term loan A facility, secured notes and unsecured notes were 7.8%, 7.1% and 8.0%, respectively. |
| (e) | Represents the elimination of interest expense and write-off of unamortized deferred debt issuance costs associated with the repayment or refinancing of RBA existing debt using the proceeds from the newly raised borrowings, including the repayment or refinancing of all of our outstanding short-term debt, redemption of the 2016 Notes and repayment or refinancing of the delayed-draw term loan. |
| (f) | Represents the tax expense (benefit) impact at an estimated blended effective tax rate of 22.9% for the year ended December 31, 2022, based on the weighted-average statutory tax rate of the jurisdictions expected to be impacted for each of these periods and is not necessarily indicative of the effective tax rate of RBA following the Mergers, which could be significantly different depending on post-acquisition activities, including the geographical mix of income among other factors. The actual tax effects of the Mergers will differ from the pro forma adjustments, and the differences may be material. |
| (g) | Represents the estimated cumulative preferred share dividend and participation rights associated with the Series A Senior Preferred Shares sold and issued in connection with the Investment Transaction. |
5. Transaction Accounting Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The adjustments included in the unaudited pro forma condensed combined balance sheet as of December 31, 2022 are as follows:
| (a) | Represents the adjustments to historical IAA balances to reflect the impact of acquisition accounting as outlined in Note 3 above, based on the total preliminary merger consideration of $6,646.1 million, which consists of (i) cash consideration of $1,714.2 million to be paid to IAA stockholders, (ii) the issuance of 70,339,723 RBA common shares with a fair value of $3,713.1 million, (iii) the issuance of RBA equity awards covering 554,626 RBA common shares with a fair value of $13.0 million attributable to IAA equity award holders’ pre-combination service, (iv) the repayment of certain existing indebtedness of IAA outstanding as of March 20, 2023 of approximately $1,157.1 million, including accrued interest and prepayment penalties under IAA’s credit facilities and senior notes and (v) the estimated reimbursement of sell side acquisition costs of $48.8 million, as summarized below: |
| (dollars in millions) | ||||
| Total merger consideration | $ | 6,646 | ||
| Less: identifiable net assets acquired(1) | (2,715 | ) | ||
| Estimated goodwill | $ | 3,931 | ||
| IAA historical goodwill | 768 | |||
| Adjustment to goodwill | $ | 3,163 | ||
| Historical RBA goodwill | 949 | |||
| Pro forma goodwill | $ | 4,880 | ||
| (1) | The purchase price allocation is based on preliminary estimates of fair value of assets acquired and liabilities assumed. The difference between the preliminary total merger consideration and preliminary identifiable net assets acquired is recorded as estimated goodwill. The preliminary purchase price and purchase price allocation are presented in Note 3 above. Upon completion of the fair value assessment after the Mergers, it is anticipated that the ultimate purchase price allocation will differ from the preliminary assessment outlined here. Any changes to the initial estimates of the fair value of the acquired assets and assumed liabilities will be recorded as adjustments to those assets and liabilities, and residual amounts will be allocated to goodwill. |
Prepaid consigned vehicle charges include inbound tow, titling costs and enhancement charges associated with the receipt of a consigned vehicle for auction. These costs are incurred by IAA and are not reimbursable. Because RBA will not receive a future economic benefit from these deferred costs, they do not qualify for asset recognition in the Mergers.
The identifiable net assets acquired includes a deferred tax liability which is associated with the preliminary purchase price allocation and the pro forma adjustments. These purchase accounting adjustments create new differences between the book basis and tax basis of the respective assets. The amount of these adjustments to the unaudited pro forma condensed combined balance sheet is determined by applying the blended statutory rate of approximately 24% to the portion of these adjustments assuming all assets are within U.S. jurisdictions.
The acquired right-of-use assets and lease liabilities are measured and recognized based on the remaining future lease payments using RBA’s incremental borrowing rates. The current portion of the lease liability is calculated as the present value of the contractual lease payments for the subsequent twelve months. No amounts were recorded in the unaudited pro forma condensed combined income statements related to the lease adjustment as the amount is not material.
The assumed liabilities include a one-time one percent excise tax incurred on the cash consideration that increases the repurchase excise tax base for IAA concurrent with the Mergers. This tax was added by the Inflation Reduction Act and is effective January 1, 2023.
The adjustments to additional paid-in capital in connection with the acquisition accounting for the Mergers are summarized below:
| (dollars in millions) | ||||
| Elimination of IAA historical additional paid-in capital | $ | (26 | ) | |
| Fair value of RBA common shares issued | 3,713 | |||
| Fair value of assumed IAA equity awards attributable to pre-combination service | 13 | |||
| Additional paid-in capital | $ | 3,700 | ||
| (b) | Represents the settlement of transaction costs accrued as of December 31, 2022 and the remaining estimated transaction costs to be incurred by RBA in connection with the Mergers. |
| (c) | Represents the one-time RBA Special Dividend approved and declared in connection with the closing of the Mergers in an aggregate amount of $120.0 million. On March 28, 2023, the RBA Special Dividend was paid in cash to holders of record of RBA common shares as of March 17, 2023. |
| (d) | Represents the accelerated stock-based compensation expense at closing related to certain IAA executives’ equity awards in connection with the Mergers. As the IAA awards granted to those executives will be settled at closing and require no future service, the entire post-combination portion of such awards is recognized as compensation expense immediately after the closing of the Mergers. |
6. Transaction Accounting Adjustments to Unaudited Pro Forma Condensed Combined Income Statement
The adjustments included in the unaudited pro forma condensed combined income statement for the year ended December 31, 2022 are as follows:
| (a) | Represents the elimination of IAA historical amortization expense relate to identifiable intangible assets. |
| (b) | Represents the recognition of new amortization expense related to acquired identifiable assets based on the estimated fair value as of March 20, 2023. Amortization expense is calculated based on the estimated fair value of each of the identifiable intangible assets and the associated estimated useful lives below: |
| Estimated Value | Potential Useful Life | |||||||
| Assets acquired | (dollars in millions) | (years) | ||||||
| Provider and buyer relationships | $ | 2,030 | 10 | |||||
| Developed technology | 150 | 6 | ||||||
| Trade names and trademarks | 160 | 6 | ||||||
| Total assets acquired | $ | 2,340 | ||||||
| (c) | Represents the elimination of the interest expense associated with IAA’s extinguished credit facilities and senior notes. |
| (d) | Represents the remaining one-time estimated costs incurred by RBA prior to, or concurrent with, the Mergers and are reflected in the unaudited pro forma condensed combined balance sheet as a direct reduction to the combined entity’s accumulated deficit and are assumed to be cash settled. |
| (e) | Represents the elimination of historical IAA stock-based compensation expense related to IAA equity awards. |
| (f) | Represents the recognition of new stock-based compensation expense for the post-combination portion of the cancelled and exchanged IAA equity awards recorded under Selling, general and administrative expenses. |
As IAA RSAs and IAA Phantom Stock Awards granted to non-employee directors were settled at closing with no future service required, the entire post-combination portion of such awards of $0.3 million will be recognized as compensation expense immediately after the closing of the Mergers. Vested IAA Stock Options were cancelled and exchanged to RBA options, and the post-combination fair value step-up that will be expensed immediately after the closing of the Mergers is not material. These are non-recurring adjustments.
IAA Stock Options, IAA RSU Awards and IAA PRSU Awards were cancelled and exchanged into 554,626 RBA awards with an estimated aggregate fair value of $22.3 million, of which $9.3 million is attributable to post-combination services and will be recognized as compensation expense throughout the remaining service periods. RBA awards are subject to the same terms and conditions applicable to the corresponding IAA equity awards, including vesting terms. With respect to any RSU awards that replace IAA PRSU Awards, vesting is longer be subject to the achievement of performance goals and is solely be based on providing continued services to RBA through the end of the applicable service period.
| (g) | Represents the one-time transaction bonuses that certain IAA employees, including certain executive officers, became entitled to receive in connection with the Mergers, in addition to one-time discretionary payments made to certain IAA and RBA employees and accelerated vesting of equity awards granted to certain IAA and RBA employees as a result of the Mergers. |
| (h) | Represents the pro forma basic and diluted net income per share attributable to the combined entity’s common shareholders presented in conformity with the two-class method required for participating securities as a result of the pro forma adjustments. The two-class method requires income available to common shareholders for the period to be allocated between shares of common stock and participating securities based on their respective rights to receive earnings as if all earnings for the period had been distributed. The Series A Senior Preferred Shares of the combined entity are participating securities that contractually entitle the holders of such shares to participate in the combined entity’s earnings but do not contractually require the holders of such shares to participate in the combined entity’s losses. |
The pro forma basic net income per share attributable to the combined entity’s common shareholders is calculated using the historical basic weighted average shares of RBA common shares outstanding, adjusted for the additional new shares of RBA common stock issued to consummate the Mergers, and the new shares of RBA common stock issued and sold to the Starboard purchasers. Pro forma diluted net income per share attributable to the combined entity’s common shareholders is calculated using the historical diluted weighted average shares of RBA common shares outstanding, adjusted for the additional new shares of RBA common stock issued to consummate the Mergers, and the new shares of RBA common stock issued and sold to the Starboard purchasers, and the potentially dilutive effect of the exchanged IAA Stock Options, IAA RSU Awards and IAA PRSU Awards.
The pro forma weighted average shares outstanding used to calculate pro forma basic and diluted net income per share attributable to common shareholders was not adjusted for the potential common shares that may be issued to settle the cumulative dividend payments and allocated earnings attributable to the Series A Senior Preferred Shares as such amounts are assumed to be cash settled at the combined entity’s election for purposes of this unaudited pro forma condensed combined financial information. The impact to pro forma basic and diluted net income per share attributable to the combined entity’s common shareholders assuming share settlement of such amounts is not material.
| For the year ended December 31, 2022 | ||||
| (dollars in millions, except share and per share data) | ||||
| Numerator: | ||||
| Net income | $ | 230 | ||
| Cumulative dividend related to the issuance of Series A Senior Preferred Shares | (27 | ) | ||
| Allocated earnings to participating securities | (7 | ) | ||
| Pro forma net income attributable to common stockholders | $ | 196 | ||
| Denominator: | ||||
| Historical RBA weighted average shares outstanding (basic) | 110,781,282 | |||
| RBA common shares issued to IAA stockholders pursuant to the Merger Agreement(1) | 70,339,723 | |||
| RBA common shares issued to holders of assumed IAA equity awards subject to post-closing vesting(2) | 244,151 | |||
| Common shares issued in connection with the Investment Transaction | 251,163 | |||
| Pro forma weighted average shares (basic) | 181,616,319 | |||
| Historical RBA weighted average shares outstanding (diluted) | 111,886,025 | |||
| RBA common shares issued to IAA stockholders pursuant to the Merger Agreement(1) | 70,339,723 | |||
| RBA common shares issued to holders of assumed IAA equity awards subject to post-closing vesting(2) | 366,773 | |||
| Common shares issued in connection with the Investment Transaction | 251,163 | |||
| Pro forma weighted average shares (diluted) | 182,843,684 | |||
| Pro forma net income per share attributable to common shares: | ||||
| Basic | $ | 1.08 | ||
| Diluted | $ | 1.07 | ||
| (1) | Includes the cancellation and exchange of all 133,864,518 issued and outstanding shares of IAA Common Stock in addition to 27,855 shares underlying IAA RSAs and 37,049 shares underlying IAA Phantom Stock Awards granted to non-employee directors based on the capitalization activity of IAA as of March 20, 2023, into $12.80 per share in cash, plus an aggregate of 70,339,723 RBA common shares. |
| (2) | A total of 268,291 granted and outstanding unvested IAA RSU Awards and 212,979 shares granted and outstanding of unvested IAA PRSU Awards are cancelled and converted into 366,899 shares of RBA RSU awards. The number of such RBA RSU awards vested during the first 12 months after the Mergers are added to the historical basic RBA common shares outstanding. The weighted average impact to the number of shares added to the historical basic RBA common shares is not material. |
7. Non-GAAP Measures
Below is a description of our unaudited pro forma non-GAAP financial measures. The pro forma non-GAAP metrics included in this current report have been calculated in accordance with Item 10 of Regulation S-K. We regularly review the following non-GAAP financial measures to evaluate our business, measure our performance, identify trends, prepare financial projections and make business decisions. The measures set forth below should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP or the unaudited pro forma financial information presented in this current report. Other companies may calculate these measures differently, limiting their usefulness as comparative measures. The pro forma non-GAAP measures are presented herein because these are important metrics used by management as one of the means by which it assesses acquisition targets. Moreover, they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
The unaudited pro forma non-GAAP financial measures were derived from and should be read in conjunction with the following SEC filings:
| · | the non-GAAP financial information of RBA as of and for the year ended December 31, 2022 set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in RBA’s Annual Report on Form 10-K filed with the SEC on February 21, 2023; and |
| · | the non-GAAP financial information as of and for the year ended January 1, 2023 included within Exhibit 99.1 of IAA’s Current Report (excluding any information and exhibits furnished under Item 2.02 or 7.01) on Form 8-K filed with the SEC on February 22, 2023. |
Adjusted pro forma EBITDA and adjusted pro forma net income attributable to common stockholders have limitations as analytical measures, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that the non-GAAP measures:
| · | do not reflect interest income, interest expense or other non-operating gains and losses, which may represent an increase to or reduction in cash available to us; |
| · | exclude non-cash charges for depreciation of property, plant and equipment and amortization of intangible assets, and although the assets being depreciated and amortized may have to be replaced in the future, adjusted pro forma EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| · | do not reflect acquisition costs, restructuring costs, litigation costs or other costs that we do not consider to be routine in nature for the ongoing financial performance of our business, which may represent a reduction in cash available to us; |
| · | exclude non-cash charges for stock-based compensation expense, which is expected to continue to be part of our compensation strategy; |
| · | do not reflect provisions for income taxes, which may represent a reduction in cash available to us. |
Adjusted pro forma EBITDA is calculated by adding back depreciation and amortization, interest expense, income tax expense, and subtracting interest income from pro forma net income, as well as adding back share-based payments expense, acquisition-related costs, loss (gain) on disposition of property, plant and equipment and related costs, certain non-recurring advisory, legal and restructuring costs, change in fair value of derivatives, and the fair value adjustments related to contingent consideration. Certain historical adjustments which are included in IAA Adjusted EBITDA, and meet RBA’s definition, have been included and adjusted for in the adjusted pro forma EBITDA reconciliation below.
Adjusted pro forma net income attributable to common stockholders eliminates the financial impact of adjusting items from pro forma net income attributable to common stockholders that we do not consider to be part of our normal operating results, such as share-based payments expense, acquisition-related costs, amortization of acquired intangible assets, and loss (gain) on disposition of property, plant and equipment and related costs. Also adjusted were certain non-recurring advisory, legal and restructuring costs, the change in fair value of derivatives, loss on redemption and extinguishment of indebtedness and related interest expenses, and the fair value adjustments related to contingent consideration. Certain historical adjustments which are included in IAA’s adjusted net income, and meet RBA definition, have been included and adjusted for in the adjusted pro forma net income attributable to common stockholders reconciliation below.
The following table reconciles adjusted pro forma EBITDA to pro forma net income, the most directly comparable pro forma financial measure:
| For the year ended December 31, 2022 |
||||
| (dollars in millions) | ||||
| Pro forma net income | $ | 230 | ||
| Add: depreciation and amortization | 393 | |||
| Add: interest expense | 278 | |||
| Less: interest income(1) | (8 | ) | ||
| Add: income tax expense | 43 | |||
| Pro forma EBITDA | $ | 936 | ||
| Share-based payment expense(2) | 45 | |||
| Acquisition-related costs | 187 | |||
| Non-recurring advisory, legal and restructuring costs(3) | 8 | |||
| Loss (gain) on disposition of property, plant and equipment and related costs(4) | (168 | ) | ||
| Change in fair value of derivatives | (1 | ) | ||
| Fair value adjustments related to contingent consideration(5) | 5 | |||
| Adjusted pro forma EBITDA | $ | 1,012 | ||
| (1) | Includes $0.9 million of interest income for IAA for the year ended January 1, 2023. |
| (2) | Includes $13.0 million of pro forma IAA share-based payment expenses for the year ended January 1, 2023. |
| (3) | Includes $3.0 million of non-recurring IAA retention/severance costs and professional fees costs for the year ended January 1, 2023. |
| (4) | Includes $(1.0) million of IAA costs related to loss (gain) on disposition of property, plant and equipment for the year ended January 1, 2023. |
| (5) | Adjustment specific to IAA only activities for the period. |
The following table reconciles adjusted pro forma net income attributable to common stockholders to pro forma net income attributable to common stockholders, the most directly comparable pro forma financial measure:
| For the year ended December 31, 2022 |
||||
| (dollars in millions) | ||||
| Pro forma net income attributable to common stockholders | $ | 196 | ||
| Share-based payment expense | 45 | |||
| Acquisition-related costs | 187 | |||
| Amortization of acquired intangible assets(1) | 285 | |||
| Non-recurring advisory, legal and restructuring costs | 8 | |||
| Loss (Gain) on disposition on property, plant and equipment and related costs | (168 | ) | ||
| Loss on redemption and extinguishment of indebtedness and related interest expenses(2) | 10 | |||
| Change in fair value of derivatives | (1 | ) | ||
| Fair value adjustments related to contingent consideration | 5 | |||
| Related tax effects of the above | (90 | ) | ||
| Related allocation of the above to participating securities | (10 | ) | ||
| Adjusted pro forma net income attributable to common stockholders | $ | 467 | ||
| (1) | Includes the recognition of new amortization expense related to identifiable acquired assets based on the estimated fair values as of March 20, 2023. |
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