IAA, Inc. Announces Fourth Quarter and Full Year Fiscal 2019 Financial Results

Strong Top and Bottom Line Performance for Fiscal 2019

Announces Margin Expansion Plan

WESTCHESTER, Ill.–(BUSINESS WIRE)–IAA, Inc. (NYSE: IAA) today announced its financial results for the fourth quarter and full year fiscal 2019, which ended December 29, 2019.

John Kett, Chief Executive Officer and President, stated, “On behalf of everyone at IAA, our thoughts are with all individuals impacted by the COVID-19 outbreak. Our first priority remains the health and safety of our employees. As we reflect on the past year, we are pleased to report that we finished 2019 in line to slightly ahead of the goals we set for ourselves at the time of the spin-off. Fiscal 2019 was an important year for IAA, as we became an independent, publicly-traded company and expanded our organization to support our new stand-alone structure. We also made great progress against our key strategic initiatives, including broadening our service offering, enhancing our international buyer network, and continuing to innovate and enhance our data analytics capabilities. I am grateful to our teams for the work they have done to drive these results.”

Mr. Kett continued, “We remain on track to be substantially complete with the rollout of our Buyer Digital Transformation by the end of the second quarter of fiscal 2020. I am excited to also announce our margin expansion plan, through which we expect to generate meaningfully improved margins over the next several years. Our team has worked hard to identify opportunities across the organization to improve efficiencies, reduce costs and optimize revenues, while continuing to provide excellent service levels to our buyers and sellers.”

Mr. Kett further noted, “While our volumes and revenue per unit quarter-to-date were in line with our original expectations during that time period, COVID-19 has created a fluid situation and we are in early stages of gathering data and monitoring customers as well as market dynamics to assess the potential impact. In light of the current COVID-19 situation, we are not providing a 2020 outlook or long-term outlook at this time, but we plan to do so and are hopeful that we can do this on our earnings call for the first quarter of 2020.”

Key Fourth Quarter and Full Year Measures:

(Dollars in millions, except per share amounts)

¹Revenues and Adjusted EBITDA for the year ended December 29, 2019 include a benefit of $3.6 million and Net Income and Adjusted Net Income include a benefit of $2.7 million, or a $0.02 benefit to Diluted EPS and Adjusted Diluted EPS, related to a non-cash adjustment for certain revenue agreements.

²For all non-GAAP financial measures, please refer to the accompanying financial tables for additional information and a reconciliation of these adjusted measures to their most comparable U.S. GAAP financial measures. We have changed our definition of these adjusted metrics from those previously presented in our Form 10 filed with the SEC on June 13, 2019. For a description of the current definitions, please refer to the “Note Regarding Non-GAAP Financial Information” that precedes the reconciliation tables at the end of this press release.

Highlights for the Fourth Quarter Ended December 29, 2019:

• Consolidated revenues increased 6.2% to $355.9 million from $335.2 million in the fourth quarter of fiscal 2018. Fourth quarter revenue includes $2.4 million of revenue from DDI, which was acquired on July 31, 2019. Foreign currency movements had a negative impact of less than $0.1 million on revenue for the quarter. Excluding the impact of these items, organic revenue increased 5.5% to $353.5 million, consisting of increased volumes of approximately 0.3% and higher revenue per vehicle of approximately 5.2%. Total purchased vehicle revenue increased by $4.6 million, or 15.4%, to $34.4 million, compared to $29.8 million in the prior year period. U.S. segment revenues increased 6.1% to $313.2 million from $295.2 million in the prior year period, as higher revenue per unit offset a slight decline in volume. International segment revenues increased 6.8% to $42.7 million from $40.0 million in the prior year period. The increase in International segment revenues was primarily due to an increase in volume, as well as a higher mix of purchased vehicles.

• Gross profit, which is defined as total consolidated revenues minus cost of services, and exclusive of depreciation and amortization, increased by 8.7% to $135.1 million from $124.3 million in the fourth quarter of fiscal 2018. The increase in gross profit was primarily due to the increase in revenues, which was partially offset by an increase in our cost of services. Gross margin in the quarter increased by 90 basis points versus the prior year to 38.0%.

• SG&A expenses increased by 28.4% to $36.2 million from $28.2 million in the fourth quarter of fiscal 2018. Adjusted SG&A expenses in the fourth quarter of 2019, which exclude $0.2 million of expenses related to the Company’s spin-off from KAR Auction Services and $0.3 million related to other items, were $35.7 million, an increase of 27.0% compared to Adjusted SG&A expenses of $28.1 million in the prior year period. Adjusted SG&A expenses in the fourth quarter of fiscal 2018 exclude $0.1 million of expenses related to the Company’s separation from KAR Auction Services. SG&A expenses and Adjusted SG&A expenses increased primarily due to additional public company costs.

• Interest expense was $16.6 million compared to $9.8 million in the fourth quarter of fiscal 2018, with the increase primarily driven by a higher debt balance resulting from our new capital structure following the separation from KAR Auction Services.

• The effective tax rate was 23.9% versus 24.5% in the fourth quarter of fiscal 2018.

• Net income decreased by 2.1% to $45.6 million, or $0.34 per diluted share, compared to $46.6 million, or $0.35 per diluted share, in the fourth quarter of fiscal 2018. Adjusted net income decreased by 1.6% to $50.1 million, or $0.37 per diluted share, compared to $50.9 million, or $0.38 per diluted share, in the fourth quarter of fiscal 2018.

• Adjusted EBITDA increased by 3.9% to $99.4 million from $95.7 million in the fourth quarter of fiscal 2018, primarily due to the increase in revenues, partially offset by an increase in cost of services and higher SG&A expenses. Adjusted EBITDA includes unfavorable foreign currency movements of less than $0.1 million and a contribution from the DDI acquisition of $0.3 million. Excluding these items, organic Adjusted EBITDA was $99.1 million, an increase of 3.6% over the prior year.

Additional Highlights for the Year Ended December 29, 2019:

• Consolidated revenues increased 8.3% to $1,436.8 million from $1,326.8 million in fiscal year 2018. Revenue includes $3.6 million related to a non-cash adjustment for certain revenue agreements and $4.3 million of revenue from DDI. Unfavorable foreign currency movements impacted revenue by $4.9 million. Excluding the impact of these items, organic revenue increased 8.1% to $1,433.8 million, consisting of increased volumes of approximately 2.9% and higher revenue per vehicle of approximately 5.2%. Total purchased vehicle revenue increased by $25.9 million, or 24.2%, to $133.1 million, from $107.2 million in the prior year. U.S. segment revenues increased 6.8% to $1.27 billion from $1.19 billion in the prior year period, due to higher volume and revenue per unit. International segment revenues increased 20.5% to $170.7 million from $141.7 million in the prior year. The significant increase in revenues for our international business was primarily due to a higher mix of purchased vehicles as well as an increase in volume and revenue per unit.

• Gross profit increased by 8.5% to $548.6 million from $505.6 million in the prior year period, primarily due to the increase in revenues, which was partially offset by an increase in our cost of services. The increase in cost of services was primarily due to a higher mix of purchased vehicles in our International segment as well as an increase in occupancy costs. Gross margin of 38.2% was essentially flat in 2019 versus the prior year. Excluding the benefit of the $3.6 million non-cash adjustment for certain revenue agreements, gross margin was 38.0%.

• SG&A expenses increased by 15.0% to $142.4 million from $123.8 million in the prior year period. Adjusted SG&A expenses, which exclude $3.5 million of expenses related to the Company’s separation from KAR Auction Services and $2.0 million of other items, were $136.9 million, an increase of 12.5% compared to Adjusted SG&A expenses of $121.7 million in the prior year. Adjusted SG&A expenses for 2018 exclude $2.0 million of costs related to the Company’s separation from KAR Auction Services and $0.1 million of other items. SG&A expenses and Adjusted SG&A expenses increased primarily due to additional public company costs.

• Interest expense was $55.7 million compared to $38.7 million in the prior year period, with the increase primarily driven by a higher debt balance resulting from our new capital structure following the separation from KAR Auction Services.

• The effective tax rate was 26.3% versus 25.4% in the prior year.

• Net income increased by 5.2% to $193.2 million, or $1.44 per diluted share, compared to $183.7 million, or $1.37 per diluted share, in the prior year. Adjusted net income increased by 6.6% to $216.9 million, or $1.61 per diluted share, compared to $203.4 million, or $1.52 per diluted share, in the prior year.

• Adjusted EBITDA increased by 7.5% to $411.7 million from $383.0 million in the prior year, primarily due to revenue growth, partially offset by an increase in cost of services, and higher SG&A expenses. Adjusted EBITDA includes $3.6 million related to a non-cash adjustment for certain revenue agreements, unfavorable foreign currency movements of $1.0 million and a loss from the DDI acquisition of $0.1 million. Excluding these items, organic Adjusted EBITDA was $409.2 million, an increase of 6.8% over the prior year.

Other Financial Highlights as of December 29, 2019:

• Net Debt: $1.256 Billion
• Leverage Ratio: 3.1x
• Full year 2019 Net Cash Provided by Operating Activities: $271.2 million
• Full year 2019 Free Cash Flow: $202.7 million
• Full year vehicle inventory growth: -3.1%

Leverage Ratio is defined as Net Debt divided by LTM Adjusted EBITDA. Please refer to the accompanying financial tables for a reconciliation of these adjusted measures to U.S. GAAP.

Margin Expansion Plan

The Company has completed its assessment of margin expansion opportunities. In addition to its Buyer Digital Transformation, the Company has identified additional opportunities in pricing, towing optimization and branch operational efficiencies. The Company is targeting the following annual fiscal 2024 run-rate benefits from its margin expansion plan:

• Approximately $45 million – $50 million in revenue benefits.
• Approximately $104 million – $122 million in net Adjusted EBITDA benefits.

The margin expansion plan does not incorporate any potential impact from the COVID-19 situation, which we are unable to reasonably estimate at this time.

These benefits will be realized at various points during the next five years and are outlined in today’s supplemental slide presentation available at https://investors.iaai.com/.

The Company has not provided a reconciliation of the estimated net Adjusted EBITDA benefits from the margin expansion plan to net income, the most directly comparable GAAP financial measure, because, without unreasonable efforts, it is unable to predict with reasonable certainty the amount or timing of non-GAAP adjustments that are used to calculate this non-GAAP measure, including, but not limited to, (a) transaction and other costs related to the spin-off from KAR Auction Services in the second quarter of 2019, (b) severance, restructuring and other retention expenses, (c) the net loss or gains on the sale of assets or expenses associated with certain M&A, financing and other transactions, (d) other expenses that we do not believe are indicative of our ongoing operations, as well as (e) gains and losses related to foreign currency exchange rates. These adjustments are uncertain, depend on various factors that are beyond our control and could have a material impact on, in each case, the most directly comparable GAAP financial measure.

Conference Call Information:

A conference call to discuss the fourth quarter and fiscal 2019 financial results, as well as the margin expansion plan, is scheduled for today, March 18, 2020, at 9:00 a.m. Eastern Time. Investors and analysts interested in participating in the call are invited to join a live audio webcast of the conference call. The webcast, along with a supplemental slide presentation that will be referenced during the call, are available online at https://investors.iaai.com/.

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

About IAA, Inc.

IAA, Inc. (NYSE: IAA) is a leading global marketplace connecting vehicle buyers and sellers. Leveraging leading-edge technology and focusing on innovation, IAA’s unique multi-channel platform processes approximately 2.5 million total-loss, damaged and low-value vehicles annually. Headquartered near Chicago in Westchester, Illinois, IAA has over 3,800 talented employees and more than 200 facilities throughout the U.S., Canada and the United Kingdom. IAA serves a global buyer base located throughout more than 135 countries and a full spectrum of sellers, including insurers, dealerships, fleet lease and rental car companies, and charitable organizations. IAA offers sellers a comprehensive suite of services aimed at maximizing vehicle value, reducing administrative costs, shortening selling cycle time and delivering the highest economic returns. Buyers have access to industry leading, innovative vehicle evaluation and digital bidding tools, enhancing the overall purchasing experience.

Forward-Looking Statements Certain statements contained in this release include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements made that are not historical facts may be forward-looking statements and can be identified by words such as “should,” “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions. In this release, such forward-looking statements include statements regarding the expected timing and associated benefits of our margin expansion plan. Such statements are based on management’s current expectations, are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by these forward-looking statements. These risks and uncertainties include: the loss of one or more significant suppliers or a reduction in significant volume from such suppliers; our ability to meet or exceed customers’ demand and expectations; significant current competition and the introduction of new competitors or other disruptive entrants in our industry; the risk that our facilities lack the capacity to accept additional vehicles and our ability to obtain land or renew/enter into new leases at commercially reasonable rates; our ability to effectively maintain or update information and technology systems; our ability to implement and maintain measures to protect against cyberattacks and comply with applicable privacy and data security requirements; our ability to successfully implement our business strategies or realize expected cost savings and revenue enhancements, including from our margin expansion program; business development activities, including acquisitions and integration of acquired businesses; our expansion into markets outside the U.S. and the operational, competitive and regulatory risks facing our non-U.S. based operations; our reliance on subhaulers and trucking fleet operations; changes in used-vehicle prices and the volume of damaged and total loss vehicles we purchase; economic conditions, including fuel prices, commodity prices, foreign exchange rates and interest rate fluctuations; uncertainties regarding the impact of the COVID-19 virus on our business and the economy generally; trends in new- and used-vehicle sales and incentives; and other risks and uncertainties identified in our filings with the Securities and Exchange Commission (the “SEC”), including under “Risk Factors” in our information statement filed as Exhibit 99.1 to our Registration Statement on Form 10 filed with the SEC on June 13, 2019, and will also be included in our Annual Report on Form 10-K for the year ended December 29, 2019, which we expect to file on or near March 18, 2020. Additional information regarding risks and uncertainties will also be contained in subsequent annual and quarterly reports we file with the SEC. The forward-looking statements included in this release are made as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement to reflect new information or events, except as required by law.

Note Regarding Non-GAAP Financial Information

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

IAA, Inc.

Consolidated Statements of Income

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Consolidated Balance Sheets

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Consolidated Statements of Cash Flows

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Note Regarding Non-GAAP Financial Information

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

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

Contacts

Media Inquiries:

Jeanene O’Brien

SVP Marketing and Communications

jobrien@iaai.com | (708) 492-7328

Investor Inquiries:

Farah Soi/Caitlin Churchill

ICR

investors@iaai.com | (203) 682-8200

Arif Ahmed

Vice President, Treasury

arif.ahmed@iaai.com | (708) 492-7257

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