The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on
Form 10-K, as well as the “Statement Regarding Forward-Looking Statements”
preceding Part I.
Our 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. As used in this section, references to the:
-“fiscal year ended
period that began on
-“fiscal year ended
period that began on
-“fiscal year ended
period that began on
We are a leading global digital marketplace connecting vehicle buyers and sellers. Leveraging leading-edge technology and focusing on innovation, our unique platform facilitates the marketing and sale of total-loss, damaged and low-value vehicles for a full spectrum of sellers. Headquartered in
Westchester, IL, we have two operating segments: United Statesand International. We maintain operations in the United States, which make up the United Statessegment and operations in Canadaand the United Kingdom, which make up the International segment. We have more than 210 facilities across both business segments. We serve a global buyer base and a full spectrum of sellers, including insurance companies, dealerships, fleet lease and rental car companies, and charitable organizations. We offer sellers a comprehensive suite of services aimed at maximizing vehicle value, reducing administrative costs, shortening selling cycle time and delivering the highest economic returns. Our products provide global buyers with the vehicles they need to, among other things, fulfill their vehicle rebuild requirements, replacement part inventory or scrap demand. We provide global buyers with multiple bidding/buying digital channels, innovative vehicle merchandising, efficient evaluation services and online bidding tools, enhancing the overall purchasing experience.
February 27, 2018, KAR announced a plan to pursue the separation and spin off ("the Separation") of its salvage auction businesses 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 Separation and Distribution, IAA became an independent publicly-traded company.
November 7, 2022, we entered into the Original Merger Agreement, and on January 22, 2023, we entered into the Merger Agreement Amendment with RBA, US Holdings, Merger Sub 1, and Merger Sub 2, providing for RBA's acquisition of the Company in a stock and cash transaction. Upon the terms and subject to the conditions set forth in the Merger Agreement, at the closing of the transactions (i) Merger Sub 1 will be merged with and into us (the "First Merger"), with the Company surviving as an indirect wholly owned subsidiary of RBA and a direct wholly owned subsidiary of US Holdings(the "Surviving Corporation"), and (ii) immediately following the consummation of the First Merger, the Surviving Corporationwill be 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. At the effective time of the First Merger (the "Effective Time"), each issued and outstanding share of common stock of the Company (other than certain customary excluded shares) as of immediately prior to the Effective Time will be converted automatically into the right to receive (A) 0.5252 of an RBA Common Share and (B) $12.80in cash, without interest and less any applicable withholding taxes (together, the "Merger Consideration"). Our stockholders will receive cash in lieu of any fractional RBA Common Shares to which they would otherwise be entitled. 34 -------------------------------------------------------------------------------- Table of Contents Cooperation Agreement Also on January 22, 2023, we entered into a cooperation agreement (the "Cooperation Agreement") with Ancora Group Holdings, LLCand/or its affiliates ("Ancora") regarding the Mergers, the membership and composition of our 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 our voting power as of the date of the Cooperation Agreement, in favor of the Mergers and related proposals at the IAA Special Meeting to consider and vote on the adoption of the Merger Agreement and approval of the transactions contemplated thereby and certain other matters. See Item 1. Business - Recent Highlights and Developments - Proposed Mergers for additional information.
December 20, 2022, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired and RBA received a no-action letter from the Canadian Commissioner of Competition with respect to the Mergers. The parties have received all necessary antitrust clearance required by the Merger Agreement. The IAA Special Meeting is scheduled for March 14, 2023and the RBA Special Meeting is also scheduled for March 14, 2023. If these matters are approved by our stockholders and RBA shareholders at the IAA Special Meeting and the RBA Special Meeting, respectively, we expect to close the Mergers in the first half of 2023, subject to the satisfaction or waiver of additional conditions to closing set forth in the Merger Agreement. We currently operate, and until completion of the Mergers will continue to operate, independently of RBA. See Note 1 - Basis of Presentation in the notes to consolidated financial statements for additional information regarding the proposed Merger.
Vehicles deemed a total loss by automobile insurance companies represent the largest category of vehicles sold in the salvage vehicle auction industry. Based on data from CCC Information Services, the percentage of claims resulting in total losses was approximately 18% in 2022, 20% in 2021 and 21% in 2020. There is no central reporting system for the salvage vehicle auction industry that tracks the number of salvage vehicle auction volumes in any given year, which makes estimating industry volumes difficult. Fluctuations in used vehicle and commodity pricing (aluminum, steel, etc.) have an impact on proceeds received in the salvage vehicle auction industry. In times of rising prices, we experience higher revenue per unit in our auctions, which positively impacts revenue and gross profit. If used vehicle and commodity prices decrease, proceeds, revenue and gross profit at salvage auctions may be negatively impacted, which could adversely affect our level of profitability. The price per ton of crushed auto bodies in
North Americadecreased approximately 15% in 2022 as compared to 2021 and increased approximately 60% in 2021 as compared to 2020.
See Part I, Item 1, Business – Our Industry and Trends in Market Demand for
Sources of Revenues and Expenses
A significant portion of our revenue is derived from auction fees and related services associated with our salvage auctions. Approximately two-thirds of our revenue is earned from buyers. Buyer revenue represents fees charged based on a tiered structure that increases with the sales price of the vehicle as well as fees for additional services such as storage, transportation, and vehicle condition reporting. Approximately one-third of our revenue is associated with vehicles supplied by sellers. Seller revenue represents the revenue collected for auctioning of the vehicle, combination of the inbound tow, processing, storage, titling and enhancing of the vehicle. In exchange for agreed-upon processing and service fees, we sell total loss, damaged and low-value vehicles on behalf of vehicle sellers primarily on a consignment basis, meaning that our sellers continue to own their vehicles until they are sold to buyers through one of our digital marketplaces. We recognize revenues from consigned vehicles on a net basis as we have no influence on the vehicle auction selling price agreed by the seller and the buyer at the auction. However, our related receivables and payables include the gross value of the vehicles sold. We also purchase vehicles in certain situations and resell them or, in our International segment, dismantle them and sell the vehicle parts and scrap. We recognize revenues from purchased vehicles on a gross basis, which results in lower gross margin versus vehicles sold at auction on a consignment basis. Our operating expenses consist of cost of services, cost of vehicle and parts sales, selling, general and administrative and depreciation and amortization. Cost of services is comprised of payroll and related costs, subcontract services, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites. Cost of vehicle and parts sales represents the cost of purchased vehicles. Cost of services and vehicle sales excludes depreciation and amortization. Selling, general and administrative expenses are comprised of payroll and related costs, sales and marketing, information technology services and professional fees. 35
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Market Trends and Uncertainties
The global economy has recently experienced extreme volatility and disruptions, inflationary conditions, including increases in fuel prices, disruptions in the global supply chain and uncertainty about economic stability. The higher production costs and supply chain disruptions related to new vehicles continue to keep new vehicle prices elevated resulting in an increase in used car prices. This increase in used car prices has contributed to our higher average selling prices and revenue per unit, which have been offset slightly by higher purchased vehicle costs. As a result of macroeconomic conditions, we are continuing to experience labor, towing and other transportation pressures, which have increased our associated costs and adversely impacted our gross margin. In addition, rising interest rates are increasing our interest expense related to our variable debt obligations. We believe the foregoing direct and indirect impacts of the current macroeconomic environment will continue to impact our business in fiscal 2023. Recent Acquisitions On
October 26, 2021, we acquired SYNETIQ, a leading integrated salvage and vehicle dismantling company in the United Kingdom. The cash purchase price for SYNETIQ, including working capital and other adjustments, was $314.2 million(£228.2 million), of which $260.2 million(£189.0 million) was paid out in the fourth quarter of fiscal 2021. The remaining payment of $54.0 million(£39.2 million) was paid out in the first quarter of fiscal 2022 upon receiving required approvals from the U.K. Competitionand Markets Authority ("CMA"). The results of operations of SYNETIQare included in our International segment from the date of the acquisition. On June 18, 2021, we acquired Marisat, Inc.d/b/a Auto Exchange ("Auto Exchange"), a salvage auction provider located in New Jersey. The results of operations of Auto Exchange are included in our United Statessegment from the date of the acquisition.
See Note 4 – Acquisitions in the notes to consolidated financial statements for
additional information on these acquisitions.
Share Repurchase Program
August 2, 2021, our Board of Directors authorized a share repurchase program under which we can repurchase up to $400.0 million(exclusive of fees and commissions) of shares of our common stock (the "Repurchase Program"). The Repurchase Program expires on August 3, 2026. During fiscal 2022, we repurchased 751,285 shares of our common stock for an aggregate gross purchase price of approximately $27.2 millionpursuant to the Repurchase Program. As of January 1, 2023, approximately $338.8 millionremained available under the Repurchase Program. See Note 5 - Net Income Per Share in the notes to consolidated financial statements for additional information on the Repurchase Program. Pursuant to the Merger Agreement, we are restricted from repurchasing shares of our common stock without RBA's prior consent.
Results of Operations
Fiscal 2022 Compared to Fiscal 2021
Our fiscal 2022 contained 52 weeks and fiscal 2021 contained 53 weeks. The table below presents consolidated statements of income for the periods indicated and the dollar change and percentage change between periods. 36
Table of Contents Fiscal Years Ended Change January 1, January 2, (Dollars in millions except per share amounts) 2023 2022 $ % Revenues: Service revenues
$ 1,686.4 $ 1,537.7 $ 148.79.7 % Vehicle and parts sales 412.5 299.7 112.8 37.6 % Total revenues 2,098.9 1,837.4 261.5 14.2 % Cost of services and vehicle sales: Cost of services 996.5 851.5 145.0 17.0 % Cost of vehicle and parts sales 367.7 261.2 106.5 40.8 % Selling, general and administrative 212.1 192.3 19.8 10.3 % Depreciation and amortization 105.6 86.5 19.1 22.1 % Operating profit 417.0 445.9 (28.9) (6.5) % Interest expense 51.0 57.7 (6.7) (11.6) % Other expense, net 4.6 0.2 4.4 NM* Income before income taxes 361.4 388.0 (26.6) (6.9) % Income taxes 69.0 93.6 (24.6) (26.3) % Net income $ 292.4 $ 294.4 $ (2.0)(0.7) % Net income per share Basic $ 2.18 $ 2.18$ - - % Diluted $ 2.18 $ 2.18$ - - % * NM - Not meaningful Service Revenues Fiscal Years Ended Change (Dollars in millions) January 1, 2023 January 2, 2022 $ % United States $ 1,539.7 $ 1,429.2 $ 110.57.7 % International 146.7 108.5 38.2 35.2 % Total service revenues $ 1,686.4 $ 1,537.7 $ 148.79.7 % United Statesservice revenues increased $110.5 milliondue to an increase in revenue per unit of 12%, which primarily resulted from higher average selling prices due to increased buyer participation, enhanced product and service offerings, and higher used car prices. This increase was partially offset by a lower volume of vehicles sold, which decreased by 4% primarily due to the previously disclosed loss of significant volume from a single vehicle supplier, partially offset by volume gains from other vehicle suppliers, and the impact of the 53rd week in fiscal 2021. International service revenues increased by $38.2 millionmainly due to incremental revenue of $20.7 millionfrom SYNETIQthrough its first year anniversary on October 26, 2022, a higher volume of vehicles sold, which increased by approximately 10% primarily due to an increase in miles driven. Vehicle and Parts Sales Fiscal Years Ended Change (Dollars in millions) January 1, 2023 January 2, 2022 $ % United States $ 161.1$ 134.1 $ 27.020.1 % International 251.4 165.6
85.8 51.8 %
Total vehicle and parts sales
revenue per unit sold of 12%, which primarily resulted from higher average
selling prices due to increased buyer participation, enhanced product and
service offerings and higher used car prices, as well as a higher volume of
vehicles sold, which increased by 7% mainly due to an increase in vehicle
37 -------------------------------------------------------------------------------- Table of Contents International vehicle and parts sales increased
$85.8 millionprimarily due to incremental revenue of $113.6 millionfrom SYNETIQthrough its first year anniversary on October 26, 2022, partially offset by lower volume of vehicles sold of approximately 8% and lower revenue per unit sold of 10%.
Cost of Services
Fiscal Years Ended
(Dollars in millions)
% United States
$ 874.8$ 776.3 $ 98.512.7 % International 121.7 75.2 46.5 61.8 % Total cost of services $ 996.5$ 851.5 $ 145.017.0 %
As a result of current macroeconomic conditions, we are continuing to experience
labor, towing and other transportation pressures, which have increased our
associated costs in both segments. See “Overview-Market Trends and
Uncertainties” for additional information.
United Statescost of services increased $98.5 millionprimarily due to higher costs relating to towing, occupancy, wages and vehicle processing, including costs associated with responding to catastrophic events. These increases were partially offset by a lower volume of vehicles sold and the impact of the 53rd week in fiscal 2021.
International cost of services increased
incremental costs from
occupancy and wages.
Cost of Vehicles and Parts Sales
Fiscal Years Ended Change (Dollars in millions) January 1, 2023 January 2, 2022 $ % United States
$ 151.9$ 118.1 $ 33.828.6 % International 215.8 143.1 72.7 50.8 % Total cost of vehicle and parts sales $ 367.7$ 261.2 $ 106.540.8 %
higher volume of vehicles sold and higher average purchase prices.
International cost of vehicle and parts sales increased
$72.7 millionprimarily due to incremental costs from SYNETIQthrough its first year anniversary on October 26, 2022and higher average purchase prices, partially offset by a lower volume of vehicles sold.
Selling, General and Administrative
Fiscal Years Ended Change (Dollars in millions) January 1, 2023 January 2, 2022 $ % United States
$ 189.4$ 178.6 $ 10.86.0 % International 22.7 13.7 9.0 65.7 % Total selling, general and administrative expenses $ 212.1$ 192.3 $ 19.810.3 % United Statesselling, general and administrative expenses increased $10.8 millionprimarily due to higher costs relating to headcount, professional services associated with the proposed Mergers, and information technology and a $5.0 millionfair value adjustment relating to contingent consideration. These increases were partially offset by lower incentive compensation and a $2.7 millionnon-income, tax related accrual in the prior year period.
International selling, general and administrative expenses increased
year anniversary on
Table of Contents Depreciation and Amortization Fiscal Years Ended Change (Dollars in millions) January 1, 2023 January 2, 2022 $ % United States
$ 85.3$ 75.9 $ 9.412.4 % International 20.3 10.6 9.7 91.5 % Total depreciation and amortization $ 105.6$ 86.5 $ 19.122.1 %
Depreciation and amortization increased
year due to a higher intangible asset base in both segments, including
intangible assets acquired in recent acquisitions.
Interest Expense Interest expense decreased by
$6.7 millionas compared to the prior year period due to a $10.3 millionloss on early extinguishment of debt recognized in fiscal 2021 partially offset by higher interest rates on our floating rate debt during fiscal 2022.
Other expense (income) net Other expense increased by
unrealized foreign currency transaction losses in the current year period.
Income Taxes The effective tax rate for fiscal 2022 was 19.1% as compared to 24.1% for fiscal 2021. The effective tax rate in fiscal 2022 benefited from favorable adjustments of
$15.1 millionrelating to Foreign Derived Intangible Income and $3.0 millionrelating to state tax planning initiatives.
Fiscal 2021 Compared to Fiscal 2020
For a discussion of fiscal 2021 as compared to fiscal 2020, please refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended
January 2, 2022, filed with the Securities and Exchange Commissionon February 28, 2022.
LIQUIDITY AND CAPITAL RESOURCES
We believe that the significant indicators of liquidity for our business are cash on hand, cash flow from operations and working capital. Our principal source of liquidity consists of cash generated by operations. Our 2021 Revolving Credit Facility (as defined below) provides another source of liquidity as needed. Our cash flow is used to invest in new products and services, fund capital expenditures and working capital requirements and, coupled with borrowings under our 2021 Revolving Credit Facility, is expected to be adequate to satisfy our cash requirements, including those listed below, fund future acquisitions, and repurchase shares of our common stock, if any. Our ability to fund our cash requirements will depend on our ongoing ability to generate cash from operations and to access borrowings under our 2021 Revolving Credit Facility. We believe that our cash on hand, future cash from operations, and borrowings available under our 2021 Revolving Credit Facility will provide adequate resources to fund our anticipated operating, financing and other cash requirements for the next twelve months and beyond. We may also seek to fund future cash needs, including long-term debt obligations, by accessing the debt and capital markets or by refinancing existing obligations.
Our material cash requirements from known contractual and other obligations
Debt Service Obligations
June 6, 2019, we issued $500.0 millionaggregate principal amount of 5.500% Senior Notes due 2027 (the "Notes"). We must pay interest on the Notes in cash on June 15and December 15of each year at a rate of 5.500% per annum. The Notes will mature on June 15, 2027. The net proceeds from the Notes offering, together with borrowings under our prior senior credit facility, were used to make a cash distribution to KAR and to pay fees and expenses related to the Separation. We were in compliance with the covenants in the indenture governing the Notes at January 1, 2023. On February 17, 2023, we gave conditional notice of optional full redemption that we have elected to redeem on March 20, 2023(or, at our option, such later date as of which the conditions to redemption are satisfied) all $500.0 millionof the Notes. The redemption is conditioned on consummation of the Mergers on or prior to March 20, 2023or such later date as we may determine in our sole and absolute discretion and our delivery of written notice to the trustee for the Notes confirming satisfaction of such condition and specifying the redemption date and redemption price for the Notes. If the conditions precedent are not satisfied as we determine in our sole and absolute discretion, the redemption notice will be rescinded.
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other lenders from time to time party thereto (the "2021 Credit Agreement"). The 2021 Credit Agreement provides for, among other things: (i) a senior secured term loan in an aggregate principal amount of
$650 million(the "2021 Term Loan") and (ii) a senior secured revolving credit facility with revolving commitments in an aggregate principal amount of $525 million(the "2021 Revolving Credit Facility" and, together with the 2021 Term Loan, the "2021 Credit Facility"). Borrowing availability under the 2021 Revolving Credit Facility is subject to no default or event of default under the 2021 Credit Agreement having occurred at the time of borrowing. The proceeds of the 2021 Credit Facility, along with cash on hand, were used to repay in full the $774.0 millionin outstanding borrowings under our prior seven-year senior secured term loan. The 2021 Credit Facility matures on April 30, 2026. As of January 1, 2023, $633.8 millionwas outstanding under the 2021 Term Loan and no borrowings were outstanding under the 2021 Revolving Credit Facility. As of January 1, 2023, the interest rate per annum for the 2021 Term Loan was 5.76%. We were in compliance with the covenants in the 2021 Credit Agreement at January 1, 2023. See Note 10 - Debt in the notes to consolidated financial statements for additional information including future principal payment schedule.
We expend capital to support our operating plan and business strategies. Capital expenditures for the years ended
January 1, 2023and January 2, 2022, were $178.3 millionand $135.6 million, respectively. Capital expenditures were funded primarily from cash flow from operations. We continue to invest in our core information technology capabilities and capacity expansion. Our capital expenditures during fiscal 2022 primarily related to real estate purchases and development and technology-based investments, including improvements in information technology systems and infrastructure. Future capital expenditures could vary substantially based on capital project timing, the opening of new auction facilities, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies. Pursuant to the Merger Agreement, we are restricted from engaging in capital expenditures beyond certain levels without RBA's prior consent.
We enter into leases in the normal course of business. We lease property, software, automobiles, trucks and trailers pursuant to operating lease agreements. Lease obligations for fiscal 2022 were funded primarily from cash flow from operations. We also lease furniture, fixtures and equipment under finance leases. See Note 11 - Leases in the notes to consolidated financial statements for additional information and a schedule of maturities of lease maturities. Future lease obligations would change if we entered into additional lease agreements. Proposed Mergers In connection with the Mergers, we have 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 millionbecame 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 millionof which became payable by IAA to J.P. Morgan in connection with J.P. Morgan's delivery of its opinion dated January 22, 2023in 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, we are permitted to establish a transaction bonus program for employees, including certain executive officers, providing for cash payments of up to $6.0 millionthat will become payable on the closing of the Mergers, subject to the employee's continued employment through such date. We are 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 millionthat will be payable subject to continued employment for at least a period of time after closing of the Mergers. Acquisitions Some of our prior years' acquisitions included contingent payments based on certain conditions and future performance. As of January 1, 2023, we had estimated contingent consideration with a fair value of approximately $5.5 million(based on Level 3 inputs), of which $2.6 millionis reported in current liabilities, Other accrued expenses line, and $2.9 millionis reported in non-current liabilities, Other liabilities line, within the accompanying consolidated balance sheet. These contingent consideration payments will be made over the next 4 years, subject to satisfaction of the relevant conditions and future performance. 40 -------------------------------------------------------------------------------- Table of Contents Put Option In November 2020, we 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. We measured and recognized this Put Option at fair value using a Monte Carlo simulation. The estimated fair value of the Put Option at January 1, 2023and January 2, 2022was zero. Working Capital A substantial amount of our working capital is generated from the payments received for services provided. The majority of our working capital needs are short-term in nature, usually less than three months in duration. Due to the decentralized nature of the business, payments for most vehicles purchased are received at each auction and branch. Most of the financial institutions place a temporary hold on the availability of the funds deposited that generally can range up to two business days, resulting in cash in our accounts and on our balance sheet that is unavailable for use until it is made available by the various financial institutions. There are outstanding checks (book overdrafts) to sellers and vendors included in current liabilities. Because a portion of these outstanding checks for operations are drawn upon bank accounts at financial institutions other than the financial institutions that hold the cash, we cannot offset all the cash and the outstanding checks on our balance sheet. Changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from auctions held near period end. Approximately $36.3 millionof available cash was held by our foreign subsidiaries at January 1, 2023. We do not currently expect to incur significant additional tax liabilities if funds held by our foreign subsidiaries were to be repatriated. Summary of Cash Flows Fiscal Years Ended (Dollars in millions) January 1, 2023 January 2, 2022 Change Net cash provided by (used by): Operating activities $ 399.3$ 311.1 $ 88.2Investing activities (143.0) (393.9) 250.9 Financing activities (212.1) 12.2 (224.3)
Effect of exchange rate on cash and restricted cash (10.7)
0.2 (10.9) Net increase (decrease) in cash, cash equivalents and restricted cash
Fiscal 2022 compared to Fiscal 2021
Net cash flow provided by operating activities in fiscal 2022 increased by
$88.2 millionas compared to fiscal 2021. The increase in operating cash flow was primarily attributable to changes in accounts receivable as a result of the timing of collections from customers and an increase in profitability, net of non-cash adjustments, of $32.8 million. These increases n cash inflows were partially offset by an increase in operating lease payments, a decrease in incentive-based compensation, and changes in payables and accruals as a result of the timing of funds disbursement to tax authorities, vehicle consignors and vendors. Net cash used by investing activities decreased by $250.9 millionin fiscal 2022 as compared to fiscal 2021 primarily due to the acquisition of the Auto Exchange and SYNETIQbusinesses and an increase in capital expenditures during fiscal 2021. See "Capital Expenditures" above for additional information. Net cash used by financing activities changed by $224.3 millionin fiscal 2022 as compared to fiscal 2021 primarily due to increases in net payments of our debt of $222.3 millionand contingent consideration payments of $53.4 millionrelating to SYNETIQand other prior acquisitions. These increases were partially offset by increases in book overdrafts of $39.1 million, decreases in repurchases of our common stock of $6.8 millionand decreases in other miscellaneous payments.
Fiscal 2021 compared to Fiscal 2020
For a discussion of fiscal 2021 as compared to fiscal 2020, please refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Summary of Cash Flows in our Form 10-K for the fiscal year ended
January 2, 2022, filed with the Securities and Exchange Commissionon February 28, 2022. 41
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Critical Accounting Estimates
In preparing the financial statements in accordance with
U.S.generally accepted accounting principles, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex. Consequently, actual results could differ from those estimates. Accounting measurements that management believes are most critical to the reported results of our operations and financial condition include: (1) business combinations; (2) goodwill; and (3) legal proceedings and other loss contingencies. In addition to the critical accounting estimates, there are other items used in the preparation of the consolidated financial statements that require estimation, but are not deemed critical. Changes in estimates used in these and other items could have a material impact on our financial statements. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. In cases where management estimates are used, they are based on historical experience, information from third-party professionals, and various other assumptions believed to be reasonable. In addition, our most significant accounting policies are discussed in Note 2 - Summary of Significant Accounting Policies and elsewhere in the notes to consolidated financial statements for additional information.
When we acquire businesses, we estimate and recognize the fair values of tangible assets acquired, liabilities assumed, identifiable intangible assets acquired, and contingent consideration, if any. The excess of the purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. The purchase accounting process requires management to make significant estimates and assumptions in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets and contingent consideration. Critical estimates are often developed using valuation models that are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, growth rates, royalty rates, obsolescence, the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which could affect the accuracy or validity of such estimates. Depending on the facts and circumstances, we may engage an independent valuation expert to assist in valuing significant assets and liabilities.
We assess goodwill for impairment annually during the fourth quarter or more frequently when events or changes in circumstances indicate that impairment may exist. Important factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results; significant negative industry or economic trends; and our market valuation relative to our book value. When evaluating goodwill for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that a reporting unit's fair value is not more likely than not greater than its carrying value, then we calculate the estimated fair value of the reporting unit using income approach (discounted cash flows) and market approach (market multiples of companies in similar lines of business). When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for a reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, and the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of a reporting unit's goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and apply judgment when estimating future cash flows and earnings, including projected revenue growth and operating expenses related to existing businesses, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate based on the estimated cost of capital that reflects the risk profile of the related business. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit's past performance and forecasted growth, strategic initiatives and changes in economic conditions. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approach are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. 42
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The estimated fair value of our
United Statesreporting unit exceeded its carrying value by a substantial amount in our last quantitative assessment during fiscal 2021. During the fourth quarter of fiscal 2022, we performed our annual qualitative assessment for our United Statesreporting unit and we concluded there were no indicators of impairment that existed. The goodwill allocated to the United Statesreporting unit was $498.6 millionas of January 1, 2023.
International reporting unit goodwill:
During the third quarter of fiscal 2022, we updated our forecasts which resulted in a decline in the International reporting unit's operating results and projections. We 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 by approximately 40% and therefore no goodwill impairment was recorded. During the fourth quarter of fiscal 2022, we performed a qualitative assessment of the International reporting unit and evaluated significant events and circumstances that occurred during the fourth quarter of fiscal 2022. Based on this assessment, we concluded no impairment was required. The goodwill allocated to the International reporting unit was $268.9 millionas of January 1, 2023. The valuation of the International reporting unit requires significant judgment and is sensitive to underlying assumptions including forecasted revenues, costs and discount rate, as well as the selection of comparable companies and valuation multiples. Further declines in future cash flows or valuation multiples could negatively impact the estimated fair value and result in an impairment for the reporting unit which could be material to our consolidated financial statements.
Based on our goodwill assessments, we have not identified a reporting unit for
which the goodwill was impaired in fiscal 2022, 2021 or 2020.
Legal Proceedings and Other Loss Contingencies
We are subject to the possibility of various legal proceedings and other loss contingencies, many involving litigation incidental to the business and a variety of environmental laws and regulations. Litigation and other loss contingencies are subject to inherent uncertainties and the outcomes of such matters are often very difficult to predict and generally are resolved over long periods of time. We consider 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. Estimating probable losses requires the analysis of multiple possible outcomes that often are dependent on the judgment about potential actions by third parties. Contingencies are recorded in the consolidated financial statements, or otherwise disclosed, in accordance with ASC 450, Contingencies. We accrue for an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. If the amount of an actual loss is greater than the amount accrued, this could have an adverse impact on our operating results in that period.
New Accounting Standards
Refer to Note 2 – Summary of Significant Accounting Policies in the notes to
consolidated financial statements for a description of recently issued
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