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14: R3 Consolidated Statements of Comprehensive Income HTML 43K
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Discontinued Operations
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Share
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Accounting Policies (Policies)
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Discontinued Operations (Tables)
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(Exact name of Registrant as specified in its charter)
iDelaware
i20-8744739
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i11299 N. Illinois Street, iCarmel, iIndianai46032
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (i800) i923-3725
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
iCommon
Stock, par value $0.01 per share
iKAR
iNew York Stock Exchange
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required
to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated
filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No i☒
As of April 30, 2023, i109,208,855
shares of the registrant's common stock, par value $i0.01 per share, were outstanding.
Note 1—iBasis
of Presentation and Nature of Operations
Defined Terms
Unless otherwise indicated or unless the context otherwise requires, the following terms used herein shall have the following meanings:
•"we,""us,""our,""KAR" and "the Company" refer, collectively, to KAR Auction Services, Inc. and all of its subsidiaries;
•"ADESA" or "ADESA Auctions" refer, collectively, to ADESA, Inc., a wholly-owned subsidiary of KAR Auction Services, and ADESA, Inc.'s subsidiaries,
including Openlane, Inc. (together with Openlane, Inc.'s subsidiaries, "OPENLANE"), BacklotCars, Inc. ("BacklotCars"), CARWAVE LLC ("CARWAVE"), Nth Gen Software Inc. ("TradeRev"), ADESA Remarketing Limited ("ADESA U.K.") and ADESA Europe NV and its subsidiaries ("ADESA Europe");
•"ADESA U.S. physical auction business,""ADESA U.S. physical auctions" and "ADESA U.S." refer to the auction sales, operations and staff at ADESA’s U.S. vehicle logistics centers, which were sold to Carvana Group, LLC (together with Carvana Co. and its subsidiaries, "Carvana") in May 2022;
•"AFC"
refers, collectively, to Automotive Finance Corporation, a wholly-owned subsidiary of ADESA, and Automotive Finance Corporation's subsidiaries and other related entities, including PWI Holdings, Inc. (which was sold on December 1, 2020);
•"Credit Agreement" refers to the Amended and Restated Credit Agreement, dated March 11, 2014 (as amended, amended and restated, modified or supplemented from time to time), among KAR Auction Services, Inc., as the borrower, the several banks and other financial institutions or entities from time to time parties thereto and JPMorgan Chase Bank N.A., as administrative agent;
•"Credit Facility" refers
to the $i950 million, senior secured term loan B-6 facility due September 19, 2026 ("Term Loan B-6"), of which the outstanding amount was fully repaid in 2022, and the $i325
million, senior secured revolving credit facility due September 19, 2024 (the "Revolving Credit Facility"), the terms of which are set forth in the Credit Agreement;
•"IAA" refers, collectively, to Insurance Auto Auctions, Inc., formerly a wholly-owned subsidiary of KAR Auction Services, and Insurance Auto Auctions, Inc.'s subsidiaries and other related entities;
•"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries;
•"Senior notes" refers to the i5.125%
senior notes due 2025 ($i350 million aggregate principal was outstanding at March 31, 2023); and
•"Series A Preferred Stock" refers to the Series A Convertible Preferred Stock, par value $i0.01
per share (ii634,305/ shares
of Series A Preferred Stock were outstanding at March 31, 2023 and December 31, 2022, respectively).
Business and Nature of Operations
KAR is a leading digital marketplace for used vehicles, connecting sellers and buyers across North America and Europe to facilitate fast, easy and transparent transactions. Our portfolio of integrated technology, data analytics, financing, logistics, reconditioning and other remarketing solutions, combined with our vehicle logistics centers in Canada, help advance our purpose: to make wholesale easy so our customers can be more successful. As of March 31, 2023, the Marketplace segment serves a domestic and international customer base through digital marketplaces and i14
vehicle logistics center locations across Canada.
For our commercial sellers, our OPENLANE software platform supports private label digital remarketing sites and provides comprehensive solutions to our automobile manufacturer, captive finance company and other commercial customers.
For
dealer customers, the Company also operates BacklotCars and TradeRev digital marketplace platforms that facilitate real-time transactions between automotive dealers, coast-to-coast in the United States and Canada. The CARWAVE digital auction platform was integrated with BacklotCars in the fourth quarter of 2022, adding additional features and functionality to the BacklotCars marketplace, including a live auction format that allows dealers to sell and source inventory in a fast-paced, head-to-head bidding environment.
Internationally, our digital marketplaces also include ADESA U.K., an online wholesale used vehicle remarketing business in the United Kingdom and ADESA Europe, an online wholesale used vehicle marketplace in Continental Europe.
Remarketing services include a variety of activities
designed to facilitate the transfer of used vehicles between sellers and buyers throughout the vehicle life cycle. We facilitate the exchange of these vehicles through our marketplaces, which aligns sellers and buyers. As an agent for customers, the Company generally does not take title to or ownership of vehicles sold through our marketplaces. Generally, fees are earned from the seller and buyer on each successful marketplace transaction in addition to fees earned for ancillary services. We also sell vehicles that have been purchased, for which we do take title and record the gross selling price of the vehicle sold through our marketplaces as revenue.
We also provide services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services.
We are able to serve the diverse and multi-faceted needs of our customers through the wide range of services offered.
AFC is a leading provider of floorplan financing primarily to independent used vehicle dealers and this financing is provided through approximately i100 locations throughout the United States and Canada as of March 31, 2023. Floorplan financing supports independent used vehicle dealers in North America who purchase vehicles at ADESA, BacklotCars (including CARWAVE), TradeRev, and
other used vehicle and salvage auctions. In addition, AFC provides financing for dealer inventory purchased directly from wholesalers, other dealers and directly from consumers, as well as providing liquidity for customer trade-ins which encompasses settling lien holder payoffs. AFC also provides title services for their customers.
i
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP")
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. Operating results for interim periods are not necessarily indicative of results that may be expected for the year as a whole. In the opinion of management, the consolidated financial statements reflect all adjustments, generally consisting of normal recurring accruals, necessary for a fair statement of our results of operations, cash flows and financial position for the periods presented. These consolidated financial statements and condensed notes to consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the
Securities and Exchange Commission on March 9, 2023. The 2022 year-end consolidated balance sheet data included in this Form 10-Q was derived from the audited financial statements referenced above and does not include all disclosures required by U.S. GAAP for annual financial statements.
i
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates based in part on assumptions about current, and for some estimates, future economic and market conditions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Although the current estimates contemplate current conditions and expected future changes, as appropriate, it is reasonably possible that future conditions could differ from these estimates, which could materially affect our results of operations and financial position. Among other effects, such changes could result in future impairments of goodwill, intangible assets and long-lived assets, incremental losses on finance receivables, additional allowances on accounts receivable and deferred tax assets and changes in litigation and other loss contingencies.
Note 2—iSale of ADESA U.S. Physical Auction Business and Discontinued Operations
In February 2022, the
Company announced that it had entered into a definitive agreement with Carvana, pursuant to which Carvana would acquire the ADESA U.S. physical auction business from KAR (the "Transaction"). The Transaction was completed in May 2022 for approximately $i2.2 billion in cash and included all auction sales, operations and staff at ADESA’s U.S. vehicle logistics centers and use of the ADESA.com marketplace in the U.S. The net proceeds received in connection with the Transaction were included in "Net cash
provided by investing activities - discontinued operations" in the consolidated statement of cash flow for the year ended December 31, 2022. In connection with the Transaction, the Company and Carvana entered into various agreements to provide a framework for their relationship after the Transaction, including a transition services agreement for a transitional period and a commercial agreement for a term of i7 years that
provides for platform and other fees for services rendered. For the three months ended March 31, 2023, KAR has received a net cash inflow from the commercial agreement and transition services agreement of approximately $i30.0 million.
KAR provided transportation services of $ii21.9/ million
and $ii17.7/ million
to the ADESA U.S. physical auctions for the three months ended March 31, 2023 and 2022, respectively.
The financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. The business was formerly included in the Company’s Marketplace reportable segment. Goodwill was allocated to the ADESA U.S. physical auctions based on relative fair value. The Transaction resulted in a pretax gain on disposal of approximately $i521.8 million
for the year ended December 31, 2022. The effective tax rate for discontinued operations was approximately i60% primarily due to non-deductible goodwill recognized in the Transaction.
i
The
following table presents the results of operations for the ADESA U.S. physical auction business that have been reclassified to discontinued operations for all periods presented (in millions):
The KAR Auction Services, Inc. Amended and Restated 2009
Omnibus Stock and Incentive Plan ("Omnibus Plan") is intended to provide equity and/or cash-based awards to our executive officers and key employees. Our stock-based compensation expense includes expense associated with KAR Auction Services service-based options ("service options"), market-based options ("market options"), performance-based restricted stock units ("PRSUs") and service-based restricted stock units ("RSUs"). We have determined that the KAR Auction Services service options, market options, PRSUs and RSUs should be classified as equity awards.
i
The
following table summarizes our stock-based compensation expense by type of award (in millions):
In
the first quarter of 2023, we granted a target amount of approximately i0.5 million PRSUs to certain executive officers of the Company. Three quarters of the PRSUs vest if and to the extent that the Company's three-year
cumulative Adjusted EBITDA ("Adjusted EBITDA PRSUs") attains certain specified goals. The other one quarter of the PRSUs vest if and to the extent that the Company's total shareholder return relative to that of companies within the S&P SmallCap 600 ("TSR PRSUs") exceeds certain levels over the three-year period ending December 31, 2025. The weighted average grant date fair value of the Adjusted EBITDA PRSUs was $i14.14
per share, which was determined using the closing price of the Company's common stock on the date of grant. The grant date fair value of the TSR PRSUs was $i21.24 per share and was developed with a Monte Carlo simulation using a multivariate Geometric Brownian
Motion.
RSUs
In the first quarter of 2023, approximately i0.6 million RSUs were granted to certain management members of the Company. The RSUs are contingent upon continued employment and generally vest in ithree
equal annual installments. The fair value of RSUs is the value of the Company's common stock at the date of grant and the weighted average grant date fair value of the RSUs was $i14.14 per share.
Share Repurchase
Program
In October 2019, the board of directors authorized a repurchase of up to $i300 million of the Company's outstanding common stock, par value $i0.01
per share, through October 30, 2021. In October 2021, the board of directors authorized an extension of the October 2019 share repurchase program through December 31, 2022. On April 27, 2022, the board of directors authorized an increase in the size of the Company’s $i300 million share repurchase program by an additional
$i200 million and an extension of the share repurchase program through iDecember 31, 2023. At March 31,
2023, approximately $i126.9 million of the Company's outstanding common stock remained available for repurchase under the 2019 share repurchase program. Repurchases may be made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934,
as amended. The timing and amount of any repurchases is subject to market and other conditions. This program does not oblige the Company to repurchase any dollar amount or any number of shares under the authorization, and the program may be suspended, discontinued or modified at any time, for any reason and without notice. iiNo/
shares of common stock were repurchased during the three months ended March 31, 2023 and 2022.
Income
from continuing operations attributable to participating securities
(i0.4)
i—
Income
(loss) from continuing operations attributable to common stockholders
$
i1.2
$
(i19.1)
Weighted
average common shares outstanding
i109.3
i121.4
Effect
of dilutive stock options and restricted stock awards
i0.6
i—
Weighted
average common shares outstanding and potential common shares
i109.9
i121.4
Income
(loss) from continuing operations per share
Basic
$
i0.01
$
(i0.16)
Diluted
$
i0.01
$
(i0.16)
/
The
Company includes participating securities (Series A Preferred Stock) in the computation of income from continuing operations per share pursuant to the two-class method. The two-class method of calculating income from continuing operations per share is an allocation method that calculates earnings per share for common stock and participating securities. Under the two-class method, total dividends provided to the holders of the Series A Preferred Stock and undistributed earnings allocated to participating securities are subtracted from income from continuing operations in determining income attributable to common stockholders.
The effect of stock options and restricted stock on income from continuing operations 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 our common stock at the average market price during the period. As a result of the spin-off, there are IAA employees who hold KAR equity awards included in the calculation. Stock options that would have an anti-dilutive effect on income from continuing operations per diluted share, unexercisable market options and PRSUs subject to performance conditions which have not yet been satisfied are excluded from the calculations. Approximately i0.5 million
service options and all of the market options were excluded from the calculation of diluted income from continuing operations per share for the three months ended March 31, 2023. In addition, approximately i1.6 million PRSUs were excluded from the calculation of diluted income from continuing operations per share for the three months ended March 31,
2023. In accordance with U.S. GAAP, no potential common shares were included in the computation of diluted income from continuing operations per share for the three months ended March 31, 2022, because to do so would have been anti-dilutive based on the period undistributed loss from continuing operations. Total options outstanding at March 31, 2023 and 2022 were i4.7 million
and i5.7 million, respectively.
Note 5—iFinance
Receivables and Obligations Collateralized by Finance Receivables
AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to a wholly-owned, bankruptcy remote, consolidated, special purpose subsidiary ("AFC Funding Corporation"), established for the purpose of purchasing AFC's finance receivables. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires on January 31, 2026. AFC Funding Corporation had committed liquidity of $i2.0
billion for U.S. finance receivables at March 31, 2023.
We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") receivables. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$i300 million on March 31, 2023. In March 2023, AFCI entered into the Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement").
The Canadian Receivables Purchase Agreement increased AFCI's committed liquidity from C$i225 million to C$i300 million and the
facility's maturity date remains January 31, 2026. In addition, provisions providing a mechanism for determining alternative rates of interest were added. We capitalized approximately $i0.5 million
of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
i
The following tables present quantitative information about delinquencies, credit loss charge-offs less recoveries ("net credit losses") and components of securitized financial assets and other related assets managed. For purposes of
this illustration, delinquent receivables are defined as receivables i31 days or more past due.
As
of March 31, 2023 and December 31, 2022, $i2,373.6 million and $i2,396.6
million, respectively, of finance receivables and a cash reserve of ii1/
or ii3/
percent of the obligations collateralized by finance receivables served as security for the obligations collateralized by finance receivables. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. iObligations collateralized by finance receivables consisted of the following:
Obligations collateralized by finance receivables, gross
$
i1,656.5
$
i1,697.0
Unamortized
securitization issuance costs
(i18.3)
(i19.4)
Obligations
collateralized by finance receivables
$
i1,638.2
$
i1,677.6
Proceeds
from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt
AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants
tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At March 31, 2023, we were in compliance with the covenants in the securitization agreements.
Note 6—iLong-Term Debt
i
Long-term
debt consisted of the following (in millions):
*The
interest rates presented in the table above represent the rates in place at March 31, 2023.
Credit Facilities
On September 19, 2019, we entered into the Third Amendment Agreement (the "Third Amendment") to the Credit Agreement. The Third Amendment provided for, among other things, the seven-year, $i950 million Term Loan B-6, and the $i325
million, five-year Revolving Credit Facility. In May 2022, the Company prepaid the $i926.2 million outstanding balance on Term Loan B-6 with proceeds from the Transaction. As a result of the prepayment, we incurred a non-cash loss on the extinguishment of debt of $i7.7 million
in the second quarter of 2022. The loss was primarily a result of the write-off of unamortized debt issuance costs/discounts associated with Term Loan B-6.
The Revolving Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $i50 million sub-limit for issuance of letters of credit and a $i60
million sub-limit for swingline loans. The Company also pays a commitment fee between i25 to i35
basis points, payable iquarterly, on the average daily unused amount of the Revolving Facility based on the Company’s Consolidated Senior Secured Net Leverage Ratio, from time to time.
The obligations of the Company under the Credit Facilities are guaranteed by certain of our domestic subsidiaries (the "Subsidiary
Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority security interests in i100% of the equity interests of certain of the Company's and the Subsidiary
Guarantors' domestic subsidiaries and i65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) first priority
security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions. The Credit Agreement contains affirmative and negative covenants that we believe are usual and customary for a senior secured credit agreement. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with our affiliates. The Credit Agreement also requires us to maintain a Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), not to exceed i3.5
as of the last day of each fiscal quarter, if there are revolving loans outstanding. We were in compliance with the applicable covenants in the Credit Agreement at March 31, 2023.
As of March 31, 2023 and December 31, 2022, $i65.0 million and $i145.0
million was drawn on the Revolving Credit Facility, respectively. In addition, we had related outstanding letters of credit in the aggregate amount of $ii19.0/
million at March 31, 2023 and December 31, 2022, which reduce the amount available for borrowings under the Revolving Credit Facility.
On May
31, 2017, we issued $i950 million of i5.125% senior notes due June 1, 2025. The
Company pays interest on the senior notes semi-annually in arrears on June 1 and December 1 of each year. The senior notes may be redeemed at i101.281% currently and at par as of June 1, 2023. The senior notes are guaranteed by the Subsidiary Guarantors. In August 2022, we conducted a cash tender offer to purchase up to $i600 million
principal amount of the senior notes. The tender offer was oversubscribed and as such, $i600 million of the senior notes were accepted for prepayment and were prepaid in August 2022 with proceeds from the Transaction. We incurred a loss on the extinguishment of the senior notes of $i9.5 million
in 2022 primarily representative of the early repayment premium and the write-off of unamortized debt issuance costs associated with the portion of the senior notes repaid.
The Company expects to use the remaining proceeds from the Transaction after the repayment of Term Loan B-6 to offer to redeem or repay a portion of the senior notes within 365 days of the close of the Transaction. The terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. Therefore, at March 31, 2023, $i140.0 million
of the remaining senior notes are classified as current debt.
European Lines of Credit
ADESA Europe has lines of credit aggregating $i32.5 million (€i30
million). The lines of credit have an aggregate $i20.8 million and $i3.7 million of borrowings outstanding at March 31, 2023
and December 31, 2022, respectively. The lines of credit are secured by certain inventory and receivables at ADESA Europe subsidiaries.
Fair Value of Debt
As of March 31, 2023, the estimated fair value of our long-term debt amounted to $i430.6 million. The estimates of fair value were based on broker-dealer
quotes (Level 2 inputs) for our debt as of March 31, 2023. The estimates presented on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.
Note 7—iDerivatives
In January 2020, we entered into ithree
pay-fixed interest rate swaps with an aggregate notional amount of $i500 million to swap variable rate interest payments under our term loan for fixed interest payments bearing a weighted average interest rate of i1.44%,
for a total interest rate of i3.69%. The interest rate swaps had a five-year term, each maturing on January 23, 2025.
We originally designated the interest rate swaps as cash flow hedges. The changes in the fair value of the interest rate swaps that were included in the assessment of hedge effectiveness were recorded as a component of "Accumulated other comprehensive income." For the three months ended March 31, 2022, the
Company recorded an unrealized gain on the interest rate swaps of $i9.1 million, net of tax of $i3.0
million in "Accumulated other comprehensive income." The earnings impact of the interest rate derivatives designated as cash flow hedges was recorded upon the recognition of the interest related to the hedged debt. In February 2022, we discontinued hedge accounting as we concluded that the forecasted interest rate payments were no longer probable of occurring in consideration of the Transaction and expected repayment of Term Loan B-6. As a result, the increase in the fair value of the swaps from the time of hedge accounting discontinuance to March 31, 2022 was recognized as an $i8.7 million
unrealized gain in "Interest expense" in the consolidated statement of income for the three months ended March 31, 2022. In connection with the repayment of Term Loan B-6 in May 2022, we entered into swap termination agreements. We received $i16.7 million to settle and terminate the swaps, which was recognized as a realized gain in "Interest expense" in the consolidated statement of income for the three months ended June
30, 2022.
Change in realized and unrealized (gains) losses on investment securities, net
$
i0.1
$
i3.0
Foreign
currency (gains) losses
i0.1
i1.2
Investment
and note receivable impairment
i11.0
i—
Other
(i4.1)
(i3.0)
Other
(income) expense, net
$
i7.1
$
i1.2
/
Fair
Value Measurement of Investments
The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. There were iino/
realized gains on these investments for the three months ended March 31, 2023 and 2022. The Company had unrealized losses of $i0.1 million and $i3.0
million for the three months ended March 31, 2023 and 2022, respectively.
ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A small portion of finance receivables for one entity were converted to investment securities during the first quarter of 2021. This entity became publicly traded during the first quarter of 2021 and as a result has a readily determinable fair value. As of March 31, 2023, investment securities measured at fair value are based on quoted market prices for identical assets (Level 1 of the fair value hierarchy) and approximated $i0.3 million.
The net unrealized loss on these investment securities was $i0.1 million for the three months ended March 31, 2023. The remaining investments held of $i24.9 million
do not have readily determinable fair values and the Company has elected to apply the measurement alternative to these investments and present them at cost. Investments are reported in "Other assets" in the accompanying consolidated balance sheets. Realized and unrealized gains and losses are reported in "Other (income) expense, net" in the consolidated statements of income.
In late March 2023, one of the investees we present at cost filed to reorganize its operations through the bankruptcy process. Based on this information, we recorded an other than temporary impairment of approximately $i3.7 million
in "Other (income) expense, net" representing our entire equity investment in the company. In addition, we also had a note receivable with this investee for $i7.3 million, on which we recorded a credit impairment loss in "Other (income) expense, net" in the first quarter of 2023.
Note 9—iCommitments
and Contingencies
We are 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 such as employment matters and dealer disputes. 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. We accrue 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 our operating results in that period. Although the outcome of litigation cannot be accurately predicted, based on evaluation of information presently available, our management does not currently believe that the ultimate resolution of these actions will have a material adverse effect on our financial condition, results of operations or cash flows. Legal fees are expensed as incurred. There has been ino
significant change in the legal and regulatory proceedings which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
ASC 280, Segment Reporting, requires reporting of segment information that is consistent with the manner in which the chief operating decision maker operates and views the Company. Our operations are grouped into iitwo/
operating segments: Marketplace and Finance, which also serve as our reportable business segments. These reportable business segments offer different services and have fundamental differences in their operations. Beginning in the first quarter of 2022, results of the ADESA U.S. physical auctions are reported as discontinued operations (see Note 2).
i
Financial information regarding our reportable segments is set forth below as of and for the three months ended March 31,
2023(in millions):
Marketplace
Finance
Consolidated
Operating revenues
$
i321.0
$
i99.6
$
i420.6
Operating
expenses
Cost of services (exclusive of depreciation and amortization)
i207.8
i16.4
i224.2
Selling,
general and administrative
i95.6
i12.4
i108.0
Depreciation
and amortization
i21.2
i1.8
i23.0
Total
operating expenses
i324.6
i30.6
i355.2
Operating
profit (loss)
(i3.6)
i69.0
i65.4
Interest
expense
i8.0
i30.3
i38.3
Other
(income) expense, net
i7.0
i0.1
i7.1
Intercompany
expense (income)
i6.4
(i6.4)
i—
Income
(loss) from continuing operations before income taxes
Financial information regarding our reportable segments is set forth below as of and for the three months ended March 31, 2022(in millions):
Marketplace
Finance
Consolidated
Operating
revenues
$
i285.2
$
i84.2
$
i369.4
Operating
expenses
Cost of services (exclusive of depreciation and amortization)
i195.8
i15.0
i210.8
Selling,
general and administrative
i108.4
i10.5
i118.9
Depreciation
and amortization
i23.9
i2.1
i26.0
Total
operating expenses
i328.1
i27.6
i355.7
Operating
profit (loss)
(i42.9)
i56.6
i13.7
Interest
expense
i13.3
i12.3
i25.6
Other
(income) expense, net
(i1.8)
i3.0
i1.2
Intercompany
expense (income)
i0.1
(i0.1)
i—
Income
(loss) from continuing operations before income taxes
(i54.5)
i41.4
(i13.1)
Income
taxes
(i15.1)
i10.4
(i4.7)
Income
(loss) from continuing operations
$
(i39.4)
$
i31.0
$
(i8.4)
Total
assets
$
i2,630.3
$
i3,103.5
$
i5,733.8
Geographic
Information
Our foreign operations include Canada, Continental Europe and the U.K. Approximately i60% and i64% of our foreign operating revenues were from Canada for the three
months ended March 31, 2023 and 2022, respectively. Most of the remaining foreign operating revenues were generated from Continental Europe. iInformation regarding the geographic areas of our operations is set forth below (in millions):
On May 2, 2023, the Company announced that it is changing its name to OPENLANE, Inc., effective May 15, 2023. The change reflects the Company’s transformation to a more asset-light, digital marketplace company and signals a new simplified, customer-first approach to used vehicle remarketing. OPENLANE will serve as both the parent company brand and the go-to-market brand for the Company’s digital marketplaces in the U.S., Canada and Europe. OPENLANE will continue trading on the New York Stock Exchange under the ticker symbol “KAR.” As the OPENLANE branded
marketplace will replace the existing branded marketplaces, the Company will evaluate the $i122.8 million carrying amount of its indefinite-lived ADESA tradename, as well as the $i1.3 million
carrying amount for certain other definite-lived tradenames associated with recent acquisitions, which may result in a potential non-cash impairment charge in the second quarter of 2023. In addition, the Company will reassess the useful life of the ADESA tradename in the second quarter of 2023.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should,""may,""will,""can,""of the opinion,""confident,""anticipates,""expects,""intends,""plans,""believes,""seeks,""estimates,""continues,""outlook," initiatives," "goals,""opportunities" and similar expressions identify forward-looking
statements. Such statements, including statements regarding the potential impacts of the COVID-19 pandemic and adverse market conditions; our future growth; anticipated cost savings, revenue increases, credit losses and capital expenditures; contractual obligations; dividend declarations and payments; common stock repurchases; tax rates and assumptions; strategic initiatives, acquisitions and dispositions; our competitive position and retention of customers; and our continued investment in information technology, 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. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and Item 1A "Risk Factors" in our Annual
Report on Form 10-K for the year ended December 31, 2022, filed on March 9, 2023, and those described from time to time in our future reports filed with the Securities and Exchange Commission. Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
Automotive Industry and Economic Impacts on our Business
The automotive industry has experienced unprecedented
market conditions, caused in part by supply chain issues, the shortage of semiconductors and associated delays in new vehicle production. These factors have resulted in significant fluctuations in used vehicle values and declines in vehicle volumes in the wholesale market. We expect this volatility to continue.
In addition, macroeconomic factors, including inflationary pressures, rising interest rates, volatility of oil and natural gas prices and declining consumer confidence impact the affordability and demand for new and used vehicles. Declining economic conditions present a risk to our operations and the stability of the automotive industry. Given the nature of these factors, we cannot predict whether or for how long certain trends will continue, nor to what degree these trends will impact us in the future.
Overview
We
are a leading digital marketplace for used vehicles, connecting sellers and buyers across North America and Europe to facilitate fast, easy and transparent transactions. Our business is divided into two reportable business segments, each of which is an integral part of the wholesale used vehicle remarketing industry: Marketplace and Finance.
•The Marketplace segment serves a domestic and international customer base through digital marketplaces and vehicle logistics center locations across Canada. Powered with software developed by OPENLANE, comprehensive private label remarketing solutions are offered to automobile manufacturers, captive finance companies and other commercial customers to offer vehicles digitally. Vehicles sold on our digital platforms are typically sold by commercial fleet operators, financial institutions, rental car companies, new and used vehicle dealers and vehicle manufacturers
and their captive finance companies to franchise and independent used vehicle dealers. We also provide value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. Our digital marketplaces also include BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized in the United States (CARWAVE was integrated with BacklotCars in the fourth quarter of 2022), TradeRev, an online automotive remarketing platform in Canada where dealers can sell and source used vehicle inventory at any time, ADESA U.K., an online wholesale used vehicle remarketing business in the United Kingdom and ADESA Europe, an online wholesale vehicle marketplace in Continental Europe.
•Through AFC, the Finance segment provides short-term, inventory-secured financing, known
as floorplan financing, primarily to independent used vehicle dealers throughout the United States and Canada. In addition, AFC provides liquidity for customer trade-ins which encompasses settling lien holder payoffs. AFC also provides title services for their customers. These services are provided through AFC's digital servicing network as well as its physical locations throughout North America.
Beginning in the first quarter of 2022, results of the ADESA U.S. physical auctions are now reported as discontinued operations (see Note 2 of the accompanying unaudited financial statements).
Industry
Trends
Wholesale Used Vehicle Industry
We believe the U.S. and Canadian wholesale used vehicle industry has a total addressable market of approximately 20 million vehicles, which can fluctuate depending on seasonality and a variety of other macro-economic factors. This wholesale used vehicle industry consists of the commercial market (commercial sellers that sell to franchise and independent dealers) and the dealer-to-dealer market (franchise and independent dealers that both buy and sell vehicles). The Company supports the majority of commercial sellers in North America through our OPENLANE technology. We believe digital applications, such as BacklotCars and TradeRev, may provide an opportunity to expand the total addressable market for dealer-to-dealer transactions. The supply chain issues and
current market conditions facing the automotive industry, including the disruption of new vehicle production, low new vehicle supply and historically high used vehicle pricing have had a material impact on the wholesale used vehicle industry.
Automotive Finance
AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverage its local presence of branches and in-market representatives, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 15,200 dealers in 2022.
Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, access to consumer financing, increased interest rates and increased used car retail
activity of franchise and public dealerships (most of which do not utilize AFC or its competitors for floorplan financing). These same challenges, to the extent they occur, could result in a material negative impact on AFC's results of operations. A significant decline in used vehicle sales would result in a decrease in consumer auto loan originations and an increased number of dealers defaulting on their loans. In addition, volatility in wholesale vehicle pricing impacts the value of recovered collateral on defaulted loans and the resulting severity of credit losses at AFC. A decrease in wholesale used car pricing could lead to increased losses if dealers are unable to satisfy their obligations.
Seasonality
The volume of vehicles sold through our marketplaces generally fluctuates from quarter-to-quarter. This seasonality is caused by several factors including weather, the timing
of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affects the demand side of the auction industry. Wholesale used vehicle volumes tend to decline during prolonged periods of winter weather conditions. As a result, revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The fourth calendar quarter typically experiences lower used vehicle volume as well as additional costs associated with the holidays and winter weather.
In addition, changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from marketplace sales held near period end.
Sources of Revenues and Expenses
The vehicles sold on our marketplaces generate auction fees from buyers
and sellers. The Company generally does not take title to these consigned vehicles and records only its auction fees as revenue ("Auction fees" in the consolidated statement of income) because it has no influence on the vehicle auction selling price agreed to by the seller and the buyer at the auction. The Company does not record the gross selling price of the consigned vehicles sold at auction as revenue. The Company generally enforces its rights to payment for seller transactions through net settlement provisions following the sale of a vehicle. Marketplace services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, collateral recovery services
and technology solutions are generally recognized at the time of service ("Service revenue" in the consolidated statement of income). The Company also sells vehicles that have been purchased, which represent approximately 1% of the total volume of vehicles sold. For these types of sales, the Company does record the gross selling price of purchased vehicles sold at auction as revenue ("Purchased vehicle sales" in the consolidated statement of income) and the gross purchase price of the vehicles as "Cost of services." AFC's revenue ("Finance-related revenue" in the consolidated statement of income) is comprised of interest and fee income, provision for credit losses and other revenues associated with our finance receivables.
Although
Marketplace revenues primarily include auction fees and service revenue, our related receivables and payables include the gross value of the vehicles sold. Trade receivables include the unremitted purchase price of vehicles purchased by third parties through our marketplaces, fees to be collected from those buyers and amounts due for services provided by us
related to certain consigned vehicles. The amounts due with respect to the services provided by us related to certain consigned vehicles are generally deducted from the sales proceeds upon the eventual auction or other disposition of the related vehicles.
Accounts payable include amounts due sellers from the proceeds of the sale of their consigned vehicles less any fees.
Our operating expenses consist of cost of services, selling, general and administrative and depreciation and amortization. Cost of services is composed of payroll and related costs, subcontract services, the cost of vehicles purchased, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites and loan offices. Cost of services excludes depreciation and amortization. Selling, general and administrative expenses are composed of payroll and related costs, sales and marketing, information technology services and professional fees.
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended March 31, 2023 and 2022:
Three Months Ended March 31,
(Dollars in millions except per share amounts)
2023
2022
Revenues
from continuing operations
Auction fees
$
99.9
$
101.4
Service revenue
165.6
137.5
Purchased vehicle sales
55.5
46.3
Finance-related
revenue
99.6
84.2
Total revenues from continuing operations
420.6
369.4
Cost of services*
224.2
210.8
Gross profit*
196.4
158.6
Selling,
general and administrative
108.0
118.9
Depreciation and amortization
23.0
26.0
Operating profit
65.4
13.7
Interest expense
38.3
25.6
Other
(income) expense, net
7.1
1.2
Income (loss) from continuing operations before income taxes
20.0
(13.1)
Income taxes
7.3
(4.7)
Income (loss) from continuing operations
12.7
(8.4)
Income
from discontinued operations, net of income taxes
—
8.1
Net income (loss)
$
12.7
$
(0.3)
Income (loss) from continuing operations per share
Basic
$
0.01
$
(0.16)
Diluted
$
0.01
$
(0.16)
*
Exclusive of depreciation and amortization
Discontinued Operations
The financial performance of the ADESA U.S. physical auction business is presented as discontinued operations. As a result, revenue, cost of services and all costs of discontinued operations are presented as one line item in the above table as "Income from discontinued operations, net of income taxes."
Overview
For the three months ended March 31, 2023, we had revenue of $420.6 million compared with revenue of $369.4 million for the three months ended March 31, 2022, an increase of 14%. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions
below.
Depreciation and Amortization
Depreciation and amortization decreased $3.0 million, or 12%, to $23.0 million for the three months ended March 31, 2023, compared with $26.0 million for the three months ended March 31, 2022. The decrease in depreciation and amortization was primarily the result of assets that have become fully depreciated and a reduction in assets placed in service.
Interest
expense increased $12.7 million, or 50%, to $38.3 million for the three months ended March 31, 2023, compared with $25.6 million for the three months ended March 31, 2022. Interest expense increased $18.0 million at AFC and the increase was attributable to an increase in the average interest rate on the AFC securitization obligations to approximately 6.6% for the three months ended March 31, 2023, as compared with approximately 2.3% for the three months ended March 31, 2022. In addition, in March 2022, there was an unrealized gain of $8.7 million related to the discontinuance of hedge accounting for the interest rate swaps. These items were partially offset by a decrease in interest expense resulting from repayments of term loan and senior note debt in 2022.
Other
(Income) Expense, Net
For the three months ended March 31, 2023, we had other expense of $7.1 million compared with $1.2 million for the three months ended March 31, 2022. The increase in other expense was primarily attributable to the impairment of an equity security and note receivable with the same investee aggregating $11.0 million, partially offset by a $2.9 million decrease in unrealized losses on investment securities, a $1.1 million decrease in foreign currency losses on intercompany balances and an increase in other miscellaneous income aggregating $1.1 million.
Income Taxes
We had an effective tax rate of 36.5% for the three months ended March 31, 2023, compared
with an effective tax rate of 35.9% on a pre-tax loss for the three months ended March 31, 2022.
Income from Discontinued Operations
In May 2022, Carvana acquired the ADESA U.S. physical auction business from KAR. As such, the financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the three months ended March 31, 2023 and 2022, the Company's financial statements included income from discontinued operations of $0.0 million and $8.1 million, respectively. For further discussion, reference the condensed notes to the consolidated financial statements.
Impact
of Foreign Currency
For the three months ended March 31, 2023 compared with the three months ended March 31, 2022, the change in the Canadian dollar exchange rate decreased revenue by $6.0 million, operating profit by $1.7 million and net income by $1.0 million. For the three months ended March 31, 2023 compared with the three months ended March 31, 2022, the change in the euro exchange rate decreased revenue by $3.0 million, operating profit by $0.2 million and net income by $0.1 million.
Marketplace Results
Three
Months Ended March 31,
(Dollars in millions, except per vehicle amounts)
2023
2022
Auction fees
$
99.9
$
101.4
Service revenue
165.6
137.5
Purchased
vehicle sales
55.5
46.3
Total Marketplace revenue from continuing operations
Revenue from the Marketplace segment increased $35.8 million, or 13%, to $321.0 million for the three months ended March 31, 2023, compared with $285.2 million for the three months ended March 31, 2022. The change in revenue included the impact of decreases in revenue of $5.2 million and $3.0 million due to fluctuations in the Canadian dollar exchange rate and the euro exchange rate, respectively. The increase in revenue was primarily attributable to the increases in service revenue and purchased vehicle sales (discussed below).
The 6% decrease in the number of vehicles sold was comprised of a 4% decline in commercial volumes and an 8% decrease in dealer consignment volumes. The decrease in
the number of vehicles sold was driven by an industry-wide lack of wholesale used vehicle supply.
Auction Fees
Auction fees decreased $1.5 million, or 1%, to $99.9 million for the three months ended March 31, 2023, compared with $101.4 million for the three months ended March 31, 2022. The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the three months ended March 31, 2023 increased $14, or 5%, to $303, compared with $289 for the three months ended March 31, 2022. The increase in auction fees per vehicle sold reflects an increase in auction fees and a smaller mix of lower-fee commercial off-premise vehicles,
partially offset by lower vehicle values.
Service Revenue
Service revenue increased $28.1 million, or 20%, to $165.6 million for the three months ended March 31, 2023, compared with $137.5 million for the three months ended March 31, 2022, primarily as a result of increases in repossession and remarketing fees of $10.5 million, transportation revenue of $8.2 million, third-party fees for platform services of $6.6 million, inspection service revenue of $2.3 million and a net increase in other miscellaneous service revenues aggregating approximately $0.5 million.
Purchased Vehicle Sales
Purchased vehicle sales, which include the entire selling price of the vehicle, increased $9.2 million, or 20%, to
$55.5 million for the three months ended March 31, 2023, compared with $46.3 million for the three months ended March 31, 2022, primarily as a result of an increase in purchased vehicles sold and the average selling price of purchased vehicles sold in Europe.
Gross Profit
For the three months ended March 31, 2023, gross profit from the Marketplace segment increased $23.8 million, or 27%, to $113.2 million, compared with $89.4 million for the three months ended March 31, 2022. Revenue increased 13% for the three months ended March 31, 2023, while cost of services increased 6% during the same period. Gross profit from the Marketplace segment
was 35.3% of revenue for the three months ended March 31, 2023, compared with 31.3% of revenue for the three months ended March 31, 2022. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 42.6% and 37.4% for the three months ended March 31, 2023 and 2022, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold.
Gross profit as a percentage of revenue increased for the three ended March 31, 2023 as compared with the three months ended March 31, 2022, primarily due to improved transportation margins, an increase in revenue
for vehicles sold on dealer-to-dealer platforms and an increase in third-party fees for platform services.
Selling, General and Administrative
Selling, general and administrative expenses from the Marketplace segment decreased $12.8 million, or 12%, to $95.6 million for the three months ended March 31, 2023, compared with $108.4 million for the three months ended March 31, 2022, primarily as a result of decreases in professional fees of $6.3 million, information technology costs of $4.4 million, severance of $2.6 million, stock-based compensation of $1.6 million, fluctuations in the Canadian exchange rate of $1.4 million and telecom expenses of $0.8 million, partially offset by increases in bad debt expense of $0.7 million, marketing costs of $0.6 million, incentive-based compensation
of $0.6 million and other miscellaneous expenses aggregating $2.4 million.
(Dollars in millions except volumes and per loan
amounts)
2023
2022
Finance-related revenue
Interest income
$
60.6
$
43.2
Fee income
47.6
40.2
Other
revenue
3.4
2.2
Provision for credit losses
(12.0)
(1.4)
Total Finance revenue
99.6
84.2
Cost of services*
16.4
15.0
Gross
profit*
83.2
69.2
Selling, general and administrative
12.4
10.5
Depreciation and amortization
1.8
2.1
Operating profit
$
69.0
$
56.6
Loan
transactions
420,000
372,000
Revenue per loan transaction
$
237
$
226
* Exclusive of depreciation and amortization
Revenue
For the three months ended March 31, 2023, the Finance segment revenue increased $15.4 million,
or 18%, to $99.6 million, compared with $84.2 million for the three months ended March 31, 2022. The increase in revenue was primarily the result of a 13% increase in loan transactions and a 5% increase in revenue per loan transaction.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $11, or 5%, primarily as a result of an increase in interest yields driven by an increase in prime rates (Federal Reserve raised interest rates 450 basis points since March 31, 2022), an increase in floorplan fees and other fee income per unit and an increase in average portfolio duration, partially offset by an increase in net credit losses and a decrease in loan values.
The provision for credit losses increased to 2.0% of the average managed receivables for
the three months ended March 31, 2023 from 0.2% for the three months ended March 31, 2022. The provision for credit losses is expected to be 2% or under, annually, of the average managed receivables balance. However, the actual losses in any particular quarter could deviate from this range.
Gross Profit
For the three months March 31, 2023, gross profit for the Finance segment increased $14.0 million, or 20%, to $83.2 million, or 83.5% of revenue, compared with $69.2 million, or 82.2% of revenue, for the three months ended March 31, 2022. The increase in gross profit as a percent of revenue was primarily the result of an 18% increase in revenue, partially offset by a 9% increase in cost
of services. The increase in cost of services was primarily the result of increases in compensation expense of $0.7 million, lot check expenses of $0.5 million and other miscellaneous expenses aggregating $0.2 million.
Selling, General and Administrative
Selling, general and administrative expenses for the Finance segment increased $1.9 million, or 18%, to $12.4 million for the three months ended March 31, 2023, compared with $10.5 million for the three months ended March 31, 2022 primarily as a result of increases in information technology costs of $0.8 million, compensation expense of $0.5 million and other miscellaneous expenses aggregating $0.6 million.
We believe that the significant indicators of liquidity for our business are cash on hand, cash flow from operations, working capital and amounts available under our Credit Facility. Our principal sources of liquidity consist of cash generated by operations and borrowings under our Revolving Credit Facility.
March 31,
December 31,
March
31,
(Dollars in millions)
2023
2022
2022
Cash and cash equivalents
$
219.6
$
225.7
$
134.2
Restricted cash
32.2
52.0
26.3
Working
capital
408.6
379.2
1,023.2
Amounts available under the Revolving Credit Facility
241.0
161.0
224.0
Cash provided by (used by) operating activities for the three months ended
96.1
(22.6)
We
regularly evaluate alternatives for our capital structure and liquidity given our expected cash flows, growth and operating capital requirements as well as capital market conditions.
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 a week in duration. 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 in the U.S. 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 marketplace sales held near period end.
Approximately $160.5 million of available cash was held by our foreign subsidiaries at March 31, 2023. If funds held by our foreign subsidiaries were to be repatriated, state and local income tax expense and withholding
tax expense would need to be recognized, net of any applicable foreign tax credits.
AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 90 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
On September 19, 2019, we entered into the seven-year, $950 million Term Loan B-6 and the $325 million, five-year Revolving Credit Facility. In May 2022, the
Company prepaid the $926.2 million outstanding balance on Term Loan B-6 with proceeds from the Transaction. As a result of the prepayment, we incurred a non-cash loss on the extinguishment of debt of $7.7 million in the second quarter of 2022. The loss was primarily a result of the write-off of unamortized debt issuance costs/discounts associated with Term Loan B-6.
The Revolving Credit Facility, with a maturity date of September 19, 2024, is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline loans.
As set forth in the Credit Agreement, loans under the Revolving Credit Facility will bear interest at a rate calculated based on the type
of borrowing (either adjusted LIBOR or Base Rate) and the Company’s Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), with such rate ranging from 2.25% to 1.75% for adjusted LIBOR loans and from 1.25% to 0.75% for Base Rate loans. The Company also pays a commitment fee between 25 to 35 basis points, payable quarterly, on the average daily unused amount of the Revolving Facility based on the Company’s Consolidated Senior Secured Net Leverage Ratio, from time to time.
As of March 31, 2023 and December 31, 2022, $65.0 million and $145.0 million was drawn on the Revolving Credit Facility, respectively. We had related outstanding letters of credit in the aggregate amount of $19.0 million at March 31, 2023 and December 31, 2022, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility. Our European operations have lines of credit aggregating $32.5 million (€30 million) of which $20.8 million was drawn at March 31, 2023.
The obligations of the
Company under the Credit Facilities are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority security interests in 100% of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and 65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries
and (b) first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions.
Certain covenants contained within the Credit Agreement are critical to an investor’s understanding of our financial liquidity, as the failure to maintain compliance with these covenants could result in a default and allow the lenders under the Credit Agreement to declare all amounts borrowed immediately due and payable. The Credit Agreement contains a financial covenant requiring compliance with a Consolidated Senior Secured Net Leverage Ratio not to exceed 3.5 as of the last day of each fiscal quarter if revolving loans are outstanding. The Consolidated Senior Secured Net Leverage Ratio is calculated as consolidated total debt (as defined in the Credit Agreement)
divided by the last four quarters consolidated Adjusted EBITDA. Consolidated total debt includes term loan borrowings, revolving loans, finance lease liabilities and other obligations for borrowed money less unrestricted cash as defined in the Credit Agreement. Consolidated Adjusted EBITDA is EBITDA (earnings before interest expense, income taxes, depreciation and amortization) adjusted to exclude among other things (a) gains and losses from asset sales; (b) unrealized foreign currency translation gains and losses in respect of indebtedness; (c) certain non-recurring gains and losses; (d) stock-based compensation expense; (e) certain other non-cash amounts included in the determination of net income; (f) charges and revenue reductions resulting from purchase accounting; (g) minority interest; (h) consulting expenses incurred for cost reduction, operating restructuring and business improvement efforts; (i) expenses realized upon the termination of employees and the termination
or cancellation of leases, software licenses or other contracts in connection with the operational restructuring and business improvement efforts; (j) expenses incurred in connection with permitted acquisitions; (k) any impairment charges or write-offs of intangibles; and (l) any extraordinary, unusual or non-recurring charges, expenses or losses. Our Consolidated Senior Secured Net Leverage Ratio was negative at March 31, 2023.
In addition, the Credit Agreement and the indenture governing our senior notes (see Note 6, "Long-Term Debt" for additional information) contain certain limitations on our ability to pay dividends
and other distributions, make certain acquisitions or investments, grant liens and sell assets, and the Credit Agreement contains certain limitations on our ability to incur indebtedness. The applicable covenants in the Credit Agreement affect our operating flexibility by, among other things, restricting our ability to incur expenses and indebtedness that could be used to grow the business, as well as to fund general corporate purposes. We were in compliance with the covenants in the Credit Agreement and the indenture governing our senior notes at March 31, 2023.
Senior Notes
On May 31, 2017, we issued
$950 million of 5.125% senior notes due June 1, 2025. The Company pays interest on the senior notes semi-annually in arrears on June 1 and December 1 of each year. The senior notes may be redeemed at 101.281% currently and at par as of June 1, 2023. The senior notes are guaranteed by the Subsidiary Guarantors. In August 2022, we conducted a cash tender offer to purchase up to $600 million principal amount of the senior notes. The tender offer was oversubscribed and as such, $600 million of the senior notes were accepted for prepayment and were prepaid in August 2022 with proceeds from the Transaction. We incurred a loss on the extinguishment of the senior notes of $9.5 million in 2022 primarily representative of the early repayment premium and the write-off of unamortized debt issuance
costs associated with the portion of the senior notes repaid.
Use of Proceeds from the Transaction
The Company generated gross proceeds from the sale of the U.S. physical auction business of approximately $2.2 billion. The Transaction closed in May 2022. Under terms of the Credit Agreement, net cash proceeds from the Transaction were used to repay Term Loan B-6 within three days of the Transaction. The Company also prepaid $600 million of the senior notes in August 2022. The terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. The Company is required to
offer to redeem or repay approximately $140 million of senior notes within 10 business days of May 10, 2023, subject to the terms of the indenture governing our senior notes.
At March 31, 2023, $140.0 million of the remaining senior notes are classified as current debt, as the terms of the senior notes specify that excess proceeds must be reinvested or used to pay down
a portion of the senior notes. As of March 31, 2023, $65.0 million was drawn on the Revolving Credit Facility and is classified as current debt based on the Company’s past practice of using the Revolving Credit Facility for short term borrowings. However, the terms of the Revolving Credit Facility do not require repayment until maturity at September 19, 2024.
At March 31, 2023, cash totaled $219.6 million and there was an additional $241.0 million available for borrowing under the Revolving Credit Facility (net of $19.0 million in outstanding letters of credit). Funds held by our foreign subsidiaries
could be repatriated, at which point state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits.
The Company’s auction volumes have been adversely impacted by the supply chain disruptions and associated challenges in the automotive industry. We expect to see an improvement in the used vehicle market in the coming years, which is expected to increase the volume of vehicles entering our auction platforms and have a positive impact on our operating results. We believe our sources of liquidity from our cash and cash equivalents on hand, working capital, cash provided by operating activities, and availability under our Credit Facility are sufficient to meet our operating needs for the foreseeable future. In addition, we believe the previously mentioned sources of liquidity will be sufficient to fund our capital
requirements and debt service payments for the foreseeable future. A lack of recovery in market conditions, or further deterioration in market conditions, could materially affect the Company's liquidity.
Securitization Facilities
AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to AFC Funding Corporation. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires on January 31, 2026. AFC Funding Corporation had committed liquidity of $2.0 billion for U.S. finance receivables at March 31,
2023.
We also have an agreement for the securitization of AFCI's receivables, which expires on January 31, 2026. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$300 million at March 31, 2023. In March 2023, AFCI entered into the Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement"). The Canadian Receivables Purchase Agreement increased AFCI's committed liquidity from C$225 million to C$300 million and the facility's maturity date remains January 31, 2026. In addition, provisions providing a mechanism for determining alternative rates of interest were added. We capitalized approximately $0.5 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold
pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
AFC managed total finance receivables of $2,406.4 million and $2,416.6 million at March 31, 2023 and December 31, 2022, respectively. AFC's allowance for losses was $21.0 million and $21.5 million at March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023 and December 31,
2022, $2,373.6 million and $2,396.6 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the $1,638.2 million and $1,677.6 million of obligations collateralized by finance receivables at March 31, 2023 and December 31, 2022, respectively. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. There were unamortized securitization issuance costs of approximately $18.3 million and $19.4 million at March 31, 2023 and December 31, 2022, respectively. After the occurrence
of a termination event, as defined in the U.S. securitization agreement, the banks may, and could, cause the stock of AFC Funding Corporation to be transferred to the bank facility, though as a practical matter the bank facility would look to the liquidation of the receivables under the transaction documents as their primary remedy.
Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At March 31, 2023, we were in compliance with
the covenants in the securitization agreements.
EBITDA and Adjusted EBITDA, as presented herein, are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States, or GAAP. They are not measurements of our financial performance under GAAP and should not be considered substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income
(loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings, as described above in the discussion of certain restrictive loan covenants under "Credit Facilities."
Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported
by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to income (loss) from continuing operations for the periods presented:
Certain of our loan covenant calculations utilize financial results
for the most recent four consecutive fiscal quarters. The following table reconciles EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
Net change in unrealized (gains) losses on investment securities
3.2
0.3
0.6
0.1
4.2
Professional
fees related to business improvement efforts
0.8
3.2
3.1
0.7
7.8
Other
1.5
5.1
0.9
0.8
8.3
Total
addbacks/(deductions)
20.3
7.1
(62.2)
(21.5)
(56.3)
Adjusted EBITDA from continuing ops
$
56.1
$
69.5
$
56.5
$
58.9
$
241.0
Summary
of Cash Flows
Three Months Ended March 31,
(Dollars in millions)
2023
2022
Net cash provided by (used by):
Operating activities - continuing
operations
$
96.1
$
(22.6)
Operating activities - discontinued operations
—
(39.2)
Investing activities - continuing operations
(13.6)
(246.7)
Investing activities
- discontinued operations
7.0
(11.8)
Financing activities - continuing operations
(116.5)
276.7
Financing activities - discontinued operations
—
22.0
Net change in cash balances of discontinued operations
—
(24.3)
Effect
of exchange rate on cash
1.1
3.0
Net decrease in cash, cash equivalents and restricted cash
$
(25.9)
$
(42.9)
Cash flow from operating activities (continuing operations) Net cash provided by operating activities (continuing operations) was $96.1 million for the three months ended March 31, 2023,
compared with net cash used by operating activities of $22.6 millionfor the three months ended March 31, 2022. Cash provided by continuing operations for the three months ended March 31, 2023 consisted primarily of cash earnings and an increase in accounts payable and accrued expenses, partially offset by an increase in trade receivables and other assets. Cash used by continuing operations for the three months ended March 31,
2022
consisted primarily of an increase in trade receivables and other assets as well as payments of contingent consideration in excess of acquisition-date fair value, partially offset by cash earnings and an increase in accounts payable and accrued expenses. The increase in operating cash flow was primarily attributable to changes in operating assets and liabilities as a result of the timing of collections and the disbursement of funds to consignors for marketplace sales held near period-ends, as well as a decrease in payments of contingent consideration in excess of acquisition-date fair value.
Changes in AFC’s accounts payable balance are presented in cash flows from operating activities while changes in AFC’s finance receivables are presented in cash flows from investing activities. Changes in these balances can cause variations in operating and investing cash flows.
Cash flow from
investing activities (continuing operations) Net cash used by investing activities (continuing operations) was $13.6 million for the three months ended March 31, 2023, compared with $246.7 million for the three months ended March 31, 2022. The cash used by investing activities for the three months ended March 31, 2023 was primarily from purchases of property and equipment and an increase in finance receivables held for investment. The cash used by investing activities for the three months ended March 31, 2022 was primarily due to an increase in finance receivables held for investments and purchases of property and equipment.
Cash
flow from financing activities (continuing operations) Net cash used by financing activities (continuing operations) was $116.5 million for the three months ended March 31, 2023, compared with net cash provided by financing activities of $276.7 million for the three months ended March 31, 2022. The cash used by financing activities for the three months ended March 31, 2023was primarily due to a decrease in borrowings from lines of credit, a decrease in obligations collateralized by finance receivables and dividends paid on the Series A Preferred Stock. The cash provided by financing activities for the three months ended March 31, 2022 was primarily due to
an increase in obligations collateralized by finance receivables and an increase in borrowings from lines of credit.
Cash flow from operating activities (discontinued operations) There were no operating activities (discontinued operations) for the three months ended March 31, 2023, compared with net cash used by operating activities of $39.2 million for the three months ended March 31, 2022. The cash used by operating activities for the three months ended March 31, 2022 primarily consisted of an increase in trade receivables and other assets, partially offset by cash earnings and an increase in accounts payable and accrued expenses.
Cash flow from investing activities
(discontinued operations) Net cash provided by investing activities (discontinued operations) was $7.0 million for the three months ended March 31, 2023, compared with net cash used by investing activities of $11.8 million for the three months ended March 31, 2022. The cash provided by investing activities for the three months ended March 31, 2023 is attributable to the final proceeds from the sale of the ADESA U.S. physical auction business. The cash used by investing activities for the three months ended March 31, 2022 is primarily attributed to purchases of property and equipment.
Cash flow from financing activities
(discontinued operations) There were no financing activities (discontinued operations) for the three months ended March 31, 2023, compared with net cash provided by financing activities of $22.0 million for the three months ended March 31, 2022. The cash provided by financing activities for the three months ended March 31, 2022 is primarily attributable to a net increase in book overdrafts.
Capital Expenditures
Capital expenditures for the three months ended March 31, 2023 and 2022
approximated $12.0 million and $13.5 million, respectively. Capital expenditures were funded from internally generated funds. We continue to invest in our core information technology capabilities and our service locations. Capital expenditures related to continuing operations are expected to be approximately $65 million for fiscal year 2023. Future capital expenditures could vary substantially based on capital project timing, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies.
The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $0.01 per share, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7% per annum, payable quarterly in arrears. Dividends were payable in kind through the issuance of additional shares of Series A Preferred Stock for the first eight dividend payments (through June 30, 2022), and thereafter, in cash or in kind, or in any
combination of both, at the option of the Company. For the three months ended March 31, 2023, the holders of the Series A Preferred Stock received cash dividends aggregating $11.1 million and for the three months ended March 31, 2022, the holders of the Series A Preferred Stock received dividends in kind with a value in the aggregate of approximately $10.7 million. The holders of the Series A Preferred Stock are also entitled to participate in dividends declared or paid on our common stock on an as-converted basis.
The Company has suspended its quarterly common stock dividend. Future dividend decisions will be based on and affected by a variety of factors,
including our financial condition and results of operations, contractual restrictions, including restrictive covenants contained in our Credit Agreement and AFC's securitization facilities and the indenture governing our senior notes, capital requirements and other factors that our board of directors deems relevant. No assurance can be given as to whether any future dividends may be declared by our board of directors or the amount thereof.
Contractual Obligations
The Company's contractual cash obligations for long-term debt, interest payments related to long-term debt, finance lease obligations,
operating leases and contingent consideration related to acquisitions are summarized in the table of contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2022. Since December 31, 2022, the contractual obligations of the Company have changed as follows:
•Operating lease obligations change in the ordinary course of business. We lease most of our facilities, as well as other property and equipment under operating leases. Future operating lease obligations will continue to change if renewal options are exercised and/or if we enter into additional operating lease agreements.
See Note 6 to the Consolidated Financial Statements, included elsewhere
in this Quarterly Report on Form 10-Q, for additional information about the items described above. Our contractual cash obligations as of December 31, 2022, are discussed in the "Contractual Obligations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the "SEC").
Critical Accounting Estimates
Our critical accounting estimates are discussed in the "Critical Accounting Estimates" section of "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC. A summary of significant accounting policies is discussed in Note 2 and elsewhere in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, which includes audited financial statements.
Off-Balance Sheet Arrangements
As of March 31, 2023, we had no off-balance sheet arrangements pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that
we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Our foreign currency exposure is limited and arises from transactions denominated in foreign currencies, particularly intercompany loans, as well as from translation of the results of operations
from our Canadian and, to a lesser extent, United Kingdom and Continental Europe subsidiaries. However, fluctuations between U.S. and non-U.S. currency values may adversely affect our results of operations and financial position. We have not entered into any foreign exchange contracts to hedge changes in the Canadian dollar, British pound or euro. Foreign currency losses on intercompany loans were approximately $0.1 million and $1.2 million for the three months ended March 31, 2023 and 2022, respectively. Canadian currency translation negatively affected net income by approximately $1.0 million for the three months ended March 31, 2023 and
had no impact on net income for the three months ended March 31, 2022. A 1% change in the month-end Canadian dollar exchange rate for March 31, 2023 would have impacted foreign currency losses on intercompany loans by $0.8 million and net income by $0.5 million. A 1% change in the month-end euro exchange rate for March 31, 2023 would have impacted foreign currency losses on intercompany loans by $0.7 million and net income by $0.5 million. A 1% change in the average Canadian dollar exchange rate for the three months ended March 31, 2023 would have impacted net income by approximately $0.2 million. Currency exposure of our U.K. and European operations is not material to the results of operations.
Interest Rates
We
are exposed to interest rate risk on our variable rate borrowings. Accordingly, interest rate fluctuations affect the amount of interest expense we are obligated to pay. We most recently used interest rate swap agreements to manage our exposure to interest rate changes. We originally designated the interest rate swaps as cash flow hedges for accounting purposes. Accordingly, the earnings impact of the derivatives designated as cash flow hedges are recorded upon the recognition of the interest related to the hedged debt.
In January 2020, we entered into three pay-fixed interest rate swaps with an aggregate notional amount of $500 million to swap variable rate interest payments under our term loan for fixed interest payments bearing a weighted average interest rate of 1.44%. The interest rate swaps had a five-year term, each maturing on January 23, 2025.
In
February 2022, we discontinued hedge accounting as we concluded that the forecasted interest rate payments were no longer probable of occurring in consideration of the Transaction and expected repayment of Term Loan B-6. In connection with the repayment of Term Loan B-6 in May 2022, we entered into swap termination agreements. We received $16.7 million to settle and terminate the swaps, which was recognized as a realized gain in "Interest expense" in the consolidated statement of income for the three and six months ended June 30, 2022.
A sensitivity analysis of the impact on our variable rate corporate debt instruments to a hypothetical 100 basis point increase in short-term rates (LIBOR) for the three months ended March 31, 2023 would have resulted in an increase in interest expense of approximately $0.3 million.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Remediation of Material Weakness
During the quarter ended December
31, 2022, we identified a material weakness in certain internal controls over financial reporting related to ineffective process level controls over the review of the statement of cash flows as it relates to operating cash flows related to discontinued operations and operating and financing cash flows related to contingent consideration paid resulting from ineffective risk assessment associated with changes in our business operations related to the acquisition and disposition of businesses. To address this material weakness in internal control over financial reporting, management has performed an appropriate risk assessment over cash flow presentation, which includes assessment of controls designed to identify all accounts and transactions impacting the classification of cash flows related to the acquisition and disposition of businesses to ensure that the presentation in the statement of cash flows of transactions that do not relate to normal operations are complete
and accurate. During the quarter ended March 31, 2023, the Company successfully completed the testing necessary to conclude that the material weakness has been remediated.
Changes in Internal Control over Financial Reporting
Except for the changes related to the Company's remediation efforts described above, there has been no change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the quarter ended March 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are involved in litigation and disputes arising in the ordinary course of business. Although the outcome of litigation cannot be accurately predicted, based on evaluation of information presently available, our management does not currently believe that the ultimate resolution of these actions will have a material adverse effect on our financial condition, results of operations or cash flows.
Certain legal proceedings in which the Company is involved are discussed in Note 19
to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022 and Part I, Item 3 of the same Annual Report. Unless otherwise indicated therein, all proceedings discussed in the Annual Report remain outstanding.
Item 1A. Risk Factors
Before deciding to invest in our Company, in addition to the other information contained in our Annual Report on Form 10-K and other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2022, which could materially and adversely affect our business, financial condition, prospects, results of operations and cash flows. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. The risks described in our most recent Annual Report on Form 10-K, including our ability to access capital and macroeconomic conditions and geopolitical events, are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially affect our business, financial condition, results of operations and prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered
Sales of Equity Securities
The information required by Item 701 of Regulation S-K was previously disclosed (for the sale of Series A Preferred Stock) in the Company's Current Reports on Form 8-K, filed with the SEC on June 10, 2020 and June 30, 2020.
On November 12, 2020, we issued 857,630 shares of our common stock to three individuals and one trust in connection with the BacklotCars acquisition in the fourth quarter of 2020. We received $15 million as consideration for the sale of such securities. On October 14, 2021, we issued 1,953,124 shares of our common stock to two individuals and one trust
in connection with the CARWAVE acquisition in the fourth quarter of 2021. We received $30 million as consideration for the sale of such securities. The issuance of these securities was exempt from registration under the Securities Act, in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering and/or the private offering safe harbor provision of Rule 506 of Regulation D promulgated under the Securities Act.
Issuer Purchases of Equity Securities
The following table provides information about purchases by KAR Auction Services of its shares of common stock during the quarter ended March 31, 2023:
Period
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
(Dollars in millions)
January 1 - January 31
—
$
—
—
$
126.9
February
1 - February 28
—
—
—
126.9
March 1 - March 31
—
—
—
126.9
Total
—
$
—
—
(1)
In October 2019, the board of directors authorized a repurchase of up to $300 million of the Company’s outstanding common stock, par value $0.01 per share, through October 30, 2021. In October 2021, the board of directors authorized an extension of the Company's share repurchase program through December 31, 2022. On April 27, 2022, the board of directors authorized an increase in the size of the Company’s $300 million share repurchase program by an additional $200 million and an extension of the share repurchase program through December
31, 2023. Repurchases may be made in
the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases is subject to market and other conditions.
In reviewing the agreements included as exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company and its subsidiaries or other parties to the agreements.
The agreements included or incorporated by reference as exhibits to this report contain representations and warranties by each of the parties to
the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of "materiality" that are different from "materiality" under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.
Accordingly, these representations and warranties may not describe the actual
state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this report and the Company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov.
The
following materials from KAR Auction Services, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Income for the three months ended March 31, 2023 and 2022; (ii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022 (iii) the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022; (iv) the Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2023 and 2022;
(v) the Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022; and (vi) the Condensed Notes to Consolidated Financial Statements.
X
104
Cover
page Interactive Data File, formatted in iXBRL (contained in Exhibit 101).
Certain information has been excluded from this exhibit because it is
not material and would likely cause competitive harm to the registrant if publicly disclosed.
^
Portions of this exhibit have been redacted pursuant to a request for confidential treatment filed separately with the Secretary of the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act of 1933, as amended.
*
Denotes management contract
or compensation plan, contract or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
