OPENLANE, INC.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the "Selected Financial Data" and
the consolidated financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K 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-K 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," "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify
forward-looking statements. Such statements, including statements regarding our
future growth; anticipated cost savings, revenue increases, credit losses and
capital expenditures; dividend declarations and payments; common stock
repurchases; tax rates and assumptions; strategic initiatives, greenfields and
acquisitions; 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 Item 1A "Risk
Factors" of this Annual Report on Form 10-K. Some of these factors include:
• our ability to effectively maintain or update information and
technology systems;
• our ability to implement and maintain measures to protect against
cyber-attacks;
• significant current competition and the introduction of new competitors;
• competitive pricing pressures;
• our ability to successfully implement our business strategies or
realize expected cost savings and revenue enhancements;
• our ability to meet or exceed customers' expectations, as well as
develop and implement information systems responsive to customer
needs;
• business development activities, including greenfields, acquisitions
and integration of acquired businesses;
• costs associated with the acquisition of businesses or technologies;
• fluctuations in consumer demand for and in the supply of used, leased
and salvage vehicles and the resulting impact on auction sales
volumes, conversion rates and loan transaction volumes;
• any losses of key personnel;
• our ability to obtain land or renew/enter into new leases at
commercially reasonable rates;
• decreases in the number of used vehicles sold at physical auctions;
• changes in the market value of vehicles auctioned;
• trends in new and used vehicle sales and incentives, including
wholesale used vehicle pricing;
• the ability of consumers to lease or finance the purchase of new
and/or used vehicles;
• the ability to recover or collect from delinquent or bankrupt customers;
• economic conditions including fuel prices, commodity prices, foreign
exchange rates and interest rate fluctuations;
• trends in the vehicle remarketing industry;
• trends in the number of commercial vehicles being brought to auction,
in particular off-lease volumes;
• changes in the volume of vehicle production, including capacity
reductions at the major original equipment manufacturers;
• laws, regulations and industry standards, including changes in
regulations governing the sale of used vehicles and commercial lending
activities;
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• our ability to maintain our brand and protect our intellectual property;
• the costs of environmental compliance and/or the imposition of
liabilities under environmental laws and regulations;
• weather, including increased expenses as a result of catastrophic events;
• general business conditions;
• our substantial amount of debt;
• restrictive covenants in our debt agreements;
• our assumption of the settlement risk for vehicles sold;
• litigation developments;
• our self-insurance for certain risks;
• interruptions to service from our workforce;
• any impairment to our goodwill or other intangible assets;
• changes in effective tax rates;
• the taxable nature of the spin-off of our former salvage auction business;
• changes to accounting standards; and
• other risks described from time to time in our filings with theSEC , including the Quarterly Reports on Form 10-Q to be filed by us in 2020. 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. Our future growth depends on a variety of factors, including our ability to increase vehicle sold volumes and loan transaction volumes, expand our product and service offerings, including information systems development, acquire and integrate additional business entities, manage expansion, control costs in our operations, introduce fee increases, and retain our executive officers and key employees. We cannot predict whether our growth strategy will be successful. In addition, we cannot predict what portion of overall sales will be conducted through online auctions or other remarketing methods in the future and what impact this may have on our auction business. Overview We provide whole car auction services inNorth America andEurope . Our business is divided into two reportable business segments, each of which is an integral part of the vehicle remarketing industry: ADESA Auctions and AFC. • The ADESA Auctions segment serves a domestic and international customer base through physical and online auctions and through 74 whole car auction facilities inNorth America that are developed and strategically located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Through ADESA.com, powered byOpenlane technology, ADESA offers comprehensive private label remarketing solutions to
automobile
manufacturers, captive finance companies and other institutions to
offer vehicles via the Internet prior to arrival at the physical
auction. Vehicles at ADESA's auctions are typically sold bycommercial
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.
ADESA also provides value-added ancillary services including inbound
and outbound transportation logistics, reconditioning, vehicle
inspection and certification, titling, administrative andcollateral
recovery services. ADESA also includes TradeRev, an onlineautomotive
remarketing system where dealers can launch and participate in
real-time vehicle auctions at any time, ADESA RemarketingLimited, an
online whole car vehicle remarketing business in the UnitedKingdom
and ADESA Europe (formerly known as CarsOnTheWeb), an online wholesale
vehicle auction marketplace in Continental Europe.
• The AFC segment provides short-term, inventory-secured financing,
known as floorplan financing, primarily to independent usedvehicle
dealers. At December 31, 2019 , AFC conducted business at 121 locations
in the United States and Canada . The Company also sells vehicle
service contracts through Preferred Warranties, Inc. ("PWI").
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The holding company is maintained separately from the two reportable segments and includes expenses associated with the corporate offices, such as salaries, benefits and travel costs for our management team, certain human resources, information technology and accounting costs, and certain insurance, treasury, legal and risk management costs. Holding company interest expense includes the interest expense incurred on finance leases and the corporate debt structure. Intercompany charges relate primarily to interest on intercompany debt or receivables and certain administrative costs allocated by the holding company. Industry Trends Whole Car Used vehicles sold inNorth America through whole car auctions, including online only volumes and mobile application volumes, were approximately 11.5 million in 2018. Data for the whole car auction industry is collected by the NAAA through an annual survey. NAAA industry volumes for 2019 have not yet been released. The NAAA industry volumes collected by the annual survey do not include online only volumes or mobile application volumes (e.g.Openlane and TradeRev), but we have included these volumes in our totals. We estimate that used vehicle auction volumes inNorth America in 2019 were approximately 12 million vehicles, including online only volumes and mobile application volumes. We expect that used vehicle auction volumes inNorth America , including online only volumes and mobile application volumes, will be over 11.5 million units in 2020, 2021 and 2022. Our estimates are based on information from theBureau of Economic Analysis ,IHS Automotive , Kontos Total Market Estimates, NAAA's annual survey and management estimates. In addition to the traditional whole car auction market and online only venues described above, which we estimate have sold near 11 million units in each of the last few years, mobile applications, such as TradeRev, may provide an opportunity to expand our total addressable market for whole car by approximately 5 million units. We are incurring costs to grow TradeRev in theU.S. andCanada . TradeRev incurred operating losses of$71.5 million and$53.0 million for the year endedDecember 31, 2019 and 2018, respectively. Automotive Finance AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverages its local branches, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 16,100 dealers in 2019, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1,800,000 in 2019. Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, lack of access to consumer financing and increased competition resulting from consolidation in the used vehicle dealer industry. 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. Seasonality The volume of vehicles sold through our auctions 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. Used vehicle auction 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 auction volume as well as additional costs associated with the holidays and winter weather. Sources of Revenues and Expenses Our revenue is derived from auction fees and related services associated with our whole car auctions, and from dealer financing fees, interest income and other service revenue at AFC. Although auction revenues primarily include the auction services and related fees, our related receivables and payables include the gross value of the vehicles sold. 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. 33
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Results of Operations
Overview of Results of
Year Ended
December 31,
(Dollars in millions except per share amounts) 2019 2018
Revenues
Auction fees and services revenue$ 2,133.5 $ 1,985.1 Purchased vehicle sales 295.5 116.8 Finance-related revenue 352.9 340.9 Total revenues 2,781.9 2,442.8 Cost of services* 1,617.1 1,321.5 Gross profit* 1,164.8 1,121.3 Selling, general and administrative 662.0
608.8
Depreciation and amortization 188.7 172.4 Operating profit 314.1 340.1 Interest expense 189.5 191.2 Other income, net (7.7 ) (3.0 ) Loss on extinguishment of debt 2.2 -
Income from continuing operations before income taxes 130.1 151.9 Income taxes
37.7 34.3
Net income from continuing operations 92.4
117.6
Net income from discontinued operations 96.1
210.4
Net income$ 188.5 $
328.0
Net income from continuing operations per share Basic$ 0.70 $ 0.88 Diluted$ 0.70 $ 0.87 * Exclusive of depreciation and amortization Overview For the year endedDecember 31, 2019 , we had revenue of$2,781.9 million compared with revenue of$2,442.8 million for the year endedDecember 31, 2018 , an increase of 14%. Businesses acquired accounted for an increase in revenue of$193.0 million or 7% of revenue. 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 increased$16.3 million , or 9%, to$188.7 million for the year endedDecember 31, 2019 , compared with$172.4 million for the year endedDecember 31, 2018 . The increase in depreciation and amortization was primarily the result of certain assets placed in service over the last twelve months and depreciation and amortization for the assets of businesses acquired in 2019. Interest Expense Interest expense decreased$1.7 million , or 1%, to$189.5 million for the year endedDecember 31, 2019 , compared with$191.2 million for the year endedDecember 31, 2018 . The decrease was primarily attributable to a decrease of approximately$447.5 million in the average outstanding balance of corporate debt for the year endedDecember 31, 2019 compared with the year endedDecember 31, 2018 , resulting from the pay down of debt of approximately$1.3 billion in connection with the spin-off of IAA onJune 28, 2019 and a net increase in term loan debt of approximately$0.5 billion in connection with the debt refinancing onSeptember 19, 2019 , partially offset by an increase in the weighted average interest rate for the same period of approximately 0.3%. 34
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Loss on Extinguishment of Debt InSeptember 2019 , we amended our Credit Agreement and recorded a$2.2 million pretax charge primarily resulting from the write-off of unamortized debt issue costs associated with Term Loan B-4 and Term Loan B-5. Income Taxes We had an effective tax rate of 29.0% for the year endedDecember 31, 2019 , compared with an effective tax rate of 22.6% for the year endedDecember 31, 2018 . The lower effective tax rate for the year endedDecember 31, 2018 was the result of favorable state tax law changes and higher deductions for stock compensation in 2018. Net Income from Discontinued Operations OnJune 28, 2019 , the Company completed the separation ("Separation") of its salvage auction business, IAA, through a spin-off, creating a new independent publicly traded salvage auction company. As such, the financial results of IAA have been accounted for as discontinued operations for all periods presented. For the year endedDecember 31, 2019 and 2018, the Company's financial statements included income from discontinued operations of$96.1 million and$210.4 million , respectively. The operating results included one-time transaction costs of approximately$31.3 million and$8.1 million for the year endedDecember 31, 2019 and 2018, respectively, in connection with the Separation of the two companies. These costs consisted of consulting and professional fees associated with preparing for and executing the spin-off. For a further discussion, reference Note 4 of the notes to the consolidated financial statements. Impact of Foreign Currency The strengthening of theU.S. dollar has impacted the reporting of our Canadian operations inU.S. dollars. For the year endedDecember 31, 2019 , fluctuations in the Canadian exchange rate decreased revenue by$7.5 million , operating profit by$1.6 million , net income by$0.6 million and net income per diluted share by less than$0.01 . ADESA Results Year EndedDecember 31 , (Dollars in millions, except per vehicle amounts) 2019
2018
Auction fees and services revenue$ 2,133.5 $ 1,985.1 Purchased vehicle sales 295.5 116.8 Total ADESA revenue 2,429.0 2,101.9 Cost of services* 1,520.7 1,230.8 Gross profit* 908.3 871.1 Selling, general and administrative 494.3
435.8
Depreciation and amortization 149.9 127.5 Operating profit$ 264.1 $ 307.8 Vehicles sold 3,784,000 3,472,000 Institutional vehicles sold in North America 2,653,000
2,401,000
Dealer consignment vehicles sold in
1,027,000
Vehicles sold inEurope 113,000
44,000
Percentage of vehicles sold online 58 %
54 %
Conversion rate at North American physical auctions 62.8 %
61.6 % Physical auction revenue per vehicle sold, excluding purchased vehicles
$ 884 $ 844 Online only revenue per vehicle sold, excluding purchased vehicles$ 149 $ 121
* Exclusive of depreciation and amortization
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Revenue
Revenue from ADESA increased$327.1 million , or 16%, to$2,429.0 million for the year endedDecember 31, 2019 , compared with$2,101.9 million for the year endedDecember 31, 2018 . The increase in revenue was the result of an increase in the number of vehicles sold and increased proceeds from purchased vehicle sales, partially offset by a decrease in average revenue per vehicle sold, excluding purchased vehicle sales. Businesses acquired in the last 12 months accounted for an increase in revenue of$193.0 million , of which$131.7 million was included in "Purchased vehicle sales." The increase in revenue included the impact of a decrease in revenue of$6.9 million due to fluctuations in the Canadian exchange rate. The increase in vehicles sold was primarily attributable to an 11% increase in institutional volume (10% increase excluding acquisitions), including vehicles sold on our online only platform, as well as a 3% increase in dealer consignment units sold for the year endedDecember 31, 2019 compared with the year endedDecember 31, 2018 . Online sales volume for ADESA represented approximately 58% of the total vehicles sold in 2019, compared with approximately 54% in 2018. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location; (ii) online solutions that offer vehicles for sale while in transit to auction locations; (iii) vehicles sold on the TradeRev platform; (iv) vehicle sales inEurope , including units sold by COTW; (v) simultaneously broadcasting video and audio of the physical auctions to online bidders (ADESA Simulcast); and (vi) bulletin-board or real-time online auctions (DealerBlock®). Online only sales, which do not include vehicles sold on ADESA Simulcast or DealerBlock, accounted for approximately 73% of ADESA's North American online sales volume. ADESA sold approximately 1,533,000 (including approximately 157,000 from TradeRev) and 1,304,000 (including approximately 117,000 from TradeRev) vehicles through its North American online only offerings in 2019 and 2018, respectively. For the year endedDecember 31, 2019 , dealer consignment vehicles represented approximately 40% of used vehicles sold at ADESA physical auction locations, compared with approximately 42% for the year endedDecember 31, 2018 . Vehicles sold at physical auction locations increased approximately 1% in 2019, compared with 2018. The used vehicle conversion percentage at North American physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, increased to 62.8% for the year endedDecember 31, 2019 , compared with 61.6% for the year endedDecember 31, 2018 . Physical auction revenue per vehicle sold increased$40 , or 5%, to$884 for the year endedDecember 31, 2019 , compared with$844 for the year endedDecember 31, 2018 . Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services and excludes purchased vehicle sales. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in lower margin ancillary and other related services revenue and auction fees related to higher average transaction prices, partially offset by a decrease in physical auction revenue per vehicle sold of$3 due to fluctuation in the Canadian exchange rate. Online only auction revenue per vehicle sold increased$96 to$235 for the year endedDecember 31, 2019 , compared with$139 for the year endedDecember 31, 2018 . The increase in online only auction revenue per vehicle sold was attributable to an increase in purchased vehicle sales associated with the ADESA Assurance Program, the increase in TradeRev revenue and the inclusion of CarsOnTheWeb sales. The entire selling price of the purchased vehicles sold at auction is recorded as revenue ("Purchased vehicle sales"). Excluding purchased vehicle sales, online only revenue per vehicle would have been$149 and$121 for the year endedDecember 31, 2019 and 2018, respectively. The$28 increase in online only revenue per vehicle was attributable to increased revenue per vehicle for units sold on the TradeRev platform and the addition of CarsOnTheWeb. Gross Profit For the year endedDecember 31, 2019 , gross profit for ADESA increased$37.2 million , or 4%, to$908.3 million , compared with$871.1 million for the year endedDecember 31, 2018 . Gross profit for ADESA was 37.4% of revenue for the year endedDecember 31, 2019 , compared with 41.4% of revenue for the year endedDecember 31, 2018 . Gross profit as a percentage of revenue decreased for the year endedDecember 31, 2019 as compared with the year endedDecember 31, 2018 as a result of an increase in purchased vehicle sales primarily related to the acquisition of COTW and increased activity under ADESA Assurance. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 42.6% and 43.9% for the year endedDecember 31, 2019 and 2018, respectively. The remaining decrease in gross profit as a percentage of revenue relates to growth in lower margin ancillary and related services. Businesses acquired in the last 12 months accounted for an increase in cost of services of$164.8 million for the year endedDecember 31, 2019 . For the year endedDecember 31, 2019 , High Tech Locksmiths, a subsidiary of ADESA, incurred an inventory loss of approximately$5.4 million . InDecember 2019 , the Company recovered approximately$4 million related to expenses incurred in previous quarters. 36
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Selling, General and Administrative Selling, general and administrative expenses for the ADESA segment increased$58.5 million , or 13%, to$494.3 million for the year endedDecember 31, 2019 , compared with$435.8 million for the year endedDecember 31, 2018 , primarily due to increases in costs associated with TradeRev aggregating$25.4 million , acquisitions of$21.2 million , incentive-based compensation of$6.6 million , information technology costs of$6.1 million , severance of$3.7 million , professional fees of$1.7 million , benefit related expense of$1.7 million , telecom costs of$1.0 million and other miscellaneous expenses aggregating$1.3 million , partially offset by a decrease in compensation expense of$3.9 million , fluctuations in the Canadian exchange rate of$2.0 million , and decreases in marketing costs of$1.6 million , stock-based compensation of$1.5 million and travel expenses of$1.2 million . AFC Results Year EndedDecember 31 ,
(Dollars in millions except volumes and per loan amounts) 2019
2018 Finance-related revenue Interest and fee income$ 342.1 $ 327.3 Other revenue 10.9 13.1 Provision for credit losses (35.3 ) (32.9 ) Warranty contract revenue 35.2 33.4 Total AFC revenue 352.9 340.9 Cost of services* 96.4 90.7 Gross profit* 256.5 250.2 Selling, general and administrative 25.6
30.7
Depreciation and amortization 10.3 16.0 Operating profit$ 220.6 $ 203.5 Loan transactions 1,783,000 1,760,000 Revenue per loan transaction, excluding "Warranty contract revenue"$ 178 $ 175 * Exclusive of depreciation and amortization Revenue For the year endedDecember 31, 2019 , AFC revenue increased$12.0 million , or 4%, to$352.9 million , compared with$340.9 million for the year endedDecember 31, 2018 . The increase in revenue was the result of a 2% increase in revenue per loan transaction and a 1% increase in loan transactions. The increase in revenue included the impact of a decrease in revenue of$0.6 million due to fluctuations in the Canadian exchange rate. Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased$3 , or 2%, primarily as a result of an increase in interest yield as a result of prime rate increases and an increase in average loan values, partially offset by a decrease in floorplan fee per unit and an increase in provision for credit losses for the year endedDecember 31, 2019 . Revenue per loan transaction excludes "Warranty contract revenue." The provision for credit losses remained constant at 1.7% of the average managed receivables for the year endedDecember 31, 2019 and 2018. The provision for credit losses is expected to be under 2%, annually, of the average managed receivables balance. However, the actual losses in any particular quarter could deviate from this range. Gross Profit For the year endedDecember 31, 2019 , gross profit for the AFC segment increased$6.3 million , or 3%, to$256.5 million , or 72.7% of revenue, compared with$250.2 million , or 73.4% of revenue, for the year endedDecember 31, 2018 . The decrease in gross profit as a percent of revenue was primarily the result of a 6% increase in cost of services. The increase in cost of services was the result of increases in PWI expenses of$3.7 million , compensation expense of$2.4 million , travel expenses of$1.6 million and other miscellaneous expenses aggregating$0.5 million , partially offset by decreases in lot checks of$1.7 million and incentive-based compensation of$0.8 million . 37
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Selling, General and Administrative Selling, general and administrative expenses at AFC decreased$5.1 million , or 17%, to$25.6 million for the year endedDecember 31, 2019 , compared with$30.7 million for the year endedDecember 31, 2018 primarily as a result of decreases in travel expenses of$1.7 million , incentive-based compensation of$1.6 million , compensation expense of$1.1 million and stock-based compensation expense of$0.8 million , partially offset by other miscellaneous expenses aggregating$0.1 million . Holding Company Results Year Ended December 31, (Dollars in millions) 2019 2018
Selling, general and administrative
28.5 28.9
Operating loss $ (170.6 ) $ (171.2 )
Selling, General and Administrative
For the year ended December 31, 2019 , selling, general and administrative
expenses at the holding company decreased $0.2 million , or less than 1%, to
$142.1 million , compared with $142.3 million for the year ended December 31,
2018 . For the year ended December 31, 2019 compared with the year ended
December 31, 2018 , there were decreases in incentive-based compensation of $5.7
million , compensation expense of $4.3 million , professional fees of $1.3 million
and other miscellaneous expenses aggregating $3.9 million , partially offset by
increases in severance of $5.7 million , information technology costs of $5.1
million , stock-based compensation of $2.2 million and telecom costs of $2.0
million .
Overview of Results of KAR Auction Services, Inc. for the Year Ended
December 31, 2017 :
An overview of the results of KAR Auction Services, Inc. for the year ended
December 31, 2017 was included in Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our Annual Report
on Form 10-K for the year ended December 31, 2018 , as filed with the SEC on
February 21, 2019 .
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Overview of Results of
Three Months Ended
December 31 ,
(Dollars in millions except per share amounts) 2019 2018
Revenues
Auction fees and services revenue$ 504.0 $ 475.3 Purchased vehicle sales 79.3 33.2 Finance-related revenue 88.0 85.3 Total revenues 671.3 593.8 Cost of services* 394.9 332.3 Gross profit* 276.4 261.5 Selling, general and administrative 164.7 148.7 Depreciation and amortization 50.1 42.6 Operating profit 61.6 70.2 Interest expense 39.5 52.5 Other (income) expense, net (2.5 ) 0.8
Income from continuing operations before income taxes 24.6 16.9 Income taxes
9.3 1.8
Net income from continuing operations 15.3
15.1
Net income from discontinued operations 4.5
52.2
Net income$ 19.8 $
67.3
Net income from continuing operations per share Basic$ 0.12 $ 0.11 Diluted$ 0.12 $ 0.11 * Exclusive of depreciation and amortization Overview For the three months endedDecember 31, 2019 , we had revenue of$671.3 million compared with revenue of$593.8 million for the three months endedDecember 31, 2018 , an increase of 13%. Businesses acquired accounted for an increase in revenue of$55.1 million or 8% of revenue. 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 increased$7.5 million , or 18%, to$50.1 million for the three months endedDecember 31, 2019 , compared with$42.6 million for the three months endedDecember 31, 2018 . The increase in depreciation and amortization was primarily the result of certain assets placed in service over the last twelve months and depreciation and amortization for the asset of businesses acquired in 2019. Interest Expense Interest expense decreased$13.0 million , or 25%, to$39.5 million for the three months endedDecember 31, 2019 , compared with$52.5 million for the three months endedDecember 31, 2018 . The decrease was primarily attributable to a decrease of approximately$793.8 million in the average outstanding balance of corporate debt for the three months endedDecember 31, 2019 compared with the three months endedDecember 31, 2018 , resulting from the pay down of debt of approximately$1.3 billion in connection with the spin-off of IAA onJune 28, 2019 , as well as a decrease in the weighted average interest rate for the same period of approximately 0.3%. In addition, there was a decrease in interest expense at AFC of$1.2 million , which resulted from a decrease in incremental interest rates for the three months endedDecember 31, 2019 , as compared with the three months endedDecember 31, 2018 . 39
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Income Taxes We had an effective tax rate of 37.8% for the three months endedDecember 31, 2019 , compared with an effective tax rate of 10.7% for the three months endedDecember 31, 2018 . Excluding the effect of the discrete items, our effective tax rate for the three months endedDecember 31, 2019 and 2018 would have been 32.7% and 29.6%, respectively. Net Income from Discontinued Operations OnJune 28, 2019 , the Company completed the Separation of its salvage auction business, IAA, through a spin-off, creating a new independent publicly traded salvage auction company. As such, the financial results of IAA have been accounted for as discontinued operations for all periods presented. For the three months endedDecember 31, 2019 and 2018, the Company's financial statements included income from discontinued operations of$4.5 million and$52.2 million , respectively. The$4.5 million recorded for the three months endedDecember 31, 2019 related to income taxes. For further discussion, reference Note 4 of the notes to the consolidated financial statements. Impact of Foreign Currency For the three months endedDecember 31, 2019 , the average Canadian exchange rate was consistent with the rate for the three months endedDecember 31, 2018 . ADESA Results Three Months EndedDecember 31 , (Dollars in millions, except per vehicle amounts) 2019
2018
Auction fees and services revenue$ 504.0 $ 475.3 Purchased vehicle sales 79.3 33.2 Total ADESA revenue 583.3 508.5 Cost of services* 370.9 309.8 Gross profit* 212.4 198.7 Selling, general and administrative 124.1
106.9
Depreciation and amortization 39.7 33.1 Operating profit$ 48.6 $ 58.7 Vehicles sold 887,000 811,000 Institutional vehicles sold in North America 623,000 568,000 Dealer consignment vehicles sold in North America 234,000 233,000 Vehicles sold in Europe 30,000 10,000 Percentage of vehicles sold online 59 % 54 % Conversion rate at North American physical auctions 58.4 %
58.5 % Physical auction revenue per vehicle sold, excluding purchased vehicles
$ 886 $ 868 Online only revenue per vehicle sold, excluding purchased vehicles$ 155 $ 122 * Exclusive of depreciation and amortization Revenue Revenue from ADESA increased$74.8 million , or 15%, to$583.3 million for the three months endedDecember 31, 2019 , compared with$508.5 million for the three months endedDecember 31, 2018 . The increase in revenue was the result of an increase in the number of vehicles sold and increased proceeds from purchased vehicle sales, partially offset by a decrease in average revenue per vehicle, excluding purchased vehicle sales. Businesses acquired in the last 12 months accounted for an increase in revenue of$55.1 million , of which$37.7 million was included in "Purchased vehicle sales." The increase in vehicles sold was primarily attributable to an 11% increase in institutional volume (9% increase excluding acquisitions), including vehicles sold on our online only platform, as well as a 6% increase in dealer consignment units sold for the three months endedDecember 31, 2019 compared with the three months endedDecember 31, 2018 . Online sales volume for ADESA represented approximately 59% of the total vehicles sold in the fourth quarter of 2019, compared with approximately 54% in the fourth quarter of 2018. "Online sales" includes the following: (i) selling vehicles directly from a 40
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dealership or other interim storage location; (ii) online solutions that offer vehicles for sale while in transit to auction locations; (iii) vehicles sold on the TradeRev platform; (iv) vehicle sales inEurope , including units sold by COTW; (v) simultaneously broadcasting video and audio of the physical auctions to online bidders (ADESA Simulcast); and (vi) bulletin-board or real-time online auctions (DealerBlock®). Online only sales, which do not include vehicles sold on ADESA Simulcast or DealerBlock, accounted for approximately 73% of ADESA's North American online sales volume. ADESA sold approximately 355,000 (including 38,000 from TradeRev) and 306,000 (including 31,000 from TradeRev) vehicles through its North American online only offerings in the fourth quarter of 2019 and 2018, respectively. For the three months endedDecember 31, 2019 , dealer consignment vehicles represented approximately 39% of used vehicles sold at ADESA physical auction locations, compared with approximately 40% for the three months endedDecember 31, 2018 . Vehicles sold at physical auction locations increased approximately 1% in the fourth quarter of 2019, compared with the fourth quarter of 2018. The used vehicle conversion percentage at North American physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, decreased to 58.4% for the three months endedDecember 31, 2019 , compared with 58.5% for the three months endedDecember 31, 2018 . Physical auction revenue per vehicle sold increased$18 , or 2%, to$886 for the three months endedDecember 31, 2019 , compared with$868 for the three months endedDecember 31, 2018 . Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services and excludes the sale of purchased vehicles. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in lower margin ancillary and other related services revenue and auction fees related to higher average transaction prices. Online only auction revenue per vehicle sold increased$123 to$259 for the three months endedDecember 31, 2019 , compared with$136 for the three months endedDecember 31, 2018 . The increase in online only auction revenue per vehicle sold was attributable to an increase in purchased vehicle sales associated with the ADESA Assurance Program, the increase in TradeRev revenue and the inclusion of CarsOnTheWeb sales. The entire selling price of the purchased vehicles sold at auction is recorded as revenue ("Purchased vehicle sales"). Excluding purchased vehicle sales, online only revenue per vehicle would have been$155 and$122 for the three months endedDecember 31, 2019 and 2018, respectively. The$33 increase in online only revenue per vehicle was attributable to increased revenue per vehicle for units sold on the TradeRev platform and the addition of CarsOnTheWeb. Gross Profit For the three months endedDecember 31, 2019 , gross profit for ADESA increased$13.7 million , or 7%, to$212.4 million , compared with$198.7 million for the three months endedDecember 31, 2018 . Gross profit for ADESA was 36.4% of revenue for the three months endedDecember 31, 2019 , compared with 39.1% of revenue for the three months endedDecember 31, 2018 . Gross profit as a percentage of revenue decreased for the three months endedDecember 31, 2019 as compared with the three months endedDecember 31, 2018 as a result of an increase in purchased vehicle sales primarily related to the acquisition of COTW and increased activity under ADESA Assurance. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 42.1% and 41.8% for the three months endedDecember 31, 2019 and 2018, respectively. Businesses acquired in the last 12 months accounted for an increase in cost of services of$47.1 million for the three months endedDecember 31, 2019 . In addition, inDecember 2019 , the Company recovered approximately$4 million related to expenses incurred at High Tech Locksmiths in previous quarters. Selling, General and Administrative Selling, general and administrative expenses for the ADESA segment increased$17.2 million , or 16%, to$124.1 million for the three months endedDecember 31, 2019 , compared with$106.9 million for the three months endedDecember 31, 2018 , primarily due to increases in incentive-based compensation of$6.1 million , costs associated with TradeRev aggregating$5.6 million , acquisitions of$4.7 million , severance of$3.4 million and other miscellaneous expenses aggregating$1.3 million , partially offset by decreases in compensation expense of$2.6 million and professional fees of$1.3 million . 41
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AFC Results
Three Months Ended
December 31,
(Dollars in millions except volumes and per loan amounts) 2019 2018
Finance-related revenue
Interest and fee income $ 86.0 $ 84.2
Other revenue 2.8 3.5
Provision for credit losses (9.8 ) (10.8 )
Warranty contract revenue 9.0 8.4
Total AFC revenue 88.0 85.3
Cost of services* 24.0 22.5
Gross profit* 64.0 62.8
Selling, general and administrative 6.1 7.1
Depreciation and amortization 2.7 2.4 Operating profit$ 55.2 $ 53.3 Loan transactions 443,000 428,000 Revenue per loan transaction, excluding "Warranty contract revenue"$ 178 $ 180 * Exclusive of depreciation and amortization Revenue For the three months endedDecember 31, 2019 , AFC revenue increased$2.7 million , or 3%, to$88.0 million , compared with$85.3 million for the three months endedDecember 31, 2018 . The increase in revenue was the result of a 4% increase in loan transactions, partially offset by a 1% decrease in revenue per loan transaction. Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased$2 , or 1%, primarily as a result of a decrease in interest yield as a result of prime rate changes, a decrease in floorplan fee per unit and a decrease in average portfolio duration, partially offset by a decrease in provision for credit losses for the three months endedDecember 31, 2019 . Revenue per loan transaction excludes "Warranty contract revenue." The provision for credit losses decreased to 1.9% of the average managed receivables for the three months endedDecember 31, 2019 from 2.2% for the three months endedDecember 31, 2018 . The provision for credit losses is expected to be under 2%, 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 endedDecember 31, 2019 , gross profit for the AFC segment increased$1.2 million , or 2%, to$64.0 million , or 72.7% of revenue, compared with$62.8 million , or 73.6% of revenue, for the three months endedDecember 31, 2018 , primarily as a result of a 3% increase in revenue, partially offset by a 7% increase in cost of services. The increase in cost of services was the result of increases in PWI expenses of$1.0 million , compensation expense of$0.6 million and travel expenses of$0.4 million , partially offset by a decrease in collection expenses of$0.5 million . Selling, General and Administrative Selling, general and administrative expenses at AFC decreased$1.0 million , or 14%, to$6.1 million for the three months endedDecember 31, 2019 , compared with$7.1 million for the three months endedDecember 31, 2018 . The decrease in selling, general and administrative expenses was primarily attributable to decreases in travel expenses of$0.5 million , incentive-based compensation of$0.4 million and other miscellaneous expenses aggregating$0.1 million . 42
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Holding Company Results
Three Months Ended
December 31,
(Dollars in millions) 2019 2018
Selling, general and administrative
7.7 7.1
Operating loss $ (42.2 ) $ (41.8 )
Selling, General and Administrative
For the three months ended December 31, 2019 , selling, general and
administrative expenses at the holding company decreased $0.2 million , or 1%, to
$34.5 million , compared with $34.7 million for the three months ended
December 31, 2018 . For the three months ended December 31, 2019 compared with
the three months ended December 31, 2018 , there were decreases in professional
fees of $2.7 million , incentive-based compensation of $1.8 million , compensation
expense of $1.7 million , medical expenses of $0.8 million and other
miscellaneous expenses aggregating $0.4 million , partially offset by increases
in severance of $4.4 million , information technology costs of $1.7 million and
stock-based compensation of $1.1 million .
LIQUIDITY AND CAPITAL RESOURCES
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.
December 31,
(Dollars in millions) 2019 2018
Cash and cash equivalents $ 507.6 $ 277.1
Restricted cash 53.3 27.6
Working capital 726.8 450.3Amounts available under revolving credit facility* 325.0 350.0 Cash flow from operations for the year ended 380.8 438.6
* There were related outstanding letters of credit totaling approximately
respectively, which reduced the amount available for borrowings under the
revolving credit facility.
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. Due to the decentralized nature of the business, payments for most vehicles purchased are received at each auction and branch. Most of the financial institutions place a temporary hold on the availability of the funds deposited that generally can range up to two business days, resulting in cash in our accounts and on our balance sheet that is unavailable for use until it is made available by the various financial institutions. There are outstanding checks (book overdrafts) to sellers and vendors included in current liabilities. Because a portion of these outstanding checks for operations in theU.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 auctions held near period end. Approximately$153.2 million of available cash was held by our foreign subsidiaries atDecember 31, 2019 . If funds held by our foreign subsidiaries were to be repatriated, state and local income tax expense and foreign withholding tax expense would need to be recognized, net of any applicable foreign tax credits. We expect any applicable taxes to be less than$8 million . 43
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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." InFebruary 2018 , the Company announced that its board of directors had approved a plan to pursue the separation of its salvage auction business, IAA, through a spin-off. As part of the spin-off, the Company raised$1.3 billion in debt, consisting of$800 million in term loans and$500 million aggregate principal amount of 5.50% Senior Notes. This debt was transferred to IAA, upon which IAA paid a cash dividend to KAR of approximately$1,278.0 million . The dividend amount was used to prepay a portion of KAR's term loans, as further discussed in the Credit Facilities discussion below. Credit Facilities InJune 2019 , the Company prepaid approximately$518.6 million and$759.4 million of Term Loan B-4 and Term Loan B-5, respectively, with cash received from IAA in connection with the Separation. OnSeptember 19, 2019 , we entered into the Third Amendment Agreement (the "Third Amendment") to the Credit Agreement. The Third Amendment provided for, among other things, (i) the refinancing of the existing Term Loan B-4 and Term Loan B-5 with the new Term Loan B-6, (ii) repayment of the 2017 Revolving Credit Facility and (iii) the$325 million Revolving Credit Facility. The Credit Facility 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 swing line loans. Term Loan B-6 was issued at a discount of$2.4 million and the discount is being amortized using the effective interest method to interest expense over the term of the loan. Term Loan B-6 is payable in quarterly installments equal to 0.25% of the original aggregate principal amount. Such payments commenced onDecember 31, 2019 , with the balance payable at the maturity date. As set forth in the Credit Agreement, the Tranche B-6 Term Loans bear interest at an adjusted LIBOR rate plus 2.25% or at the Company's election, Base Rate (as defined in the Credit Agreement) plus 1.25%. 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, 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. The rate on Term Loan B-6 was 4.06% atDecember 31, 2019 . OnDecember 31, 2019 ,$947.6 million was outstanding on Term Loan B-6 and there were no borrowings on the Revolving Credit Facility. In addition, we had related outstanding letters of credit in the aggregate amount of$27.4 million and$32.9 million atDecember 31, 2019 andDecember 31, 2018 , respectively, which reduce the amount available for borrowings under the revolving credit facility. Our Canadian operations also have aC$8 million line of credit which was undrawn atDecember 31, 2019 . However, there were related letters of credit outstanding totaling approximatelyC$1.0 million atDecember 31, 2019 , which reduce amounts available under the Canadian line of credit. In addition, our European operations have lines of credit aggregating$33.6 million (€30 million) of which$19.3 million was drawn atDecember 31, 2019 . The obligations of the Company under the Credit Facility 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 perfected 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) perfected 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 certain restrictive loan covenants, including, among others, a financial covenant requiring that a Consolidated Senior Secured Net Leverage Ratio be satisfied as of the last day of each fiscal quarter if revolving loans are outstanding, and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, consummate change of control transactions, dispose of assets, pay dividends, make investments and engage in certain transactions with affiliates. The Consolidated Senior Secured Net Leverage Ratio is calculated as total senior secured debt divided by the last four quarters consolidated Adjusted EBITDA. Senior secured net debt includes term loan borrowings, revolving loans and finance lease liabilities less available cash as defined in the Credit Agreement. Consolidated Adjusted EBITDA is EBITDA (earnings before 44
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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. 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 our lenders to declare all amounts borrowed immediately due and payable. The Consolidated Senior Secured Net Leverage Ratio is required to be met when there are revolving loans outstanding under our Credit Agreement. For the quarter endedDecember 31, 2019 , the Consolidated Senior Secured Net Leverage Ratio could not exceed 3.5. Our Consolidated Senior Secured Net Leverage Ratio, including finance lease obligations of$27.3 million , was 1.7 atDecember 31, 2019 . In addition, the Credit Agreement and the indenture governing our senior notes (see Note 12, "Long-Term Debt" for additional information) contain certain financial and operational restrictions that limit our ability to pay dividends and other distributions, make certain acquisitions or investments, incur indebtedness, grant liens and sell assets. 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 atDecember 31, 2019 . 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 short and long-term operating needs for the foreseeable future. In addition, we believe the previously mentioned sources of liquidity will be sufficient to fund our capital requirements, debt service payments, announced acquisitions and dividends for the next twelve months. Senior Notes OnMay 31, 2017 , we issued$950 million of 5.125% senior notes dueJune 1, 2025 . The Company pays interest on the senior notes semi-annually in arrears onJune 1 andDecember 1 of each year, which commenced onDecember 1, 2017 . We may redeem the senior notes, in whole or in part, at any time prior toJune 1, 2020 at a redemption price equal to 100% of the principal amount plus a make-whole premium and thereafter at a premium that declines ratably to par in 2023. The senior notes are guaranteed by the Subsidiary Guarantors. Securitization Facilities AFC sells the majority of itsU.S. dollar denominated finance receivables on a revolving basis and without recourse toAFC Funding Corporation . A securitization agreement allows for the revolving sale byAFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires onJanuary 28, 2022 .AFC Funding Corporation had committed liquidity of$1.70 billion forU.S. finance receivables atDecember 31, 2019 . We also have an agreement for the securitization of AFCI's receivables, which expires onJanuary 28, 2022 . AFCI's committed facility is provided through a third-party conduit (separate from theU.S. facility) and wasC$175 million atDecember 31, 2019 . The receivables sold pursuant to both theU.S. and Canadian securitization agreements are accounted for as secured borrowings. AFC managed total finance receivables of$2,115.2 million and$2,014.8 million atDecember 31, 2019 andDecember 31, 2018 , respectively. AFC's allowance for losses was$15.0 million and$14.0 million atDecember 31, 2019 andDecember 31, 2018 , respectively. As ofDecember 31, 2019 andDecember 31, 2018 ,$2,061.6 million and$1,973.2 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$1,461.2 million and$1,445.3 million of obligations collateralized by finance receivables atDecember 31, 2019 andDecember 31, 2018 , respectively. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreement. There were unamortized securitization issuance costs of approximately$13.2 million and$19.4 million atDecember 31, 2019 andDecember 31, 2018 , respectively. After the occurrence of a termination event, as defined in theU.S. securitization agreement, the banks may, and could, cause the stock ofAFC Funding Corporation to be transferred to 45
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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. AtDecember 31, 2019 , we were in compliance with the covenants in the securitization agreements. EBITDA and Adjusted EBITDA 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 inthe 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 net income (loss) from continuing operations for the periods presented: Three Months Ended December 31, 2019 (Dollars in millions) ADESA AFC Corporate Consolidated Net income (loss) from continuing operations$ 35.0 $ 31.4 $ (51.1 ) $ 15.3 Add back: Income taxes 13.3 9.7 (13.7 ) 9.3 Interest expense, net of interest income 0.5 15.1 22.7 38.3 Depreciation and amortization 39.7 2.7 7.7 50.1 Intercompany interest (1.8 ) (1.0 ) 2.8 - EBITDA 86.7 57.9 (31.6 ) 113.0 Intercompany charges 3.1 - (3.1 ) - Non-cash stock-based compensation 2.2 0.4 2.6 5.2 Acquisition related costs 1.7 - 0.2 1.9 Securitization interest - (13.0 ) - (13.0 ) Loss on asset sales 0.4 - - 0.4 Severance 4.9 0.3 4.4 9.6 Foreign currency (gains)/losses (0.4 ) - 0.7 0.3 Other 3.8 - 0.8 4.6 Total addbacks 15.7 (12.3 ) 5.6 9.0 Adjusted EBITDA$ 102.4 $ 45.6 $ (26.0 ) $ 122.0 46
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Three Months Ended December 31, 2018
(Dollars in millions) ADESA AFC Corporate Consolidated
Net income (loss) from continuing
operations $ 38.1 $ 29.5 $ (52.5 ) $ 15.1
Add back:
Income taxes 11.1 8.7 (18.0 ) 1.8
Interest expense, net of interest
income 0.1 16.3 34.8 51.2
Depreciation and amortization 33.1 2.4 7.1 42.6
Intercompany interest 4.2 (1.1 ) (3.1 ) -
EBITDA 86.6 55.8 (31.7 ) 110.7
Intercompany charges 4.3 - (4.3 ) -
Non-cash stock-based compensation 2.4 0.6 1.5 4.5
Acquisition related costs 1.1 - 1.0 2.1
Securitization interest - (14.5 ) - (14.5 )
Loss on asset sales 0.4 - - 0.4
Severance 1.7 0.1 0.1 1.9
Foreign currency losses 1.9 - 1.8 3.7
IAA allocated costs - - 1.3 1.3
Other 0.4 - - 0.4
Total addbacks 12.2 (13.8 ) 1.4 (0.2 )
Adjusted EBITDA $ 98.8 $ 42.0 $ (30.3 ) $ 110.5
Year Ended December 31, 2019
(Dollars in millions) ADESA AFC Corporate Consolidated
Net income (loss) from continuing
operations $ 174.3 $ 120.0 $ (201.9 ) $ 92.4
Add back:
Income taxes 67.3 41.9 (71.5 ) 37.7
Interest expense, net of interest
income 2.3 63.7 120.4 186.4
Depreciation and amortization 149.9 10.3 28.5 188.7
Intercompany interest 11.7 (5.1 ) (6.6 ) -
EBITDA 405.5 230.8 (131.1 ) 505.2
Intercompany charges 13.5 - (13.5 ) -
Non-cash stock-based compensation 7.8 1.6 10.9 20.3
Loss on extinguishment of debt - - 2.2 2.2
Acquisition related costs 6.5 - 5.7 12.2
Securitization interest - (54.9 ) - (54.9 )
Loss on asset sales 2.1 - - 2.1
Severance 9.1 0.4 5.8 15.3
Foreign currency (gains)/losses (1.5 ) - 0.8 (0.7 )
IAA allocated costs - - 2.3 2.3
Other 5.0 - 1.0 6.0
Total addbacks 42.5 (52.9 ) 15.2 4.8
Adjusted EBITDA $ 448.0 $ 177.9 $ (115.9 ) $ 510.0
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Year Ended December 31, 2018
(Dollars in millions) ADESA AFC Corporate Consolidated
Net income (loss) from continuing
operations $ 203.3 $ 112.0 $ (197.7 ) $ 117.6
Add back:
Income taxes 69.1 35.4 (70.2 ) 34.3
Interest expense, net of interest
income 1.0 59.3 127.0 187.3
Depreciation and amortization 127.5 16.0 28.9 172.4
Intercompany interest 19.8 (3.2 ) (16.6 ) -
EBITDA 420.7 219.5 (128.6 ) 511.6
Intercompany charges 15.3 - (15.3 ) -
Non-cash stock-based compensation 9.3 2.3 8.8 20.4
Acquisition related costs 4.8 - 2.5 7.3
Securitization interest - (51.5 ) - (51.5 )
Loss on asset sales 1.7 - - 1.7
Severance 5.0 0.6 0.1 5.7
Foreign currency losses 1.9 - 1.8 3.7
IAA allocated costs - - 5.2 5.2
Other 1.1 - - 1.1
Total addbacks 39.1 (48.6 ) 3.1 (6.4 )
Adjusted EBITDA $ 459.8 $ 170.9 $ (125.5 ) $ 505.2
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:
Twelve
Months
Three Months Ended Ended
March 31, June 30, September 30, December 31,
(Dollars in millions) 2019 2019 2019 2019 December 31, 2019
Net income (loss) $ 77.8 $ 55.6 $ 35.3 $ 19.8 $ 188.5
Less: Income from
discontinued operations 62.5 28.2 0.9 4.5 96.1
Income from continuing
operations 15.3 27.4 34.4 15.3 92.4
Add back:
Income taxes 6.5 8.7 13.2 9.3 37.7
Interest expense, net of
interest income 55.9 55.0 37.2 38.3 186.4
Depreciation and
amortization 44.3 47.9 46.4 50.1 188.7
EBITDA 122.0 139.0 131.2 113.0 505.2
Non-cash stock-based
compensation 6.6 4.0 4.5 5.2 20.3
Loss on extinguishment of
debt - - 2.2 - 2.2
Acquisition related costs 3.9 3.7 2.7 1.9 12.2
Securitization interest (14.8 ) (13.8 ) (13.3 ) (13.0 ) (54.9 )
Loss on asset sales 0.5 0.4 0.8 0.4 2.1
Severance 3.7 1.1 0.9 9.6 15.3
Foreign currency
(gains)/losses (0.6 ) - (0.4 ) 0.3 (0.7 )
IAA allocated costs 1.4 0.9 - - 2.3
Other 0.2 0.6 0.6 4.6 6.0
Total addbacks 0.9 (3.1 ) (2.0 ) 9.0 4.8
Adjusted EBITDA $ 122.9 $ 135.9 $ 129.2 $ 122.0 $ 510.0
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Summary of Cash Flows
Year Ended
December 31,
(Dollars in millions) 2019 2018
Net cash provided by (used by):
Operating activities - continuing operations $ 380.8 $ 438.6
Operating activities - discontinued operations 161.2
284.3
Investing activities - continuing operations (415.0 ) (315.1 ) Investing activities - discontinued operations (37.4 ) (66.1 ) Financing activities - continuing operations (1,163.8 ) (315.8 ) Financing activities - discontinued operations 1,317.6 (4.3 ) Effect of exchange rate on cash 12.8 (20.4 ) Net increase in cash, cash equivalents and restricted cash$ 256.2 $
1.2
Cash flow from operating activities (continuing operations) was$380.8 million for the year endedDecember 31, 2019 , compared with$438.6 million for the year endedDecember 31, 2018 . The decrease 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 auctions held near period-ends, as well as decreased profitability, partially offset by a net increase in non-cash item adjustments. Net cash used by investing activities (continuing operations) was$415.0 million for the year endedDecember 31, 2019 , compared with$315.1 million for the year endedDecember 31, 2018 . The increase in net cash used by investing activities was primarily attributable to: • an increase in cash used for acquisitions of approximately$75.5 million ; and
• an increase in cash used for capital expenditures of approximately
$30.3 million ; partially offset by: • a net decrease in finance receivables held for investment of approximately$5.9 million . Net cash used by financing activities (continuing operations) was$1,163.8 million for the year endedDecember 31, 2019 , compared with$315.8 million for the year endedDecember 31, 2018 . The increase in net cash used by financing activities was primarily attributable to: • an increase in net payments on debt of approximately$784.4 million . The Company used net cash provided by financing activities from discontinued operations (cash received from IAA in the
Separation) to
prepay approximately $1.3 billion of its term loan debt in the second
quarter of 2019. In addition, in the third quarter of 2019, the
Company refinanced the outstanding Term Loan B-4 and Term Loan B-5 and
repaid the remaining amount on the 2017 Revolving CreditFacility with
the new Term Loan B-6;
• a net decrease in the obligations collateralized by finance
receivables of approximately $97.6 million ; and
• an increase in cash transferred to IAA in connection with the
Separation of $50.9 million ;
partially offset by:
• a decrease in common stock repurchases of approximately $30.3 million ;
• a decrease in dividends paid to stockholders of approximately
• a
• a smaller decrease in book overdrafts in 2019 compared with 2018 of
approximately $16.0 million .
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Capital Expenditures Capital expenditures for the years endedDecember 31, 2019 and 2018 approximated$161.6 million and$131.3 million , respectively. Capital expenditures were funded primarily from internally generated funds. We continue to invest in our core information technology capabilities and capacity expansion. Capital expenditures are expected to be approximately$135 million for fiscal year 2020. Approximately half of the 2020 capital expenditures are expected to relate to technology-based investments, including improvements in information technology systems and infrastructure. Other anticipated capital expenditures are primarily attributable to improvements and expansion at the Company's facilities. Future capital expenditures could vary substantially based on capital project timing, the opening of new auction facilities, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies. Dividends Subject to board of director approval, we expect to pay a quarterly dividend of$0.19 per share using cash flow from operations, representing an annualized dividend of$0.76 per share. The following dividend information has been released for 2019 and 2020: • OnFebruary 18, 2020 , the Company announced a cash dividend of$0.19 per share that is payable onApril 3, 2020 , to stockholders of record at the close of business onMarch 20, 2020 . • OnNovember 5, 2019 , the Company announced a cash dividend of$0.19 per share that was paid onJanuary 3, 2020 , to stockholders of record at the close of business onDecember 20, 2019 . • OnAugust 6, 2019 , the Company announced a cash dividend of$0.19 per share that was paid onOctober 3, 2019 , to stockholders of record at the close of business onSeptember 20, 2019 . • OnMay 7, 2019 , the Company announced a cash dividend of$0.35 per share that was paid onJune 17, 2019 , to stockholders of record at the close of business onJune 3, 2019 . • OnFebruary 19, 2019 , the Company announced a cash dividend of$0.35 per share that was paid onApril 4, 2019 , to stockholders of record at the close of business onMarch 22, 2019 . 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. Acquisitions InJanuary 2019 , the Company completed the acquisition of Dent-ology. Dent-ology enhances our mobile reconditioning capabilities and bolsters our offerings to include wheel repair and expanded hail catastrophe response services. InJanuary 2019 , the Company also completed the acquisition of CarsOnTheWeb. COTW is an online auction company serving the wholesale vehicle sector in Continental Europe that seamlessly connects OEMs, fleet owners, wholesalers and dealers. The acquisition advances KAR's international strategy and extends its strong North American andU.K. -based portfolio of physical, online and digital auction marketplaces. Certain of the purchase agreements included additional payments over a specified period contingent on certain terms, conditions and performance. The purchased assets included accounts receivable, inventory, property and equipment, customer relationships, tradenames and software. Financial results for each acquisition have been included in our consolidated financial statements from the date of acquisition. The aggregate purchase price for the businesses acquired in 2019, net of cash acquired, was approximately$169.2 million , which included net cash payments of$120.7 million , deferred payments with a fair value of$19.2 million and estimated contingent payments with a fair value of$29.3 million based on an option pricing valuation model. The maximum amount of undiscounted deferred payments and undiscounted contingent payments related to these acquisitions could approximate$77.0 million . The purchase price for the acquired businesses was allocated to acquired assets and liabilities based upon fair values, including$32.7 million to intangible assets, representing the fair value of acquired customer relationships of$26.4 million , software of$4.3 million and tradenames of$2.0 million , which are being amortized over their expected useful lives. The acquisitions resulted in aggregate goodwill of$142.6 million . The goodwill is recorded in the ADESA Auctions 50
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reportable segment. The financial impact of these acquisitions, including pro forma financial results, was immaterial to the Company's consolidated results for the year endedDecember 31, 2019 . Recent Developments InJanuary 2020 , the Company entered into pay-fixed interest rate swaps with a notional amount of$500 million to swap variable rate interest payments under its term loan for fixed interest payments bearing a weighted average interest rate of 1.44%. The interest rate swaps have a five-year term, each maturing onJanuary 23, 2025 . Contractual Obligations The table below sets forth a summary of our contractual debt and lease obligations as ofDecember 31, 2019 . Some of the figures included in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal and other factors. Because these estimates and assumptions are necessarily subjective, the obligations we may actually pay in future periods could vary from those reflected in the table. The following summarizes our contractual cash obligations as ofDecember 31, 2019 (in millions): Payments Due by Period Less than More than Contractual Obligations Total 1 year 1 - 3 Years 4 - 5 Years 5 Years Long-term debt$325 million Revolving Credit Facility $ - $ - $ - $ - $ - Term Loan B-6 (a) 947.6 9.5 19.0 19.0 900.1 Senior notes (a) 950.0 - - - 950.0 European lines of credit 19.3 19.3 - - - Finance lease obligations (b) 29.2 14.5 14.3 0.4 - Interest payments relating to long-term debt (c) 518.6 88.0 174.4 172.6 83.6 Operating leases (d) 543.0 57.2 105.8 96.9 283.1 Other long-term liabilities 25.1 9.1 16.0 - - Total contractual cash obligations$ 3,032.8 $ 197.6 $ 329.5 $ 288.9 $ 2,216.8
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(a) The table assumes the long-term debt is held to maturity.
(b) We have entered into finance leases for furniture, fixtures, equipment and
software. The amounts include the interest portion of the finance leases.
Future finance lease obligations would change if we entered into
additional finance lease agreements.
(c) Interest payments on long-term debt are projected based on the contractual
rates of the debt securities. Interest rates for the variable rate term
debt instruments were held constant at rates as of December 31, 2019 .
(d) Operating leases are entered into in the normal course of business. We
lease most of our auction facilities, as well as other property andequipment under operating leases. Some lease agreements contain options to
renew the lease or purchase the leased property. Future operating lease
obligations would change if the renewal options were exercised and/or if
we entered into additional operating lease agreements.
Critical Accounting Estimates In preparing the financial statements in accordance withU.S. generally accepted accounting principles, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex. Consequently, actual results could differ from those estimates. Accounting measurements that management believes are most critical to the reported results of our operations and financial condition include: (1) allowance for credit losses; (2) business combinations; (3) goodwill and other intangible assets; and (4) legal proceedings and other loss contingencies. In addition to the critical accounting estimates, there are other items used in the preparation of the consolidated financial statements that require estimation, but are not deemed critical. Changes in estimates used in these and other items could have a material impact on our financial statements. 51
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We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. In cases where management estimates are used, they are based on historical experience, information from third-party professionals, and various other assumptions believed to be reasonable. In addition, our most significant accounting policies are discussed in Note 2 and elsewhere in the notes to the consolidated financial statements for the year endedDecember 31, 2019 , which are included in this Annual Report on Form 10-K. Allowance for Credit Losses We maintain an allowance for credit losses for estimated losses resulting from the inability of customers to make required payments. Delinquencies and losses are monitored on an ongoing basis and this historical experience provides the primary basis for estimating the allowance. The allowance for credit losses is also based on management's evaluation of the receivables portfolio under current economic conditions, the size of the portfolio, overall portfolio credit quality, review of specific collection matters and such other factors which, in management's judgment, deserve recognition in estimating losses. Specific collection matters can be impacted by the outcome of negotiations, litigation and bankruptcy proceedings with individual customers. AFC controls credit risk through credit approvals, credit limits, underwriting and collateral management monitoring procedures, including approximately 70,000 lot audits and holding vehicle titles where permitted. The estimates are based on management's evaluation of many factors, including AFC's historical credit loss experience, the value of the underlying collateral, delinquency trends and economic conditions. The estimates are based on information available as of each reporting date. Actual losses may differ from the original estimates due to actual results varying from those assumed in our estimates. As a measure of sensitivity, if we had experienced a 10% increase in net charge-offs of finance receivables for the year endedDecember 31, 2019 , our provision for credit losses would have increased by approximately$3.4 million in 2019. Business Combinations When we acquire businesses, we estimate and recognize the fair values of tangible assets acquired, liabilities assumed and identifiable intangible assets acquired. The excess of the purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. The purchase accounting process requires management to make significant estimates and assumptions in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets and contingent consideration. Critical estimates are often developed using valuation models that are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, growth rates, the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which could affect the accuracy or validity of such estimates. Depending on the facts and circumstances, we may engage an independent valuation expert to assist in valuing significant assets and liabilities.Goodwill and Other Intangible Assets We assess goodwill for impairment annually during the second quarter or more frequently if events or changes in circumstances indicate that impairment may exist. Important factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results; significant negative industry or economic trends; and our market valuation relative to our book value. When evaluating goodwill for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that a reporting unit's fair value is not more likely than not greater than its carrying value, then we calculate the estimated fair value of the reporting unit using discounted cash flows and market approaches. When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for a reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of a reporting unit's goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and apply judgment when estimating future cash flows and earnings, including projected revenue growth and operating expenses related to existing businesses, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate based on the estimated cost of capital that reflects the risk profile of the related business. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit's past performance and forecasted growth, strategic initiatives and changes in economic conditions. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approach are highly subjective, and our 52
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ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. In 2019, we performed a qualitative impairment assessment for our reporting units. Based on our goodwill assessments, the Company has not identified a reporting unit for which the goodwill was impaired in 2019, 2018 or 2017. As with goodwill, we assess indefinite-lived tradenames for impairment annually during the second quarter or more frequently if events or changes in circumstances indicate that impairment may exist. When assessing indefinite-lived tradenames for impairment using a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the tradename asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the tradename asset group's forecasted growth, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related business. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. We review other intangible assets for possible impairment whenever circumstances indicate that their carrying amount may not be recoverable. If it is determined that the carrying amount of an other intangible asset exceeds the total amount of the estimated undiscounted future cash flows from that asset, we would recognize a loss to the extent that the carrying amount exceeds the fair value of the asset. Management judgment is involved in both deciding if testing for recovery is necessary and in estimating undiscounted cash flows. Our impairment analysis is based on the current business strategy, expected growth rates and estimated future economic conditions. Legal Proceedings and Other Loss Contingencies We are subject to the possibility of various legal proceedings and other loss contingencies, many involving litigation incidental to the business and a variety of environmental laws and regulations. Litigation and other loss contingencies are subject to inherent uncertainties and the outcomes of such matters are often very difficult to predict and generally are resolved over long periods of time. We consider the likelihood of loss or the incurrence of a liability, as well as the ability to reasonably estimate the amount of loss, in determining loss contingencies. Estimating probable losses requires the analysis of multiple possible outcomes that often are dependent on the judgment about potential actions by third parties. Contingencies are recorded in the consolidated financial statements, or otherwise disclosed, in accordance with ASC 450, Contingencies. We accrue for an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. If the amount of an actual loss is greater than the amount accrued, this could have an adverse impact on our operating results in that period. Off-Balance Sheet Arrangements As ofDecember 31, 2019 , we had no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). New Accounting Standards For a description of new accounting standards that could affect the Company, reference the "New Accounting Standards" section of Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. 53
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