Item 1. Financial Statements
KAR Auction Services, Inc.
Consolidated Statements of Income
(In millions, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
ADESA Auction Services
|
$
|
632.4
|
|
|
$
|
538.3
|
|
|
$
|
1,232.1
|
|
|
$
|
1,066.4
|
|
|
AFC
|
86.7
|
|
|
85.1
|
|
|
176.6
|
|
|
170.2
|
|
|
Total operating revenues
|
719.1
|
|
|
623.4
|
|
|
1,408.7
|
|
|
1,236.6
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
417.4
|
|
|
330.2
|
|
|
811.3
|
|
|
658.5
|
|
|
Selling, general and administrative
|
163.2
|
|
|
149.9
|
|
|
338.4
|
|
|
305.4
|
|
|
Depreciation and amortization
|
47.9
|
|
|
42.1
|
|
|
92.2
|
|
|
88.4
|
|
|
Total operating expenses
|
628.5
|
|
|
522.2
|
|
|
1,241.9
|
|
|
1,052.3
|
|
|
Operating profit
|
90.6
|
|
|
101.2
|
|
|
166.8
|
|
|
184.3
|
|
|
Interest expense
|
55.6
|
|
|
48.4
|
|
|
112.1
|
|
|
89.7
|
|
|
Other income, net
|
(1.1
|
)
|
|
(0.5
|
)
|
|
(3.2
|
)
|
|
(0.8
|
)
|
|
Income from continuing operations before income taxes
|
36.1
|
|
|
53.3
|
|
|
57.9
|
|
|
95.4
|
|
|
Income taxes
|
8.7
|
|
|
15.9
|
|
|
15.2
|
|
|
23.8
|
|
|
Income from continuing operations
|
27.4
|
|
|
37.4
|
|
|
42.7
|
|
|
71.6
|
|
|
Income from discontinued operations, net of income taxes
|
28.2
|
|
|
55.8
|
|
|
90.7
|
|
|
111.6
|
|
|
Net income
|
$
|
55.6
|
|
|
$
|
93.2
|
|
|
$
|
133.4
|
|
|
$
|
183.2
|
|
|
Net income per share - basic
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.21
|
|
|
$
|
0.28
|
|
|
$
|
0.32
|
|
|
$
|
0.53
|
|
|
Income from discontinued operations
|
0.21
|
|
|
0.41
|
|
|
0.68
|
|
|
0.83
|
|
|
Net income
|
$
|
0.42
|
|
|
$
|
0.69
|
|
|
$
|
1.00
|
|
|
$
|
1.36
|
|
|
Net income per share - diluted
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.20
|
|
|
$
|
0.28
|
|
|
$
|
0.32
|
|
|
$
|
0.53
|
|
|
Income from discontinued operations
|
0.21
|
|
|
0.41
|
|
|
0.68
|
|
|
0.82
|
|
|
Net income
|
$
|
0.41
|
|
|
$
|
0.69
|
|
|
$
|
1.00
|
|
|
$
|
1.35
|
|
|
Dividends declared per common share
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
See accompanying condensed notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
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|
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|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income
|
$
|
55.6
|
|
|
$
|
93.2
|
|
|
$
|
133.4
|
|
|
$
|
183.2
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
8.4
|
|
|
(11.4
|
)
|
|
16.5
|
|
|
(18.3
|
)
|
|
Comprehensive income
|
$
|
64.0
|
|
|
$
|
81.8
|
|
|
$
|
149.9
|
|
|
$
|
164.9
|
|
See accompanying condensed notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions)
(Unaudited)
|
|
|
|
|
|
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|
June 30,
2019
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
233.0
|
|
|
$
|
277.1
|
|
|
Restricted cash
|
23.7
|
|
|
27.6
|
|
|
Trade receivables, net of allowances of $8.6 and $8.7
|
592.8
|
|
|
454.6
|
|
|
Finance receivables, net of allowances of $14.5 and $14.0
|
2,055.6
|
|
|
2,000.8
|
|
|
Other current assets
|
143.8
|
|
|
100.6
|
|
|
Current assets, discontinued operations
|
—
|
|
|
453.5
|
|
|
Total current assets
|
3,048.9
|
|
|
3,314.2
|
|
|
Other assets
|
|
|
|
|
Goodwill
|
1,817.6
|
|
|
1,676.9
|
|
|
Customer relationships, net of accumulated amortization of $613.3 and $587.0
|
231.1
|
|
|
227.4
|
|
|
Other intangible assets, net of accumulated amortization of $283.5 and $255.3
|
287.8
|
|
|
272.4
|
|
|
Operating lease right-of-use assets
|
370.5
|
|
|
—
|
|
|
Other assets
|
26.9
|
|
|
31.0
|
|
|
Non-current assets, discontinued operations
|
—
|
|
|
1,053.3
|
|
|
Total other assets
|
2,733.9
|
|
|
3,261.0
|
|
|
Property and equipment, net of accumulated depreciation of $502.4 and $467.5
|
595.0
|
|
|
631.0
|
|
|
Total assets
|
$
|
6,377.8
|
|
|
$
|
7,206.2
|
|
See accompanying condensed notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
$
|
847.1
|
|
|
$
|
691.3
|
|
|
Accrued employee benefits and compensation expenses
|
68.7
|
|
|
72.8
|
|
|
Accrued interest
|
9.6
|
|
|
7.9
|
|
|
Other accrued expenses
|
226.1
|
|
|
132.8
|
|
|
Income taxes payable
|
1.1
|
|
|
0.7
|
|
|
Dividends payable
|
—
|
|
|
46.5
|
|
|
Obligations collateralized by finance receivables
|
1,422.3
|
|
|
1,445.3
|
|
|
Current maturities of long-term debt
|
93.5
|
|
|
13.1
|
|
|
Current liabilities, discontinued operations
|
—
|
|
|
214.4
|
|
|
Total current liabilities
|
2,668.4
|
|
|
2,624.8
|
|
|
Non-current liabilities
|
|
|
|
|
Long-term debt
|
1,390.8
|
|
|
2,654.3
|
|
|
Deferred income tax liabilities
|
130.3
|
|
|
125.3
|
|
|
Operating lease liabilities
|
365.5
|
|
|
—
|
|
|
Other liabilities
|
70.2
|
|
|
71.6
|
|
|
Non-current liabilities, discontinued operations
|
—
|
|
|
266.0
|
|
|
Total non-current liabilities
|
1,956.8
|
|
|
3,117.2
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
Preferred stock, $0.01 par value:
|
|
|
|
|
Authorized shares: 100,000,000
|
|
|
|
|
|
|
Issued shares: none
|
—
|
|
|
—
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
Authorized shares: 400,000,000
|
|
|
|
|
|
|
Issued and outstanding shares:
|
|
|
|
|
|
|
June 30, 2019: 133,445,058
|
|
|
|
|
|
|
December 31, 2018: 132,887,029
|
1.3
|
|
|
1.3
|
|
|
Additional paid-in capital
|
1,140.8
|
|
|
1,131.9
|
|
|
Retained earnings
|
644.9
|
|
|
392.3
|
|
|
Accumulated other comprehensive loss
|
(34.4
|
)
|
|
(61.3
|
)
|
|
Total stockholders' equity
|
1,752.6
|
|
|
1,464.2
|
|
|
Total liabilities and stockholders' equity
|
$
|
6,377.8
|
|
|
$
|
7,206.2
|
|
See accompanying condensed notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Shares
|
|
Common
Stock
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
|
|
Balance at March 31, 2019
|
133.3
|
|
|
$
|
1.3
|
|
|
$
|
1,131.5
|
|
|
$
|
422.9
|
|
|
$
|
(53.2
|
)
|
|
$
|
1,502.5
|
|
|
Net income
|
|
|
|
|
|
|
55.6
|
|
|
|
|
55.6
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
8.4
|
|
|
8.4
|
|
|
Issuance of common stock under stock plans
|
0.1
|
|
|
|
|
4.7
|
|
|
|
|
|
|
4.7
|
|
|
Surrender of RSUs for taxes
|
—
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
(0.2
|
)
|
|
Stock-based compensation expense
|
|
|
|
|
4.7
|
|
|
|
|
|
|
4.7
|
|
|
Distribution of IAA
|
|
|
|
|
|
|
213.2
|
|
|
10.4
|
|
|
223.6
|
|
|
Dividends earned under stock plan
|
|
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
|
|
—
|
|
|
Cash dividends declared to stockholders ($0.35 per share)
|
|
|
|
|
|
|
(46.7
|
)
|
|
|
|
(46.7
|
)
|
|
Balance at June 30, 2019
|
133.4
|
|
|
$
|
1.3
|
|
|
$
|
1,140.8
|
|
|
$
|
644.9
|
|
|
$
|
(34.4
|
)
|
|
$
|
1,752.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Shares
|
|
Common
Stock
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
|
|
Balance at December 31, 2018
|
132.9
|
|
|
$
|
1.3
|
|
|
$
|
1,131.9
|
|
|
$
|
392.3
|
|
|
$
|
(61.3
|
)
|
|
$
|
1,464.2
|
|
|
Cumulative effect adjustment for adoption of
ASC Topic 842, net of tax
|
|
|
|
|
|
|
1.1
|
|
|
|
|
1.1
|
|
|
Net income
|
|
|
|
|
|
|
133.4
|
|
|
|
|
133.4
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
16.5
|
|
|
16.5
|
|
|
Issuance of common stock under stock plans
|
0.7
|
|
|
|
|
5.4
|
|
|
|
|
|
|
5.4
|
|
|
Surrender of RSUs for taxes
|
(0.2
|
)
|
|
|
|
(10.4
|
)
|
|
|
|
|
|
(10.4
|
)
|
|
Stock-based compensation expense
|
|
|
|
|
12.1
|
|
|
|
|
|
|
12.1
|
|
|
Distribution of IAA
|
|
|
|
|
|
|
213.2
|
|
|
10.4
|
|
|
223.6
|
|
|
Dividends earned under stock plan
|
|
|
|
|
1.8
|
|
|
(1.8
|
)
|
|
|
|
—
|
|
|
Cash dividends declared to stockholders ($0.70 per share)
|
|
|
|
|
|
|
(93.3
|
)
|
|
|
|
(93.3
|
)
|
|
Balance at June 30, 2019
|
133.4
|
|
|
$
|
1.3
|
|
|
$
|
1,140.8
|
|
|
$
|
644.9
|
|
|
$
|
(34.4
|
)
|
|
$
|
1,752.6
|
|
See accompanying condensed notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Shares
|
|
Common
Stock
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
|
|
Balance at March 31, 2018
|
135.0
|
|
|
$
|
1.3
|
|
|
$
|
1,255.9
|
|
|
$
|
295.0
|
|
|
$
|
(32.1
|
)
|
|
$
|
1,520.1
|
|
|
Net income
|
|
|
|
|
|
|
93.2
|
|
|
|
|
93.2
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(11.4
|
)
|
|
(11.4
|
)
|
|
Issuance of common stock under stock plans
|
0.2
|
|
|
|
|
2.8
|
|
|
|
|
|
|
2.8
|
|
|
Surrender of RSUs for taxes
|
(0.1
|
)
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
(0.3
|
)
|
|
Repurchase and retirement of common stock
|
(0.9
|
)
|
|
|
|
(50.0
|
)
|
|
|
|
|
|
(50.0
|
)
|
|
Stock-based compensation expense
|
|
|
|
|
5.1
|
|
|
|
|
|
|
5.1
|
|
|
Dividends earned under stock plans
|
|
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
|
|
—
|
|
|
Cash dividends declared to stockholders ($0.35 per share)
|
|
|
|
|
|
|
(47.0
|
)
|
|
|
|
(47.0
|
)
|
|
Balance at June 30, 2018
|
134.2
|
|
|
$
|
1.3
|
|
|
$
|
1,213.6
|
|
|
$
|
341.1
|
|
|
$
|
(43.5
|
)
|
|
$
|
1,512.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Shares
|
|
Common
Stock
Amount
|
|
Additional
Paid-In
Capital
|
|
Retained Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
|
|
Balance at December 31, 2017
|
134.3
|
|
|
$
|
1.3
|
|
|
$
|
1,251.8
|
|
|
$
|
257.0
|
|
|
$
|
(25.2
|
)
|
|
$
|
1,484.9
|
|
|
Cumulative effect adjustment for adoption of
ASC Topic 606, net of tax
|
|
|
|
|
|
|
(3.0
|
)
|
|
|
|
(3.0
|
)
|
|
Net income
|
|
|
|
|
|
|
183.2
|
|
|
|
|
183.2
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(18.3
|
)
|
|
(18.3
|
)
|
|
Issuance of common stock under stock plans
|
1.0
|
|
|
|
|
8.4
|
|
|
|
|
|
|
8.4
|
|
|
Surrender of RSUs for taxes
|
(0.2
|
)
|
|
|
|
(10.0
|
)
|
|
|
|
|
|
(10.0
|
)
|
|
Repurchase and retirement of common stock
|
(0.9
|
)
|
|
|
|
(50.0
|
)
|
|
|
|
|
|
(50.0
|
)
|
|
Stock-based compensation expense
|
|
|
|
|
11.5
|
|
|
|
|
|
|
11.5
|
|
|
Dividends earned under stock plans
|
|
|
|
|
1.9
|
|
|
(1.9
|
)
|
|
|
|
—
|
|
|
Cash dividends declared to stockholders ($0.70 per share)
|
|
|
|
|
|
|
(94.2
|
)
|
|
|
|
(94.2
|
)
|
|
Balance at June 30, 2018
|
134.2
|
|
|
$
|
1.3
|
|
|
$
|
1,213.6
|
|
|
$
|
341.1
|
|
|
$
|
(43.5
|
)
|
|
$
|
1,512.5
|
|
See accompanying condensed notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
Operating activities
|
|
|
|
|
Net income
|
$
|
133.4
|
|
|
$
|
183.2
|
|
|
Net income from discontinued operations
|
(90.7
|
)
|
|
(111.6
|
)
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
92.2
|
|
|
88.4
|
|
|
Provision for credit losses
|
18.2
|
|
|
16.4
|
|
|
Deferred income taxes
|
3.6
|
|
|
1.5
|
|
|
Amortization of debt issuance costs
|
7.1
|
|
|
5.3
|
|
|
Stock-based compensation
|
10.3
|
|
|
9.6
|
|
|
Loss on disposal of fixed assets
|
0.1
|
|
|
—
|
|
|
Other non-cash, net
|
5.8
|
|
|
(4.0
|
)
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
Trade receivables and other assets
|
(145.7
|
)
|
|
(161.0
|
)
|
|
Accounts payable and accrued expenses
|
127.4
|
|
|
177.9
|
|
|
Net cash provided by operating activities - continuing operations
|
161.7
|
|
|
205.7
|
|
|
Net cash provided by operating activities - discontinued operations
|
155.8
|
|
|
166.7
|
|
|
Investing activities
|
|
|
|
|
Net increase in finance receivables held for investment
|
(69.8
|
)
|
|
(63.0
|
)
|
|
Acquisition of businesses (net of cash acquired)
|
(120.7
|
)
|
|
(23.3
|
)
|
|
Purchases of property, equipment and computer software
|
(78.4
|
)
|
|
(51.4
|
)
|
|
Net cash used by investing activities - continuing operations
|
(268.9
|
)
|
|
(137.7
|
)
|
|
Net cash used by investing activities - discontinued operations
|
(37.4
|
)
|
|
(27.8
|
)
|
|
Financing activities
|
|
|
|
|
Net increase in book overdrafts
|
44.1
|
|
|
13.2
|
|
|
Net increase in borrowings from lines of credit
|
93.5
|
|
|
—
|
|
|
Net (decrease) increase in obligations collateralized by finance receivables
|
(31.0
|
)
|
|
1.0
|
|
|
Payments on long-term debt
|
(1,291.1
|
)
|
|
(3.6
|
)
|
|
Payments on capital leases
|
(6.9
|
)
|
|
(7.6
|
)
|
|
Payments of contingent consideration and deferred acquisition costs
|
(0.5
|
)
|
|
(7.4
|
)
|
|
Issuance of common stock under stock plans
|
5.4
|
|
|
8.4
|
|
|
Tax withholding payments for vested RSUs
|
(10.4
|
)
|
|
(10.0
|
)
|
|
Repurchase and retirement of common stock
|
—
|
|
|
(50.0
|
)
|
|
Dividends paid to stockholders
|
(139.8
|
)
|
|
(94.2
|
)
|
|
Cash transferred to IAA
|
(50.9
|
)
|
|
—
|
|
|
Net cash used by financing activities - continuing operations
|
(1,387.6
|
)
|
|
(150.2
|
)
|
|
Net cash provided by (used by) financing activities - discontinued operations
|
1,317.6
|
|
|
(7.3
|
)
|
|
Effect of exchange rate changes on cash
|
10.8
|
|
|
(9.8
|
)
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
(48.0
|
)
|
|
39.6
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
304.7
|
|
|
303.5
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
256.7
|
|
|
$
|
343.1
|
|
|
Cash paid for interest, net of proceeds from interest rate caps
|
$
|
98.2
|
|
|
$
|
88.0
|
|
|
Cash paid for taxes, net of refunds - continuing operations
|
$
|
20.5
|
|
|
$
|
39.3
|
|
|
Cash paid for taxes, net of refunds - discontinued operations
|
$
|
40.1
|
|
|
$
|
32.4
|
|
See accompanying condensed notes to consolidated financial statements
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements
June 30, 2019
(Unaudited)
Note 1—Basis 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" 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"), Nth Gen Software Inc. ("TradeRev"), ADESA Remarketing Limited (formerly known as GRS Remarketing Limited ("GRS" or "ADESA Remarketing Limited")) and ADESA Europe (formerly known as CarsOnTheWeb ("COTW");
|
|
|
|
|
•
|
"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.;
|
|
|
|
|
•
|
"Credit Agreement" refers to the Amended and Restated Credit Agreement, dated March 11, 2014, as amended on March 9, 2016 and May 31, 2017, among KAR Auction Services, as the borrower, the several banks and other financial institutions or entities from time to time parties thereto and the administrative agent;
|
|
|
|
|
•
|
"Credit Facility" refers to the seven-year senior secured term loan B-2 facility ("Term Loan B-2"), the seven-year senior secured term loan B-3 facility ("Term Loan B-3"), the senior secured term loan B-4 facility due March 11, 2021 ("Term Loan B-4"), the senior secured term loan B-5 facility due March 9, 2023 ("Term Loan B-5"), the
$350 million
, senior secured revolving credit facility due March 9, 2021 (the "revolving credit facility") and the
$300 million
, five-year senior secured revolving credit facility (the "2016 revolving credit facility"), the terms of which are set forth in the Credit Agreement. Term Loan B-2, Term Loan B-3 and the 2016 revolving credit facility were repaid in May 2017 with proceeds from Term Loan B-4, Term Loan B-5 and the senior notes (defined below);
|
|
|
|
|
•
|
"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, including HBC Vehicle Services Limited ("HBC"). See Note 3;
|
|
|
|
|
•
|
"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries; and
|
|
|
|
|
•
|
"Senior notes" refers to the
5.125%
senior notes due 2025 (
$950 million
aggregate principal outstanding at June 30, 2019).
|
Business and Nature of Operations
ADESA is a leading, national provider of wholesale vehicle auctions and related vehicle remarketing services for the automotive industry in North America. As of
June 30, 2019
, we have a North American network of
74
ADESA whole car auction sites and we also offer online auctions. ADESA also includes TradeRev, an online automotive remarketing system where dealers can launch and participate in real-time vehicle auctions at any time, ADESA Remarketing Limited, an online whole car vehicle remarketing business in the United Kingdom and ADESA Europe (formerly known as CarsOnTheWeb), an online wholesale vehicle auction marketplace in Continental Europe. Our auctions facilitate the sale of used vehicles through physical, online or hybrid auctions, which permit Internet buyers to participate in physical auctions. ADESA's online service offerings include customized private label solutions powered with software developed by its wholly-owned subsidiary, Openlane, that allow our institutional consignors (automobile manufacturers, captive finance companies and other institutions) to offer vehicles via the Internet prior to arrival at the physical auction. Remarketing services include a variety of activities designed to transfer used and salvage vehicles between sellers and buyers throughout the vehicle life cycle. ADESA facilitates the exchange of these vehicles through an auction marketplace, which aligns sellers and buyers. As an agent for customers, the Company generally does not take title to or ownership of vehicles sold at the auctions. Generally, fees are earned from the seller and buyer on each successful auction transaction in addition to fees earned for ancillary services.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
ADESA has the second largest used vehicle auction network in North America, based upon the number of used vehicles sold through auctions annually, and also provides services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. ADESA is able to serve the diverse and multi-faceted needs of its customers through the wide range of services offered.
AFC is a leading provider of floorplan financing to independent used vehicle dealers and this financing is provided through
125
locations throughout the United States and Canada as of
June 30, 2019
. Floorplan financing supports independent used vehicle dealers in North America who purchase vehicles at ADESA, IAA, TradeRev, other used vehicle and salvage auctions and non-auction purchases. In addition to floorplan financing, AFC also provides independent used vehicle dealers with other related services and products, such as vehicle service contracts.
Basis of Presentation
The accompanying unaudited condensed 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, 2018, as filed with the Securities and Exchange Commission on February 21, 2019. The 2018 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.
Reclassifications
Certain amounts reported in the consolidated financial statements prior to June 2019 have been reclassified to discontinued operations to reflect the spin-off of the Company's former salvage auction business. In addition, certain amounts reported for segment results in the consolidated financial statements prior to June 2019 have been reclassified to conform to a discontinued operations presentation. See Note 3 for a discussion of discontinued operations.
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.
Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02,
Leases (Topic 842)
, which replaces the existing lease guidance in Topic 840. The ASU is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use ("ROU") assets and corresponding lease liabilities on the balance sheet, with an exception for leases that meet the definition of a short-term lease. The new guidance continues to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.
We adopted Topic 842 in the first quarter of 2019 and as permitted by ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, we applied the new standard at the adoption date and recognized the cumulative-effect of initially applying the new standard as an increase of
$1.1 million
to the opening balance of retained earnings. The cumulative-effect adjustment related to the derecognition of existing fixed assets for which we were determined to be the accounting owner under Topic 840
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
and related liabilities associated with certain sale leaseback transactions in build-to-suit arrangements that did not qualify for sale accounting under Topic 840. Depreciation related to these fixed assets was recorded consistently with owned property and equipment in depreciation expense. In accordance with Topic 842, the lease agreements associated with the derecognized fixed assets and related liabilities generated ROU assets and lease liabilities that will be amortized to lease expense over the lease term. In addition, we recognized additional operating liabilities for continuing operations of approximately
$342 million
with related ROU assets of approximately
$314 million
based on the present value of the remaining minimum rental payments for existing operating leases.
Our Credit Agreement specifies that the net debt covenant shall continue to be calculated as if the accounting standard had not been adopted and that we could enter into negotiations to amend such provisions in the Credit Agreement so as to equitably reflect such changes with the desired result that the criteria for evaluating our financial condition would be the same after the change as if such change had not been made.
We determine if an arrangement is a lease at inception. Operating leases are included in “Operating lease right-of-use assets,” “Other accrued expenses” and “Operating lease liabilities” in our consolidated balance sheets. Finance leases are included in “Property and equipment, net,” “Other accrued expenses” and “Other liabilities” in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU assets also include any lease payments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, we account for the lease and non-lease components as a single lease component.
New Accounting Standards
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,
which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2018-15 will have on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the test for goodwill impairment by eliminating Step 2 (implied fair value measurement). Instead goodwill impairment would be measured as the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of ASU 2017-04 will have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The update changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The new guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted beginning in annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the consolidated financial statements, however we do not expect that it will have a material impact on the consolidated financial statements based on the short-term nature of AFC's loans.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Note 2—Acquisitions
In January 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.
In January 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 and U.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 the first six months of 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
. The maximum amount of undiscounted deferred payments and undiscounted contingent payments related to these acquisitions could approximate
$52.0 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 purchase accounting associated with these acquisitions is preliminary, subject to final valuation results. The acquisitions resulted in aggregate goodwill of
$138.4 million
. The goodwill is recorded in the ADESA Auctions reportable segment. The financial impact of these acquisitions, including pro forma financial results, was immaterial to the Company’s consolidated results for the
six
months ended
June 30, 2019
.
Note 3—IAA Separation and Discontinued Operations
In February 2018, the Company announced that its board of directors had approved a plan to pursue the separation ("Separation") of its salvage auction business, IAA, through a spin-off. On June 28, 2019, the Company completed the spin-off, creating a new independent publicly traded company, IAA, Inc. ("IAA"). The Separation provided KAR shareholders with equity ownership in both KAR and IAA. On June 28, 2019, the Company’s shareholders received one share of IAA common stock for every share of Company common stock they held as of the close of business on June 18, 2019, the record date for the distribution. In addition to the shares of IAA common stock, KAR received a cash distribution of approximately
$1,278.0 million
from IAA, which was used to prepay a portion of KAR's term loans. In connection with the spin-off, the Company and IAA entered into various agreements to effect the Separation and provide a framework for their relationship after the Separation, including a separation and distribution agreement, a transition services agreement, an employee matters agreement and a tax matters agreement. These agreements provide for the allocation between the Company and IAA of assets, employees, liabilities and obligations (including investments, property, environmental and tax-related assets and liabilities) attributable to periods prior to, at and after IAA's Separation from the Company and will govern certain relationships between IAA and the Company after the Separation.
The financial results of IAA have been accounted for as discontinued operations for all periods presented. IAA was formerly presented as one of the Company’s reportable segments. Discontinued operations included one-time transaction costs in "Selling, general and administrative" of approximately
$30.5 million
and
$31.3 million
for the three and six months ended June 30, 2019, 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.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
The following table presents the results of operations for IAA that have been reclassified to discontinued operations for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating revenues
|
$
|
366.4
|
|
|
$
|
333.2
|
|
|
$
|
723.6
|
|
|
$
|
670.5
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
227.7
|
|
|
201.1
|
|
|
446.1
|
|
|
407.8
|
|
|
Selling, general and administrative
|
62.1
|
|
|
32.8
|
|
|
94.5
|
|
|
64.8
|
|
|
Depreciation and amortization
|
22.1
|
|
|
24.7
|
|
|
43.9
|
|
|
48.8
|
|
|
Total operating expenses
|
311.9
|
|
|
258.6
|
|
|
584.5
|
|
|
521.4
|
|
|
Operating profit
|
54.5
|
|
|
74.6
|
|
|
139.1
|
|
|
149.1
|
|
|
Interest expense
|
2.4
|
|
|
0.2
|
|
|
2.7
|
|
|
0.4
|
|
|
Other income, net
|
(0.1
|
)
|
|
(0.7
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
Income from discontinued operations before income taxes
|
52.2
|
|
|
75.1
|
|
|
136.4
|
|
|
149.4
|
|
|
Income taxes
|
24.0
|
|
|
19.3
|
|
|
45.7
|
|
|
37.8
|
|
|
Income from discontinued operations
|
$
|
28.2
|
|
|
$
|
55.8
|
|
|
$
|
90.7
|
|
|
$
|
111.6
|
|
The following table summarizes the major classes of assets and liabilities immediately preceding the spin-off on June 28, 2019 and at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
2019
|
|
December 31, 2018
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
50.9
|
|
|
$
|
60.0
|
|
|
Trade receivables, net
|
284.7
|
|
|
311.0
|
|
|
Other current assets
|
83.6
|
|
|
82.5
|
|
|
Goodwill
|
536.8
|
|
|
536.8
|
|
|
Customer relationships, net
|
62.2
|
|
|
74.8
|
|
|
Other intangible assets, net
|
87.5
|
|
|
86.2
|
|
|
Operating lease right-of-use assets
|
655.2
|
|
|
—
|
|
|
Other assets
|
13.3
|
|
|
10.3
|
|
|
Property and equipment, net
|
241.4
|
|
|
345.2
|
|
|
Total assets, discontinued operations
|
$
|
2,015.6
|
|
|
$
|
1,506.8
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
$
|
115.8
|
|
|
$
|
129.0
|
|
|
Accrued employee benefits and compensation expenses
|
19.0
|
|
|
29.6
|
|
|
Other accrued expenses
|
120.9
|
|
|
53.6
|
|
|
Income taxes payable
|
—
|
|
|
2.2
|
|
|
Long-term debt
|
1,274.8
|
|
|
—
|
|
|
Deferred income tax liabilities
|
63.7
|
|
|
63.1
|
|
|
Operating lease liabilities
|
633.0
|
|
|
—
|
|
|
Other liabilities
|
12.0
|
|
|
202.9
|
|
|
Total liabilities, discontinued operations
|
$
|
2,239.2
|
|
|
$
|
480.4
|
|
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Note 4—Stock and Stock-Based Compensation Plans
The KAR Auction Services, Inc. 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, Inc. performance-based restricted stock units ("PRSUs"), service-based restricted stock units ("RSUs") and service options. We have determined that the KAR Auction Services, Inc. PRSUs, RSUs and service options should be classified as equity awards.
The following table summarizes our stock-based compensation expense by type of award
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
PRSUs
|
$
|
1.3
|
|
|
$
|
1.9
|
|
|
$
|
4.9
|
|
|
$
|
5.1
|
|
|
RSUs
|
2.6
|
|
|
2.2
|
|
|
5.4
|
|
|
4.4
|
|
|
Service options
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Total stock-based compensation expense
|
$
|
3.9
|
|
|
$
|
4.1
|
|
|
$
|
10.3
|
|
|
$
|
9.6
|
|
PRSUs and RSUs
In the first
six
months of 2019, we granted a target amount of approximately
0.3 million
PRSUs to certain executive officers and management of the Company. The PRSUs vest if and to the extent that the Company's three-year cumulative operating adjusted net income per share attains certain specified goals. In addition, approximately
0.3 million
RSUs were granted to certain executive officers and management of the Company. The RSUs are contingent upon continued employment and generally vest in
three
equal annual installments. The weighted average grant date fair value of the PRSUs and the RSUs was
$47.23
per share and
$47.63
per share, respectively, which was determined using the closing price of the Company's common stock on the dates of grant. In connection with the spin-off of IAA, the Company is modifying its stock-based compensation awards under the equity adjustment clause in the Omnibus Plan, which provides antidilution protection.
Share Repurchase Program
In October 2016, the board of directors authorized a repurchase of up to
$500 million
of the Company’s outstanding common stock, par value
$0.01
per share, through
October 26, 2019
. 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.
No
shares of common stock were repurchased during the six months ended
June 30, 2019
. In 2018, we repurchased and retired
2,695,978
shares of common stock in the open market at a weighted average price of
$55.64
per share. Approximately
$119.7 million
of the Company's common stock remains available for repurchase under the October 2016 authorization.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Note 5—Net Income from Continuing Operations Per Share
The following table sets forth the computation of net income from continuing operations per share
(in millions except per share amounts)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income from continuing operations
|
$
|
27.4
|
|
|
$
|
37.4
|
|
|
$
|
42.7
|
|
|
$
|
71.6
|
|
|
Weighted average common shares outstanding
|
133.4
|
|
|
134.6
|
|
|
133.2
|
|
|
134.6
|
|
|
Effect of dilutive stock options and restricted stock awards
|
0.7
|
|
|
1.0
|
|
|
0.7
|
|
|
1.2
|
|
|
Weighted average common shares outstanding and potential common shares
|
134.1
|
|
|
135.6
|
|
|
133.9
|
|
|
135.8
|
|
|
Net income from continuing operations per share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.21
|
|
|
$
|
0.28
|
|
|
$
|
0.32
|
|
|
$
|
0.53
|
|
|
Diluted
|
$
|
0.20
|
|
|
$
|
0.28
|
|
|
$
|
0.32
|
|
|
$
|
0.53
|
|
Basic net income from continuing operations per share was calculated by dividing net income from continuing operations by the weighted average number of outstanding common shares for the period. Diluted net income from continuing operations per share was calculated consistent with basic net income from continuing operations per share including the effect of dilutive unissued common shares related to our stock-based employee compensation program. The effect of stock options and restricted stock on net 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. Stock options that would have an anti-dilutive effect on net income from continuing operations per diluted share and PRSUs subject to performance conditions which have not yet been satisfied are excluded from the calculations.
No
options were excluded from the calculation of diluted net income from continuing operations per share for each of the
three or six
months ended
June 30, 2019
and
2018
. In addition, approximately
0.8 million
and
0.7 million
PRSUs were excluded from the calculation of diluted net income from continuing operations per share for the three months ended
June 30, 2019
and
2018
, respectively, and approximately
0.8 million
and
0.7 million
PRSUs were excluded from the calculation of diluted net income from continuing operations per share for the
six
months ended
June 30, 2019
and 2018, respectively. Total options outstanding at
June 30, 2019
and
2018
were
0.8 million
and
1.4 million
, respectively.
Note 6—Finance 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 28, 2022. AFC Funding Corporation had committed liquidity of
$1.70 billion
for U.S. finance receivables at
June 30, 2019
.
We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") receivables which expires on January 28, 2022. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was
C$175 million
at
June 30, 2019
. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
The following tables present quantitative information about delinquencies, credit losses 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
31
days or more past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Net Credit Losses
Three Months Ended
June 30, 2019
|
|
Net Credit Losses
Six Months Ended
June 30, 2019
|
|
|
Total Amount of:
|
|
|
|
(in millions)
|
Receivables
|
|
Receivables
Delinquent
|
|
|
|
Floorplan receivables
|
$
|
2,057.4
|
|
|
$
|
12.3
|
|
|
$
|
8.2
|
|
|
$
|
16.2
|
|
|
Other loans
|
12.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total receivables managed
|
$
|
2,070.1
|
|
|
$
|
12.3
|
|
|
$
|
8.2
|
|
|
$
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Net Credit Losses
Three Months Ended
June 30, 2018
|
|
Net Credit Losses
Six Months Ended
June 30, 2018
|
|
|
Total Amount of:
|
|
|
|
(in millions)
|
Receivables
|
|
Receivables
Delinquent
|
|
|
|
Floorplan receivables
|
$
|
2,001.9
|
|
|
$
|
15.9
|
|
|
$
|
6.8
|
|
|
$
|
14.2
|
|
|
Other loans
|
12.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total receivables managed
|
$
|
2,014.8
|
|
|
$
|
15.9
|
|
|
$
|
6.8
|
|
|
$
|
14.2
|
|
AFC's allowance for losses was
$14.5 million
and
$14.0 million
at
June 30, 2019
and
December 31, 2018
, respectively.
As of
June 30, 2019
and
December 31, 2018
,
$2,008.0 million
and
$1,973.2 million
, respectively, of finance receivables and a cash reserve of
1
percent of the obligations collateralized by finance receivables served as security for the obligations collateralized by finance receivables. Obligations collateralized by finance receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Obligations collateralized by finance receivables, gross
|
$
|
1,438.7
|
|
|
$
|
1,464.7
|
|
|
Unamortized securitization issuance costs
|
(16.4
|
)
|
|
(19.4
|
)
|
|
Obligations collateralized by finance receivables
|
$
|
1,422.3
|
|
|
$
|
1,445.3
|
|
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
June 30, 2019
, we were in compliance with the covenants in the securitization agreements.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Note 7—Long-Term Debt
Long-term debt consisted of the following
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate*
|
|
Maturity
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Term Loan B-4
|
Adjusted LIBOR
|
|
+ 2.25%
|
|
March 11, 2021
|
|
$
|
184.8
|
|
|
$
|
704.4
|
|
|
Term Loan B-5
|
Adjusted LIBOR
|
|
+ 2.50%
|
|
March 9, 2023
|
|
270.7
|
|
|
1,031.5
|
|
|
Revolving credit facility
|
Adjusted LIBOR
|
|
+ 2.0%
|
|
March 9, 2021
|
|
72.0
|
|
|
—
|
|
|
Senior notes
|
|
|
5.125%
|
|
June 1, 2025
|
|
950.0
|
|
|
950.0
|
|
|
European lines of credit
|
Euribor
|
|
+ 1.25%
|
|
Repayable upon demand
|
|
21.5
|
|
|
—
|
|
|
Canadian line of credit
|
CAD Prime
|
|
+ 0.50%
|
|
Repayable upon demand
|
|
—
|
|
|
—
|
|
|
Total debt
|
|
|
|
|
|
|
1,499.0
|
|
|
2,685.9
|
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
|
(14.7
|
)
|
|
(18.5
|
)
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
(93.5
|
)
|
|
(13.1
|
)
|
|
Long-term debt
|
|
|
|
|
|
|
$
|
1,390.8
|
|
|
$
|
2,654.3
|
|
*The interest rates presented in the table above represent the rates in place at
June 30, 2019
.
Credit Facility
On May 31, 2017, we entered into an Incremental Commitment Agreement and Second Amendment (the "Second Amendment") to the Credit Agreement. The Second Amendment provided for, among other things, (i) the refinancing and repricing of the existing tranche B-2 term loans ("Term Loan B-2") remaining after the repayment with new tranche B-4 term loans in an aggregate principal amount of
$717 million
("Term Loan B-4"), (ii) the refinancing and repricing of existing tranche B-3 term loans ("Term Loan B-3") remaining after the repayment with new tranche B-5 term loans in an aggregate principal amount of
$1.05 billion
("Term Loan B-5") and (iii) a
$350 million
senior secured revolving credit facility (the "revolving credit facility").
In June 2019, the Company prepaid approximately
$518.6 million
and
$759.4 million
of Term Loan B-4 and Term Loan B-5, respectively. The prepayments were applied to the remaining quarterly installments of each term loan. As such, no further principal payments are required on either term loan until maturity. In addition, as a result of the term loan prepayments in the second quarter of 2019, the Company recorded additional interest expense of approximately
$1.8 million
related to the acceleration of amortization on debt issuance costs.
The Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Company also pays a commitment fee of 30 to 35 basis points, payable quarterly, on the average daily unused amount of the revolving credit facility. The rates on Term Loan B-4 and Term Loan B-5 were
4.63%
and
4.88%
at
June 30, 2019
, respectively.
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 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 maximum leverage ratio, provided there are revolving loans outstanding. We were in compliance with the covenants in the Credit Agreement at
June 30, 2019
.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
On June 30, 2019,
$72.0 million
was drawn on the revolving credit facility and there were
no
borrowings on the revolving credit facility at
December 31, 2018
. In addition, we had related outstanding letters of credit in the aggregate amount of
$32.5 million
and
$32.9 million
at
June 30, 2019
and
December 31, 2018
, respectively, which reduce the amount available for borrowings under the revolving credit facility. The
$72.0 million
of outstanding borrowings under the revolving credit facility have been classified as current debt as the Company intends to repay the outstanding borrowings within the next twelve months.
European Lines of Credit
COTW has lines of credit aggregating
€30 million
. The lines of credit have an interest rate of Euribor plus
1.25%
and had an aggregate
$21.5 million
of borrowings outstanding at
June 30, 2019
. The lines of credit are guaranteed by certain COTW subsidiaries. In addition, as part of the acquisition of COTW, we assumed debt of approximately
$10.7 million
which was paid off in the first quarter of 2019.
Fair Value of Debt
As of
June 30, 2019
, the estimated fair value of our long-term debt amounted to
$1,512.0 million
. The estimates of fair value were based on broker-dealer quotes for our debt as of
June 30, 2019
. 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 8—Derivatives
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 use interest rate derivatives with the objective of managing exposure to interest rate movements, thereby reducing the effect of interest rate changes and the effect they could have on future cash flows. Currently, interest rate cap agreements are used to accomplish this objective.
|
|
|
|
•
|
In August 2017, we entered into
two
interest rate caps with an aggregate notional amount of
$800 million
to manage our exposure to interest rate movements on our variable rate Credit Facility when
three-month LIBOR
exceeds
2.0%
. The interest rate cap agreements each had an effective date of September 30, 2017 and each mature on September 30, 2019. We paid an aggregate amount of approximately
$1.0 million
for the caps in August 2017.
|
|
|
|
|
•
|
In March 2017, we entered into
two
interest rate caps with an aggregate notional amount of
$400 million
to manage our exposure to interest rate movements on our variable rate Credit Facility when
three-month LIBOR
exceeded
2.0%
. The interest rate cap agreements each had an effective date of March 31, 2017 and each matured on March 31, 2019. We paid an aggregate amount of approximately
$0.7 million
for the caps in April 2017.
|
We are exposed to credit loss in the event of non-performance by the counterparties; however, non-performance is not anticipated. ASC 815,
Derivatives and Hedging
, requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. The fair values of the interest rate derivatives are based on quoted market prices for similar instruments from commercial banks. The following table presents the fair value of our interest rate derivatives included in the consolidated balance sheets for the periods presented (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
2017 Interest rate caps
|
|
Other assets
|
|
$
|
0.7
|
|
|
Other assets
|
|
$
|
5.2
|
|
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
We have not designated any of the interest rate caps as hedges for accounting purposes. Accordingly, changes in the fair value of the interest rate caps are recognized as "Interest expense" in the consolidated statement of income. The following table presents the effect of the interest rate derivatives on our consolidated statements of income for the periods presented (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain / (Loss)
Recognized in Income on Derivatives
|
|
Derivatives Not Designated
|
|
Location of Gain / (Loss) Recognized
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June 30,
|
|
as Hedging Instruments
|
|
in Income on Derivatives
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2017 Interest rate caps
|
|
Interest expense
|
|
$
|
(0.4
|
)
|
|
$
|
1.4
|
|
|
$
|
(0.9
|
)
|
|
$
|
6.1
|
|
Note 9—Leases
We lease property, software, automobiles, trucks and trailers pursuant to operating lease agreements. We also lease furniture, fixtures and equipment under finance leases. Our leases have varying remaining lease terms with leases expiring through 2038, some of which include options to extend the leases.
The components of lease expense were as follows (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
Operating lease cost
|
$
|
14.6
|
|
|
$
|
29.0
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
3.6
|
|
|
$
|
7.4
|
|
|
Interest on lease liabilities
|
0.3
|
|
|
0.7
|
|
|
Total finance lease cost
|
$
|
3.9
|
|
|
$
|
8.1
|
|
Supplemental cash flow information related to leases was as follows (
in millions
):
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows related to operating leases
|
$
|
28.5
|
|
|
Operating cash flows related to finance leases
|
0.7
|
|
|
Financing cash flows related to finance leases
|
15.2
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
15.6
|
|
|
Finance leases
|
6.8
|
|
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Supplemental balance sheet information related to leases was as follows (
in millions, except lease term and discount rate
):
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Operating Leases
|
|
|
Operating lease right-of-use assets
|
$
|
370.5
|
|
|
Other accrued expenses
|
$
|
32.9
|
|
|
Operating lease liabilities
|
365.5
|
|
|
Total operating lease liabilities
|
$
|
398.4
|
|
|
Finance Leases
|
|
|
Property and equipment, gross
|
$
|
91.2
|
|
|
Accumulated depreciation
|
(66.9
|
)
|
|
Property and equipment, net
|
$
|
24.3
|
|
|
Other accrued expenses
|
$
|
12.0
|
|
|
Other liabilities
|
13.0
|
|
|
Total finance lease liabilities
|
$
|
25.0
|
|
|
Weighted Average Remaining Lease Term
|
|
|
Operating leases
|
10.6 years
|
|
|
Finance leases
|
2.1 years
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
6.1
|
%
|
|
Finance leases
|
4.8
|
%
|
Maturities of lease liabilities as of
June 30, 2019
were as follows (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Finance Leases
|
|
2019 (excluding the six months ended June 30, 2019)
|
$
|
28.8
|
|
|
$
|
13.2
|
|
|
2020
|
53.8
|
|
|
6.7
|
|
|
2021
|
51.4
|
|
|
6.3
|
|
|
2022
|
49.3
|
|
|
0.6
|
|
|
2023
|
47.6
|
|
|
0.1
|
|
|
Thereafter
|
328.0
|
|
|
—
|
|
|
Total lease payments
|
558.9
|
|
|
26.9
|
|
|
Less imputed interest
|
(160.5
|
)
|
|
(1.9
|
)
|
|
Total
|
$
|
398.4
|
|
|
$
|
25.0
|
|
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Note 10—Commitments 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. Such matters are generally not, in the opinion of management, likely to have a material adverse effect on our financial condition, results of operations or cash flows. Legal fees are expensed as incurred. There has been
no
significant change in the legal and regulatory proceedings related to continuing operations which were disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2018
.
Note 11—Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Foreign currency translation loss
|
$
|
(34.4
|
)
|
|
$
|
(61.3
|
)
|
|
Accumulated other comprehensive loss
|
$
|
(34.4
|
)
|
|
$
|
(61.3
|
)
|
Note 12—Segment Information
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. Prior to the spin-off of IAA, our operations were grouped into
three
operating segments: ADESA Auctions, IAA and AFC, which also served as our reportable business segments. Beginning in the second quarter of 2019, after the completion of the spin-off, the Company began operating under
two
reportable business segments: ADESA Auctions and AFC. These reportable business segments offer different services and have fundamental differences in their operations. Results of the former IAA segment and spin-related costs are now reported as discontinued operations (see Note 3). Segment results for prior periods have been reclassified to conform with the new presentation of segments.
The holding company is maintained separately from the reportable segments and includes expenses associated with the corporate offices, such as salaries, benefits and travel costs for the corporate 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 capital 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.
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Financial information regarding our reportable segments is set forth below as of and for the three months ended
June 30, 2019
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
|
Operating revenues
|
$
|
632.4
|
|
|
$
|
86.7
|
|
|
$
|
—
|
|
|
$
|
719.1
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
392.9
|
|
|
24.5
|
|
|
—
|
|
|
417.4
|
|
|
Selling, general and administrative
|
121.9
|
|
|
6.4
|
|
|
34.9
|
|
|
163.2
|
|
|
Depreciation and amortization
|
38.0
|
|
|
2.6
|
|
|
7.3
|
|
|
47.9
|
|
|
Total operating expenses
|
552.8
|
|
|
33.5
|
|
|
42.2
|
|
|
628.5
|
|
|
Operating profit (loss)
|
79.6
|
|
|
53.2
|
|
|
(42.2
|
)
|
|
90.6
|
|
|
Interest expense
|
1.0
|
|
|
16.2
|
|
|
38.4
|
|
|
55.6
|
|
|
Other (income) expense, net
|
(1.3
|
)
|
|
(0.1
|
)
|
|
0.3
|
|
|
(1.1
|
)
|
|
Intercompany expense (income)
|
7.6
|
|
|
(1.6
|
)
|
|
(6.0
|
)
|
|
—
|
|
|
Income (loss) from continuing operations before income taxes
|
72.3
|
|
|
38.7
|
|
|
(74.9
|
)
|
|
36.1
|
|
|
Income taxes
|
21.8
|
|
|
11.3
|
|
|
(24.4
|
)
|
|
8.7
|
|
|
Net income (loss) from continuing operations
|
$
|
50.5
|
|
|
$
|
27.4
|
|
|
$
|
(50.5
|
)
|
|
$
|
27.4
|
|
|
Total assets
|
$
|
3,717.0
|
|
|
$
|
2,495.1
|
|
|
$
|
165.7
|
|
|
$
|
6,377.8
|
|
Financial information regarding our reportable segments is set forth below as of and for the three months ended
June 30, 2018
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
|
Operating revenues
|
$
|
538.3
|
|
|
$
|
85.1
|
|
|
$
|
—
|
|
|
$
|
623.4
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
307.2
|
|
|
23.0
|
|
|
—
|
|
|
330.2
|
|
|
Selling, general and administrative
|
108.3
|
|
|
7.5
|
|
|
34.1
|
|
|
149.9
|
|
|
Depreciation and amortization
|
31.3
|
|
|
3.5
|
|
|
7.3
|
|
|
42.1
|
|
|
Total operating expenses
|
446.8
|
|
|
34.0
|
|
|
41.4
|
|
|
522.2
|
|
|
Operating profit (loss)
|
91.5
|
|
|
51.1
|
|
|
(41.4
|
)
|
|
101.2
|
|
|
Interest expense
|
0.6
|
|
|
14.8
|
|
|
33.0
|
|
|
48.4
|
|
|
Other (income) expense, net
|
(0.2
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
Intercompany expense (income)
|
7.6
|
|
|
(0.7
|
)
|
|
(6.9
|
)
|
|
—
|
|
|
Income (loss) from continuing operations before income taxes
|
83.5
|
|
|
37.0
|
|
|
(67.2
|
)
|
|
53.3
|
|
|
Income taxes
|
23.5
|
|
|
9.3
|
|
|
(16.9
|
)
|
|
15.9
|
|
|
Net income (loss) from continuing operations
|
$
|
60.0
|
|
|
$
|
27.7
|
|
|
$
|
(50.3
|
)
|
|
$
|
37.4
|
|
|
Total assets
|
$
|
3,171.6
|
|
|
$
|
2,354.1
|
|
|
$
|
246.9
|
|
|
$
|
5,772.6
|
|
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Financial information regarding our reportable segments is set forth below as of and for the six months ended
June 30, 2019
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
|
Operating revenues
|
$
|
1,232.1
|
|
|
$
|
176.6
|
|
|
$
|
—
|
|
|
$
|
1,408.7
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
763.6
|
|
|
47.7
|
|
|
—
|
|
|
811.3
|
|
|
Selling, general and administrative
|
248.5
|
|
|
13.6
|
|
|
76.3
|
|
|
338.4
|
|
|
Depreciation and amortization
|
73.0
|
|
|
5.0
|
|
|
14.2
|
|
|
92.2
|
|
|
Total operating expenses
|
1,085.1
|
|
|
66.3
|
|
|
90.5
|
|
|
1,241.9
|
|
|
Operating profit (loss)
|
147.0
|
|
|
110.3
|
|
|
(90.5
|
)
|
|
166.8
|
|
|
Interest expense
|
1.7
|
|
|
33.3
|
|
|
77.1
|
|
|
112.1
|
|
|
Other (income) expense, net
|
(3.2
|
)
|
|
(0.2
|
)
|
|
0.2
|
|
|
(3.2
|
)
|
|
Intercompany expense (income)
|
17.9
|
|
|
(2.8
|
)
|
|
(15.1
|
)
|
|
—
|
|
|
Income (loss) from continuing operations before income taxes
|
130.6
|
|
|
80.0
|
|
|
(152.7
|
)
|
|
57.9
|
|
|
Income taxes
|
37.7
|
|
|
22.1
|
|
|
(44.6
|
)
|
|
15.2
|
|
|
Net income (loss) from continuing operations
|
$
|
92.9
|
|
|
$
|
57.9
|
|
|
$
|
(108.1
|
)
|
|
$
|
42.7
|
|
Financial information regarding our reportable segments is set forth below as of and for the six months ended
June 30, 2018
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
|
Operating revenues
|
$
|
1,066.4
|
|
|
$
|
170.2
|
|
|
$
|
—
|
|
|
$
|
1,236.6
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
613.2
|
|
|
45.3
|
|
|
—
|
|
|
658.5
|
|
|
Selling, general and administrative
|
217.1
|
|
|
15.5
|
|
|
72.8
|
|
|
305.4
|
|
|
Depreciation and amortization
|
62.5
|
|
|
11.3
|
|
|
14.6
|
|
|
88.4
|
|
|
Total operating expenses
|
892.8
|
|
|
72.1
|
|
|
87.4
|
|
|
1,052.3
|
|
|
Operating profit (loss)
|
173.6
|
|
|
98.1
|
|
|
(87.4
|
)
|
|
184.3
|
|
|
Interest expense
|
1.2
|
|
|
28.2
|
|
|
60.3
|
|
|
89.7
|
|
|
Other (income) expense, net
|
(0.5
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
(0.8
|
)
|
|
Intercompany expense (income)
|
19.7
|
|
|
(1.2
|
)
|
|
(18.5
|
)
|
|
—
|
|
|
Income (loss) from continuing operations before income taxes
|
153.2
|
|
|
71.1
|
|
|
(128.9
|
)
|
|
95.4
|
|
|
Income taxes
|
39.0
|
|
|
17.7
|
|
|
(32.9
|
)
|
|
23.8
|
|
|
Net income (loss) from continuing operations
|
$
|
114.2
|
|
|
$
|
53.4
|
|
|
$
|
(96.0
|
)
|
|
$
|
71.6
|
|
KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
June 30, 2019 (Unaudited)
Geographic Information
Our foreign operations include Canada, Mexico, Continental Europe and the U.K. Most of our operations outside the U.S. are in Canada. Approximately
63%
and
66%
of our foreign operating revenues were from Canada for the three and six months ended
June 30, 2019
, respectively, and approximately
97%
and
97%
of our foreign operating revenues were from Canada for the three and six months ended June 30,
2018
, respectively. The 2019 acquisition of COTW has increased the percentage of operating revenues from Europe. Information regarding the geographic areas of our operations is set forth below
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
580.9
|
|
|
$
|
524.5
|
|
|
$
|
1,160.8
|
|
|
$
|
1,049.7
|
|
|
Foreign
|
138.2
|
|
|
98.9
|
|
|
247.9
|
|
|
186.9
|
|
|
|
$
|
719.1
|
|
|
$
|
623.4
|
|
|
$
|
1,408.7
|
|
|
$
|
1,236.6
|
|
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," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions identify forward-looking statements. Such statements, including statements regarding our future growth; potential refinancing of debt; 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 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, 2018, filed on February 21, 2019. 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;
|
|
|
|
|
•
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the ability to recover or collect from delinquent or bankrupt customers;
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•
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economic conditions including fuel prices, commodity prices, foreign exchange rates and interest rate fluctuations;
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•
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trends in the vehicle remarketing industry;
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•
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trends in the number of commercial vehicles being brought to auction, in particular off-lease volumes;
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•
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changes in the volume of vehicle production, including capacity reductions at the major original equipment manufacturers;
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•
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laws, regulations and industry standards, including changes in regulations governing the sale of used vehicles and commercial lending activities;
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•
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our ability to maintain our brand and protect our intellectual property;
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•
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the costs of environmental compliance and/or the imposition of liabilities under environmental laws and regulations;
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•
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weather, including increased expenses as a result of catastrophic events;
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•
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general business conditions;
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•
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our substantial amount of debt;
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•
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restrictive covenants in our debt agreements;
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•
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our assumption of the settlement risk for vehicles sold;
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•
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litigation developments;
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•
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our self-insurance for certain risks;
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•
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interruptions to service from our workforce;
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•
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any impairment to our goodwill or other intangible assets;
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•
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changes in effective tax rates;
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•
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the taxable nature of the spin-off of our former salvage auction business;
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•
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changes to accounting standards; and
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•
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other risks described from time to time in our filings with the SEC.
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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 in North America and Europe. 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.
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•
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The ADESA Auctions segment serves a domestic and international customer base through live and online auctions and through
74
whole car auction facilities in North 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 by Openlane 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 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. ADESA also provides value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. ADESA also includes TradeRev, an online automotive remarketing system where dealers can launch and participate in real-time vehicle auctions at any time, ADESA Remarketing Limited, an online whole car vehicle remarketing business in the United Kingdom and ADESA Europe (formerly known as CarsOnTheWeb), an online wholesale vehicle auction marketplace in Continental Europe.
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•
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The AFC segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers. At
June 30, 2019
, AFC conducted business at
125
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 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 capital 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 in North America through whole car auctions, including online only sales, were approximately 10.6 million and 11.1 million in 2016 and 2017, respectively. Data for the whole car auction industry is collected by the NAAA through an annual survey. The NAAA industry volumes collected by the annual survey do not include online only volumes or mobile application volumes (e.g. Openlane and TradeRev). We have included online only volumes in the totals above for 2016 and 2017. Used vehicle auction volumes in North America in 2018 were approximately 11.5 million vehicles, including online only volumes and mobile application volumes. We expect that used vehicle auction volumes in North America, including online only volumes and mobile application volumes, will be over 11 million units in 2019, 2020 and 2021. Our estimates are based on information from the Bureau of Economic Analysis, IHS Automotive, NAAA's annual survey and management estimates.
In addition to the traditional whole car auction market described above, which we estimate has 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 the U.S. and Canada. TradeRev incurred operating losses of $32.8 million and $22.4 million for the six months ended
June 30, 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 15,800 dealers in 2018, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.8 million in 2018.
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.
Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended
June 30, 2019
and
2018
:
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
(Dollars in millions except per share amounts)
|
2019
|
|
2018
|
|
Revenues
|
|
|
|
|
ADESA
|
$
|
632.4
|
|
|
$
|
538.3
|
|
|
AFC
|
86.7
|
|
|
85.1
|
|
|
Total revenues
|
719.1
|
|
|
623.4
|
|
|
Cost of services*
|
417.4
|
|
|
330.2
|
|
|
Gross profit*
|
301.7
|
|
|
293.2
|
|
|
Selling, general and administrative
|
163.2
|
|
|
149.9
|
|
|
Depreciation and amortization
|
47.9
|
|
|
42.1
|
|
|
Operating profit
|
90.6
|
|
|
101.2
|
|
|
Interest expense
|
55.6
|
|
|
48.4
|
|
|
Other income, net
|
(1.1
|
)
|
|
(0.5
|
)
|
|
Income from continuing operations before income taxes
|
36.1
|
|
|
53.3
|
|
|
Income taxes
|
8.7
|
|
|
15.9
|
|
|
Net income from continuing operations
|
27.4
|
|
|
37.4
|
|
|
Income from discontinued operations
|
28.2
|
|
|
55.8
|
|
|
Net income
|
$
|
55.6
|
|
|
$
|
93.2
|
|
|
Net income from continuing operations per share
|
|
|
|
|
Basic
|
$
|
0.21
|
|
|
$
|
0.28
|
|
|
Diluted
|
$
|
0.20
|
|
|
$
|
0.28
|
|
* Exclusive of depreciation and amortization
Overview
For the three months ended
June 30, 2019
, we had revenue of
$719.1 million
compared with revenue of
$623.4 million
for the three months ended
June 30, 2018
, an increase of
15%
. Businesses acquired accounted for an increase in revenue of $51.2 million or 7% of revenue. Excluding revenue from purchased vehicles of $78.3 million and $27.2 million for the three months ended
June 30, 2019
and
2018
, respectively, revenue would have been $640.8 million and $596.2 million, respectively, an increase of 7%. 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
$5.8 million
, or
14%
, to
$47.9 million
for the three months ended
June 30, 2019
, compared with
$42.1 million
for the three months ended
June 30, 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 2018 and 2019.
Interest Expense
Interest expense increased
$7.2 million
, or
15%
, to
$55.6 million
for the three months ended
June 30, 2019
, compared with
$48.4 million
for the three months ended
June 30, 2018
. The increase was primarily attributable to interest expense associated with borrowings on the revolving credit facility and European lines of credit in 2019, as well as additional interest expense of approximately $1.8 million related to the acceleration of amortization on debt issuance costs. There was an increase of approximately $14.4 million in the average outstanding balance of corporate debt for the three months ended
June 30, 2019
compared with the three months ended
June 30, 2018
, as well as an increase in the weighted average interest rate for the same period of approximately 0.23%. In addition, there was an increase in interest expense at AFC of $1.4 million, which resulted from an increase in interest rates under the U.S. securitization agreement for the three months ended
June 30, 2019
, as
compared with the three months ended
June 30, 2018
. The increases in interest expense were partially offset by $1.2 million received from the counterparties to the interest rate cap agreements.
Income Taxes
We had an effective tax rate of 24.1% for the three months ended
June 30, 2019
, compared with an effective tax rate of 29.8% for the three months ended
June 30, 2018
. The decrease in the effective tax rate was the result of the deferred tax impact of a state tax law change during the three months ended June 30, 2019.
Income from Discontinued Operations
On June 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 ended
June 30, 2019
and
2018
, IAA had revenue of
$366.4 million
and
$333.2 million
, respectively, and income from discontinued operations of
$28.2 million
and
$55.8 million
, respectively. The operating results included one-time transaction costs of approximately
$30.5 million
for the three months ended
June 30, 2019
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 3.
Impact of Foreign Currency
The strengthening of the U.S dollar has impacted the reporting of our Canadian operations in U.S. dollars. For the three months ended
June 30, 2019
, fluctuations in the Canadian exchange rate decreased revenue by $3.0 million, operating profit by $0.9 million, net income by $0.5 million and net income per diluted share by less than $0.01.
ADESA Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
(Dollars in millions, except per vehicle amounts)
|
2019
|
|
2018
|
|
ADESA revenue
|
$
|
632.4
|
|
|
$
|
538.3
|
|
|
Cost of services*
|
392.9
|
|
|
307.2
|
|
|
Gross profit*
|
239.5
|
|
|
231.1
|
|
|
Selling, general and administrative
|
121.9
|
|
|
108.3
|
|
|
Depreciation and amortization
|
38.0
|
|
|
31.3
|
|
|
Operating profit
|
$
|
79.6
|
|
|
$
|
91.5
|
|
|
Vehicles sold
|
994,000
|
|
|
907,000
|
|
|
Physical auction vehicles sold in North America
|
553,000
|
|
|
550,000
|
|
|
Online only vehicles sold in North America
|
416,000
|
|
|
346,000
|
|
|
Vehicles sold in Europe
|
25,000
|
|
|
11,000
|
|
|
Dealer consignment mix at physical auctions
|
41
|
%
|
|
43
|
%
|
|
Conversion rate at North American physical auctions
|
66.1
|
%
|
|
62.4
|
%
|
|
Physical auction revenue per vehicle sold, excluding purchased vehicles
|
$
|
882
|
|
|
$
|
839
|
|
|
Online only revenue per vehicle sold, excluding purchased vehicles
|
$
|
150
|
|
|
$
|
118
|
|
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased
$94.1 million
, or
17%
, to
$632.4 million
for the three months ended
June 30, 2019
, compared with
$538.3 million
for the three months ended
June 30, 2018
. The increase in revenue was a result of a 10% increase in the number of vehicles sold (8% increase excluding acquisitions) and an increase in average revenue per vehicle sold of 7%. Businesses acquired in the last 12 months accounted for an increase in revenue of $51.2 million.
The increase in vehicles sold was primarily attributable to a 13% increase in institutional volume, including vehicles sold on our online only platform, as well as a 3% increase in dealer consignment units sold for the three months ended
June 30, 2019
compared with the three months ended
June 30, 2018
. Online sales volume for ADESA represented approximately 59% of the
total vehicles sold in the
second quarter
of
2019
, compared with approximately 54% in the
second quarter
of
2018
. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location (upstream selling); (ii) online solutions that offer vehicles for sale while in transit to auction locations (midstream selling); (iii) vehicles sold on the TradeRev platform; (iv) vehicle sales in Europe, 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
®
). Upstream selling, midstream selling and TradeRev sales, which represent online only sales, accounted for approximately 75% of ADESA's North American online sales volume. ADESA sold approximately 416,000 (including approximately 41,000 from TradeRev) and 346,000 (including approximately 30,000 from TradeRev) vehicles through its North American online only offerings in the second quarter of
2019
and
2018
, respectively. For the three months ended
June 30, 2019
, dealer consignment vehicles represented approximately 41% of used vehicles sold at ADESA physical auction locations, compared with approximately 43% for the three months ended
June 30, 2018
. The volume of vehicles sold at physical auction locations in the
second quarter
of
2019
was consistent with the
second 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, increased to 66.1% for the three months ended
June 30, 2019
, compared with 62.4% for the three months ended
June 30, 2018
.
Physical auction revenue per vehicle sold increased $43, or 5%, to $882 for the three months ended
June 30, 2019
, compared with $839 for the three months ended
June 30, 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, partially offset by a decrease in physical auction revenue per vehicle sold of $4 due to fluctuations in the Canadian exchange rate.
Online only auction revenue per vehicle sold increased $97 to $232 for the three months ended
June 30, 2019
, compared with $135 for the three months ended
June 30, 2018
. The increase in online only auction revenue per vehicle sold was attributable to an increase in purchased vehicles associated with the ADESA Assurance Program and the inclusion of TradeRev and CarsOnTheWeb sales. Excluding vehicles purchased as part of the ADESA Assurance Program and vehicles purchased by CarsOnTheWeb, online only revenue per vehicle would have been $150 and $118 for the three months ended
June 30, 2019
and
2018
, respectively. The $32 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 ended
June 30, 2019
, gross profit for ADESA increased
$8.4 million
, or
4%
, to
$239.5 million
, compared with
$231.1 million
for the three months ended
June 30, 2018
. Gross profit for ADESA was
37.9%
of revenue for the three months ended
June 30, 2019
, compared with 42.9% of revenue for the three months ended
June 30, 2018
. Gross profit as a percentage of revenue decreased for the three months ended
June 30, 2019
as compared with the three months ended
June 30, 2018
as a result of an increase in purchase vehicles primarily related to the acquisition of COTW and increased activity under ADESA Assurance, as well as an increase in lower margin related services. Excluding purchased vehicles, gross profit as a percentage of revenue was 43.2% and 45.2% for the three months ended
June 30, 2019
and
2018
, respectively. Businesses acquired in the last 12 months accounted for an increase in cost of services of $43.9 million for the three months ended
June 30, 2019
.
For the three months ended
June 30, 2019
, High Tech Locksmiths, a subsidiary of ADESA, incurred an inventory loss of approximately $5.4 million. The inventory loss represented a 0.9% decline in gross profit for the three months ended
June 30, 2019
. The Company is pursuing all avenues to recover the loss. Despite these efforts, we may not be successful in recovering all or a portion of this loss.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased
$13.6 million
, or
13%
, to
$121.9 million
for the three months ended
June 30, 2019
, compared with
$108.3 million
for the three months ended
June 30, 2018
, primarily due to increases in costs associated with TradeRev aggregating $7.1 million, acquisitions of $6.1 million, information technology costs of $1.8 million, professional fees of $1.8 million and benefit related expense of $0.9 million, partially offset by decreases in compensation expense of $1.2 million, stock-based compensation of $0.7 million, fluctuations in the Canadian exchange rate of $0.7 million and other miscellaneous expenses aggregating $1.5 million.
AFC Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
(Dollars in millions except volumes and per loan amounts)
|
2019
|
|
2018
|
|
AFC revenue
|
|
|
|
|
Interest and fee income
|
$
|
83.7
|
|
|
$
|
80.5
|
|
|
Other revenue
|
2.6
|
|
|
3.3
|
|
|
Provision for credit losses
|
(8.4
|
)
|
|
(7.1
|
)
|
|
Warranty contract revenue
|
8.8
|
|
|
8.4
|
|
|
Total AFC revenue
|
86.7
|
|
|
85.1
|
|
|
Cost of services*
|
24.5
|
|
|
23.0
|
|
|
Gross profit*
|
62.2
|
|
|
62.1
|
|
|
Selling, general and administrative
|
6.4
|
|
|
7.5
|
|
|
Depreciation and amortization
|
2.6
|
|
|
3.5
|
|
|
Operating profit
|
$
|
53.2
|
|
|
$
|
51.1
|
|
|
Loan transactions
|
437,000
|
|
|
435,000
|
|
|
Revenue per loan transaction, excluding "Warranty contract revenue"
|
$
|
178
|
|
|
$
|
177
|
|
* Exclusive of depreciation and amortization
Revenue
For the three months ended
June 30, 2019
, AFC revenue increased
$1.6 million
, or
2%
, to
$86.7 million
, compared with
$85.1 million
for the three months ended
June 30, 2018
. The increase in revenue was primarily the result of a 1% increase in revenue per loan transaction.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $1, or 1%, primarily as a result of an increase in interest yield and fee revenue as a result of prime rate increases and an increase in average loan values, partially offset by an increase in provision for credit losses and a decrease in floorplan fee income per unit for the three months ended
June 30, 2019
. Revenue per loan transaction excludes "Warranty contract revenue."
The provision for credit losses increased to 1.7% of the average managed receivables for the three months ended
June 30, 2019
from 1.5% for the three months ended
June 30, 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 ended
June 30, 2019
, gross profit for the AFC segment increased
$0.1 million
to
$62.2 million
, or
71.7%
of revenue, compared with
$62.1 million
, or 73.0% of revenue, for the three months ended
June 30, 2018
. The decrease in gross profit as a percent of revenue was primarily the result of a
7%
increase in cost of services. The increase in cost of services was primarily the result of increases in PWI expenses of $0.9 million, compensation expense of $0.8 million and other miscellaneous expenses aggregating $0.8 million, partially offset by a decrease in lot checks of $0.7 million and incentive-based compensation of $0.3 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased
$1.1 million
, or
15%
, to
$6.4 million
for the three months ended
June 30, 2019
, compared with
$7.5 million
for the three months ended
June 30, 2018
, primarily as a result of decreases in travel expenses of $0.5 million, incentive-based compensation of $0.4 million and other miscellaneous expenses aggregating $0.2 million.
Holding Company Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
Selling, general and administrative
|
$
|
34.9
|
|
|
$
|
34.1
|
|
|
Depreciation and amortization
|
7.3
|
|
|
7.3
|
|
|
Operating loss
|
$
|
(42.2
|
)
|
|
$
|
(41.4
|
)
|
Selling, General and Administrative
For the three months ended
June 30, 2019
, selling, general and administrative expenses at the holding company increased
$0.8 million
, or
2%
, to
$34.9 million
, compared with
$34.1 million
for the three months ended
June 30, 2018
, primarily as a result of increases in medical expenses of $1.8 million, information technology costs of $1.5 million, professional fees of $0.7 million, telecom costs of $0.7 million and stock-based compensation expense of $0.5 million, partially offset by decreases in incentive-based compensation of $2.0 million, compensation expense of $1.7 million and other miscellaneous expenses aggregating $0.7 million.
Overview of Results of KAR Auction Services, Inc. for the Six Months Ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(Dollars in millions except per share amounts)
|
2019
|
|
2018
|
|
Revenues
|
|
|
|
|
ADESA
|
$
|
1,232.1
|
|
|
$
|
1,066.4
|
|
|
AFC
|
176.6
|
|
|
170.2
|
|
|
Total revenues
|
1,408.7
|
|
|
1,236.6
|
|
|
Cost of services*
|
811.3
|
|
|
658.5
|
|
|
Gross profit*
|
597.4
|
|
|
578.1
|
|
|
Selling, general and administrative
|
338.4
|
|
|
305.4
|
|
|
Depreciation and amortization
|
92.2
|
|
|
88.4
|
|
|
Operating profit
|
166.8
|
|
|
184.3
|
|
|
Interest expense
|
112.1
|
|
|
89.7
|
|
|
Other income, net
|
(3.2
|
)
|
|
(0.8
|
)
|
|
Income from continuing operations before income taxes
|
57.9
|
|
|
95.4
|
|
|
Income taxes
|
15.2
|
|
|
23.8
|
|
|
Net income from continuing operations
|
$
|
42.7
|
|
|
$
|
71.6
|
|
|
Income from discontinued operations
|
90.7
|
|
|
111.6
|
|
|
Net income
|
$
|
133.4
|
|
|
$
|
183.2
|
|
|
Net income from continuing operations per share
|
|
|
|
|
Basic
|
$
|
0.32
|
|
|
$
|
0.53
|
|
|
Diluted
|
$
|
0.32
|
|
|
$
|
0.53
|
|
* Exclusive of depreciation and amortization
Overview
For the
six
months ended
June 30, 2019
, we had revenue of
$1,408.7 million
compared with revenue of
$1,236.6 million
for the six months ended
June 30, 2018
, an increase of
14%
. Businesses acquired accounted for an increase in revenue of $83.1 million or 6% of revenue. Excluding revenue from purchased vehicles of $135.5 million and $52.6 million for the six months ended
June 30, 2019
and
2018
, respectively, revenue would have been $1,273.2 million and $1,184.0 million, respectively, an increase of 8%. 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
$3.8 million
, or
4%
, to
$92.2 million
for the
six
months ended
June 30, 2019
, compared with
$88.4 million
for the
six
months ended
June 30, 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 2018 and 2019.
Interest Expense
Interest expense increased
$22.4 million
, or
25%
, to
$112.1 million
for the
six
months ended
June 30, 2019
, compared with
$89.7 million
for the
six
months ended
June 30, 2018
. The increase was primarily attributable to interest expense associated with borrowings on the revolving credit facility and European lines of credit in 2019, as well as additional interest expense of approximately $1.8 million related to the acceleration of amortization on debt issuance costs. There was an increase of approximately $67.7 million in the average outstanding balance of corporate debt for the
six
months ended
June 30, 2019
compared with the
six
months ended
June 30, 2018
, as well as an increase in the weighted average interest rate for the same period of approximately 0.47%. In addition, there was an increase in interest expense at AFC of $5.1 million, which resulted from an increase in interest rates under the U.S. securitization agreement for the
six
months ended
June 30, 2019
, as compared with the
six
months ended
June 30, 2018
. The increases in interest expense were partially offset by $3.6 million received from the counterparties to the interest rate cap agreements.
Income Taxes
We had an effective tax rate of 26.3% for the
six
months ended
June 30, 2019
, compared with an effective tax rate of 24.9% for the
six
months ended
June 30, 2018
.
Income from Discontinued Operations
On June 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 six months ended
June 30, 2019
and
2018
, IAA had revenue of
$723.6 million
and
$670.5 million
, respectively, and income from discontinued operations of
$90.7 million
and
$111.6 million
, respectively. The operating results included one-time transaction costs of approximately
$31.3 million
for the six months ended
June 30, 2019
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 3.
Impact of Foreign Currency
The strengthening of the U.S dollar has impacted the reporting of our Canadian operations in U.S. dollars. For the
six
months ended
June 30, 2019
, fluctuations in the Canadian exchange rate decreased revenue by $6.8 million, operating profit by $1.6 million, net income by $0.8 million and net income per diluted share by less than $0.01.
ADESA Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in millions, except per vehicle amounts)
|
2019
|
|
2018
|
|
ADESA revenue
|
$
|
1,232.1
|
|
|
$
|
1,066.4
|
|
|
Cost of services*
|
763.6
|
|
|
613.2
|
|
|
Gross profit*
|
468.5
|
|
|
453.2
|
|
|
Selling, general and administrative
|
248.5
|
|
|
217.1
|
|
|
Depreciation and amortization
|
73.0
|
|
|
62.5
|
|
|
Operating profit
|
$
|
147.0
|
|
|
$
|
173.6
|
|
|
Vehicles sold
|
1,940,000
|
|
|
1,785,000
|
|
|
Physical auction vehicles sold in North America
|
1,109,000
|
|
|
1,107,000
|
|
|
Online only vehicles sold in North America
|
783,000
|
|
|
655,000
|
|
|
Vehicles sold in Europe
|
48,000
|
|
|
23,000
|
|
|
Dealer consignment mix at physical auctions
|
39
|
%
|
|
42
|
%
|
|
Conversion rate at North American physical auctions
|
64.9
|
%
|
|
62.5
|
%
|
|
Physical auction revenue per vehicle sold, excluding purchased vehicles
|
$
|
879
|
|
|
$
|
829
|
|
|
Online only revenue per vehicle sold, excluding purchased vehicles
|
$
|
148
|
|
|
$
|
117
|
|
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased
$165.7 million
, or
16%
, to
$1,232.1 million
for the
six
months ended
June 30, 2019
, compared with
$1,066.4 million
for the
six
months ended
June 30, 2018
. The increase in revenue was a result of a 9% increase in the number of vehicles sold (7% increase excluding acquisitions) and an increase in average revenue per vehicle sold of 6%. Businesses acquired in the last 12 months accounted for an increase in revenue of $83.1 million.
The increase in vehicles sold was primarily attributable to a 12% increase in institutional volume, including vehicles sold on our online only platform, for the
six
months ended
June 30, 2019
compared with the
six
months ended
June 30, 2018
. Online sales volume for ADESA represented approximately 58% of the total vehicles sold in the first
six
months of
2019
, compared with approximately 53% in the first
six
months of
2018
. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location (upstream selling); (ii) online solutions that offer vehicles for sale while in transit to auction locations (midstream selling); (iii) vehicles sold on the TradeRev platform; (iv) vehicle sales in Europe, 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
®
). Upstream selling, midstream selling and TradeRev sales, which represent online only sales, accounted for approximately 73% of ADESA's North American online sales volume. ADESA sold approximately 783,000 (including approximately 72,000 from TradeRev) and 655,000 (including approximately 52,000 from TradeRev) vehicles through its North American online only offerings in the first
six
months of
2019
and
2018
, respectively. For the
six
months ended
June 30, 2019
, dealer consignment vehicles represented approximately 39% of used vehicles sold at ADESA physical auction locations, compared with approximately 42% for the
six
months ended
June 30, 2018
. The volume of vehicles sold at physical auction locations in the first
six
months of
2019
was consistent with the first
six
months 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, increased to 64.9% for the
six
months ended
June 30, 2019
, compared with 62.5% for the
six
months ended
June 30, 2018
.
Physical auction revenue per vehicle sold increased $50, or 6%, to $879 for the
six
months ended
June 30, 2019
, compared with $829 for the
six
months ended
June 30, 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, partially offset by a decrease in physical auction revenue per vehicle sold of $5 due to fluctuations in the Canadian exchange rate.
Online only auction revenue per vehicle sold increased $87 to $220 for the
six
months ended
June 30, 2019
, compared with $133 for the
six
months ended
June 30, 2018
. The increase in online only auction revenue per vehicle sold was attributable
to an increase in purchased vehicles associated with the ADESA Assurance Program and the inclusion of TradeRev and CarsOnTheWeb sales. Excluding vehicles purchased as part of the ADESA Assurance Program and vehicles purchased by CarsOnTheWeb, online only revenue per vehicle would have been $148 and $117 for the
six
months ended
June 30, 2019
and
2018
, respectively. The $31 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
six
months ended
June 30, 2019
, gross profit for ADESA increased
$15.3 million
, or
3%
, to
$468.5 million
, compared with
$453.2 million
for the
six
months ended
June 30, 2018
. Gross profit for ADESA was
38.0%
of revenue for the six months ended
June 30, 2019
, compared with 42.5% of revenue for the
six
months ended
June 30, 2018
. Gross profit as a percentage of revenue decreased for the
six
months ended
June 30, 2019
as compared with the
six
months ended
June 30, 2018
as a result of an increase in purchase vehicles primarily related to the acquisition of COTW and increased activity under ADESA Assurance, as well as an increase in lower margin related services. Excluding purchased vehicles, gross profit as a percentage of revenue was 42.7% and 44.7% for the
six
months ended
June 30, 2019
and
2018
, respectively. Businesses acquired in the last 12 months accounted for an increase in cost of services of $70.8 million for the
six
months ended
June 30, 2019
.
For the six months ended
June 30, 2019
, High Tech Locksmiths, a subsidiary of ADESA, incurred an inventory loss of approximately $5.4 million. The inventory loss represented a 0.4% decline in gross profit for the six months ended
June 30, 2019
. The Company is pursuing all avenues to recover the loss. Despite these efforts, we may not be successful in recovering all or a portion of this loss.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased
$31.4 million
, or
14%
, to
$248.5 million
for the
six
months ended
June 30, 2019
, compared with
$217.1 million
for the
six
months ended
June 30, 2018
, primarily due to increases in costs associated with TradeRev aggregating $15.1 million, acquisitions of $10.7 million, information technology costs of $3.3 million, professional fees of $1.9 million, compensation expense of $1.5 million, incentive-based compensation $2.0 million, benefit related expense of $1.5 million and telecom costs of $0.8 million, partially offset by fluctuations in the Canadian exchange rate of $1.8 million and decreases in travel expenses of $1.0 million, supplies expense of $0.8 million and other miscellaneous expenses aggregating $1.8 million.
AFC Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(Dollars in millions except volumes and per loan amounts)
|
2019
|
|
2018
|
|
AFC revenue
|
|
|
|
|
Interest and fee income
|
$
|
170.6
|
|
|
$
|
162.4
|
|
|
Other revenue
|
5.4
|
|
|
6.2
|
|
|
Provision for credit losses
|
(16.6
|
)
|
|
(14.8
|
)
|
|
Warranty contract revenue
|
17.2
|
|
|
16.4
|
|
|
Total AFC revenue
|
176.6
|
|
|
170.2
|
|
|
Cost of services*
|
47.7
|
|
|
45.3
|
|
|
Gross profit*
|
128.9
|
|
|
124.9
|
|
|
Selling, general and administrative
|
13.6
|
|
|
15.5
|
|
|
Depreciation and amortization
|
5.0
|
|
|
11.3
|
|
|
Operating profit
|
$
|
110.3
|
|
|
$
|
98.1
|
|
|
Loan transactions
|
898,000
|
|
|
899,000
|
|
|
Revenue per loan transaction, excluding "Warranty contract revenue"
|
$
|
177
|
|
|
$
|
171
|
|
* Exclusive of depreciation and amortization
Revenue
For the
six
months ended
June 30, 2019
, AFC revenue increased
$6.4 million
, or
4%
, to
$176.6 million
, compared with
$170.2 million
for the
six
months ended
June 30, 2018
. The increase in revenue was primarily the result of a 4% increase in revenue per loan transaction.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $6, or 4%, primarily as a result of an increase in interest yield and fee revenue as a result of prime rate increases and an increase in average loan values, partially offset by an increase in provision for credit losses and a decrease in floorplan fee income per unit for the six months ended
June 30, 2019
. Revenue per loan transaction excludes "Warranty contract revenue."
The provision for credit losses increased to 1.6% of the average managed receivables for the
six
months ended
June 30, 2019
from 1.5% for the six months ended
June 30, 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
six
months ended
June 30, 2019
, gross profit for the AFC segment increased
$4.0 million
, or
3%
, to
$128.9 million
, or
73.0%
of revenue, compared with
$124.9 million
, or 73.4% of revenue, for the
six
months ended
June 30, 2018
. The decrease in gross profit as a percent of revenue was primarily the result of a
5%
increase in cost of services. The increase in cost of services was the result of increases in PWI expenses of $1.5 million, compensation expense of $1.0 million, travel expenses of $0.8 million and other miscellaneous expenses aggregating $0.5 million, partially offset by decreases in lot checks of $1.0 million and incentive-based compensation of $0.4 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased
$1.9 million
, or
12%
, to
$13.6 million
for the
six
months ended
June 30, 2019
, compared with
$15.5 million
for the
six
months ended
June 30, 2018
, primarily as a result of decreases in incentive-based compensation of $0.7 million, travel expenses of $0.7 million and compensation expense of $0.5 million.
Holding Company Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
Selling, general and administrative
|
$
|
76.3
|
|
|
$
|
72.8
|
|
|
Depreciation and amortization
|
14.2
|
|
|
14.6
|
|
|
Operating loss
|
$
|
(90.5
|
)
|
|
$
|
(87.4
|
)
|
Selling, General and Administrative
For the
six
months ended
June 30, 2019
, selling, general and administrative expenses at the holding company increased
$3.5 million
, or
5%
, to
$76.3 million
, compared with
$72.8 million
for the
six
months ended
June 30, 2018
, primarily as a result of increases in information technology costs of $2.5 million, medical expenses of $1.3 million, professional fees of $1.3 million, stock-based compensation expense of $1.2 million and telecom costs of $1.0 million, partially offset by decreases in incentive-based compensation of $1.4 million, compensation expense of $0.5 million and other miscellaneous expenses aggregating $1.9 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2018
|
|
Cash and cash equivalents
|
$
|
233.0
|
|
|
$
|
277.1
|
|
|
$
|
322.4
|
|
|
Restricted cash
|
23.7
|
|
|
27.6
|
|
|
20.7
|
|
|
Working capital
|
380.5
|
|
|
450.3
|
|
|
562.4
|
|
|
Amounts available under Credit Facility*
|
278.0
|
|
|
350.0
|
|
|
350.0
|
|
|
Cash flow from operations for the six months ended
|
161.7
|
|
|
|
|
205.7
|
|
|
|
|
|
*
|
There were related outstanding letters of credit totaling approximately
$32.5 million
,
$32.9 million
and $32.4 million at
June 30, 2019
,
December 31, 2018
and
June 30, 2018
, 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
In February 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 described in the
Credit Facilities
discussion below.
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 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 auctions held near period end.
Approximately $96.0 million of available cash was held by our foreign subsidiaries at
June 30, 2019
. If funds held by our foreign subsidiaries were to be repatriated, foreign withholding tax expense and federal, state and local income tax expense would need to be recognized, net of any applicable foreign tax credits. We expect this tax to be less than $5 million.
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 May 31, 2017, we entered into an Incremental Commitment Agreement and Second Amendment (the "Second Amendment") to the Credit Agreement. The Second Amendment provided for, among other things, (i) the refinancing and repricing of the existing tranche B-2 term loans ("Term Loan B-2") remaining after the repayment with new tranche B-4 term loans in an aggregate principal amount of $717 million ("Term Loan B-4"), (ii) the refinancing and repricing of existing tranche B-3 term loans ("Term Loan B-3") remaining after the repayment with new tranche B-5 term loans in an aggregate principal amount of $1.05 billion ("Term Loan B-5") and (iii) a $350 million senior secured revolving credit facility (the "revolving credit facility").
The Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate
purposes. The Credit Agreement provides that with respect to the revolving credit facility, up to $75 million is available for
letters of credit and up to $90 million is available for swing line loans.
Both Term Loan B-4 and Term Loan B-5 are payable in quarterly installments equal to 0.25% of their respective original aggregate principal amounts, with the balances payable at each respective maturity date. The Credit Facility is subject to mandatory prepayments and reduction in an amount equal to the net proceeds of certain debt offerings, certain asset sales and certain insurance recovery even
ts.
In June 2019, the Company prepaid approximately
$518.6 million
and
$759.4 million
of Term Loan B-4 and Term Loan B-5, respectively. The prepayments were applied to the remaining quarterly installments of each term loan. As such, no further principal payments are required on either term loan until maturity. In addition, as a result of the term loan prepayments in the second quarter of 2019, the Company recorded additional interest expense of approximately
$1.8 million
related to the acceleration of amortization on debt issuance costs.
As set forth in the Credit Agreement, Term Loan B-4 bears interest at Adjusted LIBOR (as defined in the Credit
Agreement) plus 2.25%, Term Loan B-5 at Adjusted LIBOR plus 2.50% and revolving loan borrowings at Adjusted LIBOR plus 2.0%. However, for specified types of borrowings, the Company may elect to make Term Loan B-4 borrowings at a Base Rate (as defined in the Credit Agreement) plus 1.25%, Term Loan B-5 at a Base Rate plus 1.50% and revolving loan borrowings at a Base Rate plus 1.0%. The rates on Term Loan B-4 and Term Loan B-5 were
4.63%
and
4.88%
at
June 30, 2019
, respectively
. In addition, if the Company's Consolidated Senior Secured Leverage Ratio (as defined in the Credit Agreement) which is based on a net debt calculation, increases to levels specified in the Credit Agreement, the applicable interest rate on the revolving credit facility will step up by 25 basis points. The Company also pays a commitment fee of 30 to 35 basis points, payable quarterly, on the average daily unused amount of the revolving credit facility based on the Company's Consolidated Senior Secured Leverage Ratio as described above.
On
June 30, 2019
,
$184.8 million
w
as outstanding on Term Loan
B-4,
$270.7 million
was
outstanding on Term Loan B-5 a
nd
$72.0 million
was drawn on the revolving credit facility.
In addition, we had related outstanding letters of credit in the aggregate amount
of
$32.5 million
and
$32.9 million
at
June 30, 2019
and
December 31, 2018
, which reduce the amount available for borrowings under the revolving credit facilit
y. Our C
anadian operations also have
a C$8
million line of credit which wa
s undrawn at
June 30, 2019
. However, there were related letters of credit outstanding totaling approxima
tely C$1.0 million at
June 30, 2019
, which reduce amounts available under the Canadian line of credit. In addition, our European
operations have
lines of credit aggregating
€30 million
of which
$21.5 million
was drawn at
June 30, 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 maximum consolidated senior secured 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 senior secured leverage ratio is calculated as total senior secured debt divided by the last four quarters consolidated Adjusted EBITDA. Senior secured debt includes term loan borrowings, revolving loans and capital lease liabilities less available 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
) expenses associated with the consolidation of salvage operations; (i)
consulting expenses incurred for cost reduction, operating restructuring and business improvement efforts; (j) 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; (k) expenses incurred in connection with permitted acquisitions; (l) any impairment charges or write-offs of intangibles; and (m) 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 maximum consolidated senior secured leverage ratio is required to be
met when there are revolving loans outstanding under our Credit Agreement. For the quarter ended
June 30, 2019
the ratio could not exceed 3.5. Our consolidated senior secured leverage ratio, including capital lease obligations of $25.0 million,
was 0.93 at
June 30, 2019
.
In addition, the Credit Agreement and the indenture governing our senior notes 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 covenants in the Credit Agreement and the indenture governing our senior notes 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
June 30, 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.
Potential Refinancing of Credit Facilities
The Company intends to refinance and extend its existing terms loans under its senior secured credit facilities and its existing revolving commitments sometime during 2019. Any potential refinancing transactions are subject to market and other conditions, and the Company cannot make any assurances that it will complete any such transactions, in whole or in part, or as to the amount or timing of any such transactions.
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, which commenced on December 1, 2017. We may redeem the senior notes, in whole or in part, at any time prior to June 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 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 28, 2022. AFC Funding Corporation had committed liquidity of
$1.70 billion
for U.S. finance receivables at
June 30, 2019
.
We also have an agreement for the securitization of AFCI's receivables. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was
C$175 million
at
June 30, 2019
. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
AFC manage
d total finance receivables
of
$2,070.1 million
and
$2,014.8 million
at
June 30, 2019
and
December 31, 2018
, respectively. AFC's allowance for losses wa
s
$14.5 million
and
$14.0 million
at
June 30, 2019
and
December 31, 2018
, respectively.
As of
June 30, 2019
and
December 31, 2018
,
$2,008.0 million
and
$1,973.2 million
, respectively, of finance receivables and a cash reserve of 1 percent of the obligations collateralized by finance receivables served as security for the
$1,422.3 million
and
$1,445.3 million
of obligations collateralized by finance receivables at
June 30, 2019
and
December 31, 2018
, respectively. There were unamortized securitization issuance costs of approximately
$16.4 million
and
$19.4 million
at
June 30, 2019
and
December 31, 2018
, 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
June 30, 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 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 net income (loss) from continuing operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
(Dollars in millions)
|
ADESA
|
|
AFC
|
|
Corporate
|
|
Consolidated
|
|
Net income (loss) from continuing operations
|
$
|
50.5
|
|
|
$
|
27.4
|
|
|
$
|
(50.5
|
)
|
|
$
|
27.4
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
Income taxes
|
21.8
|
|
|
11.3
|
|
|
(24.4
|
)
|
|
8.7
|
|
|
Interest expense, net of interest income
|
0.6
|
|
|
16.1
|
|
|
38.3
|
|
|
55.0
|
|
|
Depreciation and amortization
|
38.0
|
|
|
2.6
|
|
|
7.3
|
|
|
47.9
|
|
|
Intercompany interest
|
4.0
|
|
|
(1.6
|
)
|
|
(2.4
|
)
|
|
—
|
|
|
EBITDA
|
114.9
|
|
|
55.8
|
|
|
(31.7
|
)
|
|
139.0
|
|
|
Intercompany charges
|
3.6
|
|
|
—
|
|
|
(3.6
|
)
|
|
—
|
|
|
Non-cash stock-based compensation
|
1.6
|
|
|
0.4
|
|
|
2.0
|
|
|
4.0
|
|
|
Acquisition related costs
|
1.2
|
|
|
—
|
|
|
2.5
|
|
|
3.7
|
|
|
Securitization interest
|
—
|
|
|
(13.8
|
)
|
|
—
|
|
|
(13.8
|
)
|
|
Severance
|
0.9
|
|
|
—
|
|
|
0.2
|
|
|
1.1
|
|
|
Foreign currency gains/losses
|
(0.5
|
)
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
IAA allocated costs
|
—
|
|
|
—
|
|
|
0.9
|
|
|
0.9
|
|
|
Other
|
0.9
|
|
|
0.1
|
|
|
—
|
|
|
1.0
|
|
|
Total addbacks
|
7.7
|
|
|
(13.3
|
)
|
|
2.5
|
|
|
(3.1
|
)
|
|
Adjusted EBITDA
|
$
|
122.6
|
|
|
$
|
42.5
|
|
|
$
|
(29.2
|
)
|
|
$
|
135.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
(Dollars in millions)
|
ADESA
|
|
AFC
|
|
Corporate
|
|
Consolidated
|
|
Net income (loss) from continuing operations
|
$
|
60.0
|
|
|
$
|
27.7
|
|
|
$
|
(50.3
|
)
|
|
$
|
37.4
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
Income taxes
|
23.5
|
|
|
9.3
|
|
|
(16.9
|
)
|
|
15.9
|
|
|
Interest expense, net of interest income
|
0.4
|
|
|
14.7
|
|
|
32.3
|
|
|
47.4
|
|
|
Depreciation and amortization
|
31.3
|
|
|
3.5
|
|
|
7.3
|
|
|
42.1
|
|
|
Intercompany interest
|
4.3
|
|
|
(0.7
|
)
|
|
(3.6
|
)
|
|
—
|
|
|
EBITDA
|
119.5
|
|
|
54.5
|
|
|
(31.2
|
)
|
|
142.8
|
|
|
Intercompany charges
|
3.3
|
|
|
—
|
|
|
(3.3
|
)
|
|
—
|
|
|
Non-cash stock-based compensation
|
2.3
|
|
|
0.6
|
|
|
1.5
|
|
|
4.4
|
|
|
Acquisition related costs
|
1.0
|
|
|
—
|
|
|
0.5
|
|
|
1.5
|
|
|
Securitization interest
|
—
|
|
|
(12.7
|
)
|
|
—
|
|
|
(12.7
|
)
|
|
Severance
|
0.9
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
IAA allocated costs
|
—
|
|
|
—
|
|
|
1.3
|
|
|
1.3
|
|
|
Other
|
0.8
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
Total addbacks
|
8.3
|
|
|
(12.1
|
)
|
|
—
|
|
|
(3.8
|
)
|
|
Adjusted EBITDA
|
$
|
127.8
|
|
|
$
|
42.4
|
|
|
$
|
(31.2
|
)
|
|
$
|
139.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
(Dollars in millions)
|
ADESA
|
|
AFC
|
|
Corporate
|
|
Consolidated
|
|
Net income (loss) from continuing operations
|
$
|
92.9
|
|
|
$
|
57.9
|
|
|
$
|
(108.1
|
)
|
|
$
|
42.7
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
Income taxes
|
37.7
|
|
|
22.1
|
|
|
(44.6
|
)
|
|
15.2
|
|
|
Interest expense, net of interest income
|
1.0
|
|
|
33.0
|
|
|
76.9
|
|
|
110.9
|
|
|
Depreciation and amortization
|
73.0
|
|
|
5.0
|
|
|
14.2
|
|
|
92.2
|
|
|
Intercompany interest
|
11.1
|
|
|
(2.8
|
)
|
|
(8.3
|
)
|
|
—
|
|
|
EBITDA
|
215.7
|
|
|
115.2
|
|
|
(69.9
|
)
|
|
261.0
|
|
|
Intercompany charges
|
6.8
|
|
|
—
|
|
|
(6.8
|
)
|
|
—
|
|
|
Non-cash stock-based compensation
|
4.0
|
|
|
0.9
|
|
|
5.7
|
|
|
10.6
|
|
|
Acquisition related costs
|
2.8
|
|
|
—
|
|
|
4.8
|
|
|
7.6
|
|
|
Securitization interest
|
—
|
|
|
(28.6
|
)
|
|
—
|
|
|
(28.6
|
)
|
|
Severance
|
3.6
|
|
|
—
|
|
|
1.2
|
|
|
4.8
|
|
|
Foreign currency gains/losses
|
(1.1
|
)
|
|
—
|
|
|
0.5
|
|
|
(0.6
|
)
|
|
IAA allocated costs
|
—
|
|
|
—
|
|
|
2.3
|
|
|
2.3
|
|
|
Other
|
1.6
|
|
|
0.1
|
|
|
—
|
|
|
1.7
|
|
|
Total addbacks
|
17.7
|
|
|
(27.6
|
)
|
|
7.7
|
|
|
(2.2
|
)
|
|
Adjusted EBITDA
|
$
|
233.4
|
|
|
$
|
87.6
|
|
|
$
|
(62.2
|
)
|
|
$
|
258.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
(Dollars in millions)
|
ADESA
|
|
AFC
|
|
Corporate
|
|
Consolidated
|
|
Net income (loss) from continuing operations
|
$
|
114.2
|
|
|
$
|
53.4
|
|
|
$
|
(96.0
|
)
|
|
$
|
71.6
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
Income taxes
|
39.0
|
|
|
17.7
|
|
|
(32.9
|
)
|
|
23.8
|
|
|
Interest expense, net of interest income
|
0.8
|
|
|
28.1
|
|
|
59.5
|
|
|
88.4
|
|
|
Depreciation and amortization
|
62.5
|
|
|
11.3
|
|
|
14.6
|
|
|
88.4
|
|
|
Intercompany interest
|
12.0
|
|
|
(1.2
|
)
|
|
(10.8
|
)
|
|
—
|
|
|
EBITDA
|
228.5
|
|
|
109.3
|
|
|
(65.6
|
)
|
|
272.2
|
|
|
Intercompany charges
|
7.7
|
|
|
—
|
|
|
(7.7
|
)
|
|
—
|
|
|
Non-cash stock-based compensation
|
4.4
|
|
|
1.1
|
|
|
4.6
|
|
|
10.1
|
|
|
Acquisition related costs
|
2.4
|
|
|
—
|
|
|
1.3
|
|
|
3.7
|
|
|
Securitization interest
|
—
|
|
|
(24.1
|
)
|
|
—
|
|
|
(24.1
|
)
|
|
Severance
|
2.4
|
|
|
—
|
|
|
—
|
|
|
2.4
|
|
|
IAA allocated costs
|
—
|
|
|
—
|
|
|
2.5
|
|
|
2.5
|
|
|
Other
|
1.5
|
|
|
—
|
|
|
—
|
|
|
1.5
|
|
|
Total addbacks
|
18.4
|
|
|
(23.0
|
)
|
|
0.7
|
|
|
(3.9
|
)
|
|
Adjusted EBITDA
|
$
|
246.9
|
|
|
$
|
86.3
|
|
|
$
|
(64.9
|
)
|
|
$
|
268.3
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve
Months
Ended
|
|
(Dollars in millions)
|
September 30,
2018
|
|
December 31,
2018
|
|
March 31,
2019
|
|
June 30,
2019
|
|
June 30, 2019
|
|
Net income (loss)
|
$
|
77.5
|
|
|
$
|
67.3
|
|
|
$
|
77.8
|
|
|
$
|
55.6
|
|
|
$
|
278.2
|
|
|
Less: Income from discontinued operations
|
46.6
|
|
|
52.2
|
|
|
62.5
|
|
|
28.2
|
|
|
189.5
|
|
|
Income from continuing operations
|
$
|
30.9
|
|
|
$
|
15.1
|
|
|
$
|
15.3
|
|
|
$
|
27.4
|
|
|
$
|
88.7
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
8.7
|
|
|
1.8
|
|
|
6.5
|
|
|
8.7
|
|
|
25.7
|
|
|
Interest expense, net of interest income
|
47.7
|
|
|
51.2
|
|
|
55.9
|
|
|
55.0
|
|
|
209.8
|
|
|
Depreciation and amortization
|
41.4
|
|
|
42.6
|
|
|
44.3
|
|
|
47.9
|
|
|
176.2
|
|
|
EBITDA
|
128.7
|
|
|
110.7
|
|
|
122.0
|
|
|
139.0
|
|
|
500.4
|
|
|
Non-cash stock-based compensation
|
5.8
|
|
|
4.6
|
|
|
6.6
|
|
|
4.0
|
|
|
21.0
|
|
|
Acquisition related costs
|
1.5
|
|
|
2.1
|
|
|
3.9
|
|
|
3.7
|
|
|
11.2
|
|
|
Securitization interest
|
(12.9
|
)
|
|
(14.5
|
)
|
|
(14.8
|
)
|
|
(13.8
|
)
|
|
(56.0
|
)
|
|
(Gain)/Loss on asset sales
|
0.3
|
|
|
0.4
|
|
|
0.5
|
|
|
0.4
|
|
|
1.6
|
|
|
Severance
|
1.4
|
|
|
1.8
|
|
|
3.7
|
|
|
1.1
|
|
|
8.0
|
|
|
Foreign currency gains/losses
|
—
|
|
|
3.7
|
|
|
(0.6
|
)
|
|
—
|
|
|
3.1
|
|
|
IAA allocated costs
|
1.4
|
|
|
1.3
|
|
|
1.4
|
|
|
0.9
|
|
|
5.0
|
|
|
Other
|
0.2
|
|
|
0.5
|
|
|
0.2
|
|
|
0.6
|
|
|
1.5
|
|
|
Total addbacks
|
(2.3
|
)
|
|
(0.1
|
)
|
|
0.9
|
|
|
(3.1
|
)
|
|
(4.6
|
)
|
|
Adjusted EBITDA
|
$
|
126.4
|
|
|
$
|
110.6
|
|
|
$
|
122.9
|
|
|
$
|
135.9
|
|
|
$
|
495.8
|
|