Notes to Consolidated Financial Statements
December 31, 2019, 2018 and 2017
Note 1—Organization and Other Matters
KAR Auction Services, Inc., doing business as KAR Global, was organized in the State of Delaware on November 9, 2006. The KAR group of companies is comprised of ADESA, Inc., Automotive Finance Corporation and additional business units.
Defined Terms
Unless otherwise indicated or unless the context otherwise requires, the following terms used herein shall have the following meanings:
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"we," "us," "our," "KAR" and "the Company" refer, collectively, to KAR Auction Services, Inc. and all of its subsidiaries;
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"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"));
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"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.;
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"Credit Agreement" refers to the Amended and Restated Credit Agreement, dated March 11, 2014, as amended on March 9, 2016, May 31, 2017 and September 19, 2019, among KAR Auction Services, as the borrower, the several banks and other financial institutions or entities from time to time parties thereto and JPMorgan Chase Bank N.A., as administrative agent;
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"Credit Facility" refers to the $950 million, senior secured term loan B-6 facility due September 19, 2026 ("Term Loan B-6") and the $325 million, senior secured revolving credit facility due September 19, 2024 (the "Revolving Credit Facility"), the terms of which are set forth in the Credit Agreement;
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"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 4;
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"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries;
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"Senior notes" refers to the 5.125% senior notes due 2025 ($950 million aggregate principal outstanding at December 31, 2019);
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"Term Loan B-2" refers to the senior secured term loan B-2 facility, the terms of which are set forth in the Credit Agreement;
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"Term Loan B-3" refers to the senior secured term loan B-3 facility, the terms of which are set forth in the Credit Agreement;
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"Term Loan B-4" refers to the senior secured term loan B-4 facility, the terms of which are set forth in the Credit Agreement;
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"Term Loan B-5" refers to the senior secured term loan B-5 facility, the terms of which are set forth in the Credit Agreement;
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"2016 Revolving Credit Facility" refers to the $300 million, senior secured revolving credit facility, the terms of which are set forth in the Credit Agreement; and
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"2017 Revolving Credit Facility" refers to the $350 million, senior secured revolving credit facility, the terms of which are set forth in the Credit Agreement.
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KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Business and Nature of Operations
ADESA is a leading provider of wholesale vehicle auctions and related vehicle remarketing services for the automotive industry. As of December 31, 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 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.
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 121 locations throughout the United States and Canada as of December 31, 2019. Floorplan financing supports independent used vehicle dealers in North America who purchase vehicles at ADESA, 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.
Note 2—Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of KAR Auction Services and all of its majority owned subsidiaries. Significant intercompany transactions and balances have been eliminated.
Reclassifications
ADESA Auction Services' revenue reported in the consolidated statements of income for the years ended December 31, 2018 and 2017 has been reclassified between "Auction fees and services revenue" and "Purchased vehicle sales" in the consolidated statement of income to conform with the presentation for the year ended December 31, 2019.
In addition, certain amounts reported in the consolidated financial statements and related notes prior to June 2019 have been reclassified to discontinued operations to reflect the spin-off of the Company's former salvage auction business. Likewise, certain amounts reported for segment results in the consolidated financial statements prior to June 2019 have been reclassified to conform to the discontinued operations presentation. See Note 4 for a discussion of discontinued operations.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. 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.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Business Segments
Our operations are grouped into two operating segments: ADESA Auctions and AFC. The two operating segments also serve as our reportable business segments. Operations are measured through detailed budgeting and monitoring of contributions to consolidated income by each business segment.
Derivative Instruments and Hedging Activity
We recognize all derivative financial instruments in the consolidated financial statements at fair value in accordance with Accounting Standards Codification ("ASC") 815, Derivatives and Hedging. We have used interest rate caps to manage the variability of cash flows to be paid due to interest rate movements on our variable rate debt. The fair values of the interest rate derivatives are based on quoted market prices for similar instruments from commercial banks. The fair value of the derivatives is recorded in "Other assets" on the consolidated balance sheet. 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 derivatives are recognized as "Interest expense" in the consolidated statement of income.
Foreign Currency Translation
The local currency is the functional currency for each of our foreign entities. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at average exchange rates in effect during the year. Assets and liabilities of foreign operations are translated using the exchange rates in effect at year end. Foreign currency transaction gains and losses are included in the consolidated statements of income within "Other income, net" and resulted in a gain of $0.7 million for the year ended December 31, 2019, a loss of $3.7 million for the year ended December 31, 2018 and a gain of $0.4 million effect for the year ended December 31, 2017. Adjustments arising from the translation of net assets located outside the U.S. (gains and losses) are shown as a component of "Accumulated other comprehensive income."
Cash Equivalents
All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. These investments are valued at cost, which approximates fair value.
Restricted Cash
AFC Funding Corporation, a wholly-owned, bankruptcy remote, consolidated, special purpose subsidiary of AFC, is required to maintain a minimum cash reserve of 1 or 3 percent of total receivables sold to the group of bank purchasers as security for the receivables sold. Automotive Finance Canada Inc. ("AFCI") is also required to maintain a minimum cash reserve of 1 percent of total receivables sold to its securitization facility. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. AFC also maintains other cash reserves from time to time associated with its banking and vehicle service contract program insurance relationships. Such reserves are presented as "Restricted cash" on the consolidated balance sheets.
Receivables
Trade receivables include the unremitted purchase price of vehicles purchased by third parties at the auctions, fees to be collected from those buyers and amounts due for services provided by us related to certain consigned vehicles in our possession. The amounts due with respect to the consigned vehicles are generally deducted from the sales proceeds upon the eventual auction or other disposition of the related vehicles.
Finance receivables include floorplan receivables created by financing dealer purchases of vehicles in exchange for a security interest in those vehicles and special purpose loans. Floorplan receivables become due at the earlier of the dealer subsequently selling the vehicle or a predetermined time period (generally 30 to 90 days). Special purpose loans relate to loans that are either line of credit loans or working capital loans that can be either secured or unsecured based on the facts and circumstances of the specific loans.
Due to the nature of our business, substantially all trade and finance receivables are due from vehicle dealers and institutional sellers. We have possession of vehicles or vehicle titles collateralizing a significant portion of the trade and finance receivables.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Trade receivables and finance receivables are reported net of an allowance for doubtful accounts and credit losses. The allowances for doubtful accounts and credit losses are based on management's evaluation of the receivables portfolio under current conditions, the volume of the portfolio, overall portfolio credit quality, review of specific collection issues and such other factors which in management's judgment deserve recognition in estimating losses.
Other Current Assets
Other current assets consist of inventories, prepaid expenses, taxes receivable and other miscellaneous assets. The inventories, which consist of vehicles, supplies and parts, are accounted for on the specific identification method and are stated at the lower of cost or net realizable value.
Goodwill
Goodwill represents the excess of cost over fair value of identifiable net assets of businesses acquired. Goodwill is tested for impairment annually in the second quarter, or more frequently as impairment indicators arise. ASC 350, Intangibles—Goodwill and Other, permits an entity to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment model. If it is determined through the qualitative assessment that a reporting unit's fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. The quantitative assessment for goodwill impairment is a two-step test. Under the first step, the fair value of each reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and we must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASC 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
Customer Relationships and Other Intangible Assets
Customer relationships are amortized on a straight-line basis over the life determined at the time of acquisition. Other intangible assets generally consist of tradenames, computer software and non-compete agreements, which if amortized, are amortized using the straight-line method over their estimated useful lives. Tradenames with indefinite lives are not amortized. Costs incurred related to software developed or obtained for internal use are capitalized during the application development stage of software development and amortized over their estimated useful lives. The non-compete agreements are amortized over the life of the agreements. The amortization periods of finite-lived intangible assets are re-evaluated periodically when facts and circumstances indicate that revised estimates of useful lives may be warranted. Indefinite-lived tradenames are assessed for impairment, in accordance with ASC 350, annually in the second quarter or more frequently as impairment indicators arise. At the end of each assessment, a determination is made as to whether the tradenames still have an indefinite life.
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method at rates intended to depreciate the costs of assets over their estimated useful lives. Upon retirement or sale of property and equipment, the cost of the disposed assets and related accumulated depreciation is removed from the accounts and any resulting gain or loss is credited or charged to selling, general and administrative expenses. Expenditures for normal repairs and maintenance are charged to expense as incurred. Additions and expenditures for improving or rebuilding existing assets that extend the useful life are capitalized. Leasehold improvements made either at the inception of the lease or during the lease term are amortized over the shorter of their economic lives or the lease term including any renewals that are reasonably assured.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Unamortized Debt Issuance Costs
Debt issuance costs reflect the expenditures incurred in conjunction with term loan debt, the revolving credit facility, the senior notes and the U.S. and Canadian receivables purchase agreements. The debt issuance costs are being amortized to interest expense using the effective interest method or the straight-line method, as applicable, over the lives of the related debt issues. Debt issuance costs are presented as a direct reduction from the carrying amount of the related debt liability.
Other Assets
Other assets consist of equity and cost method investments, deposits, notes receivable, foreign deferred taxes and other long-term assets.
Long-Lived Assets
Management reviews our property and equipment, customer relationships and other intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The determination includes evaluation of factors such as current market value, future asset utilization, business climate, and future cash flows expected to result from the use of the related assets. If the carrying amount of a long-lived asset exceeds the total amount of the estimated undiscounted future cash flows from that asset, a loss is recognized in the period to the extent that the carrying amount exceeds the fair value of the asset. The impairment analysis is based on our current business strategy, expected growth rates and estimated future economic and regulatory conditions.
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 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.
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. We use the implicit rate when readily determinable. 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. 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.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Accounts Payable
Accounts payable include amounts due sellers from the proceeds of the sale of their consigned vehicles less any fees, as well as trade payables and outstanding checks to sellers and vendors. Book overdrafts, representing outstanding checks in excess of funds on deposit, are recorded in "Accounts payable" and amounted to $88.7 million and $93.4 million at December 31, 2019 and 2018, respectively.
Self-Insurance Reserves
We self-insure our employee medical benefits, as well as a portion of our automobile, general liability and workers' compensation claims. We have insurance coverage that limits the exposure on individual claims. The cost of the insurance is expensed over the contract periods. We record an accrual for the claims related to our employee medical benefits, automobile, general liability and workers' compensation claims based upon the expected amount of all such claims. Accrued medical benefits and workers' compensation expenses are included in "Accrued employee benefits and compensation expenses" while accrued automobile and general liability expenses are included in "Other accrued expenses."
Environmental Liabilities
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in "Other accrued expenses" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded the revenue recognition requirements in ASC 605, Revenue Recognition. The new guidance provides clarification on the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires additional disclosures to help financial statement users better understand the nature, amount, timing and uncertainty of revenue that is recognized. In preparation for the adoption of Topic 606, we assessed our contracts with customers, evaluated our revenue streams and compared current accounting practices to those required under the new standard. As a result of these efforts, we identified certain impacts to the presentation and timing of revenue recognition for a contract liability (deferred revenue) related to a material right associated with certain volume-related rebates. We have implemented the appropriate changes to our processes and controls to support recognition and disclosure under Topic 606.
We adopted Topic 606 in the first quarter of 2018 using the modified retrospective transition method and recognized the cumulative effect of initially applying the new standard as a decrease of $3.0 million to the opening balance of retained earnings. Prior periods have not been retrospectively adjusted.
There were no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheet as of December 31, 2019. For each of our primary revenue streams, cash flows are consistent with the timing of revenue recognition.
For the year ended December 31, 2019, revenue recognized from performance obligations related to prior periods was not material. Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less and contracts where revenue is recognized as invoiced, is not material, except for warranty contract revenue, which is described under AFC below.
Revenue is recognized when control of the promised goods or services are transferred to customers in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates its revenues from contracts with customers. In contracts with multiple performance obligations, the Company identifies each performance obligation and evaluates whether the performance obligations are distinct within the context of the contract at contract inception. Performance obligations that are not distinct at contract inception are combined. The Company allocates the transaction price to each distinct performance obligation proportionately based on the estimated standalone selling price for
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
each performance obligation. The Company then determines how the goods or services are transferred to the customer in order to determine the timing of revenue recognition.
ADESA Auction Services
The performance obligation contained within the ADESA auction contracts for sellers is facilitating the remarketing of vehicles, including titling, administration and sale at auction. The remarketing performance obligation is satisfied at the point in time the vehicle is sold through the auction process. The ADESA ancillary services contracts include services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification and collateral recovery services. The performance obligations related to these services are subject to separate contracts and are satisfied at the point in time the services are completed.
Contracts with buyers are generally established via purchase at auction, subject to standard terms and conditions. These contracts contain a single performance obligation, which is satisfied at a point in time when the vehicle is purchased through the auction process.
Most of the vehicles that are sold through auctions are consigned to ADESA by the seller and held at ADESA’s facilities or third-party locations. ADESA does not take title to these consigned vehicles and records only its auction fees as revenue ("Auction fees and services revenue" in the consolidated statement of income) because it has no influence on the vehicle auction selling price agreed to by the seller and the buyer at the auction. ADESA does not record the gross selling price of the consigned vehicles sold at auction as revenue. Our buyer fees are typically based on a tiered structure with fees increasing with the sale price of the vehicle, while seller fees are typically fixed. ADESA generally enforces its rights to payment for seller transactions through net settlement provisions following the sale of a vehicle. ADESA also sells vehicles that have been purchased, which represent less than 5% of total vehicles sold. For these types of sales, ADESA does record the gross selling price of purchased vehicles sold at auction as revenue ("Purchased vehicle sales" in the consolidated statement of income) and the gross purchase price of the vehicles as cost of services.
AFC
AFC's revenue ("Finance-related revenue" in the consolidated statement of income) is comprised of interest and fee income, provision for credit losses and other revenues associated with our finance receivables, as well as warranty contract revenue. The following table summarizes the primary components of AFC's finance-related revenue:
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Year Ended December 31,
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AFC Revenue (in millions)
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2019
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2018
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2017
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Interest and fee income
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$
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342.1
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$
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327.3
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$
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290.3
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Other revenue
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10.9
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13.1
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11.8
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Provision for credit losses
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(35.3
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)
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(32.9
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)
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(33.9
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)
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Warranty contract revenue
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35.2
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33.4
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33.1
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$
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352.9
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$
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340.9
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$
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301.3
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Interest and fee income
Revenues associated with interest and fee income are accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs, and therefore are not subject to evaluation under Topic 606. Interest on finance receivables is recognized based on the number of days the vehicle remains financed. AFC ceases recognition of interest on finance receivables when the loans become delinquent, which is generally 31 days past due. Dealers are also charged a fee to floorplan a vehicle ("floorplan fee"), to extend the terms of the receivable ("curtailment fee") and a document processing fee. AFC fee income including floorplan and curtailment fees is recognized over the estimated life of the finance receivable.
Other revenue
Other revenue includes lot check fees, filing fees, lien holder payoff services and other related program fees, each of which are charged to and collected from AFC's customers.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Warranty contract revenue
Warranty contract revenue represents the revenue generated by Preferred Warranties, Inc. ("PWI"). PWI receives advance payments for vehicle service contracts and unearned revenue is deferred and recognized over the terms of the contracts utilizing a historical earnings curve. The average term of the contracts originated in 2019 was approximately 1.7 years and PWI had unearned revenue of $34.2 million at December 31, 2019.
Income Taxes
We file federal, state and foreign income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes. The provision for income taxes includes federal, foreign, state and local income taxes payable, as well as deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable amounts in periods in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Net Income from Continuing Operations per Share
Basic net income from continuing operations per share is computed by dividing net income from continuing operations by the weighted average common shares outstanding during the year. Diluted net income from continuing operations per share represents net income from continuing operations divided by the sum of the weighted average common shares outstanding plus potential dilutive instruments 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 performance-based restricted stock units ("PRSUs") subject to performance conditions which have not yet been satisfied are excluded from the calculations.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation under ASC 718, Compensation—Stock Compensation. We recognize all stock-based compensation as expense in the financial statements over the vesting period and that cost is measured as the fair value of the award at the grant date for equity-classified awards. We also recognize the impact of forfeitures as they occur and excess tax benefits and tax deficiencies related to employee stock-based compensation within income tax expense.
New Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740 and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2019-12 will have on the consolidated financial statements.
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.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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 expects the change in methodology for measuring credit losses will result in an increase in the allowance for credit losses of approximately $5 million. The cumulative effect of this change will be recognized, net of tax, as an adjustment to retained earnings on January 1, 2020.
Note 3—Acquisitions and Equity Method Investment
2019 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 hail catastrophe response services.
In January 2019, the Company 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 2019, net of cash acquired, was approximately $169.2 million, which included net cash payments of $120.7 million, deferred payments with a fair value of $19.2 million and estimated contingent payments with a fair value of $29.3 million based on an option pricing valuation model. The maximum amount of undiscounted deferred payments and undiscounted contingent payments related to these acquisitions could approximate $77.0 million. The purchase price for the acquired businesses was allocated to acquired assets and liabilities based upon fair values, including $32.7 million to intangible assets, representing the fair value of acquired customer relationships of $26.4 million, software of $4.3 million and tradenames of $2.0 million, which are being amortized over their expected useful lives. The acquisitions resulted in aggregate goodwill of $142.6 million. The goodwill is recorded in the ADESA Auctions reportable segment. The financial impact of these acquisitions, including pro forma financial results, was immaterial to the Company's consolidated results for the year ended December 31, 2019.
2018 Acquisitions
In February 2018, the Company completed the acquisition of STRATIM Systems Inc. ("STRATIM"). STRATIM is a mobility and fleet management software company based in San Francisco, California that uses data analytics to help fleet owners manage, maintain and service their fleets. The addition of STRATIM supplements KAR’s broad portfolio of wholesale used vehicle physical, online and digital auction marketplaces and ancillary service providers.
In November 2018, the Company completed the acquisition of Clearplan. Clearplan’s digital platform provides recovery agents, drivers, forwarders and automotive lenders a centralized, mobile, cloud-based hub for repossession workflow and logistics management. The acquisition brings innovative new mobile technology and real-time data analytics to KAR’s portfolio of software as a service capabilities including Recovery Database Network (RDN).
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
The purchased assets included accounts receivable, computer equipment 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 2018, net of cash acquired, was approximately $45.2 million. The purchase price for the acquired businesses was allocated to acquired assets and liabilities based upon fair values, including $10.5 million to intangible assets, representing the fair value of acquired customer relationships of $6.3 million, software of $4.0 million and tradenames of $0.2 million, which are being amortized over their expected useful lives. The acquisitions resulted in goodwill of $32.1 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 year ended December 31, 2018.
2017 Acquisitions
In April 2017, the Company purchased all of the stock of CarCo Technologies, Inc. (“DRIVIN”). DRIVIN aggregates automotive retail, pricing, registration and other market and economic data from a variety of public and proprietary sources. The insights generated from that data are deployed through predictive pricing, inventory management and vehicle matching tools that help customers buy, sell and source vehicles.
In May 2017, the Company acquired Dependable Auto Shippers ("DAS"). DAS provides vehicle transportation services for corporate and personal vehicle transportation needs.
In October 2017, the Company acquired the remaining 50% interest in Nth Gen Software Inc. ("TradeRev"). TradeRev brings mobile and digital technology to the Company’s portfolio of whole car auctions, floorplan financing solutions, and other ancillary and related services. The Company plans to further integrate those capabilities into TradeRev to expand its digital business and strengthen its share in the dealer-to-dealer market. The Company entered into operating lease obligations related to various facilities through 2028. Initial annual lease payments for the various facilities are approximately $1.8 million per year.
Certain of the purchase agreements included contingent payments related to vehicle volumes subsequent to the purchase date. The purchased assets included accounts receivable, inventory, customer relationships, tradenames, software and other intangible assets. 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 2017, net of cash acquired, was approximately $103.0 million, which included deferred payments with a fair value of $6.6 million and estimated contingent payments with a fair value of $24.0 million. The maximum amount of undiscounted contingent payments related to these acquisitions could approximate $60.0 million. The purchase price for the acquired businesses was allocated to acquired assets and liabilities based upon fair values, including $28.5 million to intangible assets, representing the fair value of acquired customer relationships of $3.1 million, software of $23.1 million and tradenames of $2.3 million, which are being amortized over their expected useful lives. The acquisitions resulted in aggregate goodwill of $130.7 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 year ended December 31, 2017.
Equity Method Investment
For the first nine months of 2017, ADESA held a 50% interest in TradeRev. In addition, ADESA also had a joint marketing agreement with TradeRev to assist in expanding its footprint in the dealer-to-dealer online space in the U.S. and Canadian markets. Prior to acquiring the rest of the business in October 2017, the Company accounted for TradeRev as an equity method investment because we had the ability to exercise significant influence over operating and financial policies but did not have a controlling financial interest. At the date of acquisition, the carrying amount of the investment was $18.4 million. Upon acquisition, our previously held interest in TradeRev was re-measured at fair value, resulting in a non-cash gain of $21.6 million. The fair value of our previously held interest in TradeRev was developed in consultation with independent valuation specialists who used a discounted cash flow methodology. The gain has been recognized as "Gain on previously held equity interest value" in the consolidated statement of income for the year ended December 31, 2017.
The Company’s share in the net losses of TradeRev in 2017, through the date of acquisition, was $4.4 million. This amount was recorded to “Other income, net” in the consolidated statements of income.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Note 4—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 $31.3 million and $8.1 million for the year ended December 31, 2019 and 2018, respectively, in connection with the Separation of the two companies. These costs consisted of consulting and professional fees associated with preparing for and executing the spin-off.
The following table presents the results of operations for IAA that have been reclassified to discontinued operations for all periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Operating revenues
|
$
|
723.6
|
|
|
$
|
1,326.8
|
|
|
$
|
1,219.2
|
|
Operating expenses
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
446.1
|
|
|
821.2
|
|
|
778.1
|
|
Selling, general and administrative
|
94.5
|
|
|
124.0
|
|
|
108.5
|
|
Depreciation and amortization
|
43.9
|
|
|
97.4
|
|
|
93.1
|
|
Total operating expenses
|
584.5
|
|
|
1,042.6
|
|
|
979.7
|
|
Operating profit
|
139.1
|
|
|
284.2
|
|
|
239.5
|
|
Interest expense
|
2.7
|
|
|
0.8
|
|
|
0.8
|
|
Other income, net
|
—
|
|
|
(0.5
|
)
|
|
(0.9
|
)
|
Income from discontinued operations before income taxes
|
136.4
|
|
|
283.9
|
|
|
239.6
|
|
Income taxes
|
40.3
|
|
|
73.5
|
|
|
51.6
|
|
Income from discontinued operations
|
$
|
96.1
|
|
|
$
|
210.4
|
|
|
$
|
188.0
|
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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
|
|
Note 5—Stock and Stock-Based Compensation Plans
Our stock-based compensation expense has included expense associated with KAR Auction Services, Inc. PRSUs, service-based restricted stock units ("RSUs"), service options and exit options. We have determined that the KAR Auction Services, Inc. PRSUs, RSUs, service options and exit options should be classified as equity awards. In addition, as further discussed below, holders of these awards received an equivalent number of PRSUs, RSUs and options in IAA as they had in KAR at June 28, 2019. These awards are scheduled to vest over the period from February 2020 to February/March 2022.
In connection with the spin-off of IAA, the Company modified its stock-based compensation awards under the "equitable adjustments" clause in the Omnibus Plan, which provides anti-dilution protection. Generally, the award adjustments were intended to maintain the economic value of the awards before and after the Separation date. The post-spin KAR awards and post-spin IAA awards are generally subject to the same terms and conditions, and will continue to vest on the same schedule as the pre-spin KAR awards, except as noted in the equity-conversion related provisions of the employee matters agreement. There was no incremental compensation expense recorded as a result of these modifications. The post-spin expense is comprised of the combined KAR and IAA awards held by KAR employees and did not change as a result of the spin-off.
The compensation cost that was charged against income for all stock-based compensation plans was $19.6 million, $19.6 million and $20.4 million for the years ended December 31, 2019, 2018 and 2017, respectively, and the total income tax benefit recognized in the consolidated statement of income for options, PRSUs and RSUs was approximately $2.9 million, $3.9 million and $5.1 million for the years ended December 31, 2019, 2018 and 2017, respectively. We did not capitalize any stock-based compensation cost in the years ended December 31, 2019, 2018 or 2017. As of December 31, 2019, an estimated $8.3 million of unrecognized compensation expense related to non-vested PRSUs is expected to be recognized over a weighted average term of approximately 1.6 years. As of December 31, 2019, there was approximately $9.9 million of unrecognized compensation expense related to non-vested RSUs which is expected to be recognized over a weighted average term of 1.8 years.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
The following table summarizes our stock-based compensation expense by type of award (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
PRSUs
|
$
|
10.0
|
|
|
$
|
10.8
|
|
|
$
|
11.9
|
|
RSUs
|
9.6
|
|
|
8.7
|
|
|
7.1
|
|
Service options
|
—
|
|
|
0.1
|
|
|
1.4
|
|
Total stock-based compensation expense
|
$
|
19.6
|
|
|
$
|
19.6
|
|
|
$
|
20.4
|
|
KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan - PRSUs, RSUs, Service Options and Exit Options
We adopted the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan ("Omnibus Plan") in December 2009. The Omnibus Plan, which was approved by shareholders and amended and restated in June 2014, is intended to provide equity and/or cash-based awards to our executive officers and key employees. The maximum number of shares that may be issued pursuant to awards under the Omnibus Plan is 12.5 million, of which approximately 4.9 million shares remained available for future grants as of December 31, 2019. The Omnibus Plan provides for the grant of stock options, restricted stock, stock appreciation rights, other stock-based awards and cash-based awards. The PRSU and RSU grants described below were made pursuant to the Company's Policy on Granting Equity Awards.
PRSUs
In the years ended December 31, 2019, 2018 and 2017 we granted a target amount of approximately 0.3 million, 0.2 million and 0.2 million, respectively, PRSUs to certain executive officers and management of the Company. The weighted average grant date fair value of the PRSUs was $47.09 per share, $54.32 per share and $44.64 per share in 2019, 2018 and 2017, respectively, which was determined using the closing price of the Company's common stock on the dates of grant. Dividend equivalents accrue on the PRSUs and are subject to the same vesting and forfeiture terms as the PRSUs.
In 2016, we granted a target amount of approximately 0.3 million PRSUs to certain executive officers and management of the Company. The PRSUs vested in 2019 based on attainment of the Company's three-year cumulative operating adjusted net income per share goals. The weighted average grant date fair value of the PRSUs was $34.94 per share, which was determined using the closing price of the Company's common stock on the dates of grant.
The following table summarizes PRSU activity (held by KAR and IAA employees), including dividend equivalents, under the Omnibus Plan for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Performance Restricted Stock Units
|
|
Number
|
|
Weighted Average Grant Date Fair Value
|
PRSUs at January 1, 2019
|
|
789,707
|
|
|
$
|
44.62
|
|
Granted
|
|
288,545
|
|
|
47.09
|
|
Vested
|
|
(342,276
|
)
|
|
33.44
|
|
Forfeited
|
|
(38,058
|
)
|
|
25.26
|
|
PRSUs at December 31, 2019
|
|
697,918
|
|
|
$
|
18.52
|
|
KAR employees hold 625,515 of the non-vested PRSUs at December 31, 2019 and IAA employees hold 72,403 of the non-vested PRSUs at December 31, 2019. KAR employees also hold 616,753 of non-vested PRSUs in IAA at December 31, 2019. The fair value of shares that vested during the years ended December 31, 2019 and 2018 was $17.4 million and $16.1 million, respectively.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
RSUs
In each of the years ended December 31, 2019, 2018 and 2017, 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 fair value of RSUs is the value of the Company's common stock at the date of grant and the weighted average grant date fair value of the RSUs was $46.95 per share, $54.28 per share and $44.03 per share in 2019, 2018 and 2017, respectively. Dividend equivalents accrue on the RSUs and are subject to the same vesting and forfeiture terms as the RSUs.
The following table summarizes RSU activity (held by KAR and IAA employees), including dividend equivalents, under the Omnibus Plan for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number
|
|
Weighted Average Grant Date Fair Value
|
RSUs at January 1, 2019
|
|
556,172
|
|
|
$
|
47.87
|
|
Granted
|
|
307,772
|
|
|
46.95
|
|
Vested
|
|
(251,328
|
)
|
|
42.86
|
|
Forfeited
|
|
(61,849
|
)
|
|
33.24
|
|
RSUs at December 31, 2019
|
|
550,767
|
|
|
$
|
22.71
|
|
KAR employees hold 410,606 of the non-vested RSUs at December 31, 2019 and IAA employees hold 140,161 of the non-vested RSUs at December 31, 2019. KAR employees also hold 402,540 of non-vested RSUs in IAA at December 31, 2019. The fair value of shares that vested during the years ended December 31, 2019, 2018 and 2017 was $11.8 million, $29.7 million and $14.7 million, respectively.
Service Options
The outstanding service options granted under the Omnibus Plan have a ten year life and are fully vested and exercisable. The following table summarizes service option activity under the Omnibus Plan for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Options
|
Number
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Outstanding at January 1, 2019
|
1,003,654
|
|
|
$
|
24.36
|
|
|
|
|
|
|
Granted
|
—
|
|
|
N/A
|
|
|
|
|
|
|
Exercised
|
(295,244
|
)
|
|
19.87
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
N/A
|
|
|
|
|
|
|
Canceled
|
(563
|
)
|
|
10.49
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
707,847
|
|
|
$
|
9.08
|
|
|
3.3 years
|
|
$
|
9.0
|
|
Exercisable at December 31, 2019
|
707,847
|
|
|
$
|
9.08
|
|
|
3.3 years
|
|
$
|
9.0
|
|
The intrinsic value presented in the table above represents the amount by which the market value of the underlying stock exceeds the exercise price of the option at December 31, 2019. The intrinsic value changes continuously based on the fair value of our stock. The market value is based on KAR Auction Services' closing stock price of $21.79 on December 31, 2019. The total intrinsic value of service options exercised during the years ended December 31, 2019, 2018 and 2017 was $7.1 million, $13.1 million and $8.1 million, respectively. The fair market value of all vested and exercisable service options at December 31, 2019 and 2018 was $15.4 million and $47.9 million, respectively. All compensation expense related to the service options has been recognized.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Exit Options
The outstanding exit options granted in 2010 under the Omnibus Plan have a ten year life and are fully vested and exercisable. The following table summarizes exit option activity under the Omnibus Plan for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit Options
|
Number
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(in millions)
|
Outstanding at January 1, 2019
|
14,465
|
|
|
$
|
12.85
|
|
|
|
|
|
|
Granted
|
—
|
|
|
N/A
|
|
|
|
|
|
|
Exercised
|
(10,912
|
)
|
|
12.02
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
N/A
|
|
|
|
|
|
|
Canceled
|
—
|
|
|
N/A
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
3,553
|
|
|
$
|
5.12
|
|
|
0.2 years
|
|
$
|
0.1
|
|
Exercisable at December 31, 2019
|
3,553
|
|
|
$
|
5.12
|
|
|
0.2 years
|
|
$
|
0.1
|
|
The intrinsic value presented in the table above represents the amount by which the market value of the underlying stock exceeds the exercise price of the option at December 31, 2019. The intrinsic value changes continuously based on the fair value of our stock. The market value is based on KAR Auction Services' closing stock price of $21.79 on December 31, 2019. The total intrinsic value of exit options exercised during the years ended December 31, 2019, 2018 and 2017 was $0.4 million, $23.9 million and $14.7 million, respectively. The fair market value of all vested and exercisable exit options at December 31, 2019 and 2018 was $0.1 million and $0.7 million, respectively. All compensation expense related to the exit options has been recognized.
KAR Auction Services, Inc. Employee Stock Purchase Plan
We adopted the KAR Auction Services, Inc. Employee Stock Purchase Plan ("ESPP") in December 2009. The ESPP, which was approved by shareholders, is designed to provide an incentive to attract, retain and reward eligible employees and is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. A maximum of 1,000,000 shares of our common stock have been reserved for issuance under the ESPP, of which 225,020 shares remained available for future ESPP purchases as of December 31, 2019. The ESPP provides for one month offering periods with a 15% discount from the fair market value of a share on the date of purchase. A participant's annual contribution to the ESPP may not exceed $25,000 per year. Unless terminated earlier, the ESPP will terminate on December 31, 2028. In accordance with ASC 718, Compensation—Stock Compensation, the entire 15% purchase discount is recorded as compensation expense.
Share Repurchase Programs
In October 2019, the board of directors authorized a repurchase of up to $300 million of the Company's outstanding common stock, par value $0.01 per share, through October 30, 2021. Repurchases may be made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases is subject to market and other conditions. This program does not oblige the Company to repurchase any dollar amount or any number of shares under the authorization, and the program may be suspended, discontinued or modified at any time, for any reason and without notice.
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 were made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases is subject to market and other conditions. In 2019, 2018 and 2017 we repurchased and retired
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
4,753,300, 2,695,978 and 3,279,089 shares of common stock, respectively, in the open market at a weighted average price of $25.18, $55.64 and $45.74 per share, respectively, under the October 2016 authorization.
Note 6—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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net income from continuing operations
|
$
|
92.4
|
|
|
$
|
117.6
|
|
|
$
|
174.0
|
|
Weighted average common shares outstanding
|
131.6
|
|
|
134.3
|
|
|
136.3
|
|
Effect of dilutive stock options and restricted stock awards
|
1.3
|
|
|
1.4
|
|
|
1.7
|
|
Weighted average common shares outstanding and potential common shares
|
132.9
|
|
|
135.7
|
|
|
138.0
|
|
Net income from continuing operations per share
|
|
|
|
|
|
Basic
|
$
|
0.70
|
|
|
$
|
0.88
|
|
|
$
|
1.28
|
|
Diluted
|
$
|
0.70
|
|
|
$
|
0.87
|
|
|
$
|
1.26
|
|
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. As a result of the spin-off, there are IAA employees who hold KAR equity awards included in the calculation. Stock options that would have an anti-dilutive effect on 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 the years ended December 31, 2019, 2018 and 2017. In addition, no PRSUs, approximately 0.5 million PRSUs and approximately 0.5 million PRSUs were excluded from the calculation of diluted net income per share for the years ended December 31, 2019, 2018 and 2017, respectively. Total options outstanding at December 31, 2019, 2018 and 2017 were 0.7 million, 1.0 million and 1.9 million, respectively.
Note 7—Allowance for Credit Losses and Doubtful Accounts
The following is a summary of the changes in the allowance for credit losses related to finance receivables (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Allowance for Credit Losses
|
|
|
|
|
|
Balance at beginning of period
|
$
|
14.0
|
|
|
$
|
13.0
|
|
|
$
|
12.0
|
|
Provision for credit losses
|
35.3
|
|
|
32.9
|
|
|
33.9
|
|
Recoveries
|
7.7
|
|
|
6.9
|
|
|
5.3
|
|
Less charge-offs
|
(42.0
|
)
|
|
(38.8
|
)
|
|
(38.2
|
)
|
Balance at end of period
|
$
|
15.0
|
|
|
$
|
14.0
|
|
|
$
|
13.0
|
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
AFC's allowance for credit losses includes estimated losses for finance receivables currently held on the balance sheet of AFC and its subsidiaries.
The following is a summary of changes in the allowance for doubtful accounts related to trade receivables (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
Balance at beginning of period
|
$
|
8.7
|
|
|
$
|
9.1
|
|
|
$
|
11.0
|
|
Provision for credit losses
|
4.8
|
|
|
4.0
|
|
|
4.0
|
|
Less net charge-offs
|
(4.0
|
)
|
|
(4.4
|
)
|
|
(5.9
|
)
|
Balance at end of period
|
$
|
9.5
|
|
|
$
|
8.7
|
|
|
$
|
9.1
|
|
Recoveries of trade receivables were netted with charge-offs, as they were not material. Changes in the Canadian exchange rate did not have a material effect on the allowance for doubtful accounts.
Note 8—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 December 31, 2019.
In December 2018, AFC and AFC Funding Corporation entered into the Eighth Amended and Restated Receivables Purchase Agreement (the "Receivables Purchase Agreement"). The Receivables Purchase Agreement increased AFC Funding's U.S. committed liquidity from $1.50 billion to $1.70 billion and extended the facility's maturity date. In addition, the definition of eligible receivables was expanded. We capitalized approximately $11.6 million of costs in connection with the Receivables Purchase Agreement.
We also have an agreement for the securitization of AFCI's 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 December 31, 2019. In December 2018, AFCI entered into Amending Agreement No. 2 to the Fourth Amended and Restated Receivables Purchase Agreement (the "Canadian Receivable Purchase Agreement"). The Canadian Receivables Purchase Agreement increased AFCI's committed liquidity from C$125 million to C$175 million and extended the facility's maturity date. In addition, the definition of eligible receivables was expanded. We capitalized approximately $0.9 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Net Credit Losses
During 2019
|
|
Total Amount of:
|
|
(in millions)
|
Receivables
|
|
Receivables
Delinquent
|
|
Floorplan receivables
|
$
|
2,099.4
|
|
|
$
|
28.8
|
|
|
$
|
34.3
|
|
Other loans
|
15.8
|
|
|
—
|
|
|
—
|
|
Total receivables managed
|
$
|
2,115.2
|
|
|
$
|
28.8
|
|
|
$
|
34.3
|
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Net Credit Losses
During 2018
|
|
Total Amount of:
|
|
(in millions)
|
Receivables
|
|
Receivables
Delinquent
|
|
Floorplan receivables
|
$
|
2,001.9
|
|
|
$
|
15.9
|
|
|
$
|
31.9
|
|
Other loans
|
12.9
|
|
|
—
|
|
|
—
|
|
Total receivables managed
|
$
|
2,014.8
|
|
|
$
|
15.9
|
|
|
$
|
31.9
|
|
AFC's allowance for losses was $15.0 million and $14.0 million at December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, $2,061.6 million and $1,973.2 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the obligations collateralized by finance receivables. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreement.
Obligations collateralized by finance receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
Obligations collateralized by finance receivables, gross
|
$
|
1,474.4
|
|
|
$
|
1,464.7
|
|
Unamortized securitization issuance costs
|
(13.2
|
)
|
|
(19.4
|
)
|
Obligations collateralized by finance receivables
|
$
|
1,461.2
|
|
|
$
|
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 December 31, 2019, we were in compliance with the covenants in the securitization agreements.
Note 9—Goodwill and Other Intangible Assets
Goodwill consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Total
|
Balance at December 31, 2017
|
$
|
1,390.4
|
|
|
$
|
263.7
|
|
|
$
|
1,654.1
|
|
Increase for acquisition activity
|
32.1
|
|
|
—
|
|
|
32.1
|
|
Other
|
(9.3
|
)
|
|
—
|
|
|
(9.3
|
)
|
Balance at December 31, 2018
|
$
|
1,413.2
|
|
|
$
|
263.7
|
|
|
$
|
1,676.9
|
|
Increase for acquisition activity
|
142.6
|
|
|
—
|
|
|
142.6
|
|
Other
|
2.2
|
|
|
—
|
|
|
2.2
|
|
Balance at December 31, 2019
|
$
|
1,558.0
|
|
|
$
|
263.7
|
|
|
$
|
1,821.7
|
|
Goodwill represents the excess cost over fair value of identifiable net assets of businesses acquired. Goodwill increased in 2019 and 2018 primarily as a result of acquisitions. A portion of the goodwill resulting from the businesses acquired in 2019 and 2018 is expected to be deductible for tax purposes. The "other" category includes the impact of fluctuations in exchange rates.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
A summary of customer relationships is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Useful
Lives
(in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
Customer relationships
|
5 - 19
|
|
$
|
845.3
|
|
|
$
|
(637.4
|
)
|
|
$
|
207.9
|
|
|
$
|
814.4
|
|
|
$
|
(587.0
|
)
|
|
$
|
227.4
|
|
The increase in customer relationships in 2019 was primarily related to customer relationships acquired, partially offset by the amortization of existing customer relationships. The decrease in customer relationships in 2018 was primarily a result of continued amortization.
A summary of other intangibles is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Useful Lives
(in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Carrying
Value
|
Tradenames
|
2 - Indefinite
|
|
$
|
147.6
|
|
|
$
|
(10.7
|
)
|
|
$
|
136.9
|
|
|
$
|
145.6
|
|
|
$
|
(8.6
|
)
|
|
$
|
137.0
|
|
Computer software & technology
|
3 - 13
|
|
443.0
|
|
|
(281.5
|
)
|
|
161.5
|
|
|
381.8
|
|
|
(246.5
|
)
|
|
135.3
|
|
Covenants not to compete
|
5
|
|
0.3
|
|
|
(0.2
|
)
|
|
0.1
|
|
|
0.3
|
|
|
(0.2
|
)
|
|
0.1
|
|
Total
|
|
|
$
|
590.9
|
|
|
$
|
(292.4
|
)
|
|
$
|
298.5
|
|
|
$
|
527.7
|
|
|
$
|
(255.3
|
)
|
|
$
|
272.4
|
|
Other intangibles increased in 2019 and 2018 primarily as a result of computer software additions and acquisitions, partially offset by the amortization of existing intangibles. The carrying amount of tradenames with an indefinite life was approximately $131.5 million at December 31, 2019 and 2018.
Amortization expense for customer relationships and other intangibles was $122.9 million, $111.7 million and $118.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. Estimated amortization expense on existing intangible assets for the next five years is $110.7 million for 2020, $77.4 million for 2021, $42.5 million for 2022, $26.8 million for 2023 and $19.3 million for 2024.
Note 10—Property and Equipment
Property and equipment consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Useful Lives
(in years)
|
|
December 31,
|
|
2019
|
|
2018
|
Land
|
|
|
$
|
205.5
|
|
|
$
|
244.6
|
|
Buildings
|
5 - 40
|
|
247.3
|
|
|
245.0
|
|
Land improvements
|
5 - 20
|
|
183.7
|
|
|
172.3
|
|
Building and leasehold improvements
|
3 - 33
|
|
133.6
|
|
|
92.6
|
|
Furniture, fixtures and equipment
|
1 - 15
|
|
344.0
|
|
|
297.7
|
|
Vehicles
|
3 - 10
|
|
16.5
|
|
|
14.9
|
|
Construction in progress
|
|
|
12.7
|
|
|
31.4
|
|
|
|
|
1,143.3
|
|
|
1,098.5
|
|
Accumulated depreciation
|
|
|
(534.3
|
)
|
|
(467.5
|
)
|
Property and equipment, net
|
|
|
$
|
609.0
|
|
|
$
|
631.0
|
|
Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $65.8 million, $60.7 million and $52.8 million, respectively.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Note 11—Self-Insurance and Retained Loss Reserves
We self-insure our employee medical benefits, as well as a portion of our automobile, general liability and workers' compensation claims. We have insurance coverage that limits the exposure on individual claims. The cost of the insurance is expensed over the contract periods. Utilizing historical claims experience, we record an accrual for the claims based upon the expected amount of all such claims, which includes the cost of claims that have been incurred but not reported. Accrued medical benefits and workers' compensation expenses are included in "Accrued employee benefits and compensation expenses" while accrued automobile and general liability expenses are included in "Other accrued expenses."
The following is a summary of the changes in the reserves for self-insurance and the retained losses (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of period
|
$
|
35.8
|
|
|
$
|
37.7
|
|
|
$
|
35.8
|
|
Net payments
|
(66.2
|
)
|
|
(57.8
|
)
|
|
(59.3
|
)
|
Expense
|
67.1
|
|
|
55.9
|
|
|
61.2
|
|
Balance at end of period
|
$
|
36.7
|
|
|
$
|
35.8
|
|
|
$
|
37.7
|
|
Individual stop-loss coverage for medical benefits was $0.5 million in 2019, 2018 and 2017. There was no aggregate policy limit for medical benefits for the Company in either year. The retention for automobile and general liability claims was $1.0 million per occurrence and the retention for workers' compensation claims was $0.5 million per occurrence with a $1.0 million corridor deductible in the 2019, 2018 and 2017 policy years. Once the $1.0 million corridor deductible is met for workers' compensation claims, the deductible reverts back to $0.5 million per occurrence. These retentions are aggregated for workers’ compensation, automobile and general liability claims at approximately $35.9 million in 2019, $31.5 million in 2018 and $30.0 million in 2017. If these aggregates are met, the insurance company would pay the next $7.5 million.
Note 12—Long-Term Debt
Long-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Interest Rate*
|
|
Maturity
|
|
2019
|
|
2018
|
Term Loan B-4
|
Adjusted LIBOR
|
|
+ 2.25%
|
|
March 11, 2021
|
|
$
|
—
|
|
|
$
|
704.4
|
|
Term Loan B-5
|
Adjusted LIBOR
|
|
+ 2.50%
|
|
March 9, 2023
|
|
—
|
|
|
1,031.5
|
|
Term Loan B-6
|
Adjusted LIBOR
|
|
+ 2.25%
|
|
September 19, 2026
|
|
947.6
|
|
|
—
|
|
Revolving Credit Facility
|
Adjusted LIBOR
|
|
+ 1.75%
|
|
September 19, 2024
|
|
—
|
|
|
—
|
|
Senior notes
|
|
|
5.125%
|
|
June 1, 2025
|
|
950.0
|
|
|
950.0
|
|
European lines of credit
|
Euribor
|
|
+ 1.25%
|
|
Repayable upon demand
|
|
19.3
|
|
|
—
|
|
Canadian line of credit
|
CAD Prime
|
|
+ 0.50%
|
|
Repayable upon demand
|
|
—
|
|
|
—
|
|
Total debt
|
|
|
|
|
|
|
1,916.9
|
|
|
2,685.9
|
|
Unamortized debt issuance costs/discounts
|
|
|
|
|
|
(26.8
|
)
|
|
(18.5
|
)
|
Current portion of long-term debt
|
|
|
|
|
|
|
(28.8
|
)
|
|
(13.1
|
)
|
Long-term debt
|
|
|
|
|
|
|
$
|
1,861.3
|
|
|
$
|
2,654.3
|
|
*The interest rates presented in the table above represent the rates in place at December 31, 2019. The weighted average interest rate on our variable rate debt was 4.01% and 5.21% at December 31, 2019 and 2018, respectively.
Credit Facilities
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, with cash received from IAA in connection with the Separation. As a result of the term loan prepayments in
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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.
On September 19, 2019, we entered into the Third Amendment Agreement (the "Third Amendment") to the Credit Agreement. The Third Amendment provided for, among other things, (i) the refinancing of the existing Term Loan B-4 and Term Loan B-5 with the new seven-year, $950 million Term Loan B-6, (ii) repayment of the 2017 Revolving Credit Facility and (iii) the $325 million, five-year Revolving Credit Facility. No early termination penalties were incurred by the Company; however, we incurred a non-cash loss on the extinguishment of debt of $2.2 million in the third quarter of 2019. The loss was primarily a result of the write-off of unamortized debt issue costs associated with Term Loan B-4 and Term Loan B-5. We capitalized approximately $14.1 million of debt issuance costs in connection with the Third Amendment.
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 Term Loan B-2 remaining after the repayment with Term Loan B-4, (ii) the refinancing and repricing of existing Term Loan B-3 remaining after the repayment with Term Loan B-5 and (iii) the 2017 Revolving Credit Facility. The Company used proceeds from the issuance of $950 million senior notes and proceeds from the issuance of $1,767 million in the aggregate of Term Loan B-4 and Term Loan B-5 to repay Term Loan B-2 and Term Loan B-3 in full and to repay the outstanding balance on the 2016 Revolving Credit Facility. No early termination penalties were incurred by the Company; however, we incurred a non-cash loss on the extinguishment of debt of $27.5 million in the second quarter of 2017. The loss was a result of the write-off of unamortized debt issue costs and debt discounts associated with Term Loan B-2 and Term Loan B-3. We capitalized approximately $7.8 million of debt issuance costs in connection with the Second Amendment.
The Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline loans.
Term Loan B-6 was issued at a discount of $2.4 million and the discount is being amortized using the effective interest method to interest expense over the term of the loan. Term Loan B-6 is payable in quarterly installments equal to 0.25% of the original aggregate principal amount. Such payments commenced on December 31, 2019, with the balance payable at the maturity date.
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 Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement, not to exceed 3.5 as of the last day of each fiscal quarter), provided there are revolving loans outstanding. We were in compliance with the covenants in the Credit Agreement at December 31, 2019.
As set forth in the Credit Agreement, the Tranche B-6 Term Loans bear interest at an adjusted LIBOR rate plus 2.25% or at the Company’s election, Base Rate (as defined in the Credit Agreement) plus 1.25%. Loans under the Revolving Credit Facility will bear interest at a rate calculated based on the type of borrowing (either adjusted LIBOR or Base Rate) and the Company’s Consolidated Senior Secured Net Leverage Ratio, with such rate ranging from 2.25% to 1.75% for adjusted LIBOR loans and from 1.25% to 0.75% for Base Rate loans. The Company also pays a commitment fee between 25 to 35 basis points, payable quarterly, on the average daily unused amount of the Revolving Facility based on the Company’s Consolidated Senior Secured Net Leverage Ratio, from time to time. The rate on Term Loan B-6 was 4.06% at December 31, 2019.
There were no borrowings on the Revolving Credit Facility at December 31, 2019 or 2018. In addition, we had related outstanding letters of credit in the aggregate amount of $27.4 million and $32.9 million at December 31, 2019 and 2018, respectively, which reduce the amount available for borrowings under the revolving credit facility.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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. We capitalized approximately $14.7 million of debt issuance costs in connection with the senior notes. The senior notes are guaranteed by the Subsidiary Guarantors.
European Lines of Credit
COTW has lines of credit aggregating $33.6 million (€30 million). The lines of credit have an interest rate of Euribor plus 1.25% and had an aggregate $19.3 million of borrowings outstanding at December 31, 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.
Canadian Line of Credit
ADESA Canada has a C$8 million line of credit. The line of credit bears interest at a rate equal to the Canadian prime rate plus 50 basis points. There were no borrowings under the Canadian line of credit at December 31, 2019 or 2018. There were related letters of credit outstanding totaling approximately C$1.0 million at December 31, 2019 and 2018, which reduce credit available under the Canadian line of credit, but do not affect amounts available for borrowings under our Revolving Credit Facility. The line of credit is guaranteed by certain ADESA Canada companies.
Future Principal Payments
At December 31, 2019, aggregate future principal payments on long-term debt are as follows (in millions):
|
|
|
|
|
2020
|
$
|
28.8
|
|
2021
|
9.5
|
|
2022
|
9.5
|
|
2023
|
9.5
|
|
2024
|
9.5
|
|
Thereafter
|
1,850.1
|
|
|
$
|
1,916.9
|
|
Note 13—Financial Instruments
Our derivative activities are initiated within the guidelines of documented corporate risk management policies. We do not enter into any derivative transactions for speculative or trading purposes.
Interest Rate Risk Management
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 have used 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. We have used interest rate cap agreements 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 exceeded 2.0%. The interest rate cap agreements each had an effective date of September 30, 2017 and each matured on September 30, 2019. We paid an aggregate amount of approximately $1.0 million for the caps in August 2017.
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 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.
|
When derivatives are used, 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
|
|
|
December 31, 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
|
|
N/A
|
|
Other assets
|
|
$
|
5.2
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain / (Loss) Recognized in Income on Derivatives
|
|
Amount of Gain / (Loss)
Recognized in Income on Derivatives
|
|
|
|
Year Ended December 31,
|
Derivatives Not Designated as Hedging Instruments
|
|
|
2019
|
|
2018
|
|
2017
|
2017 Interest rate caps
|
|
Interest expense
|
|
$
|
(0.9
|
)
|
|
$
|
5.8
|
|
|
$
|
0.8
|
|
Concentrations of Credit Risk
Financial instruments that potentially subject us to credit risk consist principally of interest-bearing investments, finance receivables, trade receivables and interest rate derivatives. We maintain cash and cash equivalents, short-term investments, and certain other financial instruments with various major financial institutions. We perform periodic evaluations of the relative credit standing of these financial institutions and companies and limit the amount of credit exposure with any one institution. Cash and cash equivalents include interest-bearing investments with maturities of three months or less. Due to the nature of our business, substantially all trade and finance receivables are due from vehicle dealers and institutional sellers. We have possession of vehicles or vehicle titles collateralizing a significant portion of the trade and finance receivables. The risk associated with this concentration is limited due to the large number of accounts and their geographic dispersion. We monitor the creditworthiness of customers to which we grant credit terms in the normal course of business. In the event of non-performance by counterparties to financial instruments we are exposed to credit-related losses, but management believes this credit risk is limited by periodically reviewing the creditworthiness of the counterparties to the transactions.
Financial Instruments
The carrying amounts of trade receivables, finance receivables, other current assets, accounts payable, accrued expenses and borrowings under our short-term revolving line of credit facilities approximate fair value because of the short-term nature of those instruments.
As of December 31, 2019 and 2018, the estimated fair value of our long-term debt amounted to $1,958.5 million and $2,537.9 million, respectively. The estimates of fair value were based on broker-dealer quotes for our debt as of December 31, 2019 and 2018. The estimates presented on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Note 14—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):
|
|
|
|
|
|
Year Ended December 31, 2019
|
Operating lease cost
|
$
|
60.2
|
|
Finance lease cost:
|
|
Amortization of right-of-use assets
|
$
|
14.7
|
|
Interest on lease liabilities
|
1.3
|
|
Total finance lease cost
|
$
|
16.0
|
|
Supplemental cash flow information related to leases was as follows (in millions):
|
|
|
|
|
|
Year Ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows related to operating leases
|
$
|
58.8
|
|
Operating cash flows related to finance leases
|
1.3
|
|
Financing cash flows related to finance leases
|
15.9
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
85.9
|
|
Finance leases
|
18.1
|
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
|
|
|
|
|
|
December 31, 2019
|
Operating Leases
|
|
Operating lease right-of-use assets
|
$
|
364.1
|
|
Other accrued expenses
|
$
|
34.5
|
|
Operating lease liabilities
|
358.3
|
|
Total operating lease liabilities
|
$
|
392.8
|
|
Finance Leases
|
|
Property and equipment, gross
|
$
|
102.2
|
|
Accumulated depreciation
|
(74.3
|
)
|
Property and equipment, net
|
$
|
27.9
|
|
Other accrued expenses
|
$
|
13.3
|
|
Other liabilities
|
14.0
|
|
Total finance lease liabilities
|
$
|
27.3
|
|
Weighted Average Remaining Lease Term
|
|
Operating leases
|
10.8 years
|
|
Finance leases
|
2.3 years
|
|
Weighted Average Discount Rate
|
|
Operating leases
|
6.1
|
%
|
Finance leases
|
4.9
|
%
|
Maturities of lease liabilities as of December 31, 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Finance Leases
|
2020
|
$
|
57.2
|
|
|
$
|
14.5
|
|
2021
|
54.3
|
|
|
11.2
|
|
2022
|
51.5
|
|
|
3.1
|
|
2023
|
49.0
|
|
|
0.2
|
|
2024
|
47.9
|
|
|
0.2
|
|
Thereafter
|
283.1
|
|
|
—
|
|
Total lease payments
|
543.0
|
|
|
29.2
|
|
Less imputed interest
|
(150.2
|
)
|
|
(1.9
|
)
|
Total
|
$
|
392.8
|
|
|
$
|
27.3
|
|
The following prior year information was accounted for under ASC 840, Leases. Total lease expense for the years ended December 31, 2018 and 2017 was $61.1 million and $54.9 million, respectively. Certain assets included in our furniture, fixtures and equipment at December 31, 2018 were held under finance leases. These assets are summarized below:
|
|
|
|
|
Classes of Property
|
December 31,
2018
|
Furniture, fixtures and equipment
|
$
|
86.1
|
|
Accumulated depreciation
|
(59.5
|
)
|
Capital lease assets
|
$
|
26.6
|
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Note 15—Income Taxes
The components of our income from continuing operations before income taxes and the provision for income taxes are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Income from continuing operations before income taxes:
|
|
|
|
|
|
Domestic
|
$
|
100.0
|
|
|
$
|
85.6
|
|
|
$
|
72.6
|
|
Foreign
|
30.1
|
|
|
66.3
|
|
|
85.8
|
|
Total
|
$
|
130.1
|
|
|
$
|
151.9
|
|
|
$
|
158.4
|
|
Income tax expense (benefit):
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
18.4
|
|
|
$
|
5.0
|
|
|
$
|
30.9
|
|
Foreign
|
17.4
|
|
|
23.7
|
|
|
23.8
|
|
State
|
5.2
|
|
|
2.6
|
|
|
2.0
|
|
Total current provision
|
41.0
|
|
|
31.3
|
|
|
56.7
|
|
Deferred:
|
|
|
|
|
|
Federal
|
3.8
|
|
|
10.4
|
|
|
(73.2
|
)
|
Foreign
|
(7.4
|
)
|
|
(6.2
|
)
|
|
(2.8
|
)
|
State
|
0.3
|
|
|
(1.2
|
)
|
|
3.7
|
|
Total deferred provision
|
(3.3
|
)
|
|
3.0
|
|
|
(72.3
|
)
|
Income tax expense
|
$
|
37.7
|
|
|
$
|
34.3
|
|
|
$
|
(15.6
|
)
|
The provision for income taxes was different from the U.S. federal statutory rate applied to income before taxes, and is reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State and local income taxes, net
|
3.6
|
%
|
|
1.9
|
%
|
|
1.8
|
%
|
Reserves for tax exposures
|
(0.5
|
)%
|
|
(0.6
|
)%
|
|
(0.8
|
)%
|
Change in valuation allowance
|
0.9
|
%
|
|
0.4
|
%
|
|
(1.5
|
)%
|
International operations
|
3.1
|
%
|
|
4.7
|
%
|
|
(5.6
|
)%
|
Stock-based compensation
|
(2.5
|
)%
|
|
(5.0
|
)%
|
|
(2.8
|
)%
|
Impact of law and rate change
|
(0.2
|
)%
|
|
(1.7
|
)%
|
|
(36.2
|
)%
|
Excess officer's compensation
|
1.5
|
%
|
|
0.9
|
%
|
|
—
|
%
|
Transaction costs
|
0.6
|
%
|
|
0.3
|
%
|
|
—
|
%
|
Other, net
|
1.5
|
%
|
|
0.7
|
%
|
|
0.3
|
%
|
Effective rate
|
29.0
|
%
|
|
22.6
|
%
|
|
(9.8
|
)%
|
On December 22, 2017, U.S. tax reform (Tax Cuts and Jobs Act of 2017) was enacted. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate income tax rate reduction from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. As a result, for the year ended December 31, 2017, the Company recorded a deferred income tax benefit of $65.7 million related to the remeasurement of its deferred tax assets and
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
liabilities. In addition, the law imposed a one-time deemed repatriation transition tax on the accumulated unrepatriated and untaxed earnings of our foreign subsidiaries. This resulted in the Company recording a current tax expense of $9.0 million for the year ended December 31, 2017.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The valuation allowance as of December 31, 2019 primarily relates to net operating losses, tax credits and capital loss carryforwards that are not more likely than not to be utilized prior to their expiration.
We offset all deferred tax assets and liabilities by jurisdiction, as well as any related valuation allowance, and present them as a non-current deferred income tax asset or liability (as applicable). Deferred tax assets (liabilities) are comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Gross deferred tax assets:
|
|
|
|
Allowances for trade and finance receivables
|
$
|
6.0
|
|
|
$
|
5.5
|
|
Accruals and liabilities
|
6.2
|
|
|
12.7
|
|
Employee benefits and compensation
|
14.0
|
|
|
14.6
|
|
Net operating loss carryforwards
|
48.8
|
|
|
45.5
|
|
Investment basis difference
|
(2.2
|
)
|
|
(2.1
|
)
|
Right of use lease liability
|
97.0
|
|
|
—
|
|
Other
|
4.1
|
|
|
4.8
|
|
Total deferred tax assets
|
173.9
|
|
|
81.0
|
|
Deferred tax asset valuation allowance
|
(31.1
|
)
|
|
(29.9
|
)
|
Total
|
142.8
|
|
|
51.1
|
|
Gross deferred tax liabilities:
|
|
|
|
Property and equipment
|
(76.4
|
)
|
|
(68.7
|
)
|
Goodwill and intangible assets
|
(100.5
|
)
|
|
(102.7
|
)
|
Right of use lease asset
|
(89.8
|
)
|
|
—
|
|
Other
|
(4.7
|
)
|
|
(5.0
|
)
|
Total
|
(271.4
|
)
|
|
(176.4
|
)
|
Net deferred tax liabilities
|
$
|
(128.6
|
)
|
|
$
|
(125.3
|
)
|
The tax benefit from state and federal net operating loss carryforwards expires as follows (in millions):
|
|
|
|
|
2020
|
$
|
0.3
|
|
2021
|
1.1
|
|
2022
|
0.3
|
|
2023
|
0.3
|
|
2024
|
0.2
|
|
2025 to 2039
|
46.6
|
|
|
$
|
48.8
|
|
Permanently reinvested undistributed earnings of our foreign subsidiaries were approximately $352.6 million at December 31, 2019. Because these amounts have been or will be permanently reinvested in properties and working capital, we have not recorded the deferred taxes associated with these earnings. If the undistributed earnings of foreign subsidiaries were to be remitted, state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
foreign tax credits. It is not practical for us to determine the additional tax that would be incurred upon remittance of these earnings.
We made federal income tax payments, net of federal income tax refunds, of $9.9 million, $20.5 million and $37.8 million in 2019, 2018 and 2017, respectively. State and foreign income taxes paid by us, net of refunds, totaled $27.9 million, $37.4 million and $32.3 million in 2019, 2018 and 2017, respectively.
We apply the provisions of ASC 740, Income Taxes. ASC 740 clarifies the accounting and reporting for uncertainty in income taxes recognized in an enterprise's financial statements. These provisions prescribe a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken on income tax returns.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Balance at beginning of period
|
$
|
7.4
|
|
|
$
|
9.7
|
|
Increase in prior year tax positions
|
—
|
|
|
—
|
|
Decrease in prior year tax positions
|
(0.2
|
)
|
|
(0.7
|
)
|
Increase in current year tax positions
|
0.7
|
|
|
0.8
|
|
Lapse in statute of limitations
|
(1.8
|
)
|
|
(2.4
|
)
|
Balance at end of period
|
$
|
6.1
|
|
|
$
|
7.4
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $4.4 million and $5.0 million at December 31, 2019 and 2018, respectively.
We record interest and penalties associated with the uncertain tax positions within our provision for income taxes on the income statement. We had reserves totaling $0.5 million and $1.1 million at December 31, 2019 and December 31, 2018, respectively, associated with interest and penalties, net of tax.
The provision for income taxes involves management judgment regarding interpretation of relevant facts and laws in the jurisdictions in which the Company operates. Future changes in applicable laws, projected levels of taxable income and tax planning could change the effective tax rate and tax balances recorded by us. In addition, U.S. and non-U.S. tax authorities periodically review income tax returns filed by us and can raise issues regarding our filing positions, timing and amount of income or deductions and the allocation of income among the jurisdictions in which we operate. A significant period of time may elapse between the filing of an income tax return and the ultimate resolution of an issue raised by a revenue authority with respect to that return. In the normal course of business we are subject to examination by taxing authorities in the U.S., Canada, Western Europe, United Kingdom and Mexico. In general, the examination of our material tax returns is completed for the years prior to 2012.
Based on the potential outcome of the Company's tax examinations and the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the currently remaining unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the reserve balance is estimated to be in the range of a $0.5 million to $1.0 million decrease.
Note 16—Employee Benefit Plans
401(k) Plan
We maintain a defined contribution 401(k) plan that covers substantially all U.S. employees. Participants are generally allowed to make non-forfeitable contributions up to the annual IRS limits. The Company matches 100 percent of the amounts contributed by each individual participant up to 4 percent of the participant's compensation. Participants are 100 percent vested in the Company's contributions. For the years ended December 31, 2019, 2018 and 2017 we contributed $16.3 million, $16.9 million and $15.5 million, respectively.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Note 17—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. Legal fees are expensed as incurred.
We have accrued, as appropriate, for environmental remediation costs anticipated to be incurred at certain of our auction facilities. There were no liabilities for environmental matters included in "Other accrued expenses" at December 31, 2019 or 2018.
We store a significant number of vehicles owned by various customers that are consigned to us to be auctioned. We are contingently liable for each consigned vehicle until the eventual sale or other disposition, subject to certain natural disaster exceptions. Individual stop loss and aggregate insurance coverage is maintained on the consigned vehicles. These consigned vehicles are not included in the consolidated balance sheets.
In the normal course of business, we also enter into various other guarantees and indemnities in our relationships with suppliers, service providers, customers and others. These guarantees and indemnifications do not materially impact our financial condition or results of operations, but indemnifications associated with our actions generally have no dollar limitations and historically have been inconsequential.
As noted above, 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. Such litigation is generally not, in the opinion of management, likely to have a material adverse effect on our financial condition, results of operations or cash flows.
Note 18—Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Foreign currency translation loss
|
$
|
(31.0
|
)
|
|
$
|
(61.3
|
)
|
Accumulated other comprehensive loss
|
$
|
(31.0
|
)
|
|
$
|
(61.3
|
)
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Note 19—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 4). Segment results for prior periods have been reclassified to conform with the new presentation of segments.
ADESA Auctions encompasses all physical and online wholesale auctions throughout North America (U.S., Canada and Mexico) and Europe. Beginning in 2019, the ADESA Auctions Segment includes COTW, an online auction company serving the wholesale vehicle sector in Continental Europe. Beginning in October 2017, the ADESA Auctions segment includes TradeRev, an online automotive remarketing system where dealers can launch and participate in real-time vehicle auctions at any time. ADESA Auctions relates to used vehicle remarketing, including auction services, remarketing, or make ready services and all are interrelated, synergistic elements along the auto remarketing chain.
AFC is primarily engaged in the business of providing short-term, inventory-secured financing to independent, used vehicle dealers. AFC also includes other businesses and ventures that AFC may enter into, focusing on providing independent used vehicle dealer customers with other related services and products, including vehicle service contracts. AFC conducts business primarily at or near wholesale used vehicle auctions in the U.S. and Canada.
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 finance leases and the corporate debt structure. Intercompany charges relate primarily to interest on intercompany debt or receivables and certain administrative costs allocated by the holding company.
Financial information regarding our reportable segments is set forth below as of and for the year ended December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
Operating revenues
|
$
|
2,429.0
|
|
|
$
|
352.9
|
|
|
$
|
—
|
|
|
$
|
2,781.9
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
1,520.7
|
|
|
96.4
|
|
|
—
|
|
|
1,617.1
|
|
Selling, general and administrative
|
494.3
|
|
|
25.6
|
|
|
142.1
|
|
|
662.0
|
|
Depreciation and amortization
|
149.9
|
|
|
10.3
|
|
|
28.5
|
|
|
188.7
|
|
Total operating expenses
|
2,164.9
|
|
|
132.3
|
|
|
170.6
|
|
|
2,467.8
|
|
Operating profit (loss)
|
264.1
|
|
|
220.6
|
|
|
(170.6
|
)
|
|
314.1
|
|
Interest expense
|
3.7
|
|
|
64.2
|
|
|
121.6
|
|
|
189.5
|
|
Other (income) expense, net
|
(6.4
|
)
|
|
(0.4
|
)
|
|
(0.9
|
)
|
|
(7.7
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
2.2
|
|
|
2.2
|
|
Intercompany expense (income)
|
25.2
|
|
|
(5.1
|
)
|
|
(20.1
|
)
|
|
—
|
|
Income (loss) from continuing operations before income taxes
|
241.6
|
|
|
161.9
|
|
|
(273.4
|
)
|
|
130.1
|
|
Income taxes
|
67.3
|
|
|
41.9
|
|
|
(71.5
|
)
|
|
37.7
|
|
Net income (loss) from continuing operations
|
$
|
174.3
|
|
|
$
|
120.0
|
|
|
$
|
(201.9
|
)
|
|
$
|
92.4
|
|
Total assets
|
$
|
3,658.4
|
|
|
$
|
2,565.7
|
|
|
$
|
357.1
|
|
|
$
|
6,581.2
|
|
Capital expenditures
|
$
|
95.2
|
|
|
$
|
7.0
|
|
|
$
|
59.4
|
|
|
$
|
161.6
|
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Financial information regarding our reportable segments is set forth below as of and for the year ended December 31, 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
Operating revenues
|
$
|
2,101.9
|
|
|
$
|
340.9
|
|
|
$
|
—
|
|
|
$
|
2,442.8
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
1,230.8
|
|
|
90.7
|
|
|
—
|
|
|
1,321.5
|
|
Selling, general and administrative
|
435.8
|
|
|
30.7
|
|
|
142.3
|
|
|
608.8
|
|
Depreciation and amortization
|
127.5
|
|
|
16.0
|
|
|
28.9
|
|
|
172.4
|
|
Total operating expenses
|
1,794.1
|
|
|
137.4
|
|
|
171.2
|
|
|
2,102.7
|
|
Operating profit (loss)
|
307.8
|
|
|
203.5
|
|
|
(171.2
|
)
|
|
340.1
|
|
Interest expense
|
2.2
|
|
|
59.6
|
|
|
129.4
|
|
|
191.2
|
|
Other (income) expense, net
|
(1.9
|
)
|
|
(0.3
|
)
|
|
(0.8
|
)
|
|
(3.0
|
)
|
Intercompany expense (income)
|
35.1
|
|
|
(3.2
|
)
|
|
(31.9
|
)
|
|
—
|
|
Income (loss) from continuing operations before income taxes
|
272.4
|
|
|
147.4
|
|
|
(267.9
|
)
|
|
151.9
|
|
Income taxes
|
69.1
|
|
|
35.4
|
|
|
(70.2
|
)
|
|
34.3
|
|
Net income (loss) from continuing operations
|
$
|
203.3
|
|
|
$
|
112.0
|
|
|
$
|
(197.7
|
)
|
|
$
|
117.6
|
|
Total assets
|
$
|
3,097.7
|
|
|
$
|
2,446.1
|
|
|
$
|
155.6
|
|
|
$
|
5,699.4
|
|
Capital expenditures
|
$
|
95.1
|
|
|
$
|
7.1
|
|
|
$
|
29.1
|
|
|
$
|
131.3
|
|
Financial information regarding our reportable segments is set forth below as of and for the year ended December 31, 2017 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
Operating revenues
|
$
|
1,937.5
|
|
|
$
|
301.3
|
|
|
$
|
—
|
|
|
$
|
2,238.8
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
1,123.9
|
|
|
85.2
|
|
|
—
|
|
|
1,209.1
|
|
Selling, general and administrative
|
360.0
|
|
|
30.9
|
|
|
140.8
|
|
|
531.7
|
|
Depreciation and amortization
|
113.1
|
|
|
31.3
|
|
|
27.1
|
|
|
171.5
|
|
Total operating expenses
|
1,597.0
|
|
|
147.4
|
|
|
167.9
|
|
|
1,912.3
|
|
Operating profit (loss)
|
340.5
|
|
|
153.9
|
|
|
(167.9
|
)
|
|
326.5
|
|
Interest expense
|
1.2
|
|
|
43.6
|
|
|
118.4
|
|
|
163.2
|
|
Other (income) expense, net
|
(0.3
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
(1.0
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
27.5
|
|
|
27.5
|
|
Gain on previously held equity interest value
|
(21.6
|
)
|
|
—
|
|
|
—
|
|
|
(21.6
|
)
|
Intercompany expense (income)
|
47.4
|
|
|
(20.2
|
)
|
|
(27.2
|
)
|
|
—
|
|
Income (loss) from continuing operations before income taxes
|
313.8
|
|
|
130.5
|
|
|
(285.9
|
)
|
|
158.4
|
|
Income taxes
|
52.9
|
|
|
26.6
|
|
|
(95.1
|
)
|
|
(15.6
|
)
|
Net income (loss) from continuing operations
|
$
|
260.9
|
|
|
$
|
103.9
|
|
|
$
|
(190.8
|
)
|
|
$
|
174.0
|
|
Total assets
|
$
|
3,132.3
|
|
|
$
|
2,315.6
|
|
|
$
|
98.0
|
|
|
$
|
5,545.9
|
|
Capital expenditures
|
$
|
66.9
|
|
|
$
|
6.1
|
|
|
$
|
24.3
|
|
|
$
|
97.3
|
|
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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 62%, 96% and 96% of our foreign operating revenues were from Canada for the year ended December 31, 2019, 2018 and 2017, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Operating revenues
|
|
|
|
|
|
U.S.
|
$
|
2,267.5
|
|
|
$
|
2,078.2
|
|
|
$
|
1,912.3
|
|
Foreign
|
514.4
|
|
|
364.6
|
|
|
326.5
|
|
|
$
|
2,781.9
|
|
|
$
|
2,442.8
|
|
|
$
|
2,238.8
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Long-lived assets
|
|
|
|
U.S.
|
$
|
2,877.8
|
|
|
$
|
2,564.3
|
|
Foreign
|
458.9
|
|
|
274.4
|
|
|
$
|
3,336.7
|
|
|
$
|
2,838.7
|
|
No single customer accounted for more than ten percent of our total revenues in any fiscal year presented.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Note 20—Quarterly Financial Data (Unaudited)
Information for any one quarterly period is not necessarily indicative of the results that may be expected for the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarter Ended
|
March 31
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
Operating revenues
|
$
|
689.6
|
|
|
$
|
719.1
|
|
|
$
|
701.9
|
|
|
$
|
671.3
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
393.9
|
|
|
417.4
|
|
|
410.9
|
|
|
394.9
|
|
Selling, general, and administrative
|
175.2
|
|
|
163.2
|
|
|
158.9
|
|
|
164.7
|
|
Depreciation and amortization
|
44.3
|
|
|
47.9
|
|
|
46.4
|
|
|
50.1
|
|
Total operating expenses
|
613.4
|
|
|
628.5
|
|
|
616.2
|
|
|
609.7
|
|
Operating profit
|
76.2
|
|
|
90.6
|
|
|
85.7
|
|
|
61.6
|
|
Interest expense
|
56.5
|
|
|
55.6
|
|
|
37.9
|
|
|
39.5
|
|
Other (income) expense, net
|
(2.1
|
)
|
|
(1.1
|
)
|
|
(2.0
|
)
|
|
(2.5
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
2.2
|
|
|
—
|
|
Income from continuing operations before income taxes
|
21.8
|
|
|
36.1
|
|
|
47.6
|
|
|
24.6
|
|
Income taxes
|
6.5
|
|
|
8.7
|
|
|
13.2
|
|
|
9.3
|
|
Net income from continuing operations
|
$
|
15.3
|
|
|
$
|
27.4
|
|
|
$
|
34.4
|
|
|
$
|
15.3
|
|
Net income from continuing operations per share
|
|
|
|
|
|
|
|
Basic
|
$
|
0.11
|
|
|
$
|
0.21
|
|
|
$
|
0.26
|
|
|
$
|
0.12
|
|
Diluted
|
$
|
0.11
|
|
|
$
|
0.20
|
|
|
$
|
0.26
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 Quarter Ended
|
March 31
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
Operating revenues
|
$
|
613.2
|
|
|
$
|
623.4
|
|
|
$
|
612.4
|
|
|
$
|
593.8
|
|
Operating expenses
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
328.3
|
|
|
330.2
|
|
|
330.7
|
|
|
332.3
|
|
Selling, general, and administrative
|
155.5
|
|
|
149.9
|
|
|
154.7
|
|
|
148.7
|
|
Depreciation and amortization
|
46.3
|
|
|
42.1
|
|
|
41.4
|
|
|
42.6
|
|
Total operating expenses
|
530.1
|
|
|
522.2
|
|
|
526.8
|
|
|
523.6
|
|
Operating profit
|
83.1
|
|
|
101.2
|
|
|
85.6
|
|
|
70.2
|
|
Interest expense
|
41.3
|
|
|
48.4
|
|
|
49.0
|
|
|
52.5
|
|
Other (income) expense, net
|
(0.3
|
)
|
|
(0.5
|
)
|
|
(3.0
|
)
|
|
0.8
|
|
Income from continuing operations before income taxes
|
42.1
|
|
|
53.3
|
|
|
39.6
|
|
|
16.9
|
|
Income taxes
|
7.9
|
|
|
15.9
|
|
|
8.7
|
|
|
1.8
|
|
Net income from continuing operations
|
$
|
34.2
|
|
|
$
|
37.4
|
|
|
$
|
30.9
|
|
|
$
|
15.1
|
|
Net income from continuing operations per share
|
|
|
|
|
|
|
|
Basic
|
$
|
0.25
|
|
|
$
|
0.28
|
|
|
$
|
0.23
|
|
|
$
|
0.11
|
|
Diluted
|
$
|
0.25
|
|
|
$
|
0.28
|
|
|
$
|
0.23
|
|
|
$
|
0.11
|
|
Note 21—Subsequent Event
In January 2020, the Company entered into pay-fixed interest rate swaps with a notional amount of $500 million to swap variable rate interest payments under its term loan for fixed interest payments bearing a weighted average interest rate of 1.44%. The interest rate swaps have a five-year term, each maturing on January 23, 2025.