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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-34568
KAR-20200930_G1.JPG
KAR Auction Services, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
20-8744739
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
11299 N. Illinois Street, Carmel, Indiana 46032
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (800) 923-3725

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol Name of each exchange on which registered
Common Stock, par value $0.01 per share KAR New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes     No 
As of October 31, 2020, 129,251,552 shares of the registrant's common stock, par value $0.01 per share, were outstanding.


KAR Auction Services, Inc.
Table of Contents
2

PART I
FINANCIAL INFORMATION
Item 1.    Financial Statements
KAR Auction Services, Inc.
Consolidated Statements of Income
(In millions, except per share data)
(Unaudited)
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Operating revenues    
Auction fees and services revenue $ 440.5  $ 534.5  $ 1,244.6  $ 1,629.5 
Purchased vehicle sales 86.2  79.1  211.3  216.2 
Finance-related revenue 66.9  88.3  202.2  264.9 
Total operating revenues 593.6  701.9  1,658.1  2,110.6 
Operating expenses    
Cost of services (exclusive of depreciation and amortization) 329.7  410.9  959.4  1,222.2 
Selling, general and administrative 131.0  158.9  405.7  497.3 
Depreciation and amortization 46.5  46.4  140.7  138.6 
  Goodwill and other intangibles impairment   —  29.8  — 
Total operating expenses 507.2  616.2  1,535.6  1,858.1 
Operating profit 86.4  85.7  122.5  252.5 
Interest expense 29.5  37.9  98.4  150.0 
Other income, net (1.1) (2.0) (1.8) (5.2)
Loss on extinguishment of debt   2.2    2.2 
Income from continuing operations before income taxes 58.0  47.6  25.9  105.5 
Income taxes 10.9  13.2  8.3  28.4 
Income from continuing operations $ 47.1  $ 34.4  $ 17.6  $ 77.1 
Income from discontinued operations, net of income taxes   0.9    91.6 
Net income $ 47.1  $ 35.3  $ 17.6  $ 168.7 
Net income per share - basic
Income from continuing operations $ 0.23  $ 0.26  $ 0.04  $ 0.58 
Income from discontinued operations   0.01    0.69 
Net income per share - basic $ 0.23  $ 0.27  $ 0.04  $ 1.27 
Net income per share - diluted
Income from continuing operations $ 0.23  $ 0.26  $ 0.04  $ 0.58 
Income from discontinued operations   0.01    0.68 
Net income per share - diluted $ 0.23  $ 0.27  $ 0.04  $ 1.26 
Dividends declared per common share $   $ 0.19  $ 0.19  $ 0.89 





See accompanying condensed notes to consolidated financial statements
3

KAR Auction Services, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Net income $ 47.1  $ 35.3  $ 17.6  $ 168.7 
Other comprehensive income (loss), net of tax      
Foreign currency translation gain (loss) 12.6  (10.8) (7.3) 5.7 
Unrealized gain (loss) on interest rate derivatives, net of tax 1.0  —  (21.6) — 
Total other comprehensive income (loss), net of tax 13.6  (10.8) (28.9) 5.7 
Comprehensive income (loss) $ 60.7  $ 24.5  $ (11.3) $ 174.4 
   



























See accompanying condensed notes to consolidated financial statements
4

KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions)
(Unaudited)
  September 30,
2020
December 31,
2019
Assets    
Current assets    
Cash and cash equivalents $ 1,276.7  $ 507.6 
Restricted cash 54.7  53.3 
Trade receivables, net of allowances of $10.9 and $9.5 494.1  457.5 
Finance receivables, net of allowances of $22.0 and $15.0 1,722.8  2,100.2 
Other current assets 126.3  125.9 
Total current assets 3,674.6  3,244.5 
Other assets    
Goodwill 1,798.2  1,821.7 
Customer relationships, net of accumulated amortization of $665.0 and $637.4 168.6  207.9 
Other intangible assets, net of accumulated amortization of $341.5 and $292.4 284.4  298.5 
Operating lease right-of-use assets 354.9  364.1 
Property and equipment, net of accumulated depreciation of $578.6 and $534.3 585.2  609.0 
Other assets 44.0  35.5 
Total other assets 3,235.3  3,336.7 
Total assets $ 6,909.9  $ 6,581.2 
   

















See accompanying condensed notes to consolidated financial statements
5

KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
(Unaudited)
  September 30,
2020
December 31,
2019
Liabilities, Temporary Equity and Stockholders' Equity    
Current liabilities    
Accounts payable $ 938.1  $ 704.6 
Accrued employee benefits and compensation expenses 66.0  72.7 
Accrued interest 19.5  7.9 
Other accrued expenses 197.9  216.9 
Income taxes payable 5.6  1.1 
Dividends payable   24.5 
Obligations collateralized by finance receivables 1,101.0  1,461.2 
Current maturities of long-term debt 26.4  28.8 
Total current liabilities 2,354.5  2,517.7 
Non-current liabilities    
Long-term debt 1,854.8  1,861.3 
Deferred income tax liabilities 125.1  134.5 
Operating lease liabilities 348.6  358.3 
Other liabilities 79.9  59.2 
Total non-current liabilities 2,408.4  2,413.3 
Commitments and contingencies (Note 11)
Temporary equity
Series A convertible preferred stock (Note 10) 540.0   
Stockholders' equity    
Common stock, $0.01 par value:    
Authorized shares: 400,000,000    
Issued and outstanding shares:    
September 30, 2020: 129,245,854    
December 31, 2019: 128,833,452 1.3  1.3 
Additional paid-in capital 1,037.8  1,028.9 
Retained earnings 627.8  651.0 
Accumulated other comprehensive loss (59.9) (31.0)
Total stockholders' equity 1,607.0  1,650.2 
Total liabilities, temporary equity and stockholders' equity $ 6,909.9  $ 6,581.2 












See accompanying condensed notes to consolidated financial statements
6

KAR Auction Services, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-In
Capital
Retained Earnings Accumulated
Other
Comprehensive
Loss
Total
Balance at June 30, 2020 129.2  $ 1.3  $ 1,034.2  $ 592.5  $ (73.5) $ 1,554.5 
Net income 47.1  47.1 
Other comprehensive income 13.6  13.6 
Issuance of common stock under stock plans 0.3  0.3 
Surrender of RSUs for taxes (0.2) (0.2)
Stock-based compensation expense 3.5  3.5 
Dividends on preferred stock (11.8) (11.8)
Balance at September 30, 2020 129.2  $ 1.3  $ 1,037.8  $ 627.8  $ (59.9) $ 1,607.0 
 
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-In
Capital
Retained Earnings Accumulated
Other
Comprehensive
Loss
Total
Balance at December 31, 2019 128.8  $ 1.3  $ 1,028.9  $ 651.0  $ (31.0) $ 1,650.2 
Cumulative effect adjustment for adoption of
ASC Topic 326, net of tax
(3.8) (3.8)
Net income 17.6  17.6 
Other comprehensive loss (28.9) (28.9)
Issuance of common stock under stock plans 0.6  1.0  1.0 
Surrender of RSUs for taxes (0.2) (3.9) (3.9)
Stock-based compensation expense 11.1  11.1 
Dividends earned under stock plan 0.7  (0.7) — 
Cash dividends declared to stockholders ($0.19 per share) (24.5) (24.5)
Dividends on preferred stock (11.8) (11.8)
Balance at September 30, 2020 129.2  $ 1.3  $ 1,037.8  $ 627.8  $ (59.9) $ 1,607.0 



















See accompanying condensed notes to consolidated financial statements
7

KAR Auction Services, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-In
Capital
Retained Earnings Accumulated
Other
Comprehensive
Loss
Total
Balance at June 30, 2019 133.4  $ 1.3  $ 1,140.8  $ 644.9  $ (34.4) $ 1,752.6 
Net income 35.3  35.3 
Other comprehensive loss (10.8) (10.8)
Issuance of common stock under stock plans 0.2  (1.3) (1.3)
Surrender of RSUs for taxes (0.1) (0.1)
Stock-based compensation expense 4.3  4.3 
Repurchase and retirement of common stock (4.8) (119.7) (119.7)
Cash dividends declared to stockholders ($0.19 per share) (24.5) (24.5)
Balance at September 30, 2019 128.8  $ 1.3  $ 1,024.0  $ 655.7  $ (45.2) $ 1,635.8 

Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-In
Capital
Retained Earnings Accumulated
Other
Comprehensive
Loss
Total
Balance at December 31, 2018 132.9  $ 1.3  $ 1,131.9  $ 392.3  $ (61.3) $ 1,464.2 
Cumulative effect adjustment for adoption of
ASC Topic 842, net of tax
1.1  1.1 
Net income 168.7  168.7 
Other comprehensive income 5.7  5.7 
Issuance of common stock under stock plans 0.9  4.1  4.1 
Surrender of RSUs for taxes (0.2) (10.5) (10.5)
Stock-based compensation expense 16.4  16.4 
Repurchase and retirement of common stock (4.8) (119.7) (119.7)
Distribution of IAA 213.2  10.4  223.6 
Dividends earned under stock plan 1.8  (1.8) — 
Cash dividends declared to stockholders ($0.89 per share) (117.8) (117.8)
Balance at September 30, 2019 128.8  $ 1.3  $ 1,024.0  $ 655.7  $ (45.2) $ 1,635.8 










See accompanying condensed notes to consolidated financial statements
8

KAR Auction Services, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
  Nine Months Ended September 30,
  2020 2019
Operating activities    
Net income $ 17.6  $ 168.7 
Net income from discontinued operations   (91.6)
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 140.7  138.6 
Provision for credit losses 41.6  28.9 
Deferred income taxes (3.0) 2.5 
Amortization of debt issuance costs 8.6  9.6 
Stock-based compensation 11.1  14.6 
Goodwill and other intangibles impairment 29.8  — 
Loss on extinguishment of debt   2.2 
Other non-cash, net 6.1  7.9 
Changes in operating assets and liabilities, net of acquisitions:    
Trade receivables and other assets (49.4) (41.3)
Accounts payable and accrued expenses 228.8  51.0 
Net cash provided by operating activities - continuing operations 431.9  291.1 
Net cash provided by operating activities - discontinued operations   156.7 
Investing activities    
Net decrease (increase) in finance receivables held for investment 337.1  (119.0)
Acquisition of businesses (net of cash acquired)   (120.7)
Purchases of property, equipment and computer software (74.3) (127.6)
Proceeds from the sale of property and equipment 0.8  — 
Net cash provided by (used by) investing activities - continuing operations 263.6  (367.3)
Net cash used by investing activities - discontinued operations   (37.4)
Financing activities    
Net increase in book overdrafts 20.3  9.2 
Net (decrease) increase in borrowings from lines of credit (2.4) 17.5 
Net decrease in obligations collateralized by finance receivables (345.1) (25.0)
Proceeds from issuance of Series A Preferred Stock 550.1  — 
Payments for issuance costs of Series A Preferred Stock (21.9) — 
Proceeds from long-term debt   947.6 
Payments for debt issuance costs/amendments (18.2) (13.7)
Payments on long-term debt (7.1) (1,746.6)
Payments on finance leases (12.6) (12.2)
Payments of contingent consideration and deferred acquisition costs (22.3) (0.5)
Issuance of common stock under stock plans 1.0  4.1 
Tax withholding payments for vested RSUs (3.9) (10.5)
Repurchase and retirement of common stock   (119.7)
Dividends paid to stockholders (49.0) (139.8)
  Cash transferred to IAA   (50.9)
Net cash provided by (used by) financing activities - continuing operations 88.9  (1,140.5)
Net cash provided by financing activities - discontinued operations   1,317.6 
Effect of exchange rate changes on cash (13.9) 7.0 
Net increase in cash, cash equivalents and restricted cash 770.5  227.2 
Cash, cash equivalents and restricted cash at beginning of period 560.9  304.7 
Cash, cash equivalents and restricted cash at end of period $ 1,331.4  $ 531.9 
Cash paid for interest, net of proceeds from interest rate derivatives $ 77.7  $ 120.0 
Cash paid for taxes, net of refunds - continuing operations $ 9.7  $ 27.8 
Cash paid for taxes, net of refunds - discontinued operations $   $ 40.1 

See accompanying condensed notes to consolidated financial statements
9


KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 2020 (Unaudited)

Note 1—Basis of Presentation and Nature of Operations
Defined Terms
Unless otherwise indicated or unless the context otherwise requires, the following terms used herein shall have the following meanings:
"we," "us," "our," "KAR" and "the Company" refer, collectively, to KAR Auction Services, Inc. and all of its subsidiaries;
"ADESA" or "ADESA Auctions" refer, collectively, to ADESA, Inc., a wholly-owned subsidiary of KAR Auction Services, and ADESA, Inc.'s subsidiaries, including Openlane, Inc. (together with Openlane, Inc.'s subsidiaries, "Openlane"), Nth Gen Software Inc. ("TradeRev"), ADESA Remarketing Limited (formerly known as GRS Remarketing Limited ("GRS" or "ADESA Remarketing Limited")) and ADESA Europe (formerly known as CarsOnTheWeb ("COTW"));
"AFC" refers, collectively, to Automotive Finance Corporation, a wholly-owned subsidiary of ADESA, and Automotive Finance Corporation's subsidiaries and other related entities, including PWI Holdings, Inc.;
"Credit Agreement" refers to the Amended and Restated Credit Agreement, dated March 11, 2014, as amended on March 9, 2016, May 31, 2017, September 19, 2019, May 29, 2020 and September 2, 2020, 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;
"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;
"IAA" refers, collectively, to Insurance Auto Auctions, Inc., formerly a wholly-owned subsidiary of KAR Auction Services, and Insurance Auto Auctions, Inc.'s subsidiaries and other related entities, including HBC Vehicle Services Limited ("HBC"). See Note 3;
"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries;
"Senior notes" refers to the 5.125% senior notes due 2025 ($950 million aggregate principal outstanding at September 30, 2020);
"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;
"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; and
"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.
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 September 30, 2020, we have a North American network of 74 facilities and we also offer online auctions. ADESA also includes TradeRev, an online automotive remarketing platform 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,
10

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
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 119 locations throughout the United States and Canada as of September 30, 2020. 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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by U.S. GAAP for annual financial statements. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. In the opinion of management, the consolidated financial
statements reflect all adjustments, generally consisting of normal recurring accruals, necessary for a fair statement of our results
of operations, cash flows and financial position for the periods presented. These consolidated financial statements and
condensed notes to consolidated financial statements are unaudited and should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2019, as filed with the Securities and Exchange Commission on February 19, 2020. The 2019 year-end
consolidated balance sheet data included in this Form 10-Q was derived from the audited financial statements referenced above
and does not include all disclosures required by U.S. GAAP for annual financial statements.
Reclassifications
ADESA Auction Services' revenue reported in the consolidated statements of income for the three and nine months ended September 30, 2019 has been reclassified between "Auction fees and services revenue" and "Purchased vehicle sales" in the consolidated statements of income to conform with the presentation for the three and nine months ended September 30, 2020.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates based in part on assumptions about current, and for some estimates, future economic and market conditions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Although the current estimates contemplate current conditions and expected future changes, as appropriate, it is reasonably possible that future conditions could differ from these estimates, which could materially affect our results of operations and financial position. Among other effects, such changes could result in future impairments of goodwill, intangible assets and long-lived assets, incremental losses on finance receivables, additional allowances on accounts receivable and deferred tax assets and changes in litigation and other loss contingencies.

Acquisition-Related Deferred and Contingent Consideration

Some of the purchase agreements related to prior year acquisitions included additional payments over a specified period, including deferred and contingent payments based on certain conditions and performance. At September 30, 2020, we had accrued deferred and estimated contingent consideration with a fair value of approximately $3.7 million and $43.4 million, respectively. At September 30, 2020, the aggregate maximum potential payment remaining for undiscounted deferred payments and undiscounted contingent payments related to these acquisitions could approximate $105.1 million. For the nine months ended September 30, 2020, we made contingent consideration and deferred acquisition payments related to the CarsOnTheWeb acquisition of $22.3 million.
11

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)

Temporary Equity

The Company records shares of convertible preferred stock at their respective fair values on the date of issuance, net of issuance costs. The convertible preferred stock is recorded outside of stockholders' equity on the consolidated balance sheet because the shares contain liquidation features that are not solely within the Company's control. The Company has elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty of whether or when such an event would occur. Subsequent adjustments to increase the carrying value to the liquidation preferences will be made only when it becomes probable that such a liquidation event will occur. See Note 10 for a discussion of the convertible preferred stock.
Credit Losses
In June 2016, the Financial Accounting Standards Board ("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. We adopted Topic 326 in the first quarter of 2020 and the change in methodology for measuring credit losses resulted in an increase in the allowance for credit losses of $5.0 million. The cumulative effect of this change was recognized, net of tax, as a $3.8 million adjustment to retained earnings on January 1, 2020.
New Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. The update also requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. The new guidance is effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update can be adopted on either a fully retrospective or a modified retrospective basis. The Company is currently evaluating the impact the adoption of ASU 2020-06 will have on the consolidated financial statements.

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 was effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-15 did not have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 (implied fair value measurement). Instead goodwill impairment would be measured as the amount by which a reporting unit's carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance was effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2017-04 did not have a material impact on the consolidated financial statements.
12

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Note 2—Pending Acquisition
In September 2020, ADESA entered into an agreement and plan of merger to acquire BacklotCars, Inc. ("BacklotCars") for $425 million in cash. BacklotCars is an app and web-based dealer-to-dealer wholesale platform featuring a 24/7 “bid-ask” marketplace offering vehicles with comprehensive inspections performed by automobile mechanics. The acquisition is expected to further diversify the Company's broad portfolio of digital capabilities and accelerate the Company’s strategy to be a leading digital dealer-to-dealer marketplace provider. The merger is expected to be completed in the fourth quarter of 2020, subject to the satisfaction of customary closing conditions. On November 4, 2020, the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect to the merger.
Note 3—IAA Separation and Discontinued Operations
In February 2018, the Company announced that its board of directors had approved a plan to pursue the separation ("Separation") of its salvage auction business, IAA, through a spin-off. On June 28, 2019, the Company completed the spin-off, creating a new independent publicly traded company, IAA, Inc. ("IAA"). The Separation provided KAR stockholders with equity ownership in both KAR and IAA. On June 28, 2019, the Company’s stockholders 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 govern certain relationships between IAA and the Company after the Separation.

The financial results of IAA have been accounted for as discontinued operations in the comparable 2019 results 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 $0.0 million and $31.3 million for the three and nine months ended September 30, 2019, in connection with the separation of the two companies. These costs consisted of consulting and professional fees associated with preparing for and executing the spin-off.

The following table presents the results of operations for IAA that have been reclassified to discontinued operations for all periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Operating revenues $   $ —  $   $ 723.6 
Operating expenses
Cost of services (exclusive of depreciation and amortization)   —    446.1 
Selling, general and administrative   —    94.5 
Depreciation and amortization   —    43.9 
Total operating expenses   —    584.5 
Operating profit   —    139.1 
Interest expense   —    2.7 
Other income, net   —    — 
Income from discontinued operations before income taxes   —    136.4 
Income taxes   (0.9)   44.8 
Income from discontinued operations $   $ 0.9  $   $ 91.6 

13

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Note 4—Stock and Stock-Based Compensation Plans
The KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan ("Omnibus Plan") is intended to provide equity and/or cash-based awards to our executive officers and key employees. Our stock-based compensation expense includes expense associated with KAR Auction Services, Inc. performance-based restricted stock units ("PRSUs") and service-based restricted stock units ("RSUs"). We have determined that the KAR Auction Services, Inc. PRSUs and RSUs should be classified as equity awards.
The following table summarizes our stock-based compensation expense by type of award (in millions):
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
PRSUs $ 1.3  $ 2.6  $ 3.6  $ 7.5 
RSUs 2.2  1.7  7.5  7.1 
Total stock-based compensation expense $ 3.5  $ 4.3  $ 11.1  $ 14.6 
In the first nine months of 2020, we granted a target amount of approximately 0.4 million PRSUs to certain executive officers and management of the Company. The PRSUs vest if and to the extent that the Company's three-year cumulative operating adjusted net income per share attains certain specified goals. In addition, approximately 0.4 million RSUs were granted to certain executive officers and management of the Company. The RSUs are contingent upon continued employment and generally vest in three equal annual installments. The weighted average grant date fair value of the PRSUs and the RSUs was $22.24 per share, which was determined using the closing price of the Company's common stock on the dates of grant.
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 our stockholders, 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. At the Company’s annual meeting of stockholders in June 2020, the stockholders approved an amendment to the ESPP. As a result, the maximum number of shares reserved for issuance under the ESPP was increased from 1.0 million to 2.5 million.
Share Repurchase Program
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 "Exchange Act"). 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. No shares of common stock were repurchased during the nine months ended September 30, 2020. For the nine months ended September 30, 2019, we used the remaining $119.7 million under the 2016 authorization to repurchase and retire 4,753,300 shares of common stock in the open market at a weighted average price of $25.18 per share.
14

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Note 5—Net Income from Continuing Operations Per Share
The following table sets forth the computation of net income from continuing operations per share (in millions except per share amounts):
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Net income from continuing operations $ 47.1  $ 34.4  $ 17.6  $ 77.1 
Series A Preferred Stock dividends (9.7) —  (11.8) — 
Net income attributable to participating securities (7.4) —    — 
Net income attributable to common stockholders $ 30.0  $ 34.4  $ 5.8  $ 77.1 
Weighted average common shares outstanding 129.3  131.2  129.2  132.5 
Effect of dilutive stock options and restricted stock awards 0.7  1.2  0.8  1.3 
Weighted average common shares outstanding and potential common shares 130.0  132.4  130.0  133.8 
Net income from continuing operations per share  
Basic $ 0.23  $ 0.26  $ 0.04  $ 0.58 
Diluted $ 0.23  $ 0.26  $ 0.04  $ 0.58 
For periods prior to June 30, 2020, 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 each of the three or nine months ended September 30, 2020 and 2019. In addition, approximately 0.4 million and 0.3 million PRSUs were excluded from the calculation of diluted net income from continuing operations per share for the three months ended September 30, 2020 and 2019, respectively, and approximately 0.4 million and 0.3 million PRSUs were excluded from the calculation of diluted net income from continuing operations per share for the nine months ended September 30, 2020 and 2019, respectively. Total options outstanding at September 30, 2020 and 2019 were 0.7 million and 0.8 million, respectively.
Beginning with the quarter ended June 30, 2020, the Company also includes participating securities (Series A Preferred Stock) in the computation of net income from continuing operations per share pursuant to the two-class method. The two-class method of calculating net income from continuing operations per share is an allocation method that calculates earnings per share for common stock and participating securities. Under the two-class method, total dividends provided to the holders of the Series A Preferred Stock and undistributed earnings allocated to participating securities are subtracted from net income from continuing operations in determining net income attributable to common stockholders. During periods of net loss from continuing operations, no effect is given to the participating securities because they do not share in the losses of the Company.

15

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Note 6—Finance Receivables and Obligations Collateralized by Finance Receivables
AFC sells 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. AFC Funding Corporation had committed liquidity of $1.60 billion for U.S. finance receivables at September 30, 2020.
In September 2020, AFC and AFC Funding Corporation entered into the Ninth Amended and Restated Receivables Purchase Agreement (the "Receivables Purchase Agreement"). The Receivables Purchase Agreement decreased AFC Funding's U.S. committed liquidity from $1.70 billion to $1.60 billion and extended the facility's maturity date from January 28, 2022 to January 31, 2024. In addition, provisions designed to provide additional credit enhancement to the purchasers upon the occurrence of the certain events related to the payment rate and net spread on the receivables portfolio were added, certain portfolio performance metrics that could result in a requirement to increase the cash reserve or constitute a termination event were amended to the benefit of AFC Funding and provisions providing for a mechanism for determining an alternative rate of interest were added. We capitalized approximately $12.3 million of costs in connection with the Receivables Purchase Agreement.
We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") receivables. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$175 million at September 30, 2020. In September 2020, AFCI entered into the Fifth Amended and Restated Receivables Purchase Agreement (the "Canadian Receivable Purchase Agreement"). The Canadian Receivables Purchase Agreement extended the facility's maturity date from January 28, 2022 to January 31, 2024. In addition, provisions designed to provide additional credit enhancement to the purchasers upon the occurrence of the certain events related to the payment rate and net spread on the receivables portfolio were added, certain portfolio performance metrics that could result in a requirement to increase the cash reserve or constitute a termination event were amended to the benefit of AFC Funding and provisions providing for a mechanism for determining an alternative rate of interest were added. We capitalized approximately $1.0 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 loss charge-offs less recoveries ("net credit losses") and components of securitized financial assets and other related assets managed. For purposes of this illustration, delinquent receivables are defined as receivables 31 days or more past due.
  September 30, 2020 Net Credit Losses
Three Months Ended
September 30, 2020
Net Credit Losses
Nine Months Ended
September 30, 2020
  Total Amount of:
(in millions) Receivables Receivables
Delinquent
Floorplan receivables $ 1,728.9  $ 22.6  $   $ 33.9 
Other loans 15.9       
Total receivables managed $ 1,744.8  $ 22.6  $   $ 33.9 

  December 31, 2019 Net Credit Losses
Three Months Ended
September 30, 2019
Net Credit Losses
Nine Months Ended
September 30, 2019
  Total Amount of:
(in millions) Receivables Receivables
Delinquent
Floorplan receivables $ 2,099.4  $ 28.8  $ 8.6  $ 24.7 
Other loans 15.8  —  —  — 
Total receivables managed $ 2,115.2  $ 28.8  $ 8.6  $ 24.7 

16

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
The following is a summary of the changes in the allowance for credit losses related to finance receivables (in millions):
  September 30,
2020
September 30,
2019
Allowance for Credit Losses  
Balance at December 31 $ 15.0  $ 14.0 
Opening balance adjustment for adoption of ASC Topic 326 5.0  — 
Provision for credit losses 35.9  25.5 
Recoveries 8.0  5.7 
Less charge-offs (41.9) (30.4)
Balance at September 30 $ 22.0  $ 14.8 
As of September 30, 2020 and December 31, 2019, $1,688.0 million and $2,061.6 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the obligations collateralized by finance receivables. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. Obligations collateralized by finance receivables consisted of the following:
September 30,
2020
December 31,
2019
Obligations collateralized by finance receivables, gross $ 1,124.2  $ 1,474.4 
Unamortized securitization issuance costs (23.2) (13.2)
Obligations collateralized by finance receivables $ 1,101.0  $ 1,461.2 
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 September 30, 2020, we were in compliance with the covenants in the securitization agreements.
Note 7—Goodwill and Other Intangible Assets
Goodwill consisted of the following at September 30, 2020 (in millions):
ADESA
Auctions
AFC Total
Balance at December 31, 2019 $ 1,558.0  $ 263.7  $ 1,821.7 
Impairment (25.5) —  (25.5)
Other 2.0  —  2.0 
Balance at September 30, 2020 $ 1,534.5  $ 263.7  $ 1,798.2 

Goodwill represents the excess cost over fair value of identifiable net assets of businesses acquired. The Company tests goodwill and tradenames for impairment at the reporting unit level annually in the second quarter, or more frequently as impairment indicators arise. In light of the impact that the COVID-19 pandemic has had on the economy, forecasts for all reporting units were revised. These circumstances contributed to lower sales, operating profits and cash flows at ADESA Remarketing Limited through the first part of 2020 as compared to 2019, and the outlook for the business was significantly reduced. This analysis resulted in the impairment of the goodwill balance totaling $25.5 million in our ADESA Remarketing Limited reporting unit and a non-cash goodwill impairment charge was recorded for this amount in the second quarter of 2020. The fair value of that reporting unit was estimated using the expected present value of future cash flows.

In addition, in the second quarter of 2020, a non-cash customer relationship impairment charge of approximately $4.3 million was also recorded in the ADESA Remarketing Limited reporting unit, representing the impairment in the value of this reporting unit’s customer relationships. The fair value of the customer relationships was estimated using the expected present value of future cash flows.
17

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)

Goodwill and tradenames were tested for impairment in all of the Company's reporting units in the second quarter of 2020 and no impairment was identified, other than the impairments previously discussed in the ADESA Remarketing Limited reporting unit. Future events and changing market conditions, including the impact of COVID-19, may require us to re-evaluate the estimates used in our fair value measurements, which could result in additional impairment of goodwill and other intangible assets in future periods and could have a material effect on our operating results.
Note 8—Long-Term Debt
Long-term debt consisted of the following (in millions):
  Interest Rate* Maturity September 30,
2020
December 31,
2019
Term Loan B-6 Adjusted LIBOR + 2.25% September 19, 2026 $ 940.5  $ 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 16.9  19.3 
Total debt     1,907.4  1,916.9 
Unamortized debt issuance costs/discounts   (26.2) (26.8)
Current portion of long-term debt     (26.4) (28.8)
Long-term debt     $ 1,854.8  $ 1,861.3 
*The interest rates presented in the table above represent the rates in place at September 30, 2020.
Credit Facilities
On September 2, 2020, we entered into the Fifth Amendment Agreement (the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment (1) eliminates the financial covenant “holiday” provided by the Fourth Amendment Agreement, dated as of May 29, 2020 (the “Fourth Amendment”); (2) eliminates the changes to the calculation of Consolidated EBITDA for the purposes of the financial covenant compliance for the fiscal quarters ending September 30, 2021 and December 31, 2021, as provided by the Fourth Amendment; (3) removes the monthly minimum liquidity covenant provided by the Fourth Amendment; and (4) eliminates the limitations imposed by the Fourth Amendment on the Company’s ability to make certain investments, junior debt repayments, acquisitions and restricted payments and to incur additional secured indebtedness.
On May 29, 2020, we entered into the Fourth Amendment to the Credit Agreement. The Fourth Amendment (1) provided a financial covenant “holiday” through and including June 30, 2021; (2) for purposes of determining compliance with the financial covenant for the fiscal quarters ending September 30, 2021 and December 31, 2021, permits the Consolidated EBITDA for the applicable test period to be calculated on an annualized basis, excluding results prior to April 1, 2021; (3) established a monthly minimum liquidity covenant of $225.0 million through and including September 30, 2021; and (4) effectively placed certain limitations on the ability to make certain investments, junior debt repayments, acquisitions and restricted payments and to incur additional secured indebtedness until October 1, 2021.
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, (1) 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, (2) repayment of the 2017 Revolving Credit Facility and (3) the $325 million, five-year Revolving Credit Facility.
The Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline 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 interest rate applicable to Term Loan B-6 was 2.44% at September 30, 2020.
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
18

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
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 applicable covenants in the Credit Agreement at September 30, 2020.
There were no borrowings on the Revolving Credit Facility at September 30, 2020 and December 31, 2019. In addition, we had related outstanding letters of credit in the aggregate amount of $25.4 million and $27.4 million at September 30, 2020 and December 31, 2019, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility.
European Lines of Credit

COTW has lines of credit aggregating $35.2 million (€30 million). The lines of credit had an aggregate $16.9 million of borrowings outstanding at September 30, 2020. The lines of credit are secured by certain inventory and receivables at COTW subsidiaries.

Fair Value of Debt
As of September 30, 2020, the estimated fair value of our long-term debt amounted to $1,869.8 million. The estimates of fair value were based on broker-dealer quotes for our debt as of September 30, 2020. The estimates presented on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.
Note 9—Derivatives
We are exposed to interest rate risk on our variable rate borrowings. Accordingly, interest rate fluctuations affect the amount of interest expense we are obligated to pay. We use interest rate derivatives with the objective of managing exposure to interest rate movements, thereby reducing the effect of interest rate changes and the effect they could have on future cash flows. Currently, interest rate swap agreements are used to accomplish this objective.
In January 2020, we entered into three pay-fixed interest rate swaps with an aggregate notional amount of $500 million to swap variable rate interest payments under our term loan for fixed interest payments bearing a weighted average interest rate of 1.44%, for a total interest rate of 3.69%. The interest rate swaps have a five-year term, each maturing on January 23, 2025.
We have designated the interest rate swaps as cash flow hedges. The effective portion of changes in the fair value of the interest rate swaps (unrealized gains/losses) are recorded as a component of "Accumulated other comprehensive income." For the three months ended September 30, 2020, the Company recorded an unrealized gain on the interest rate swaps of $1.0 million, net of tax of $0.3 million, and, for the nine months ended September 30, 2020, the Company recorded an unrealized loss on the interest rate swaps of $21.6 million, net of tax of $7.0 million. The Company does not expect any gains/losses currently recorded in accumulated other comprehensive income to be recognized in earnings over the next 12 months. The earnings impact of the interest rate derivatives designated as cash flow hedges is recorded upon the recognition of the interest related to the hedged debt. No amount of ineffectiveness was included in net income (loss) for the nine months ended September 30, 2020.
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 (based on significant observable inputs - Level 2 inputs). The following table presents the fair value of our interest rate derivatives included in the consolidated balance sheets for the periods presented (in millions):
19

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Liability Derivatives
September 30, 2020 December 31, 2019
Derivatives Designated as Hedging Instruments Balance Sheet Location Fair Value Balance Sheet Location Fair Value
2020 Interest rate swaps Other liabilities $ 28.6  N/A N/A
We did not designate any of the 2017 interest rate caps as hedges for accounting purposes. Accordingly, changes in the fair value of the interest rate caps were 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
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Derivatives Designated as Hedging Instruments
2020 Interest rate swaps Interest expense $   N/A $   N/A
Derivatives Not Designated as Hedging Instruments
2017 Interest rate caps Interest expense N/A $ —  N/A $ (0.9)
Note 10—Convertible Preferred Stock
In June 2020, KAR completed the issuance and sale of an aggregate of 550,000 shares of the Company’s Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), in two closings at a purchase price of $1,000 per share (for the second closing, plus accumulated dividends from and including the first closing date to but excluding June 29, 2020) for an aggregate purchase price of approximately $550 million to an affiliate of Ignition Parent LP (“Apax”) and an affiliate of Periphas Capital GP, LLC (“Periphas”).

The Company has authorized 1,500,000 shares of Series A Preferred Stock. The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $0.01 per share, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock has a liquidation preference of $1,000 per share. The holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7% per annum, payable quarterly in arrears. Dividends are payable in kind through the issuance of additional shares of Series A Preferred Stock for the first eight dividend payments, and thereafter, in cash or in kind, or in any combination of both, at the option of the Company. As of September 30, 2020, the holders of the Series A Preferred Stock had received dividends in kind with a value in the aggregate of approximately $11.8 million. The holders of the Series A Preferred Stock are also entitled to participate in dividends declared or paid on our common stock on an as-converted basis.

The Series A Preferred Stock will be convertible at the option of the holders thereof at any time after one year into shares of common stock at a conversion price of $17.75 per share of Series A Preferred Stock and a conversion rate of 56.3380 shares of common stock per share of Series A Preferred Stock, subject to certain anti-dilution adjustments. At any time after three years, if the closing price of the common stock exceeds $31.0625 per share, as may be adjusted pursuant to the Certificate of Designations, for at least 20 trading days in any period of 30 consecutive trading days, at the election of the Company, all or any portion of the Series A Preferred Stock will be convertible into the relevant number of shares of common stock.

The holders of the Series A Preferred Stock are entitled to vote with the holders of the Company's common stock as a single class on all matters submitted to a vote of the holders of the Company's common stock.

20

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
At any time after six years, the Company may redeem some or all of the Series A Preferred Stock for a per share amount in cash equal to: (i) the sum of (x) the liquidation preference thereof, plus (y) all accrued and unpaid dividends, multiplied by (ii) (A) 105% if the redemption occurs at any time after the six-year anniversary of June 10, 2020 (the "Initial Closing Date") and prior to the seven-year anniversary of the Initial Closing Date or (B) 100% if the redemption occurs after the seven-year anniversary of the Initial Closing Date.

Upon certain change of control events involving the Company, and subject to certain limitations set forth in the Certificate of Designations, each holder of the Series A Preferred Stock will either (i) receive such number of shares of common stock into which such holder is entitled to convert all or a portion of such holder’s shares of Series A Preferred Stock at the then current conversion price, (ii) receive, in respect of all or a portion of such holder’s shares of Series A Preferred Stock, the greater of (x) the amount per share of Series A Preferred Stock that such holder would have received had such holder, immediately prior to such change of control, converted such share of Series A Preferred Stock into common stock and (y) a purchase price per share of Series A Preferred Stock, payable in cash, equal to the product of (A) 105% multiplied by (B) the sum of the liquidation preference and accrued dividends with respect to such share of Series A Preferred Stock, or (iii) unless the consideration in such change of control event is payable entirely in cash, retain all or a portion of such holder’s shares of Series A Preferred Stock.

For so long as Apax or its affiliates beneficially own a certain percentage of the shares of Series A Preferred Stock purchased in the Apax issuance on an as-converted basis, Apax will continue to have the right to appoint one individual to the board of directors. Additionally, so long as Apax or its affiliates beneficially own a certain percentage of the shares of Series A Preferred Stock purchased in the Apax issuance on an as-converted basis, Apax will have the right to appoint one non-voting observer to the board of directors. Likewise, so long as Periphas beneficially owns a certain percentage of the shares of Series A Preferred Stock purchased in the Periphas issuance on an as-converted basis, Periphas will have the right to appoint one non-voting observer to the board of directors.

Apax is subject to certain standstill restrictions, until the later of three years and the date on which Apax no longer owns 25% of the shares of Series A Preferred Stock purchased in the Apax issuance on an as-converted basis. Periphas is also subject to certain standstill restrictions, until the later of three years and the date on which Periphas no longer owns 50% of the shares of Series A Preferred Stock purchased in the Periphas issuance on an as-converted basis. Subject to certain customary exceptions, Apax and Periphas are restricted from transferring the Series A Preferred Stock for one year.

Apax, its affiliates and Periphas have certain customary registration rights with respect to shares of the Series A Preferred Stock and the shares of the common stock held by it issued upon any future conversion of the Series A Preferred Stock.
Note 11—Commitments and Contingencies
We are involved in litigation and disputes arising in the ordinary course of business, such as actions related to injuries; property damage; handling, storage or disposal of vehicles; environmental laws and regulations; and other litigation incidental to the business such as employment matters and dealer disputes. Management considers the likelihood of loss or the incurrence of a liability, as well as the ability to reasonably estimate the amount of loss, in determining loss contingencies. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss (or range of possible losses) can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. Accruals for contingencies including litigation and environmental matters are included in "Other accrued expenses" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information becomes available. If the amount of an actual loss is greater than the amount accrued, this could have an adverse impact on our operating results in that period. Such matters are generally not, in the opinion of management, likely to have a material adverse effect on our financial condition, results of operations or cash flows. Legal fees are expensed as incurred. There has been no significant change in the legal and regulatory proceedings related to continuing operations which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
21

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Note 12—Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (in millions):
  September 30,
2020
December 31,
2019
Foreign currency translation loss $ (38.3) $ (31.0)
Unrealized loss on interest rate derivatives, net of tax (21.6) — 
Accumulated other comprehensive loss $ (59.9) $ (31.0)

Note 13—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. Our operations are grouped into two operating segments: ADESA Auctions and AFC, which also serve as our reportable business segments. 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 reported as discontinued operations (see Note 3).
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 three months ended September 30, 2020 (in millions):
ADESA
Auctions
AFC Holding
Company
Consolidated
Operating revenues $ 526.7  $ 66.9  $ —  $ 593.6 
Operating expenses        
Cost of services (exclusive of depreciation and amortization) 309.4  20.3  —  329.7 
Selling, general and administrative 97.7  5.9  27.4  131.0 
Depreciation and amortization           38.2  2.5  5.8  46.5 
Total operating expenses 445.3  28.7  33.2  507.2 
Operating profit (loss) 81.4  38.2  (33.2) 86.4 
Interest expense 0.8  7.5  21.2  29.5 
Other (income) expense, net (1.7) —  0.6  (1.1)
Intercompany expense (income) (13.9) —  13.9  — 
Income (loss) from continuing operations before income taxes 96.2  30.7  (68.9) 58.0 
Income taxes 26.0  4.3  (19.4) 10.9 
Net income (loss) from continuing operations $ 70.2  $ 26.4  $ (49.5) $ 47.1 
Total assets $ 3,559.7  $ 2,166.6  $ 1,183.6  $ 6,909.9 
22

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Financial information regarding our reportable segments is set forth below as of and for the three months ended September 30, 2019 (in millions):
ADESA
Auctions
AFC Holding
Company
Consolidated
Operating revenues $ 613.6  $ 88.3  $ —  $ 701.9 
Operating expenses        
Cost of services (exclusive of depreciation and amortization) 386.2  24.7  —  410.9 
Selling, general and administrative 121.7  5.9  31.3  158.9 
Depreciation and amortization           37.2  2.6  6.6  46.4 
Total operating expenses 545.1  33.2  37.9  616.2 
Operating profit (loss) 68.5  55.1  (37.9) 85.7 
Interest expense 1.1  15.7  21.1  37.9 
Other (income) expense, net (1.3) (0.1) (0.6) (2.0)
Loss on extinguishment of debt —  —  2.2  2.2 
Intercompany expense (income) 6.0  (1.3) (4.7) — 
Income (loss) from continuing operations before income taxes 62.7  40.8  (55.9) 47.6 
Income taxes 16.3  10.1  (13.2) 13.2 
Net income (loss) from continuing operations $ 46.4  $ 30.7  $ (42.7) $ 34.4 
Total assets $ 3,713.9  $ 2,505.5  $ 360.3  $ 6,579.7 
Financial information regarding our reportable segments is set forth below for the nine months ended September 30, 2020 (in millions):
ADESA
Auctions
AFC Holding
Company
Consolidated
Operating revenues $ 1,455.9  $ 202.2  $ —  $ 1,658.1 
Operating expenses  
Cost of services (exclusive of depreciation and amortization) 897.3  62.1  —  959.4 
Selling, general and administrative 300.0  18.0  87.7  405.7 
Depreciation and amortization           115.5  7.8  17.4  140.7 
  Goodwill and other intangibles impairment 29.8  —  —  29.8 
Total operating expenses 1,342.6  87.9  105.1  1,535.6 
Operating profit (loss) 113.3  114.3  (105.1) 122.5 
Interest expense 2.3  30.3  65.8  98.4 
Other (income) expense, net (3.0) (0.1) 1.3  (1.8)
Intercompany expense (income) (13.2) (0.9) 14.1  — 
Income (loss) from continuing operations before income taxes 127.2  85.0  (186.3) 25.9 
Income taxes 37.3  18.0  (47.0) 8.3 
Net income (loss) from continuing operations $ 89.9  $ 67.0  $ (139.3) $ 17.6 
23

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2020 (Unaudited)
Financial information regarding our reportable segments is set forth below for the nine months ended September 30, 2019 (in millions):
ADESA
Auctions
AFC Holding
Company
Consolidated
Operating revenues $ 1,845.7  $ 264.9  $ —  $ 2,110.6 
Operating expenses  
Cost of services (exclusive of depreciation and amortization) 1,149.8  72.4  —  1,222.2 
Selling, general and administrative 370.2  19.5  107.6  497.3 
Depreciation and amortization           110.2  7.6  20.8  138.6 
Total operating expenses 1,630.2  99.5  128.4  1,858.1 
Operating profit (loss) 215.5  165.4  (128.4) 252.5 
Interest expense 2.8  49.0  98.2  150.0 
Other (income) expense, net (4.5) (0.3) (0.4) (5.2)
Loss on extinguishment of debt —  —  2.2  2.2 
Intercompany expense (income) 23.9  (4.1) (19.8) — 
Income (loss) from continuing operations before income taxes 193.3  120.8  (208.6) 105.5 
Income taxes 54.0  32.2  (57.8) 28.4 
Net income (loss) from continuing operations $ 139.3  $ 88.6  $ (150.8) $ 77.1 
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 57% and 59% of our foreign operating revenues were from Canada for the three and nine months ended September 30, 2020, respectively, and approximately 60% and 64% of our foreign operating revenues were from Canada for the three and nine months ended September 30, 2019, respectively. Information regarding the geographic areas of our operations is set forth below (in millions):
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
Operating revenues    
U.S.  $ 456.1  $ 565.6  $ 1,321.5  $ 1,726.4 
Foreign 137.5  136.3  336.6  384.2 
$ 593.6  $ 701.9  $ 1,658.1  $ 2,110.6 
Note 14—Subsequent Event
In October 2020, a subsidiary of ADESA signed a definitive agreement to sell all of the issued and outstanding shares of capital stock of PWI Holdings, Inc., the Company's extended vehicle service contract business ("PWI"), to certain subsidiaries of Kingsway Financial Services Inc. for a purchase price of approximately $24.5 million (subject to customary adjustments). The closing of the transaction is subject to customary conditions, including legal and regulatory approvals, and is expected to be completed by year-end.
24

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should," "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions identify forward-looking statements. Such statements, including statements regarding the impact of COVID-19; our future growth; anticipated cost savings, revenue increases, credit losses and capital expenditures; dividend declarations and payments; common stock repurchases; tax rates and assumptions; strategic initiatives, greenfields and acquisitions; our competitive position and retention of customers; and our continued investment in information technology, are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, filed on February 19, 2020. Some of these factors include:
the evolving impact of the COVID-19 pandemic on our business and the economy generally;
our ability to effectively maintain or update information and technology systems;
our ability to implement and maintain measures to protect against cyber-attacks;
significant current competition and the introduction of new competitors;
competitive pricing pressures;
our ability to successfully implement our business strategies or realize expected cost savings and revenue enhancements;
our ability to meet or exceed customers' expectations, as well as develop and implement information systems responsive to customer needs;
business development activities, including greenfields, acquisitions and integration of acquired businesses;
costs associated with the acquisition of businesses or technologies;
fluctuations in consumer demand for and in the supply of used, leased and salvage vehicles and the resulting impact on auction sales volumes, conversion rates and loan transaction volumes;
any losses of key personnel;
our ability to obtain land or renew/enter into new leases at commercially reasonable rates;
decreases in the number of used vehicles sold at physical auctions;
changes in the market value of vehicles auctioned;
trends in new and used vehicle sales and incentives, including wholesale used vehicle pricing;
the ability of consumers to lease or finance the purchase of new and/or used vehicles;
the ability to recover or collect from delinquent or bankrupt customers;
economic conditions including fuel prices, commodity prices, foreign exchange rates and interest rate fluctuations;
trends in the vehicle remarketing industry;
trends in the number of commercial vehicles being brought to auction, in particular off-lease volumes;
changes in the volume of vehicle production, including capacity reductions at the major original equipment manufacturers;
laws, regulations and industry standards, including changes in regulations governing the sale of used vehicles and commercial lending activities;
our ability to maintain our brand and protect our intellectual property;
25

the costs of environmental compliance and/or the imposition of liabilities under environmental laws and regulations;
weather, including increased expenses as a result of catastrophic events;
general business conditions;
our substantial amount of debt;
restrictive covenants in our debt agreements;
our assumption of the settlement risk for vehicles sold;
litigation developments;
our self-insurance for certain risks;
interruptions to service from our workforce;
any impairment to our goodwill or other intangible assets;
changes in effective tax rates;
the taxable nature of the spin-off of our former salvage auction business;
changes to accounting standards; and
other risks described from time to time in our filings with the SEC.
Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
Our future growth depends on a variety of factors, including our ability to increase vehicle sold volumes and loan transaction volumes, expand our product and service offerings, including information systems development, acquire and integrate additional business entities, manage expansion, control costs in our operations, introduce fee increases, and retain our executive officers and key employees. We cannot predict whether our growth strategy will be successful. In addition, we cannot predict what portion of overall sales will be conducted through online auctions or other remarketing methods in the future and what impact this may have on our auction business.
Impact of COVID-19

On March 11, 2020, the World Health Organization ("WHO") designated COVID-19 as a pandemic. Governments around the world have mandated, and continue to introduce, numerous and varying measures to slow the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter-in-place and safer-at-home orders, business shutdowns and closures, and have also implemented multi-phase plans with the goal of re-opening their respective jurisdictions. Certain jurisdictions began easing restrictions only to return to tighter restrictions in the face of increases in new COVID-19 cases. The COVID-19 pandemic and the related preventative measures taken to help slow the spread have caused, and may continue to cause, significant volatility, uncertainty and economic disruption.

In response to these measures and for the protection of our employees and customers, on March 20, 2020 we temporarily suspended physical sale operations, including Simulcast-only sales, across North America. We began operating Simulcast-only sales in select markets on April 6, 2020 and expanded the Simulcast-only sales each week, where possible and as permitted by government directives. We also held Simulcast+ auctions at select locations, a fully digital auction operated remotely with an automated auctioneer, sequential sales, audio and visual cues to simulate the live auction experience and all buyers and sellers interacting virtually through the Simulcast platform.

All ADESA auction locations in the U.S. and Canada are offering vehicles for sale via ADESA Simulcast, DealerBlock and Simulcast+. Auction locations have resumed offering ancillary and related services, where possible and as permitted by government directives. Given the evolving health, economic, social and governmental environments, the potential impact that COVID-19 could have on our business remains uncertain.

26

As a result, we proactively took a number of significant steps to help secure our business and preserve available cash during the second and third quarters of 2020, including but not limited to reducing our compensation expense (including a reduction of base salaries across many levels of the organization, including the elimination of base salaries for our CEO, CFO and President and 50% reduction of base salaries for our other executive officers during the second quarter, furloughs and a reduction in force, among others), prohibiting non-essential business travel, suspending non-essential services provided by certain third parties at our locations, delaying or canceling capital projects at our physical auction locations and suspending the Company's quarterly dividend.

In addition, in June 2020 we issued and sold an aggregate of 550,000 shares of newly issued perpetual convertible preferred stock of the Company for net proceeds of approximately $528.2 million, as described in Note 10, "Convertible Preferred Stock."
We have also taken advantage of legislation introduced to assist companies during this time. In the second and third quarters of 2020, we recorded a total of approximately $8.3 million of employee retention credits taken under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and approximately $14.3 million under the Canada Emergency Wage Subsidy. These credits partially offset salaries and medical costs recorded in the U.S. and Canada. We will continue to monitor and assess the impact the CARES Act and similar legislation in other countries may have on our business and financial results.
While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 to our employees, customers and our business, the extent of the impact of the pandemic on our business and financial results will depend on numerous evolving factors that we are not able to accurately predict.
The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.
Overview
We provide whole car auction services in North America and Europe. Our business is divided into two reportable business segments, each of which is an integral part of the vehicle remarketing industry: ADESA Auctions and AFC.
The ADESA Auctions segment serves a domestic and international customer base through online auctions and it provides services from 74 facilities in North America that are developed and strategically located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Through ADESA.com, ADESA offers comprehensive private label remarketing solutions to automobile manufacturers, captive finance companies and other institutions to offer vehicles via the Internet prior to arrival at the physical auction. Vehicles sold on ADESA's digital platforms are typically sold by commercial fleet operators, financial institutions, rental car companies, new and used vehicle dealers and vehicle manufacturers and their captive finance companies to franchise and independent used vehicle dealers. ADESA also provides value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. ADESA also includes TradeRev, an online automotive remarketing platform 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.
The AFC segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers. At September 30, 2020, AFC conducted business at 119 locations in the United States and Canada. The Company also sells vehicle service contracts through PWI.
The holding company is maintained separately from the reportable segments and includes expenses associated with the corporate offices, such as salaries, benefits and travel costs for our management team, certain human resources, information technology and accounting costs, and certain insurance, treasury, legal and risk management costs. Holding company interest expense includes the interest expense incurred on 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.
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Industry Trends
Whole Car
Used vehicles sold in North America through whole car auctions, including online only volumes and mobile application volumes, were approximately 12.0 million and 11.5 million in 2019 and 2018, respectively. Data for the whole car auction industry is collected by the NAAA through an annual survey. The NAAA industry volumes collected by the annual survey do not include online only volumes or mobile application volumes (e.g. Openlane, TradeRev and their respective competitors), but we have included these volumes in our totals. In addition to the traditional whole car auction market and online only venues described above, mobile applications, such as TradeRev, may provide an opportunity to expand our total addressable market for whole car auctions by approximately 5 million units. The COVID-19 pandemic has had a material impact on the whole car auction industry and we are unable to estimate future volumes, but expect volumes in 2020 to be lower than in 2019.
Automotive Finance
AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverages its local branches, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 16,100 dealers in 2019, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.8 million in 2019. The COVID-19 pandemic has had a significant impact on AFC and we are unable to estimate future loan transaction volumes, but expect volumes in 2020 to be lower than in 2019.
Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, lack of access to consumer financing and increased used car retail activity of franchise and public dealerships (most of which do not utilize AFC or its competitors for floorplan financing), as well as the ability to operate in locations experiencing pandemic shelter-in-place orders. These same challenges, to the extent they occur, could result in a material negative impact on AFC's results of operations. A significant decline in used vehicle sales would result in a decrease in consumer auto loan originations and an increased number of dealers defaulting on their loans. In addition, volatility in wholesale vehicle pricing impacts the value of recovered collateral on defaulted loans and the resulting severity of credit losses at AFC. As a result of reduced retail activity, wholesale used car pricing declined in April 2020, but rebounded thereafter. A decrease in wholesale used car pricing could lead to increased losses if dealers are unable to satisfy their obligations.
Seasonality
The volume of vehicles sold through our auctions generally fluctuates from quarter-to-quarter. This seasonality is caused by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays and the seasonality of the retail market for used vehicles, which affects the demand side of the auction industry. Used vehicle auction volumes tend to decline during prolonged periods of winter weather conditions. As a result, revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The fourth calendar quarter typically experiences lower used vehicle auction volume as well as additional costs associated with the holidays and winter weather.
Sources of Revenues and Expenses
Our revenue is derived from auction fees and various on-premise and off-premise services, and from dealer financing fees, interest income and other service revenue at AFC. Although auction revenues primarily include the auction services and related fees, our related receivables and payables include the gross value of the vehicles sold.
Our operating expenses consist of cost of services, selling, general and administrative and depreciation and amortization. Cost of services is composed of payroll and related costs, subcontract services, the cost of vehicles purchased, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites and loan offices. Cost of services excludes depreciation and amortization. Selling, general and administrative expenses are composed of payroll and related costs, sales and marketing, information technology services and professional fees.
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Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended September 30, 2020 and 2019:
  Three Months Ended September 30,
(Dollars in millions except per share amounts) 2020 2019
Revenues    
Auction fees and services revenue $ 440.5  $ 534.5 
Purchased vehicle sales 86.2  79.1 
Finance-related revenue 66.9  88.3 
Total revenues 593.6  701.9 
Cost of services* 329.7  410.9 
Gross profit* 263.9  291.0 
Selling, general and administrative 131.0  158.9 
Depreciation and amortization 46.5  46.4 
Operating profit 86.4  85.7 
Interest expense 29.5  37.9 
Other income, net (1.1) (2.0)
Loss on extinguishment of debt   2.2 
Income from continuing operations before income taxes 58.0  47.6 
Income taxes 10.9  13.2 
Net income from continuing operations 47.1  34.4 
Net income from discontinued operations   0.9 
Net income $ 47.1  $ 35.3 
Net income from continuing operations per share    
Basic $ 0.23  $ 0.26 
Diluted $ 0.23  $ 0.26 

* Exclusive of depreciation and amortization
Overview
For the three months ended September 30, 2020, we had revenue of $593.6 million compared with revenue of $701.9 million for the three months ended September 30, 2019, a decrease of 15%. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 0%, to $46.5 million for the three months ended September 30, 2020, compared with $46.4 million for the three months ended September 30, 2019.
Interest Expense
Interest expense decreased $8.4 million, or 22%, to $29.5 million for the three months ended September 30, 2020, compared with $37.9 million for the three months ended September 30, 2019. The decrease was primarily attributable to a decrease in the weighted average interest rate of approximately 1.3% offset by an increase of $326.9 million in the average outstanding balance of corporate debt for the three months ended September 30, 2020 compared with the three months ended September 30, 2019, resulting from a net increase in term loan debt of approximately $0.5 billion in connection with the debt refinancing on September 19, 2019. In addition, there was a decrease in interest expense at AFC of $8.2 million, which resulted from a decrease in the average finance receivables balance and interest rates for the three months ended September 30, 2020, as compared with the three months ended September 30, 2019.
Loss on Extinguishment of Debt
In September 2019, we amended our Credit Agreement and recorded a $2.2 million pretax charge primarily resulting from the write-off of unamortized debt issue costs associated with Term Loan B-4 and Term Loan B-5.
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Income Taxes
We had an effective tax rate of 18.8% for the three months ended September 30, 2020, compared with an effective tax rate of 27.7% for the three months ended September 30, 2019. The 2020 rate was favorably impacted by the tax benefit from law changes, deductions related to stock-based compensation expenses and other discrete benefits.
Net Income from Discontinued Operations
On June 28, 2019, the Company completed the separation of its salvage auction business, IAA, through a spin-off, creating a new independent publicly traded salvage auction company. As such, the financial results of IAA have been accounted for as discontinued operations in the comparable 2019 results presented. For the three months ended September 30, 2020 and 2019, the Company's financial statements included income from discontinued operations of $0.0 million and $0.9 million, respectively.
Impact of Foreign Currency
For the three months ended September 30, 2020, fluctuations in the Canadian exchange rate decreased revenue by $0.7 million, operating profit by $0.3 million, net income by $0.2 million and had no impact on net income per diluted share. For the three months ended September 30, 2020, fluctuations in the European exchange rate increased revenue by $2.8 million, operating profit by $0.1 million, net income by $0.1 million and had no impact on net income per diluted share.
Impact of COVID-19 on Our Operations
The Company has been subject to numerous orders and directives that have impacted our ability to operate our business throughout North America and in Europe. As a result of restrictions on our operations, we have adjusted our business processes to meet the needs of our customers while complying with the various laws, regulations, mandates and directives in each individual market we operate. In many cases, we have had to limit the number of employees and customers within our physical locations at any given time and modify the delivery of services to our customers. However, we were able to make adjustments in our operations that have permitted us to improve performance.

New and used car retail activity was reduced to unprecedented levels in early April. Auto retail operations were required to temporarily close and supply and demand for used cars was disrupted. By mid-April, we were experiencing improved retail automobile sales and demand for used vehicle supply was beginning to improve. The Company was prepared to meet the needs of the wholesale used car marketplace with its technology-based auction platforms throughout North America and in Europe. The Company believes that certain changes made in its business processes that were necessitated by the COVID-19 outbreak are sustainable going forward. The Company has reduced the labor required to process wholesale auction transactions and reduced its selling, general and administrative expenses.  

In March 2020, the Company had over 15,000 active employees. In early April, the Company furloughed approximately 11,000 employees. Since early April, we have called back approximately 6,000 employees throughout the Company. We notified approximately 5,000 furloughed employees that changes in our business processes in the past few months have resulted in the elimination of their positions.
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ADESA Results
  Three Months Ended September 30,
(Dollars in millions, except per vehicle amounts) 2020 2019
Auction fees and services revenue $ 440.5  $ 534.5 
Purchased vehicle sales 86.2  79.1 
Total ADESA revenue 526.7  613.6 
Cost of services* 309.4  386.2 
Gross profit* 217.3  227.4 
Selling, general and administrative 97.7  121.7 
Depreciation and amortization 38.2  37.2 
Operating profit $ 81.4  $ 68.5 
Vehicles sold 871,000  957,000 
   Institutional vehicles sold in North America 624,000  648,000 
   Dealer consignment vehicles sold in North America 217,000  274,000 
   Vehicles sold in Europe 30,000  35,000 
   Percentage of vehicles sold online 100% 59%
   Conversion rate at North American physical auction locations 69.7% 62.8%
Physical auction revenue per vehicle sold, excluding purchased vehicles $ 905  $ 893 
Online only revenue per vehicle sold, excluding purchased vehicles $ 161  $ 151 
Gross profit, excluding purchased vehicles 49.3% 42.5%

* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA decreased $86.9 million, or 14%, to $526.7 million for the three months ended September 30, 2020, compared with $613.6 million for the three months ended September 30, 2019. The decrease in revenue was the result of a decrease in the number of vehicles sold and a decrease in average revenue per vehicle sold due to the mix of vehicles sold. The decrease in revenue included the impact of a decrease in revenue of $0.7 million due to fluctuations in the Canadian exchange rate and an increase of $2.8 million due to fluctuations in the European exchange rate.
The decrease in vehicles sold was primarily attributable to a 4% decrease in institutional volume, including vehicles sold on our online only platform, as well as a 21% decrease in dealer consignment units sold for the three months ended September 30, 2020 compared with the three months ended September 30, 2019. Online sales volume for ADESA represented 100% of the total vehicles sold in the third quarter of 2020, compared with approximately 59% in the third quarter of 2019. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location; (ii) online solutions that offer vehicles for sale while in transit to auction locations; (iii) vehicles sold on the TradeRev platform; (iv) vehicle sales in Europe, including units sold by COTW; (v) simultaneously broadcasting video and audio during the physical auctions to online bidders (ADESA Simulcast and Simulcast+); and (vi) bulletin-board or real-time online auctions (DealerBlock®). Online only sales, which do not include vehicles sold on ADESA Simulcast, Simulcast+ or DealerBlock, accounted for approximately 55% of ADESA's North American online sales volume. ADESA sold approximately 437,000 (including approximately 57,000 from TradeRev) and 396,000 (including approximately 47,000 from TradeRev) vehicles through its North American online only offerings in the third quarter of 2020 and 2019, respectively. For the three months ended September 30, 2020, dealer consignment vehicles represented approximately 26% of used vehicles sold and institutional vehicles represented approximately 74% of used vehicles sold. For the three months ended September 30, 2019, dealer consignment vehicles represented approximately 30% of used vehicles sold and institutional vehicles represented approximately 70% of used vehicles sold. The volume of vehicles sold at physical auction locations in the third quarter of 2020 decreased approximately 23% compared with the third quarter of 2019. The used vehicle conversion percentage at North American physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, increased to 69.7% for the three months ended September 30, 2020, compared with 62.8% for the three months ended September 30, 2019.
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For the three months ended September 30, 2020 we held all sales through digital marketplaces to protect the health and well-being of our workforce and customers. All vehicles were offered online, cars did not run across the block and we limited access to our physical locations to promote social distancing measures and help prevent the spread of COVID-19.
Physical auction revenue per vehicle sold increased $12, or 1%, to $905 for the three months ended September 30, 2020, compared with $893 for the three months ended September 30, 2019. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services and excludes the sale of purchased vehicles.
Online only auction revenue per vehicle sold increased $8 to $252 for the three months ended September 30, 2020, compared with $244 for the three months ended September 30, 2019. The increase in online only auction revenue per vehicle sold was attributable to increased revenue per vehicle for units sold on the TradeRev platform. In addition, the entire selling price of the purchased vehicles sold at auction is recorded as revenue ("Purchased vehicle sales"). Excluding purchased vehicle sales, online only revenue per vehicle would have been $161 and $151 for the three months ended September 30, 2020 and 2019, respectively.
Gross Profit
For the three months ended September 30, 2020, gross profit for ADESA decreased $10.1 million, or 4%, to $217.3 million, compared with $227.4 million for the three months ended September 30, 2019. Gross profit for ADESA was 41.3% of revenue for the three months ended September 30, 2020, compared with 37.1% of revenue for the three months ended September 30, 2019. Gross profit as a percentage of revenue increased for the three months ended September 30, 2020 as compared with the three months ended September 30, 2019 as we have taken measures to reduce expenses to help protect our business while our operations have been impacted by COVID-19, and vehicles sold online require less direct labor. In addition, our gross profit as a percentage of revenue is impacted by purchased vehicle sales. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicle sold. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 49.3% and 42.5% for the three months ended September 30, 2020 and 2019, respectively.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment decreased $24.0 million, or 20%, to $97.7 million for the three months ended September 30, 2020, compared with $121.7 million for the three months ended September 30, 2019, primarily due to decreases in compensation expense of $10.3 million, marketing costs of $3.9 million, travel expenses of $3.8 million, supplies expense of $2.0 million, telecom costs of $1.9 million, bad debt expense of $1.9 million, other employee related expenses of $1.4 million and the recording of the Canada Emergency Wage Subsidy and the Employee Retention Credit provided under the CARES Act of $2.3 million, partially offset by an increase in incentive-based compensation of $3.5 million.
AFC Results
  Three Months Ended September 30,
(Dollars in millions except volumes and per loan amounts) 2020 2019
Finance-related revenue  
Interest and fee income $ 55.8  $ 85.5 
Other revenue 2.1  2.7 
Provision for credit losses   (8.9)
Warranty contract revenue 9.0  9.0 
Total AFC revenue 66.9  88.3 
Cost of services* 20.3  24.7 
Gross profit* 46.6  63.6 
Selling, general and administrative 5.9  5.9 
Depreciation and amortization 2.5  2.6 
Operating profit $ 38.2  $ 55.1 
Loan transactions 324,000  442,000 
Revenue per loan transaction, excluding "Warranty contract revenue" $ 179  $ 180 

* Exclusive of depreciation and amortization
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Revenue
For the three months ended September 30, 2020, AFC revenue decreased $21.4 million, or 24%, to $66.9 million, compared with $88.3 million for the three months ended September 30, 2019. The decrease in revenue was primarily the result of a 1% decrease in revenue per loan transaction and a 27% decrease in loan transactions.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased 1%, primarily as a result of decreases in interest yield, partially offset by an increase in average portfolio duration and loan values and a decrease in provision for credit losses for the three months ended September 30, 2020. Revenue per loan transaction excludes "Warranty contract revenue."
The provision for credit losses decreased to 0.0% of the average managed receivables for the three months ended September 30, 2020 from 1.7% for the three months ended September 30, 2019.
Gross Profit
For the three months ended September 30, 2020, gross profit for the AFC segment decreased $17.0 million to $46.6 million, or 69.7% of revenue, compared with $63.6 million, or 72.0% of revenue, for the three months ended September 30, 2019. The decrease in gross profit as a percent of revenue was primarily the result of a 24% decrease in revenue and an 18% decrease in cost of services. The decrease in cost of services was primarily the result of decreases in compensation expense of $2.6 million, PWI expenses of $1.0 million, lot audits of $0.7 million and other miscellaneous expenses aggregating $0.1 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC was $5.9 million for the three months ended September 30, 2020 and 2019.
Holding Company Results
  Three Months Ended September 30,
(Dollars in millions) 2020 2019
Selling, general and administrative $ 27.4  $ 31.3 
Depreciation and amortization 5.8  6.6 
Operating loss $ (33.2) $ (37.9)
Selling, General and Administrative
For the three months ended September 30, 2020, selling, general and administrative expenses at the holding company decreased $3.9 million, or 12%, to $27.4 million, compared with $31.3 million for the three months ended September 30, 2019, primarily as a result of decreases in compensation expense of $3.5 million, professional fees of $1.2 million, stock-based compensation expense of $1.1 million, telecom costs of $0.8 million and travel expenses of $0.5 million, partially offset by increases in incentive-based compensation of $2.6 million and information technology costs of $0.6 million.
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Overview of Results of KAR Auction Services, Inc. for the Nine Months Ended September 30, 2020 and 2019:
  Nine Months Ended September 30,
(Dollars in millions except per share amounts) 2020 2019
Revenues    
Auction fees and services revenue $ 1,244.6  $ 1,629.5 
Purchased vehicle sales 211.3  216.2 
Finance-related revenue 202.2  264.9 
Total revenues 1,658.1  2,110.6 
Cost of services* 959.4  1,222.2 
Gross profit* 698.7  888.4 
Selling, general and administrative 405.7  497.3 
Depreciation and amortization 140.7  138.6 
Goodwill and other intangibles impairment 29.8  — 
Operating profit 122.5  252.5 
Interest expense 98.4  150.0 
Other income, net (1.8) (5.2)
Loss on extinguishment of debt   2.2 
Income from continuing operations before income taxes 25.9  105.5 
Income taxes 8.3  28.4 
Net income from continuing operations 17.6  77.1 
Net income from discontinued operations   91.6 
Net income $ 17.6  $ 168.7 
Net income from continuing operations per share    
Basic $ 0.04  $ 0.58 
Diluted $ 0.04  $ 0.58 

* Exclusive of depreciation and amortization
Overview
For the nine months ended September 30, 2020, we had revenue of $1,658.1 million compared with revenue of $2,110.6 million for the nine months ended September 30, 2019, a decrease of 21%. Businesses acquired in 2019 accounted for an increase in revenue of $18.3 million or 1% of revenue. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.
Depreciation and Amortization
Depreciation and amortization increased $2.1 million, or 2%, to $140.7 million for the nine months ended September 30, 2020, compared with $138.6 million for the nine months ended September 30, 2019. The increase in depreciation and amortization was primarily the result of certain assets placed in service over the last twelve months and depreciation and amortization for the assets of businesses acquired in 2019.
Goodwill and Other Intangibles Impairment
In light of the impact that the COVID-19 pandemic has had on the economy, forecasts for all reporting units were revised. These circumstances contributed to lower sales, operating profits and cash flows at ADESA Remarketing Limited through the first part of 2020 as compared to 2019, and the outlook for the business was significantly reduced. This analysis resulted in the impairment of the goodwill balance totaling $25.5 million in our ADESA Remarketing Limited reporting unit and a non-cash goodwill impairment charge was recorded for this amount in the second quarter of 2020.

In addition, in the second quarter of 2020, a non-cash customer relationship impairment charge of approximately $4.3 million was also recorded in the ADESA Remarketing Limited reporting unit, representing the impairment in the value of this reporting unit’s customer relationships.
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Interest Expense
Interest expense decreased $51.6 million, or 34%, to $98.4 million for the nine months ended September 30, 2020, compared with $150.0 million for the nine months ended September 30, 2019. The decrease was primarily attributable to a decrease in the weighted average interest rate of approximately 1.0% and a decrease of $478.0 million in the average outstanding balance of corporate debt for the nine months ended September 30, 2020 compared with the nine months ended September 30, 2019, resulting from the pay down of debt of approximately $1.3 billion in connection with the spin-off of IAA on June 28, 2019 and a net increase in term loan debt of approximately $0.5 billion in connection with the debt refinancing on September 19, 2019. In addition, there was a decrease in interest expense at AFC of $18.7 million, which resulted from a decrease in the average finance receivables balance and interest rates for the nine months ended September 30, 2020, as compared with the nine months ended September 30, 2019.
Loss on Extinguishment of Debt
In September 2019, we amended our Credit Agreement and recorded a $2.2 million pretax charge primarily resulting from the write-off of unamortized debt issue costs associated with Term Loan B-4 and Term Loan B-5.
Income Taxes
We had an effective tax rate of 32.0% for the nine months ended September 30, 2020, compared with an effective tax rate of 26.9% for the nine months ended September 30, 2019. The 2020 rate was unfavorably impacted by the goodwill and other intangibles impairment charge for which no tax benefit has been recorded, as well as a greater proportion of higher taxed earnings. These were partially offset by the tax benefit from law changes, deductions related to stock-based compensation expenses and other discrete benefits.
Net Income from Discontinued Operations
On June 28, 2019, the Company completed the separation of its salvage auction business, IAA, through a spin-off, creating a new independent publicly traded salvage auction company. As such, the financial results of IAA have been accounted for as discontinued operations in the comparable 2019 results presented. For the nine months ended September 30, 2020 and 2019, the Company's financial statements included income from discontinued operations of $0.0 million and $91.6 million, respectively. For a further discussion, reference Note 3 of the condensed notes to the consolidated financial statements.
Impact of Foreign Currency
For the nine months ended September 30, 2020, fluctuations in the Canadian exchange rate decreased revenue by $2.1 million, operating profit by $0.6 million, net income by $0.3 million and net income per diluted share by less than $0.01. For the nine months ended September 30, 2020, fluctuations in the European exchange rate increased revenue by $1.2 million and had no impact on operating profit, net income and net income per diluted share. In addition, for the nine months ended September 30, 2020, as a result of the goodwill and other intangibles impairment in the U.K., fluctuations in the British pound exchange rate decreased net income by $0.1 million.
35

ADESA Results
  Nine Months Ended September 30,
(Dollars in millions, except per vehicle amounts) 2020 2019
Auction fees and services revenue $ 1,244.6  $ 1,629.5 
Purchased vehicle sales 211.3  216.2 
Total ADESA revenue 1,455.9  1,845.7 
Cost of services* 897.3  1,149.8 
Gross profit* 558.6  695.9 
Selling, general and administrative 300.0  370.2 
Depreciation and amortization 115.5  110.2 
Goodwill and other intangibles impairment 29.8  — 
Operating profit $ 113.3  $ 215.5 
Vehicles sold 2,381,000  2,897,000 
   Institutional vehicles sold in North America 1,748,000  2,030,000 
   Dealer consignment vehicles sold in North America 560,000  784,000 
   Vehicles sold in Europe 73,000  83,000 
   Percentage of vehicles sold online 84% 58%
   Conversion rate at North American physical auction locations 65.4% 64.2%
Physical auction revenue per vehicle sold, excluding purchased vehicles $ 891  $ 883 
Online only revenue per vehicle sold, excluding purchased vehicles $ 159  $ 149 
Gross profit, excluding purchased vehicles 44.9% 42.6%

* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA decreased $389.8 million, or 21%, to $1,455.9 million for the nine months ended September 30, 2020, compared with $1,845.7 million for the nine months ended September 30, 2019. The decrease in revenue was the result of a decrease in the number of vehicles sold and a decrease in average revenue per vehicle sold due to the mix of vehicles sold. Businesses acquired in 2019 accounted for an increase in revenue of $18.3 million, of which approximately $12.7 million was included in "Purchased vehicle sales." The decrease in revenue