KAR Auction Services, Inc.
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 impactpotential impacts of COVID-19;the COVID-19 pandemic; 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, 2019,2020, filed on February 19, 2020. Some of these factors include:
the evolving impact of the COVID-19 pandemic on our business18, 2021, 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;
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 risksthose described from time to time in our filingsfuture reports filed with the SEC.
Securities and Exchange Commission. Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
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
OnIn March 11, 2020, the World Health Organization ("WHO") designateddeclared the COVID-19 asoutbreak a pandemic. Governments around the world have mandated, and continueAlthough governmental restrictions that were imposed in 2020 to introduce, numerous and varying measures to slowreduce 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. Certainsince been lifted or scaled back in many jurisdictions, have begun easing restrictions only to return to tighter restrictions in the face of increases in new COVID-19 cases. cases, including more contagious variants, have resulted in the reimposition of restrictions in certain jurisdictions, and may lead to other restrictions being imposed. 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, during 2020 we implemented several measures to help secure our business, including but not limited to furloughs, prohibiting non-essential business travel, suspending non-essential services provided by certain third parties at our locations, delaying or canceling capital projects at our on-premise marketplace locations and suspending the Company's quarterly dividend.
In addition, on March 20, 2020, we temporarily suspended physicalon-premise sale operations across North America, including Simulcast-only sales, across North America. We began operatingand resumed operation of Simulcast-only sales in select markets on April 6, 2020 and expanded2020. We subsequently continued to expand 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+. Most, with all ADESA auction locations have resumedin the U.S. and Canada offering ancillary and related services, where possible and as permittedvehicles for sale by government directives. While ADESA has experienced increasing volumes over the last few months, the business has not fully returned to pre-COVID operations. Given the evolving health, economic, social and governmental environments, the potential impact that COVID-19 could have on our business remains uncertain.
As a result, we proactively took significant steps to help secure our business and preserve available cash duringend of the second quarter including but not limited to the following measures:
Reduced compensation expense by
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▪ | our CEO, CFO and President voluntarily electing to forgo 100% of their respective base salaries and the remainder of our executive officers voluntarily electing to reduce their base salaries by 50% for the second quarter of 2020, |
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▪ | reducing base salaries across many levels of the organization for part of the second quarter of 2020, |
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▪ | furloughing approximately 11,000 employees in April 2020 (approximately 5,000 have returned to work), |
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▪ | commencing a reduction in force in June 2020 (impacting approximately 3,000 of our employees), and |
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▪ | our board of directors voluntarily electing to forgo their cash compensation for the second quarter of 2020; |
Prohibited non-essential business travel;
Suspended non-essential services provided by certain third parties at our locations;
Delayed or canceled capital projects at our physical auction locations;
Negotiated the deferral of rent payments with certain landlords;
Suspended the ADESA Assurance program for part of the second quarter;
AFC reduced the unused portion of certain floorplan lines with its customers; and
Suspended 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 9, "Convertible Preferred Stock."2020.
We have also takentook advantage of legislation introduced to assist companies during this time.the pandemic. In the second quarterfirst six months of 2020,2021, we recorded a total of approximately $7.9$5.8 million of employee retentionclaimed under the Canada Emergency Wage Subsidy. These credits taken underpartially offset salaries recorded in Canada. We will continue to monitor and assess the impact the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and approximately $9.7 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.
The automotive industry has experienced unprecedented market conditions during the pandemic, including a decline in new vehicle inventory resulting from the shortage of semiconductors. This reduction in supply of new vehicles has caused increased new and used vehicle prices, as well as increased demand for used vehicles. More lessees and dealers are therefore purchasing vehicles at residual value, thus decreasing the number of off-lease vehicles coming to auction. Further, government support and loan accommodations have resulted in fewer repossessed vehicles coming to auction. These factors have contributed to our commercial vehicle volumes declining in 2021.
While we have developed and implemented and continue to develop and implement health and safety and return-to-workplace protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 toon 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 ablecontinue 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 whichthat are highly uncertain and cannot be predicted,unpredictable.
The broader implications for our business and results of operations remain uncertain and will depend on many factors outside our control, including, but not limited to,without limitation, the duration and spreadseverity of the outbreak, its severity,COVID-19 pandemic, the actionsdegree to containwhich governmental restrictions are relaxed or reimposed, the virus or treat its impact, and how quickly and to what extentlength of time it takes for normal economic and operating conditions can resume.to resume, the number and effectiveness of vaccines and numerous other uncertainties. 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.business.
Overview
We provide whole car auction services in North America and Europe. Our business is divided into two reportable business segments, each of which is an integral part of the vehicle remarketing industry: ADESA Auctions and AFC.
•The ADESA Auctions segment serves a domestic and international customer base through physical and online auctions and through 74 whole car auction facilities indigital marketplaces for wholesale vehicles supported by more than 70 vehicle logistics center locations across 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.on-premise marketplaces. Vehicles atsold on ADESA's auctionsdigital 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 BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized in the United States, TradeRev, an online automotive remarketing systemplatform in Canada 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 June 30, 2020, AFC conducted business at 123 locations indealers throughout the United States and Canada. ThePrior to December 2020, the Company also sellssold vehicle service contracts through Preferred Warranties, Inc. ("PWI").
ThePrior to 2020, the costs and expenses of the holding company is maintainedwere reported separately from the reportable segmentssegments. Due to the spin-off of IAA in 2019 and includesthe Company's transition from physical marketplaces to digital marketplaces, the Company has simplified its business and operations. Corporate expenses, associated withpreviously reported as holding company expenses, are now included in the corporate offices, such as salaries, benefits and travel costs for our management team, certain human resources,segments. Certain known expenses (e.g., information technology costs) were recorded directly to the ADESA and accounting costs, and certain insurance, treasury, legal and risk management costs. Holding company interestAFC segments. 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 allocatedpreviously reported by the holding company.company has been recorded in the ADESA segment. The residual shared services expenses were recorded at ADESA and allocated to AFC based on revenue and employee headcount. Holding company amounts reported in the segment results in the consolidated financial statements prior to December 31, 2020 have been reclassified to conform to the current presentation.
Industry Trends
Whole Car
Used vehicles sold in North America through whole car auctions, including online onlyoff-premise volumes and mobile application volumes, were approximately 10.3 million and 12.0 million in 2020 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 onlyoff-premise volumes or mobile application volumes (e.g., Openlane, TradeRev, BacklotCars and their respective competitors), but we have included these volumes in our totals. In addition to the traditional whole car auction market and online onlyoff-premise venues described above, we believe mobile applications, such as TradeRev and BacklotCars, may provide an opportunity to expand our total addressable market for whole car auctions bydealer-to-dealer transactions to as much as 15 million units from approximately 5 million units.units in 2019. TradeRev and BacklotCars sold approximately 316,000 vehicles in the digital dealer-to-dealer marketplace for the year ended December 31, 2020, compared with approximately 210,000 vehicles for the year ended December 31, 2019. TradeRev and BacklotCars sold approximately 119,000 vehicles in the digital dealer-to-dealer marketplace for the three months ended June 30, 2021, compared with approximately 72,000 vehicles for the three months ended June 30, 2020. This volume data includes vehicles sold by BacklotCars prior to its acquisition in November 2020. For the six months ended June 30, 2021 and 2020, vehicles sold by these companies in the digital dealer-to-dealer marketplace were approximately 219,000 and 127,000, respectively. 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.volumes.
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 presence of branches and in-market representatives, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 16,10013,600 dealers in 2019,2020, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.81.5 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 2019.2020.
Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, lack of access to consumer financing and increased competition resulting from consolidation in the used vehicle dealer industry,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 in May and June 2020. 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 relatedvarious on-premise and off-premise services, associated with our whole car auctions, and from dealer financing fees, interest income and other service revenue at AFC. Although auction revenues primarily include the auction services and related fees, our related receivables and payables include the gross value of the vehicles sold.
Our operating expenses consist of cost of services, selling, general and administrative and depreciation and amortization. Cost of services is composed of payroll and related costs, subcontract services, the cost of vehicles purchased, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites and loan offices. Cost of services excludes depreciation and amortization. Selling, general and administrative expenses are composed of payroll and related costs, sales and marketing, information technology services and professional fees.
Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended June 30, 20202021 and 2019:2020:
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| Three Months Ended June 30, |
(Dollars in millions except per share amounts) | 2021 | | 2020 |
Revenues | | | |
Auction fees | $ | 236.7 | | | $ | 177.8 | |
Service revenue | 182.2 | | | 134.8 | |
Purchased vehicle sales | 97.9 | | | 49.6 | |
Finance-related revenue | 68.6 | | | 56.8 | |
Total revenues | 585.4 | | | 419.0 | |
Cost of services* | 333.2 | | | 235.1 | |
Gross profit* | 252.2 | | | 183.9 | |
Selling, general and administrative | 140.2 | | | 112.3 | |
Depreciation and amortization | 45.4 | | | 46.5 | |
Goodwill and other intangibles impairment | — | | | 29.8 | |
Operating profit (loss) | 66.6 | | | (4.7) | |
Interest expense | 31.2 | | | 30.9 | |
Other (income) expense, net | 14.8 | | | 1.3 | |
Income (loss) before income taxes | 20.6 | | | (36.9) | |
Income taxes | 9.1 | | | (4.6) | |
Net income (loss) | $ | 11.5 | | | $ | (32.3) | |
Net income (loss) per share | | | |
Basic | $ | 0.01 | | | $ | (0.27) | |
Diluted | $ | 0.01 | | | $ | (0.27) | |
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| Three Months Ended June 30, |
(Dollars in millions except per share amounts) | 2020 | | 2019 |
Revenues | | | |
Auction fees and services revenue | $ | 312.6 |
| | $ | 553.1 |
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Purchased vehicle sales | 49.6 |
| | 79.3 |
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Finance-related revenue | 56.8 |
| | 86.7 |
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Total revenues | 419.0 |
| | 719.1 |
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Cost of services* | 235.1 |
| | 417.4 |
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Gross profit* | 183.9 |
| | 301.7 |
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Selling, general and administrative | 112.3 |
| | 163.2 |
|
Depreciation and amortization | 46.5 |
| | 47.9 |
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Goodwill and other intangibles impairment | 29.8 |
| | — |
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Operating profit (loss) | (4.7 | ) | | 90.6 |
|
Interest expense | 30.9 |
| | 55.6 |
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Other expense (income), net | 1.3 |
| | (1.1 | ) |
Income (loss) from continuing operations before income taxes | (36.9 | ) | | 36.1 |
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Income taxes | (4.6 | ) | | 8.7 |
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Net income (loss) from continuing operations | (32.3 | ) | | 27.4 |
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Net income from discontinued operations | — |
| | 28.2 |
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Net income (loss) | $ | (32.3 | ) | | $ | 55.6 |
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Net income (loss) from continuing operations per share | | | |
Basic | $ | (0.27 | ) | | $ | 0.21 |
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Diluted | $ | (0.27 | ) | | $ | 0.20 |
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* Exclusive of depreciation and amortization
Overview
For the three months ended June 30, 2020,2021, we had revenue of $419.0$585.4 million compared with revenue of $719.1$419.0 million for the three months ended June 30, 2019, a decrease2020, an increase of 42%40%. Businesses acquired in the last twelve months accounted for an increase in revenue of $39.7 million or 7% of revenue. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.
Depreciation and Amortization
Depreciation and amortization decreased $1.4$1.1 million, or 3%2%, to $45.4 million for the three months ended June 30, 2021, compared with $46.5 million for the three months ended June 30, 2020, compared with $47.9 million for the three months ended June 30, 2019.2020. The decrease in depreciation and amortization was primarily the result of fixed assets that have become fully depreciated and a reduction in assets placed in service or acquired, resulting from a reduction in capital spending and no acquisitions in 2020.service.
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 partsecond quarter of 2020 as compared to 2019,a $25.5 million non-cash goodwill impairment charge and the outlook for the business was significantly reduced. This analysis resulted in thea $4.3 million non-cash customer relationship impairment of the goodwill balance totaling $25.5 millioncharge were recorded in our ADESA Remarketing Limited reporting unit and a non-cash goodwill impairment charge was recorded(doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook 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.
business to be significantly reduced.
Interest Expense
Interest expense decreased $24.7increased $0.3 million, or 44%1%, to $31.2 million for the three months ended June 30, 2021, compared with $30.9 million for the three months ended June 30, 2020, compared with $55.62020. The increase was primarily attributable to an increase in interest expense at AFC of $0.2 million, which resulted from an increase in the average finance receivables balance for the three months ended June 30, 2019. The decrease was primarily attributable to a decrease in the weighted average interest rate of approximately 1.1% and a decrease of $821.9 million in the average outstanding balance of corporate debt for the three months ended June 30, 2020 compared with the three months ended June 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 $7.0 million, which resulted from a decrease in the average finance receivables balance and in incremental interest rates for the three months ended June 30, 2020,2021, as compared with the three months ended June 30, 2019.2020.
Other (Income) Expense, Net
The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. Realized gains on these investments were $0.2 million for the three months ended June 30, 2021. The Company had a reduction in unrealized gains of $11.9 million at June 30, 2021, as a result of the change in fair value for one of these investment securities which had a recent public offering. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.
For the three months ended June 30, 2021, we had other expense of $14.8 million compared with $1.3 million for the three months ended June 30, 2020. The increase in other expense was primarily attributable to a reduction in unrealized gains on investment securities of approximately $11.9 million and an increase in contingent consideration valuation of $4.5 million, partially offset by a decrease in foreign currency losses of $2.3 million and other miscellaneous items aggregating $0.6 million.
Income Taxes
We had an effective tax rate of 44.2% for the three months ended June 30, 2021, compared with an effective tax rate of 12.5% for the three months ended June 30, 2020, compared with an2020. The effective tax rate of 24.1% for the three months ended June 30, 2019.2021 was unfavorably impacted by the expense for the increase in the estimated value of contingent consideration for which no tax benefits have been recorded. The rate for the three months ended June 30, 2020 rate was unfavorably impacted by the goodwill and other intangibles impairment charge for which no tax benefit has been recorded. This was recorded, partially offset by the tax benefit from recording net operating losses and deductions related to stock-based compensation expenses.
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 June 30, 2020 and 2019, the Company's financial statements included income from discontinued operations of $0.0 million and $28.2 million, respectively. For a further discussion, reference Note 2 of the condensed notes to the consolidated financial statements.
Impact of Foreign Currency
For the three months ended June 30, 2020,2021, fluctuations in the Canadian exchange rate decreasedincreased revenue by $1.3$9.3 million, operating profit by $0.4 million, net income (loss) by $0.1$3.4 million and net income (loss) per diluted share by less than $0.01.$2.0 million. For the three months ended June 30, 2020,2021, fluctuations in the European exchange rate decreasedincreased revenue by $0.4$5.7 million, operating profit by $0.2 million and had no impact on operating profit,decreased net income (loss) and net income (loss) per diluted share. In addition, for the three months ended June 30, 2020, as a resultby $0.2 million.
Impact of the goodwill and other intangibles impairment in the U.K., fluctuations in the British pound exchange rate decreased the net loss by $1.1 million.
Business Trends Throughout the Second QuarterCOVID-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 these COVID-19 related restrictions on our operations, we have adjusted our business processes so that we can continue to meet the needs of our customers while complying with allthe various laws, regulations, mandates and directives in each individual marketof the markets in which we operate. In many cases, we have had to limit the number of employees and customers withinat our physical locations at any given time and modify the delivery of services to our customers. Our resultsHowever, these adjustments have also resulted in the quarter ended June 30, 2020 were negatively impacted by the impact COVID-19 had on our business, especially in the month of April. However, we were able to make adjustmentsimprovements in our operations that have permitted us to improve performance steadily throughoutoperations.
During this challenging time, the quarter.
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 preparedhas worked to meet the needs of the wholesale used car marketplace with its technology-based auction platforms throughout North America and in Europe. For the month of April, total vehicles sold were approximately 27% of the volume sold in April 2019. Consolidated revenue for the month April was 28% of revenue for April 2019. Consolidated gross profit for the month of April was below 20% of revenue due to the low level of revenue and this contributed to an operating loss for the month.
The Company saw improved demand for used vehicles in May and buyers and sellers were transacting on our digital platforms in order to obtain inventory to support the level of retail demand for used vehicles. Total vehicles sold were approximately 65% of the volume sold in May 2019. Consolidated revenue for the month of May was 58% of revenue for May 2019. However, our operating processes were adjusted to support 100% of all transactions being completed through our digital platforms and KAR had gross profit of 47% of revenue for the month. The Company also maintained reduced selling, general and administrative expenses and was able to generate operating profit and Adjusted EBITDA that exceeded 70% of the amounts generated in May 2019.
Improved demand for used vehicles continued throughout June and vehicles sold in June 2020 were 8% above the volume sold in June 2019 and consolidated revenue for the month of June was 91% of revenue for June 2019. We continued to sell all vehicles using our digital platforms and were able to generate gross profit for the month that was approximately 50% of revenue. We were also able to maintain lower overhead costs through this period of volume growth. As a result, we were able to generate operating profit margins (exclusive of goodwill and other intangibles impairment) and Adjusted EBITDA margins for the month that were above 20% of revenue. The Company believes that certain changes made into its business processes that were necessitated by the COVID-19 outbreak are sustainable going forward. TheFor example, the Company has reduced the labor required to process wholesale auction transactions and reduced its selling, general and administrative expenses.
Immediately prior to actions taken in late 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 5,000 employees throughout the Company. In late June 2020, we notified approximately 3,000 furloughed employees that changes in our business processes have resulted in the elimination
ADESA Results
| | | | | | | | | | | |
| Three Months Ended June 30, |
(Dollars in millions, except per vehicle amounts) | 2021 | | 2020 |
Auction fees | $ | 236.7 | | | $ | 177.8 | |
Service revenue | 182.2 | | | 134.8 | |
Purchased vehicle sales | 97.9 | | | 49.6 | |
Total ADESA revenue | 516.8 | | | 362.2 | |
Cost of services* | 319.5 | | | 217.2 | |
Gross profit* | 197.3 | | | 145.0 | |
Selling, general and administrative | 131.4 | | | 103.7 | |
Depreciation and amortization | 42.9 | | | 43.3 | |
Goodwill and other intangibles impairment | — | | | 29.8 | |
Operating profit (loss) | $ | 23.0 | | | $ | (31.8) | |
On-premise vehicles sold | 332,000 | | | 312,000 | |
Off-premise vehicles sold | 379,000 | | | 336,000 | |
Total vehicles sold | 711,000 | | | 648,000 | |
Auction fees per vehicle sold | $ | 333 | | | $ | 274 | |
Gross profit per vehicle sold* | $ | 277 | | | $ | 224 | |
Gross profit percentage, excluding purchased vehicles* | 47.1% | | 46.4% |
Dealer consignment mix | 41% | | 21% |
Commercial mix | 59% | | 79% |
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| | | | | | | |
| Three Months Ended June 30, |
(Dollars in millions, except per vehicle amounts) | 2020 | | 2019 |
Auction fees and services revenue | $ | 312.6 |
| | $ | 553.1 |
|
Purchased vehicle sales | 49.6 |
| | 79.3 |
|
Total ADESA revenue | 362.2 |
| | 632.4 |
|
Cost of services* | 217.2 |
| | 392.9 |
|
Gross profit* | 145.0 |
| | 239.5 |
|
Selling, general and administrative | 79.5 |
| | 121.9 |
|
Depreciation and amortization | 38.2 |
| | 38.0 |
|
Goodwill and other intangibles impairment | 29.8 |
| | — |
|
Operating profit (loss) | $ | (2.5 | ) | | $ | 79.6 |
|
Vehicles sold | 648,000 |
| | 994,000 |
|
Institutional vehicles sold in North America | 502,000 |
| | 701,000 |
|
Dealer consignment vehicles sold in North America | 131,000 |
| | 268,000 |
|
Vehicles sold in Europe | 15,000 |
| | 25,000 |
|
Percentage of vehicles sold online | 100 | % | | 59 | % |
Conversion rate at North American physical auctions | 63.5 | % | | 66.1 | % |
Physical auction revenue per vehicle sold, excluding purchased vehicles | $ | 839 |
| | $ | 882 |
|
Online only revenue per vehicle sold, excluding purchased vehicles | $ | 152 |
| | $ | 150 |
|
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA decreased $270.2increased $154.6 million, or 43%, to $516.8 million for the three months ended June 30, 2021, compared with $362.2 million for the three months ended June 30, 2020, compared with $632.4 million for the three months ended June 30, 2019.2020. The decreaseincrease in revenue was the result of a decreasean increase in the number of vehicles sold and a decreasean increase in average revenue per vehicle sold. Businesses acquired in the last twelve months accounted for an increase in revenue of $39.7 million. The decreasechange in revenue included the impact of decreasesan increase in revenue of $1.1$8.7 million due to fluctuations in the Canadian exchange rate and $0.4an increase of $5.7 million due to fluctuations in the European exchange rate.
On-premise marketplace sales are initiated online for vehicles at any of our locations across North America and include Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and include Openlane, TradeRev, BacklotCars and ADESA Europe sales. The decrease10% increase in the number of vehicles sold was primarily attributable tocomprised of a 29% decrease6% increase in institutional volume, includingon-premise vehicles sold on our online only platform, as well asand a 50% decrease13% increase in dealer consignment units soldoff-premise vehicles sold. However, the Company has experienced a decline in both on-premise and off-premise commercial volumes aggregating 18% for the three months ended June 30, 20202021 compared with the three months ended June 30, 2019. Online sales volume for ADESA represented approximately 100% of the total vehicles sold in the second quarter of 2020, compared with approximately 59% in the second 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 52% of ADESA's North American online sales volume. ADESA sold approximately 321,000 (including approximately 35,000 from TradeRev) and 416,000 (including approximately 41,000 from TradeRev) vehicles through its North American online only offerings in the second quarter of 2020 and 2019, respectively.2020. For the three monthsquarters ended June 30, 2020, dealer consignment vehicles represented approximately 30% of used vehicles sold at ADESA physical auction locations, compared with approximately 41% for the three months ended June 30, 2019. The volume of vehicles sold at physical auction locations in the second quarter of 2020 decreased approximately 44% compared with the second 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, decreased to 63.5% for the three months ended June 30, 2020, compared with 66.1% for the three months ended June 30, 2019.
Volumes sold for the three months ended June 30, 2020 were materially impacted by the COVID-19 related restrictions placed on businesses throughout the world. For the three months ended June 30,2021 and 2020, we heldconducted all sales in a Simulcast-only format to protect the health and well-being of our workforce and customers.through digital marketplaces. All vehicles were offered online, cars didwere not run acrossdriven through the blockauction lanes and we limited access to our physical locations to promote social distancing measures and help prevent the spread of COVID-19.
Physical auction revenueAuction fees per vehicle sold decreased $43, or 5%, to $839 for the three months ended June 30, 2020, compared with $8822021 increased $59, or 22%, reflecting higher vehicle values and a changing mix of vehicles sold.
Service revenue for the three months ended June 30, 2019. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related2021 increased $47.4 million, or 35%, primarily as a result of all the Company's services which includes non-auction services and excludes the sale of purchased vehicles. Physical auction fees per car sold were consistent at $428 for the three months ended June 30, 2020 compared with the three months ended June 30, 2019. The $43 decrease was attributable to a decreasebeing available in lower margin ancillary services revenue.
Online only auction revenue per vehicle sold decreased $21 to $211 for the three months ended June 30, 2020, compared with $232 for the three months ended June 30, 2019. The decrease in online only auction revenue per vehicle sold was attributable to a decrease in purchased vehicle sales. The entire selling price2021. A substantial amount 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 $152Company's on-premise and $150off-premise services were not available for a portion of the three months ended June 30, 2020 and 2019, respectively. The $2 increase in online only revenue per vehicle, excluding purchased vehicles, was attributable to increased revenue per vehicle for units sold on the TradeRev platform.second quarter of 2020.
Gross Profit
For the three months ended June 30, 2020,2021, gross profit for ADESA decreased $94.5increased $52.3 million, or 39%36%, to $145.0$197.3 million, compared with $239.5$145.0 million for the three months ended June 30, 2019.2020. Gross profit for ADESA was 38.2% of revenue for the
three months ended June 30, 2021, compared with 40.0% of revenue for the three months ended June 30, 2020, compared with 37.9%2020. Gross profit as a percentage of revenue decreased for the three months ended June 30, 2019. Gross profit as a percentage of revenue increased for the three months ended June 30, 20202021 as compared with the three months ended June 30, 2019 as a result2020, primarily due to the impact of a 45% decrease in cost of services. As noted elsewhere, 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, ourpurchased vehicles. Excluding purchased vehicle sales, gross profit as a percentage of revenue is impacted by purchased vehicle sales.was 47.1% and 46.4% for the three months ended June 30, 2021 and 2020, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehiclevehicles sold. Excluding purchased vehicle sales, gross profitWe have also taken measures to reduce expenses to help protect our business while our operations have been impacted by COVID-19. In the second quarter of 2021 we recorded a benefit of $1.5 million taken under the Canada Emergency Wage Subsidy as a percentagecompared with an aggregate of revenue was 46.4%$10.1 million taken under the CARES Act and 43.2%the Canada Emergency Wage Subsidy in the second quarter of 2020. Businesses acquired in the last 12 months accounted for an increase in cost of services of $23.3 million for the three months ended June 30, 2020 and 2019, respectively.2021.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment decreased $42.4increased $27.7 million, or 35%27%, to $79.5$131.4 million for the three months ended June 30, 2021, compared with $103.7 million for the three months ended June 30, 2020, compared with $121.9 million for the three months ended June 30, 2019, primarily due to decreasesincreases in compensation expenseselling, general and administrative expenses associated with acquisitions of $16.4$24.3 million, incentive-based compensation of $6.5$5.5 million, marketing costsfluctuations in the Canadian exchange rate of $6.0$2.1 million, travel expensesstock-based compensation of $3.8$1.8 million and professional fees of $2.9$1.3 million, suppliespartially offset by decreases in bad debt expense of $2.4$4.5 million, telecom costsseverance of $1.2$2.3 million, medical expenses of $2.2 million and other miscellaneous expenses aggregating $1.9 million and the recording of$4.3 million. In addition, the Employee Retention Credit provided under the CARES Act and the Canada Emergency Wage Subsidy of $6.9was $6.0 million partially offset by increases in bad debt expense of $3.8 million and severance of $1.8 million.
less for the three months ended June 30, 2021, compared with the three months ended June 30, 2020.
GoodwillGoodwill 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 partsecond quarter of 2020 as compared to 2019,a $25.5 million non-cash goodwill impairment charge and the outlook for the business was significantly reduced. This analysis resulted in thea $4.3 million non-cash customer relationship impairment of the goodwill balance totaling $25.5 millioncharge were recorded in our ADESA Remarketing Limited reporting unit and a non-cash goodwill impairment charge was recorded(doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook 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.business to be significantly reduced.
AFC Results
| | | | | | | | | | | |
| Three Months Ended June 30, |
(Dollars in millions except volumes and per loan amounts) | 2021 | | 2020 |
Finance-related revenue | | | |
Interest and fee income | $ | 68.2 | | | $ | 65.1 | |
Other revenue | 2.2 | | | 2.0 | |
Provision for credit losses | (1.8) | | | (19.0) | |
Warranty contract revenue | — | | | 8.7 | |
Total AFC revenue | 68.6 | | | 56.8 | |
Cost of services* | 13.7 | | | 17.9 | |
Gross profit* | 54.9 | | | 38.9 | |
Selling, general and administrative | 8.8 | | | 8.6 | |
Depreciation and amortization | 2.5 | | | 3.2 | |
Operating profit | $ | 43.6 | | | $ | 27.1 | |
Loan transactions | 356,000 | | | 420,000 | |
Revenue per loan transaction, excluding Warranty contract revenue | $ | 193 | | | $ | 115 | |
|
| | | | | | | |
| Three Months Ended June 30, |
(Dollars in millions except volumes and per loan amounts) | 2020 | | 2019 |
Finance-related revenue | | | |
Interest and fee income | $ | 65.1 |
| | $ | 83.7 |
|
Other revenue | 2.0 |
| | 2.6 |
|
Provision for credit losses | (19.0 | ) | | (8.4 | ) |
Warranty contract revenue | 8.7 |
| | 8.8 |
|
Total AFC revenue | 56.8 |
| | 86.7 |
|
Cost of services* | 17.9 |
| | 24.5 |
|
Gross profit* | 38.9 |
| | 62.2 |
|
Selling, general and administrative | 5.6 |
| | 6.4 |
|
Depreciation and amortization | 2.6 |
| | 2.6 |
|
Operating profit | $ | 30.7 |
| | $ | 53.2 |
|
Loan transactions | 420,000 |
| | 437,000 |
|
Revenue per loan transaction, excluding "Warranty contract revenue" | $ | 115 |
| | $ | 178 |
|
* Exclusive of depreciation and amortization
Revenue
For the three months ended June 30, 2020,2021, AFC revenue decreased $29.9increased $11.8 million, or 34%21%, to $56.8$68.6 million, compared with $86.7$56.8 million for the three months ended June 30, 2019.2020. The decreaseincrease in revenue was primarily the result of a 35% decrease68% increase in
revenue per loan transaction, andlargely as a 4%result of a decrease in the provision for credit losses, partially offset by a 15% decrease in loan transactions.transactions and the elimination of Warranty contract revenue as a result of the sale of PWI in December 2020.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased $63,increased $78, or 35%68%, primarily as a result of an increasea decrease in provision for credit losses for the three months ended June 30, 2020, as well as decreases2021, an increase in interest yieldyields and floorplan fee income,an increase in loan values, partially offset by an increasea decrease in average portfolio duration. Revenue per loan transaction excludes "WarrantyWarranty contract revenue."revenue in 2020.
The provision for credit losses increaseddecreased to 4.3%0.4% of the average managed receivables for the three months ended June 30, 20202021 from 1.7%4.3% for the three months ended June 30, 2019.2020.
Gross Profit
For the three months ended June 30, 2020,2021, gross profit for the AFC segment decreased $23.3increased $16.0 million, or 41%, to $54.9 million, or 80.0% of revenue, compared with $38.9 million, or 68.5% of revenue, compared with $62.2 million, or 71.7% of revenue, for the three months ended June 30, 2019.2020. Excluding PWI for the three months ended June 30, 2020, AFC's gross profit as a percent of revenue was 74.3%. The decreaseincrease in gross profit as a percent of revenue was primarily the result of a 34% decrease21% increase in revenue and a 27%an 23% decrease in cost of services. The decrease in cost of services was primarily the result of decreasesa decrease in compensation expense of $3.1 million, PWI expenses of $1.7$5.5 million, partially offset by increases in incentive-based compensation of $0.6 million, collection expenses of $0.5 million and other miscellaneous expenses aggregating $1.2$0.2 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $0.8increased $0.2 million, or 13%2%, to $5.6$8.8 million for the three months ended June 30, 2021, compared with $8.6 million for the three months ended June 30, 2020 compared with $6.4 million for the three months ended June 30, 2019, primarily as a result of decreasesincreases in incentive-based compensation travel expenses, promotion expensesof $0.6 million and other miscellaneous expenses totaling $1.3aggregating $0.7 million, partially offset by an increasedecreases in compensation-relatedPWI expenses of $0.6 million and compensation expense of $0.5 million.
Holding Company Results
|
| | | | | | | |
| Three Months Ended June 30, |
(Dollars in millions) | 2020 | | 2019 |
Selling, general and administrative | $ | 27.2 |
| | $ | 34.9 |
|
Depreciation and amortization | 5.7 |
| | 7.3 |
|
Operating loss | $ | (32.9 | ) | | $ | (42.2 | ) |
Selling, General and Administrative
For the three months ended June 30, 2020, selling, general and administrative expenses at the holding company decreased $7.7 million, or 22%, to $27.2 million, compared with $34.9 million for the three months ended June 30, 2019, primarily as a result of decreases in compensation expense of $3.3 million, professional fees of $2.8 million, stock-based compensation expense of $0.7 million, travel expenses of $0.7 million, incentive-based compensation of $0.5 million, telecom costs of $0.5 million and other employee related expenses of $0.5 million, partially offset by increases in information technology costs of $1.3 million.
Overview of Results of KAR Auction Services, Inc. for the Six Months Ended June 30, 20202021 and 2019:2020:
| | | | | | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions except per share amounts) | 2021 | | 2020 |
Revenues | | | |
Auction fees | $ | 472.2 | | | $ | 433.1 | |
Service revenue | 369.8 | | | 371.0 | |
Purchased vehicle sales | 190.6 | | | 125.1 | |
Finance-related revenue | 134.4 | | | 135.3 | |
Total revenues | 1,167.0 | | | 1,064.5 | |
Cost of services* | 663.6 | | | 629.7 | |
Gross profit* | 503.4 | | | 434.8 | |
Selling, general and administrative | 289.2 | | | 274.7 | |
Depreciation and amortization | 92.4 | | | 94.2 | |
Goodwill and other intangibles impairment | — | | | 29.8 | |
Operating profit | 121.8 | | | 36.1 | |
Interest expense | 62.1 | | | 68.9 | |
Other (income) expense, net | (35.4) | | | (0.7) | |
Income (loss) before income taxes | 95.1 | | | (32.1) | |
Income taxes | 32.7 | | | (2.6) | |
Net income (loss) | $ | 62.4 | | | $ | (29.5) | |
Net income (loss) per share | | | |
Basic | $ | 0.27 | | | $ | (0.24) | |
Diluted | $ | 0.26 | | | $ | (0.24) | |
|
| | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions except per share amounts) | 2020 | | 2019 |
Revenues | | | |
Auction fees and services revenue | $ | 804.1 |
| | $ | 1,095.0 |
|
Purchased vehicle sales | 125.1 |
| | 137.1 |
|
Finance-related revenue | 135.3 |
| | 176.6 |
|
Total revenues | 1,064.5 |
| | 1,408.7 |
|
Cost of services* | 629.7 |
| | 811.3 |
|
Gross profit* | 434.8 |
| | 597.4 |
|
Selling, general and administrative | 274.7 |
| | 338.4 |
|
Depreciation and amortization | 94.2 |
| | 92.2 |
|
Goodwill and other intangibles impairment | 29.8 |
| | — |
|
Operating profit | 36.1 |
| | 166.8 |
|
Interest expense | 68.9 |
| | 112.1 |
|
Other income, net | (0.7 | ) | | (3.2 | ) |
Income (loss) from continuing operations before income taxes | (32.1 | ) | | 57.9 |
|
Income taxes | (2.6 | ) | | 15.2 |
|
Net income (loss) from continuing operations | (29.5 | ) | | 42.7 |
|
Net income from discontinued operations | — |
| | 90.7 |
|
Net income (loss) | $ | (29.5 | ) | | $ | 133.4 |
|
Net income (loss) from continuing operations per share | | | |
Basic | $ | (0.24 | ) | | $ | 0.32 |
|
Diluted | $ | (0.24 | ) | | $ | 0.32 |
|
* Exclusive of depreciation and amortization
Overview
For the six months ended June 30, 2020,2021, we had revenue of $1,064.5$1,167.0 million compared with revenue of $1,408.7$1,064.5 million for the six months ended June 30, 2019, a decrease2020, an increase of 24%10%. Businesses acquired in the last twelve months accounted for an increase in revenue of $18.3$64.9 million or 2%6% 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 $2.0decreased $1.8 million, or 2%, to $92.4 million for the six months ended June 30, 2021, compared with $94.2 million for the six months ended June 30, 2020, compared with $92.2 million for the six months ended June 30, 2019.2020. The increasedecrease in depreciation and amortization was primarily the result of certainfixed assets that have become fully depreciated and a reduction in assets placed in service over the last twelve months and depreciation and amortization for the assets of businesses acquired in 2019.service.
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 partsecond quarter of 2020 as compared to 2019,a $25.5 million non-cash goodwill impairment charge and the outlook for the business was significantly reduced. This analysis resulted in thea $4.3 million non-cash customer relationship impairment of the goodwill balance totaling $25.5 millioncharge were recorded in our ADESA Remarketing Limited reporting unit and a non-cash goodwill impairment charge was recorded(doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook 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.business to be significantly reduced.
Interest Expense
Interest expense decreased $43.2$6.8 million, or 39%10%, to $62.1 million for the six months ended June 30, 2021, compared with $68.9 million for the six months ended June 30, 2020, compared with $112.1 million for the six months ended June 30, 2019.2020. The decrease was primarily attributable to a decrease in interest expense at AFC of $4.1 million, which resulted from a decrease in incremental interest rates for the six months ended June 30, 2021, as compared with the six months ended June 30, 2020. In addition, there was a slight decrease in the weighted average interest rate of approximately 0.9%on corporate debt and a decrease of $880.5$8.8 million in the average outstanding balance of corporate debt for the six months ended June 30, 20202021, compared with the six months ended June 30, 2019, resulting from2020.
Other (Income) Expense, Net
The Company invests in certain early-stage automotive companies and funds that relate to 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 $10.5 million, whichautomotive industry. We believe these investments have resulted from a decrease in the average finance receivables balance andexpansion of relationships in incremental interest ratesthe vehicle remarketing industry. Realized gains on these investments were $17.2 million for the six months ended June 30, 2020,2021. The Company had unrealized gains of $31.6 million at June 30, 2021, as compared witha result of a recent public offering for one of these investment securities. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.
For the six months ended June 30, 2019.2021, we had other income of $35.4 million compared with $0.7 million for the six months ended June 30, 2020. The increase in other income was primarily attributable to an increase in realized and unrealized gains on investment securities of approximately $48.8 million, a decrease in foreign currency losses of $0.5 million and an increase in other miscellaneous items aggregating $1.1 million, partially offset by an increase in contingent consideration valuation of $15.7 million.
Income Taxes
We had an effective tax rate of 34.4% for the six months ended June 30, 2021, compared with an effective tax rate of 8.1% for the six months ended June 30, 2020, compared with an2020. The effective tax rate of 26.3% for the six months ended June 30, 2019.2021 was unfavorably impacted by the expense for the increase in the estimated value of contingent consideration for which no tax benefits have been recorded. The rate for the six months ended June 30, 2020 rate was unfavorably impacted by the goodwill and other intangibles impairment charge for which no tax benefit has beenwas recorded. This was partially offset by the tax benefit from recording net operating losses and deductions related to stock-based compensation expenses.
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 six months ended June 30, 2020 and 2019, the Company's financial statements included income from discontinued operations of $0.0 million and $90.7 million, respectively. For a further discussion, reference Note 2 of the condensed notes to the consolidated financial statements.
Impact of Foreign Currency
For the six months ended June 30, 2020,2021, fluctuations in the Canadian exchange rate decreasedincreased revenue by $1.5$12.6 million, operating profit by $0.3 million, net income (loss) by $0.1$4.3 million and net income (loss) per diluted share by less than $0.01.$1.9 million. For the six months ended June 30, 2020,2021, fluctuations in the European exchange rate decreasedincreased revenue by $1.6$11.3 million, operating profit by $0.5 million and had no impact on operating profit,decreased net income (loss) and net income (loss) per diluted share. In addition, for the six months ended June 30, 2020, as a resultby $0.5 million.
ADESA Results
| | | | | | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions, except per vehicle amounts) | 2021 | | 2020 |
Auction fees | $ | 472.2 | | | $ | 433.1 | |
Service revenue | 369.8 | | | 371.0 | |
Purchased vehicle sales | 190.6 | | | 125.1 | |
Total ADESA revenue | 1,032.6 | | | 929.2 | |
Cost of services* | 636.4 | | | 587.9 | |
Gross profit* | 396.2 | | | 341.3 | |
Selling, general and administrative | 271.6 | | | 256.1 | |
Depreciation and amortization | 87.5 | | | 87.7 | |
Goodwill and other intangibles impairment | — | | | 29.8 | |
Operating profit (loss) | $ | 37.1 | | | $ | (32.3) | |
On-premise vehicles sold | 681,000 | | | 780,000 | |
Off-premise vehicles sold | 783,000 | | | 730,000 | |
Total vehicles sold | 1,464,000 | | | 1,510,000 | |
Auction fees per vehicle sold | $ | 323 | | | $ | 287 | |
Gross profit per vehicle sold* | $ | 271 | | | $ | 226 | |
Gross profit percentage, excluding purchased vehicles* | 47.1% | | 42.4% |
Dealer consignment mix | 37% | | 24% |
Commercial mix | 63% | | 76% |
|
| | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions, except per vehicle amounts) | 2020 | | 2019 |
Auction fees and services revenue | $ | 804.1 |
| | $ | 1,095.0 |
|
Purchased vehicle sales | 125.1 |
| | 137.1 |
|
Total ADESA revenue | 929.2 |
| | 1,232.1 |
|
Cost of services* | 587.9 |
| | 763.6 |
|
Gross profit* | 341.3 |
| | 468.5 |
|
Selling, general and administrative | 202.3 |
| | 248.5 |
|
Depreciation and amortization | 77.3 |
| | 73.0 |
|
Goodwill and other intangibles impairment | 29.8 |
| | — |
|
Operating profit | $ | 31.9 |
| | $ | 147.0 |
|
Vehicles sold | 1,510,000 |
| | 1,940,000 |
|
Institutional vehicles sold in North America | 1,124,000 |
| | 1,382,000 |
|
Dealer consignment vehicles sold in North America | 343,000 |
| | 510,000 |
|
Vehicles sold in Europe | 43,000 |
| | 48,000 |
|
Percentage of vehicles sold online | 78 | % | | 58 | % |
Conversion rate at North American physical auctions | 63.4 | % | | 64.9 | % |
Physical auction revenue per vehicle sold, excluding purchased vehicles | $ | 884 |
| | $ | 879 |
|
Online only revenue per vehicle sold, excluding purchased vehicles | $ | 158 |
| | $ | 148 |
|
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA decreased $302.9increased $103.4 million, or 25%11%, to $1,032.6 million for the six months ended June 30, 2021, compared with $929.2 million for the six months ended June 30, 2020, compared with $1,232.1 million for the six months ended June 30, 2019.2020. The decreaseincrease in revenue was the result of an increase in average revenue per vehicle sold, partially offset by a decrease in the number of vehicles sold and a decrease in average revenue per vehicle sold. Businesses acquired in the last 12twelve months accounted for an increase in revenue of $18.3 million, of which approximately $12.7 million was included in "Purchased vehicle sales."$64.9 million. The decreasechange in revenue included the impact of decreasesan increase in revenue of $1.6$11.7 million due to fluctuations in the Canadian exchange rate and an increase of $11.3 million due to fluctuations in the European exchange raterate.
On-premise marketplace sales are initiated online for vehicles at any of our locations across North America and $1.4 million due to fluctuationsinclude Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and include Openlane, TradeRev, BacklotCars and ADESA Europe sales. The 3% decrease in the Canadian exchange rate.
The decrease innumber of vehicles sold was primarily attributable tocomprised of a 19%13% decrease in institutional volume, includingon-premise vehicles sold on our online only platform, as well asand a 31% decrease7% increase in dealer consignment units soldoff-premise vehicles sold. In addition, the Company has experienced a decline in both on-premise and off-premise commercial volumes aggregating 19% for the six months ended June 30, 20202021 compared with the six months ended June 30, 2019. Online sales volume for ADESA represented approximately 78% of the total vehicles in the first six months of 2020, compared with approximately 58% in the first six months 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 61% of ADESA's North American online sales volume. ADESA sold approximately 688,000 (including approximately 68,000 from TradeRev) and 783,000 (including approximately 72,000 from TradeRev) vehicles through its North American online only offerings in the first six months of 2020 and 2019, respectively.2020. For the six months ended June 30, 2020, dealer consignment vehicles represented approximately 35% of used vehicles sold at ADESA physical auction locations, compared with approximately 39% for the six months ended June 30, 2019. The volume of vehicles sold at physical auction locations in the first six months of 2020 decreased approximately 30% compared with the first six months 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, decreased to 63.4% for the six months ended June 30, 2020, compared with 64.9% for the six months ended June 30, 2019.
Volumes sold for the six months ended June 30, 2020 were materially impacted by the COVID-19 related restrictions placed on businesses throughout the world. Beginning the week of March 16,2021, we experienced a significant decline in volumes, as customers began to cease operations in response to local, state and provincial directives. Throughout the second quarter, we heldconducted all sales in a Simulcast-only format to protect the health and well-being of our workforce and customers.through digital marketplaces. All vehicles were offered online, cars didwere not run acrossdriven through the blockauction lanes and we limited access to our physical locations to promote social distancing measures and help prevent the spread of COVID-19.
Physical auction revenueAuction fees per vehicle sold increased $5, or 1%, to $884 for the six months ended June 30, 2020, compared with $8792021 increased $36, or 13%, reflecting higher vehicle values and a changing mix of vehicles sold.
Service revenue for the six months ended June 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 $17 to $237 for the six months ended June 30, 2020, compared with $220 for the six months ended June 30, 2019. The increase in online only auction revenue per vehicle sold was attributable to an increase in TradeRev revenue. In addition, the entire selling price2021 decreased $1.2 million, or less than 1%, primarily as a result of the purchaseddecrease in vehicles soldsold. Typically consigned vehicles located at auction is recorded as revenue ("Purchased vehicle sales"). Excluding purchased vehicle sales, online only revenue per vehicle would have been $158 and $148 for the six months ended June 30, 2020 and 2019, respectively. The $10 increase in online only revenue per vehicle, excluding purchased vehicles was attributable to increased revenue per vehicle for units sold on the TradeRev platform.our facilities utilize our service offerings at a higher rate than off-premise vehicles.
Gross Profit
For the six months ended June 30, 2020,2021, gross profit for ADESA decreased $127.2increased $54.9 million, or 27%16%, to $341.3$396.2 million, compared with $468.5$341.3 million for the six months ended June 30, 2019.2020. Gross profit for ADESA was 38.4% of revenue for the six months
ended June 30, 2021, compared with 36.7% of revenue for the six months ended June 30, 2020, compared with 38.0%2020. Gross profit as a percentage of revenue increased for the six months ended June 30, 2019. Gross profit as a percentage of revenue decreased for the six months ended June 30, 20202021 as compared with the six months ended June 30, 20192020, 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 labor. In the first six months of 2021 we also recorded a benefit of $3.7 million taken under the Canada Emergency Wage Subsidy as compared with an aggregate of $10.1 million taken under the CARES Act and the Canada Emergency Wage Subsidy in the first six months of 2020. On March 20, 2020 our on-premise auctions were shut down in response to the COVID-19 pandemic. While revenue decreased during the closure, cost of services remained consistent, as all non-essential auction employees were paid during the closure. In addition, our gross profit as a resultpercentage of revenue is impacted by purchased vehicles. Excluding purchased vehicle sales.sales, gross profit as a percentage of revenue was 47.1% and 42.4% for the six months ended June 30, 2021 and 2020, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehiclevehicles sold. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 42.4% and 42.7% for the six months ended June 30, 2020 and 2019, respectively. The remaining decrease in gross profit as a percentage of revenue relates to the shut down of the physical auctions on March 20, 2020 in response to the COVID-19 pandemic. Businesses acquired in the last 12 months accounted for an increase in cost of services of $15.6$37.2 million for the six months ended June 30, 2020.2021.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment decreased $46.2increased $15.5 million, or 19%6%, to $202.3$271.6 million for the six months ended June 30, 2021, compared with $256.1 million for the six months ended June 30, 2020, compared with $248.5 million for the six months ended June 30, 2019, primarily due to increases in selling, general and administrative expenses associated with acquisitions of $45.6 million, incentive-based compensation of $14.5 million, fluctuations in the Canadian exchange rate of $3.0 million and stock-based compensation of $2.0 million, partially offset by decreases in compensation expense of $15.8$21.0 million, incentive-based compensationbad debt expense of $11.8$6.3 million, severance of $4.0 million, medical expenses of $3.9 million, marketing costs of $8.4$3.7 million, telecom expenses of $2.7 million, travel expenses of $4.7 million, supplies expense of $2.3$2.5 million, professional fees of $2.1$2.4 million and other miscellaneous expenses aggregating $2.0 million and the recording of$7.9 million. In addition, the Employee Retention Credit provided under the CARES Act and the Canada Emergency Wage Subsidy of $6.9was $4.8 million partially offset by increases in bad debt expense of $3.9 million, information technology costs of $2.0 million and costs associatedless for the six months ended June 30, 2021, compared with acquisitions of $1.9 million.the six months ended June 30, 2020.
GoodwillGoodwill 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 partsecond quarter of 2020 as compared to 2019,a $25.5 million non-cash goodwill impairment charge and the outlook for the business was significantly reduced. This analysis resulted in thea $4.3 million non-cash customer relationship impairment of the goodwill balance totaling $25.5 millioncharge were recorded in our ADESA Remarketing Limited reporting unit and a non-cash goodwill impairment charge was recorded(doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook 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.
business to be significantly reduced.
AFC Results
| | | | | | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions except volumes and per loan amounts) | 2021 | | 2020 |
Finance-related revenue | | | |
Interest and fee income | $ | 136.8 | | | $ | 148.9 | |
Other revenue | 4.2 | | | 4.7 | |
Provision for credit losses | (6.6) | | | (35.9) | |
Warranty contract revenue | — | | | 17.6 | |
Total AFC revenue | 134.4 | | | 135.3 | |
Cost of services* | 27.2 | | | 41.8 | |
Gross profit* | 107.2 | | | 93.5 | |
Selling, general and administrative | 17.6 | | | 18.6 | |
Depreciation and amortization | 4.9 | | | 6.5 | |
Operating profit | $ | 84.7 | | | $ | 68.4 | |
Loan transactions | 728,000 | | | 868,000 | |
Revenue per loan transaction, excluding Warranty contract revenue | $ | 185 | | | $ | 136 | |
|
| | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions except volumes and per loan amounts) | 2020 | | 2019 |
Finance-related revenue | | | |
Interest and fee income | $ | 148.9 |
| | $ | 170.6 |
|
Other revenue | 4.7 |
| | 5.4 |
|
Provision for credit losses | (35.9 | ) | | (16.6 | ) |
Warranty contract revenue | 17.6 |
| | 17.2 |
|
Total AFC revenue | 135.3 |
| | 176.6 |
|
Cost of services* | 41.8 |
| | 47.7 |
|
Gross profit* | 93.5 |
| | 128.9 |
|
Selling, general and administrative | 12.1 |
| | 13.6 |
|
Depreciation and amortization | 5.3 |
| | 5.0 |
|
Operating profit | $ | 76.1 |
| | $ | 110.3 |
|
Loan transactions | 868,000 |
| | 898,000 |
|
Revenue per loan transaction, excluding "Warranty contract revenue" | $ | 136 |
| | $ | 177 |
|
* Exclusive of depreciation and amortization
Revenue
For the six months ended June 30, 2020,2021, AFC revenue decreased $41.3$0.9 million, or 23%1%, to $135.3$134.4 million, compared with $176.6$135.3 million for the six months ended June 30, 2019.2020. The decrease in revenue was primarily the result of a 23%16% decrease in loan
transactions and the elimination of Warranty contract revenue as a result of the sale of PWI in December 2020, partially offset by a 36% increase in revenue per loan transaction, andlargely as a 3%result of a decrease in loan transactions.the provision for credit losses.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased $41,increased $49, or 23%36%, primarily as a result of an increasea decrease in provision for credit losses for the six months ended June 30, 2020, as well as decreases2021 and an increase in interest yield and floorplan fee income,loan values, partially offset by an increasea decrease in average portfolio duration. Revenue per loan transaction excludes "WarrantyWarranty contract revenue."revenue in 2020.
The provision for credit losses increaseddecreased to 3.8%0.7% of the average managed receivables for the six months ended June 30, 20202021 from 1.6%3.8% for the six months ended June 30, 2019.2020.
Gross Profit
For the six months ended June 30, 2020,2021, gross profit for the AFC segment decreased $35.4increased $13.7 million, or 15%, to $107.2 million, or 79.8% of revenue, compared with $93.5 million, or 69.1% of revenue, compared with $128.9 million, or 73.0% of revenue, for the six months ended June 30, 2019.2020. Excluding PWI for the six months ended June 30, 2020, AFC's gross profit as a percent of revenue was 75.0%. The decreaseincrease in gross profit as a percent of revenue was primarily the result of a 23% decrease in revenue and a 12%35% decrease in cost of services. The decrease in cost of services was primarily the result of decreases in PWI expenses of $12.4 million, compensation expense of $2.6$2.5 million PWIand lot check expenses of $1.5$1.0 million, partially offset by increases in incentive-based compensation of $0.9$1.0 million and other miscellaneous expenses aggregating $0.9$0.3 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $1.5$1.0 million, or 11%5%, to $12.1$17.6 million for the six months ended June 30, 2021, compared with $18.6 million for the six months ended June 30, 2020 compared with $13.6 million for the six months ended June 30, 2019, primarily as a result of decreases in incentive-based compensation of $0.9 million, travelPWI expenses of $0.4$1.4 million, compensation expense of $0.8 million and other miscellaneous expenses aggregating $0.7$0.3 million, partially offset by an increase in compensation-related expense of $0.5 million.
Holding Company Results
|
| | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions) | 2020 | | 2019 |
Selling, general and administrative | $ | 60.3 |
| | $ | 76.3 |
|
Depreciation and amortization | 11.6 |
| | 14.2 |
|
Operating loss | $ | (71.9 | ) | | $ | (90.5 | ) |
Selling, General and Administrative
For the six months ended June 30, 2020, selling, general and administrative expenses at the holding company decreased $16.0 million, or 21%, to $60.3 million, compared with $76.3 million for the six months ended June 30, 2019, primarily as a result of decreases in professional fees of $5.3 million, compensation expense of $4.8 million, incentive-based compensation of $4.1 million, stock-based compensation expense of $1.6 million, travel expenses of $1.0 million and other miscellaneous expenses of $2.6 million, partially offset by increases in information technology costs of $2.4 million and medical expenses of $1.0$1.5 million.
LIQUIDITY AND CAPITAL RESOURCES
We believe that the significant indicators of liquidity for our business are cash on hand, cash flow from operations, working capital and amounts available under our Credit Facility. Our principal sources of liquidity consist of cash generated by operations and borrowings under our Revolving Credit Facility.
| | | | | | | | | | | | | | | | | |
| June 30, | | December 31, | | June 30, |
(Dollars in millions) | 2021 | | 2020 | | 2020 |
Cash and cash equivalents | $ | 621.6 | | | $ | 752.1 | | | $ | 968.5 | |
Restricted cash | 53.8 | | | 60.2 | | | 50.0 | |
Working capital | 731.3 | | | 924.6 | | | 1,241.8 | |
Amounts available under the Revolving Credit Facility* | 325.0 | | | 325.0 | | | 325.0 | |
Cash flow from operations for the six months ended | 295.7 | | | | | 268.9 | |
|
| | | | | | | | | | | |
(Dollars in millions) | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Cash and cash equivalents* | $ | 968.5 |
| | $ | 507.6 |
| | $ | 233.0 |
|
Restricted cash | 50.0 |
| | 53.3 |
| | 23.7 |
|
Working capital | 1,241.8 |
| | 726.8 |
| | 380.5 |
|
Amounts available under the Revolving Credit Facility** | 325.0 |
| | 325.0 |
| | 278.0 |
|
Cash flow from operations for the six months ended | 268.9 |
| | | | 161.7 |
|
* There were related outstanding letters of credit totaling approximately $29.7 million, $28.5 million and $25.0 million at June 30, 2021, December 31, 2020 and June 30, 2020 respectively, which reduced the amount available for borrowings under the Revolving Credit Facility. | |
* | Cash and cash equivalents at June 30, 2020 included approximately $528.2 million in net proceeds from newly issued perpetual convertible preferred stock of the Company. |
| |
** | There were related outstanding letters of credit totaling approximately $25.0 million, $27.4 million and $32.5 million at June 30, 2020, December 31, 2019 and June 30, 2019, respectively, which reduced the amount available for borrowings under the revolving credit facility. |
We regularly evaluate alternatives for our capital structure and liquidity given our expected cash flows, growth and operating capital requirements as well as capital market conditions. The COVID-19 pandemic has had, and is having a significantcontinuing to have, an adverse impact on our business. As a result, during 2020 we have implemented several measures that we believe will enhance liquidity for the foreseeable future. Some of these measures include, but are not limited to, the following:
Reduced compensation expense by
| |
▪ | our CEO, CFO and President voluntarily electing to forgo 100% of their respective base salaries and the remainder of our executive officers voluntarily electing to reduce their base salaries by 50% for the second quarter of 2020, |
| |
▪ | reducing base salaries across many levels of the organization for part of the second quarter of 2020, |
| |
▪ | furloughing approximately 11,000 employees in April 2020 (approximately 5,000 have returned to work), |
| |
▪ | commencing a reduction in force in June 2020 (impacting approximately 3,000 of our employees), and |
| |
▪ | our board of directors voluntarily electing to forgo their cash compensation for the second quarter of 2020; |
Prohibitedincluded furloughs, prohibiting non-essential business travel;
Suspendedtravel, suspending non-essential services provided by certain third parties at our locations;
Delayedlocations, delaying or canceledcanceling capital projects at our physical auction locations;
Negotiated the deferral of rent payments with certain landlords;
Suspended the ADESA Assurance program for part of the second quarter;
AFC reduced the unused portion of certain floorplan lines with its customers;on-premise marketplace locations and
Suspended 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 9, "Convertible Preferred Stock."
We have also takentook advantage of legislation introduced to assist companies during this time.the pandemic. In the second quarterfirst six months of 2020,2021, we recorded a total of approximately $7.9$5.8 million of employee retention credits taken under the CARES Act and approximately $9.7 millionclaimed 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. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued disruption could materially affect our liquidity.
Working Capital
A substantial amount of our working capital is generated from the payments received for services provided. The majority of our working capital needs are short-term in nature, usually less than a week in duration. Due to the decentralized nature of the business, payments for most vehicles purchased are received at each auction and branch. Most of the financial institutions place a temporary hold on the availability of the funds deposited that generally can range up to two business days, resulting in cash in our accounts and on our balance sheet that is unavailable for use until it is made available by the various financial institutions. There are outstanding checks (book overdrafts) to sellers and vendors included in current liabilities. Because a portion of these outstanding checks for operations in the U.S. are drawn upon bank accounts at financial institutions other than the financial institutions that hold the cash, we cannot offset all the cash and the outstanding checks on our balance sheet. Changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from auctions held near period-end.period end.
Approximately $108.7$233.1 million of available cash was held by our foreign subsidiaries at June 30, 2020.2021. If funds held by our foreign subsidiaries were to be repatriated, we expect any applicable taxes to be minimal.
AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 90 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. In response to the COVID-19 pandemic and the related economic downturn, AFC launched a Customer Relief Program in March 2020. Under the Customer Relief Program, eligible customers were able to choose to defer curtailment payments (principal, fees and interest) due through June 30, 2020, on eligible units. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
On May 29, 2020, we entered into the Fourth Amendment Agreement (the "Fourth Amendment") to the Credit Agreement. The Fourth Amendment (1) provides 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; (3) establishes a monthly minimum liquidity covenant of $225.0 million through and including September 30, 2021; and (4) effectively places 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, (i) the refinancing of the existing Term Loan B-4 and Term Loan B-5 with the newseven-year, $950 million Term Loan B-6 (ii) repayment of the 2017 Revolving Credit Facility and (iii) the $325 million, five-year Revolving Credit Facility.
The Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate
purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline loans.
Term Loan B-6 was issued at a discount of $2.4 million and the discount is being amortized using the effective interest method to interest expense over the term of the loan. Term Loan B-6 is payable in quarterly installments equal to 0.25% of the original aggregate principal amount, with the balance payable at the maturity date.
As set forth in the Credit Agreement, the TrancheTerm Loan B-6 Term Loans bearbears interest at an adjusted LIBOR rate plus 2.25% or at the Company’s election, Base Rate (as defined in the Credit Agreement) plus 1.25%. Loans under the Revolving CreditFacility will bear interest at a rate calculated based on the type of borrowing (either adjusted LIBOR or Base Rate) and the Company’s Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), with such rate ranging from 2.25% to 1.75% for adjusted LIBOR loans and from 1.25% to 0.75% for Base Rate loans. The Company also payspays a commitment fee between 25 to 35 basis points, payable quarterly, on the average daily unused amount of the Revolving Credit Facility based on the Company’s Consolidated Senior Secured Net Leverage Ratio, from time to time. The interest rate applicable to Term Loan B-6 was 2.50%2.38% at June 30, 2020.2021.
OnJune 30, 2020, $942.92021, $933.4 million was outstanding on Term LoanB-6 and there were no borrowings outstanding on the Revolving Credit Facility. In addition, weWe had related outstanding letters of credit in the aggregate amountof $29.7 million of $25.0 millionand and $27.4$28.5 million at June 30, 20202021 and December 31, 2019,2020, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility. Our Canadian operations also haveEuropean a C$8 million line of credit which was undrawn at June 30, 2020. There were no related letters of credit outstanding on the Canadian line of credit at June 30, 2020. In addition, our European operations havelines of credit aggregating $33.7$35.6 million (€30 million) of which $17.4$13.2 million was drawn at June 30, 2020.2021.
The obligations of the Company under the Credit Facility are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority perfected security interests in 100% of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and 65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) perfected first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions.
Certain covenants contained within the Credit Agreement are critical to an investor’s understanding of our financial liquidity, as the failure to maintain compliance with these covenants could result in a default and allow ourthe lenders under the Credit Agreement to declare all amounts borrowed immediately due and payable. The Credit Agreement contains a financial covenant requiring thatcompliance with a Consolidated Senior Secured Net Leverage Ratio be satisfiednot to exceed 3.5 as of the last day of each fiscal quarter if revolving loans are outstanding, except during the period from May 29, 2020 through and including June 30, 2021, compliance with the financial covenant is not required.outstanding. The Consolidated Senior Secured Net Leverage Ratio is calculated as consolidated total consolidated debt (net of unrestricted cash)(as defined in the Credit Agreement) divided by the last four quarters consolidated Adjusted EBITDA, except that for purposes of determining compliance with the financial covenant for the fiscal quarters ending September 30, 2021 and December 31, 2021, theEBITDA. Consolidated EBITDA for the applicable test period is permitted to be calculated on an annualized basis pursuant to the Fourth Amendment. Total consolidatedtotal debt includes term loan borrowings, revolving loans, finance lease liabilities and financeother obligations for borrowed money
lease liabilities less availableunrestricted cash as defined in the Credit Agreement. Consolidated Adjusted EBITDA is EBITDA (earnings before interest expense, income taxes, depreciation and amortization) adjusted to exclude among other things (a) gains and losses from asset sales; (b) unrealized foreign currency translation gains and losses in respect of indebtedness; (c) certain non-recurring gains and losses; (d) stock-based compensation expense; (e) certain other non-cash amounts included in the determination of net income; (f) charges and revenue reductions resulting from purchase accounting; (g) minority interest; (h) consulting expenses incurred for cost reduction, operating restructuring and business improvement efforts; (i) expenses realized upon the termination of employees and the termination or cancellation of leases, software licenses or other contracts in connection with the operational restructuring and business improvement efforts; (j) expenses incurred in connection with permitted acquisitions; (k) any impairment charges or write-offs of intangibles; and (l) any extraordinary, unusual or non-recurring charges, expenses or losses. Our Consolidated Senior Secured Net Leverage Ratio was 0.8 at June 30, 2021.
In addition, the Credit Agreement and the indenture governing our senior notes (see Note 7, “Long-Term Debt”6, "Long-Term Debt" for additional information) contain certain limitations on our ability to pay dividends and other distributions, make certain acquisitions or investments, grant liens and sell assets, and the Credit Agreement contains certain limitations on our ability to incur indebtedness. The applicable covenants in the Credit Agreement affect our operating flexibility by, among other things, restricting our ability to incur expenses and indebtedness that could be used to grow the business, as well as to fund general corporate purposes. During the period from May 29, 2020 through and until October 1, 2021 (the “limited waiver period”), pursuant to the Fourth Amendment, certain additional limitations are placed on our ability to make certain investments, junior debt repayments, acquisitions and restricted payments and to incur additional secured indebtedness. The Fourth Amendment also established a monthly minimum liquidity covenant of $225.0 million during the limited waiver period. We werewere in compliance withwith the covenants in the Credit Agreement and the indenture governing our senior notes on at June 30, 2020.2021.
We believe our sources of liquidity from our cash and cash equivalents on hand, working capital, cash provided by operating activities, and availability under our Credit Facility are sufficient to meet our operating needs for the foreseeable future. In addition, we believe the previously mentioned sources of liquidity will be sufficient to fund our capital requirements and debt service payments for the foreseeable future. A lack of recovery in market conditions, or further deterioration in market conditions, could materially affect the Company's liquidity.
Senior Notes
On May 31, 2017, we issued $950 million of 5.125% senior notes due June 1, 2025. The Company pays interest on the senior notes semi-annually in arrears on June 1 and December 1 of each year, which commenced on December 1, 2017. We may redeem the senior notes, in whole or in part, at any time prior to June 1, 2020 at a redemption price equal to 100% of the principal amount plus a make-whole premium and thereafter at a premium that declines ratably to par in 2023. The senior notes are guaranteed by the Subsidiary Guarantors.
Securitization Facilities
AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to AFC Funding Corporation. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires on January 28, 2022.31, 2024. AFC Funding Corporation had committed liquidity of $1.70$1.60 billion for U.S. finance receivables at June 30, 2020.2021.
We also have an agreement for the securitization of AFCI's receivables, which expires on January 28, 2022.31, 2024. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$175 million at June 30, 2020.2021. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
AFC managed total finance receivablesreceivables of $1,548.3$2,108.9 million and $1,911.0 million at June 30, 2021 and December 31, 2020, respectively. AFC's allowance for losses was $24.0 million anandd $2,115.2$22.0 million at June 30, 20202021 and December 31, 2019, respectively. AFC's allowance for losses wa2020s $22.0 million and $15.0 million atJune 30, 2020 and December 31, 2019,, respectively.
As of June 30, 20202021 and December 31, 2019, $1,475.42020, $2,058.3 million and $2,061.6$1,865.3 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 $735.9$1,324.2 million and $1,461.2$1,261.2 million of obligations collateralized by finance receivables atJune 30, 20202021 and December 31, 2019,2020, respectively. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. There were unamortized securitization issuance costs of approximately approximate$11.7ly $18.1 million and $13.2$21.6 million at June 30, 20202021 and December 31, 2019,2020, respectively. After the occurrence of a termination event, as defined in the U.S. securitization agreement, the banks may, and could, cause the stock of AFC Funding Corporation to be transferred to the bank facility, though as a practical matter the bank facility would look to the liquidation of the receivables under the transaction documents as their primary remedy.
Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At June 30, 2020,2021, we werewere in compliance with the covenants in the securitization agreements.
In response to the COVID-19 pandemic and the related economic downturn, AFC amended its U.S. and Canadian securitization agreements in March and May 2020, in order to provide temporary cash relief to its customers by launching a Customer Relief Program. Under this program, eligible customers were able to choose to defer curtailment payments (principal, fees and interest) due through June 30, 2020, on eligible units. These transactions were permitted as eligible loans under the amended securitization agreements. The May 2020 amendments were also made to reflect the modifications to the Credit Facility.
On April 30, 2020, AFC amended its U.S. and Canadian securitization agreements to modify certain definitions and to reduce the minimum net spread for April, May and June 2020. In addition, the one-month minimum payment rate test decreased for April, May and June 2020. On June 25, 2020, AFC amended its U.S. and Canadian securitization agreements to extend the modification of certain definitions through the end of September and to increase the minimum net spread for July, August, and September 2020 above the April amendment requirement, but below the original agreement. An Over Collateralization floor was also implemented, and the restriction on payments being made to AFC from AFC Funding Corporation was removed, thereby reducing AFC's restricted cash requirements.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA, as presented herein, are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States, or GAAP. They are not measurements of our financial performance under GAAP and should not be considered substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings, as described above in the discussion of certain restrictive loan covenants under "Credit Facilities."
Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) from continuing operations for the periods presented:
| | | Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2021 |
(Dollars in millions) | ADESA | | AFC | | Corporate | | Consolidated | (Dollars in millions) | ADESA | | AFC | | Consolidated |
Net income (loss) from continuing operations | $ | (4.4 | ) | | $ | 16.0 |
| | $ | (43.9 | ) | | $ | (32.3 | ) | |
Net income (loss) | | Net income (loss) | $ | (5.2) | | | $ | 16.7 | | | $ | 11.5 | |
Add back: | | | | | | | | Add back: | | |
Income taxes | 2.5 |
| | 5.6 |
| | (12.7 | ) | | (4.6 | ) | Income taxes | 3.4 | | | 5.7 | | | 9.1 | |
Interest expense, net of interest income | 0.6 |
| | 9.2 |
| | 20.8 |
| | 30.6 |
| Interest expense, net of interest income | 21.6 | | | 9.4 | | | 31.0 | |
Depreciation and amortization | 38.2 |
| | 2.6 |
| | 5.7 |
| | 46.5 |
| Depreciation and amortization | 42.9 | | | 2.5 | | | 45.4 | |
Intercompany interest | (1.5 | ) | | (0.1 | ) | | 1.6 |
| | — |
| Intercompany interest | 0.1 | | | (0.1) | | | — | |
EBITDA | 35.4 |
| | 33.3 |
| | (28.5 | ) | | 40.2 |
| EBITDA | 62.8 | | | 34.2 | | | 97.0 | |
Intercompany charges | 1.5 |
| | — |
| | (1.5 | ) | | — |
| |
Non-cash stock-based compensation | 1.2 |
| | 0.4 |
| | 1.3 |
| | 2.9 |
| Non-cash stock-based compensation | 4.3 | | | 0.6 | | | 4.9 | |
Acquisition related costs | 0.9 |
| | — |
| | — |
| | 0.9 |
| Acquisition related costs | 1.8 | | | — | | | 1.8 | |
Securitization interest | — |
| | (6.0 | ) | | — |
| | (6.0 | ) | Securitization interest | — | | | (6.8) | | | (6.8) | |
Loss on asset sales | 0.5 |
| | — |
| | — |
| | 0.5 |
| |
Severance | 5.6 |
| | 0.4 |
| | 0.5 |
| | 6.5 |
| Severance | 1.2 | | | — | | | 1.2 | |
Foreign currency (gains)/losses | (0.1 | ) | | — |
| | 2.8 |
| | 2.7 |
| Foreign currency (gains)/losses | 0.4 | | | — | | | 0.4 | |
Goodwill and other intangibles impairment | 29.8 |
| | — |
| | — |
| | 29.8 |
| |
Contingent consideration adjustment | | Contingent consideration adjustment | 4.5 | | | — | | | 4.5 | |
Reduction in unrealized gains on investment securities | | Reduction in unrealized gains on investment securities | — | | | 11.9 | | | 11.9 | |
Other | 2.3 |
| | — |
| | 0.2 |
| | 2.5 |
| Other | 1.5 | | | 0.1 | | | 1.6 | |
Total addbacks | 41.7 |
| | (5.2 | ) | | 3.3 |
| | 39.8 |
| |
Total addbacks/(deductions) | | Total addbacks/(deductions) | 13.7 | | | 5.8 | | | 19.5 | |
Adjusted EBITDA | $ | 77.1 |
| | $ | 28.1 |
| | $ | (25.2 | ) | | $ | 80.0 |
| Adjusted EBITDA | $ | 76.5 | | | $ | 40.0 | | | $ | 116.5 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 |
(Dollars in millions) | ADESA | | AFC | | Consolidated |
Net income (loss) | $ | (45.5) | | | $ | 13.2 | | | $ | (32.3) | |
Add back: | | | | | |
Income taxes | (9.5) | | | 4.9 | | | (4.6) | |
Interest expense, net of interest income | 21.4 | | | 9.2 | | | 30.6 | |
Depreciation and amortization | 43.3 | | | 3.2 | | | 46.5 | |
Intercompany interest | 0.2 | | | (0.2) | | | — | |
EBITDA | 9.9 | | | 30.3 | | | 40.2 | |
Non-cash stock-based compensation | 2.4 | | | 0.5 | | | 2.9 | |
Acquisition related costs | 0.9 | | | — | | | 0.9 | |
Securitization interest | — | | | (6.0) | | | (6.0) | |
Loss on asset sales | 0.5 | | | — | | | 0.5 | |
Severance | 6.0 | | | 0.5 | | | 6.5 | |
Foreign currency (gains)/losses | 2.7 | | | — | | | 2.7 | |
Goodwill and other intangibles impairment | 29.8 | | | — | | | 29.8 | |
Other | 2.5 | | | — | | | 2.5 | |
Total addbacks/(deductions) | 44.8 | | | (5.0) | | | 39.8 | |
Adjusted EBITDA | $ | 54.7 | | | $ | 25.3 | | | $ | 80.0 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
(Dollars in millions) | ADESA | | AFC | | Consolidated |
Net income (loss) | $ | (11.0) | | | $ | 73.4 | | | $ | 62.4 | |
Add back: | | | | | |
Income taxes | 7.5 | | | 25.2 | | | 32.7 | |
Interest expense, net of interest income | 43.0 | | | 18.7 | | | 61.7 | |
Depreciation and amortization | 87.5 | | | 4.9 | | | 92.4 | |
Intercompany interest | 0.2 | | | (0.2) | | | — | |
EBITDA | 127.2 | | | 122.0 | | | 249.2 | |
Non-cash stock-based compensation | 9.2 | | | 1.3 | | | 10.5 | |
Acquisition related costs | 3.3 | | | — | | | 3.3 | |
Securitization interest | — | | | (13.6) | | | (13.6) | |
(Gain)/Loss on asset sales | 1.0 | | | (0.8) | | | 0.2 | |
Severance | 1.7 | | | 0.2 | | | 1.9 | |
Foreign currency (gains)/losses | 2.6 | | | — | | | 2.6 | |
Contingent consideration adjustment | 15.7 | | | — | | | 15.7 | |
Unrealized gains on investment securities | — | | | (31.6) | | | (31.6) | |
Other | 1.7 | | | (0.2) | | | 1.5 | |
Total addbacks/(deductions) | 35.2 | | | (44.7) | | | (9.5) | |
Adjusted EBITDA | $ | 162.4 | | | $ | 77.3 | | | $ | 239.7 | |
| | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2020 |
(Dollars in millions) | ADESA | | AFC | | Corporate | | Consolidated | (Dollars in millions) | ADESA | | AFC | | Consolidated |
Net income (loss) from continuing operations | $ | 50.5 |
| | $ | 27.4 |
| | $ | (50.5 | ) | | $ | 27.4 |
| |
Net income (loss) | | Net income (loss) | $ | (64.1) | | | $ | 34.6 | | | $ | (29.5) | |
Add back: | | | | | | | | Add back: | | |
Income taxes | 21.8 |
| | 11.3 |
| | (24.4 | ) | | 8.7 |
| Income taxes | (14.7) | | | 12.1 | | | (2.6) | |
Interest expense, net of interest income | 0.6 |
| | 16.1 |
| | 38.3 |
| | 55.0 |
| Interest expense, net of interest income | 45.1 | | | 22.7 | | | 67.8 | |
Depreciation and amortization | 38.0 |
| | 2.6 |
| | 7.3 |
| | 47.9 |
| Depreciation and amortization | 87.7 | | | 6.5 | | | 94.2 | |
Intercompany interest | 4.0 |
| | (1.6 | ) | | (2.4 | ) | | — |
| Intercompany interest | 1.0 | | | (1.0) | | | — | |
EBITDA | 114.9 |
| | 55.8 |
| | (31.7 | ) | | 139.0 |
| EBITDA | 55.0 | | | 74.9 | | | 129.9 | |
Intercompany charges | 3.6 |
| | — |
| | (3.6 | ) | | — |
| |
Non-cash stock-based compensation | 1.6 |
| | 0.4 |
| | 2.0 |
| | 4.0 |
| Non-cash stock-based compensation | 7.0 | | | 1.2 | | | 8.2 | |
Acquisition related costs | 1.2 |
| | — |
| | 2.5 |
| | 3.7 |
| Acquisition related costs | 2.3 | | | — | | | 2.3 | |
Securitization interest | — |
| | (13.8 | ) | | — |
| | (13.8 | ) | Securitization interest | — | | | (17.4) | | | (17.4) | |
Loss on asset sales | 0.4 |
| | — |
| | — |
| | 0.4 |
| Loss on asset sales | 1.0 | | | — | | | 1.0 | |
Severance | 0.9 |
| | — |
| | 0.2 |
| | 1.1 |
| Severance | 7.8 | | | 0.5 | | | 8.3 | |
Foreign currency (gains)/losses | (0.5 | ) | | — |
| | 0.5 |
| | — |
| Foreign currency (gains)/losses | 3.1 | | | — | | | 3.1 | |
IAA allocated costs | — |
| | — |
| | 0.9 |
| | 0.9 |
| |
Goodwill and other intangibles impairment | | Goodwill and other intangibles impairment | 29.8 | | | — | | | 29.8 | |
Other | 0.5 |
| | 0.1 |
| | — |
| | 0.6 |
| Other | 3.3 | | | 0.1 | | | 3.4 | |
Total addbacks | 7.7 |
| | (13.3 | ) | | 2.5 |
| | (3.1 | ) | |
Total addbacks/(deductions) | | Total addbacks/(deductions) | 54.3 | | | (15.6) | | | 38.7 | |
Adjusted EBITDA | $ | 122.6 |
| | $ | 42.5 |
| | $ | (29.2 | ) | | $ | 135.9 |
| Adjusted EBITDA | $ | 109.3 | | | $ | 59.3 | | | $ | 168.6 | |
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
(Dollars in millions) | ADESA | | AFC | | Corporate | | Consolidated |
Net income (loss) from continuing operations | $ | 19.7 |
| | $ | 40.6 |
| | $ | (89.8 | ) | | $ | (29.5 | ) |
Add back: | | | | | | | |
Income taxes | 11.3 |
| | 13.7 |
| | (27.6 | ) | | (2.6 | ) |
Interest expense, net of interest income | 1.2 |
| | 22.7 |
| | 43.9 |
| | 67.8 |
|
Depreciation and amortization | 77.3 |
| | 5.3 |
| | 11.6 |
| | 94.2 |
|
Intercompany interest | (2.5 | ) | | (0.9 | ) | | 3.4 |
| | — |
|
EBITDA | 107.0 |
| | 81.4 |
| | (58.5 | ) | | 129.9 |
|
Intercompany charges | 3.2 |
| | — |
| | (3.2 | ) | | — |
|
Non-cash stock-based compensation | 3.3 |
| | 0.8 |
| | 4.1 |
| | 8.2 |
|
Acquisition related costs | 2.1 |
| | — |
| | 0.2 |
| | 2.3 |
|
Securitization interest | — |
| | (17.4 | ) | | — |
| | (17.4 | ) |
Loss on asset sales | 1.0 |
| | — |
| | — |
| | 1.0 |
|
Severance | 6.9 |
| | 0.4 |
| | 1.0 |
| | 8.3 |
|
Foreign currency (gains)/losses | 1.7 |
| | — |
| | 1.4 |
| | 3.1 |
|
Goodwill and other intangibles impairment | 29.8 |
| | — |
| | — |
| | 29.8 |
|
Other | 2.5 |
| | — |
| | 0.9 |
| | 3.4 |
|
Total addbacks | 50.5 |
| | (16.2 | ) | | 4.4 |
| | 38.7 |
|
Adjusted EBITDA | $ | 157.5 |
| | $ | 65.2 |
| | $ | (54.1 | ) | | $ | 168.6 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
(Dollars in millions) | ADESA | | AFC | | Corporate | | Consolidated |
Net income (loss) from continuing operations | $ | 92.9 |
| | $ | 57.9 |
| | $ | (108.1 | ) | | $ | 42.7 |
|
Add back: | | | | | | | |
Income taxes | 37.7 |
| | 22.1 |
| | (44.6 | ) | | 15.2 |
|
Interest expense, net of interest income | 1.0 |
| | 33.0 |
| | 76.9 |
| | 110.9 |
|
Depreciation and amortization | 73.0 |
| | 5.0 |
| | 14.2 |
| | 92.2 |
|
Intercompany interest | 11.1 |
| | (2.8 | ) | | (8.3 | ) | | — |
|
EBITDA | 215.7 |
| | 115.2 |
| | (69.9 | ) | | 261.0 |
|
Intercompany charges | 6.8 |
| | — |
| | (6.8 | ) | | — |
|
Non-cash stock-based compensation | 4.0 |
| | 0.9 |
| | 5.7 |
| | 10.6 |
|
Acquisition related costs | 2.8 |
| | — |
| | 4.8 |
| | 7.6 |
|
Securitization interest | — |
| | (28.6 | ) | | — |
| | (28.6 | ) |
Loss on asset sales | 0.9 |
| | — |
| | — |
| | 0.9 |
|
Severance | 3.6 |
| | — |
| | 1.2 |
| | 4.8 |
|
Foreign currency (gains)/losses | (1.1 | ) | | — |
| | 0.5 |
| | (0.6 | ) |
IAA allocated costs | — |
| | — |
| | 2.3 |
| | 2.3 |
|
Other | 0.7 |
| | 0.1 |
| | — |
| | 0.8 |
|
Total addbacks | 17.7 |
| | (27.6 | ) | | 7.7 |
| | (2.2 | ) |
Adjusted EBITDA | $ | 233.4 |
| | $ | 87.6 |
| | $ | (62.2 | ) | | $ | 258.8 |
|
Other than during the financial covenant "holiday" provided by the Fourth Amendment, certainCertain of our loan covenant calculations utilize financial results for the most recent four consecutive fiscal quarters. The following table reconciles EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Twelve Months Ended |
(Dollars in millions) | September 30, 2020 | | December 31, 2020 | | March 31, 2021 | | June 30, 2021 | | June 30, 2021 |
Net income (loss) | $ | 47.1 | | | $ | (17.1) | | | $ | 50.9 | | | $ | 11.5 | | | $ | 92.4 | |
Add back: | | | | | | | | | |
Income taxes | 10.9 | | | (3.4) | | | 23.6 | | | 9.1 | | | 40.2 | |
Interest expense, net of interest income | 29.2 | | | 30.3 | | | 30.7 | | | 31.0 | | | 121.2 | |
Depreciation and amortization | 46.5 | | | 50.6 | | | 47.0 | | | 45.4 | | | 189.5 | |
EBITDA | 133.7 | | | 60.4 | | | 152.2 | | | 97.0 | | | 443.3 | |
Non-cash stock-based compensation | 3.9 | | | 3.0 | | | 5.6 | | | 4.9 | | | 17.4 | |
Acquisition related costs | 2.4 | | | 4.1 | | | 1.5 | | | 1.8 | | | 9.8 | |
Securitization interest | (3.7) | | | (6.2) | | | (6.8) | | | (6.8) | | | (23.5) | |
Loss on asset sales | 0.1 | | | 0.2 | | | 0.2 | | | — | | | 0.5 | |
Severance | 2.3 | | | 0.9 | | | 0.7 | | | 1.2 | | | 5.1 | |
Foreign currency (gains)/losses | 0.1 | | | 1.7 | | | 2.2 | | | 0.4 | | | 4.4 | |
Contingent consideration adjustment | — | | | 4.7 | | | 11.2 | | | 4.5 | | | 20.4 | |
Change in unrealized gains on investment securities | — | | | — | | | (43.5) | | | 11.9 | | | (31.6) | |
Other | 0.4 | | | (1.3) | | | (0.1) | | | 1.6 | | | 0.6 | |
Total addbacks/(deductions) | 5.5 | | | 7.1 | | | (29.0) | | | 19.5 | | | 3.1 | |
Adjusted EBITDA | $ | 139.2 | | | $ | 67.5 | | | $ | 123.2 | | | $ | 116.5 | | | $ | 446.4 | |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Twelve Months Ended |
(Dollars in millions) | September 30, 2019 | | December 31, 2019 | | March 31, 2020 | | June 30, 2020 | | June 30, 2020 |
Net income (loss) | $ | 35.3 |
| | $ | 19.8 |
| | $ | 2.8 |
| | $ | (32.3 | ) | | $ | 25.6 |
|
Less: Income from discontinued operations | 0.9 |
| | 4.5 |
| | — |
| | — |
| | 5.4 |
|
Income (loss) from continuing operations | 34.4 |
| | 15.3 |
| | 2.8 |
| | (32.3 | ) | | 20.2 |
|
Add back: | | | | | | | | | |
Income taxes | 13.2 |
| | 9.3 |
| | 2.0 |
| | (4.6 | ) | | 19.9 |
|
Interest expense, net of interest income | 37.2 |
| | 38.3 |
| | 37.2 |
| | 30.6 |
| | 143.3 |
|
Depreciation and amortization | 46.4 |
| | 50.1 |
| | 47.7 |
| | 46.5 |
| | 190.7 |
|
EBITDA | 131.2 |
| | 113.0 |
| | 89.7 |
| | 40.2 |
| | 374.1 |
|
Non-cash stock-based compensation | 4.5 |
| | 5.2 |
| | 5.3 |
| | 2.9 |
| | 17.9 |
|
Loss on extinguishment of debt | 2.2 |
| | — |
| | — |
| | — |
| | 2.2 |
|
Acquisition related costs | 2.7 |
| | 1.9 |
| | 1.4 |
| | 0.9 |
| | 6.9 |
|
Securitization interest | (13.3 | ) | | (13.0 | ) | | (11.4 | ) | | (6.0 | ) | | (43.7 | ) |
Loss on asset sales | 0.8 |
| | 0.4 |
| | 0.5 |
| | 0.5 |
| | 2.2 |
|
Severance | 0.9 |
| | 9.6 |
| | 1.8 |
| | 6.5 |
| | 18.8 |
|
Foreign currency (gains)/losses | (0.4 | ) | | 0.3 |
| | 0.4 |
| | 2.7 |
| | 3.0 |
|
Goodwill and other intangibles impairment | — |
| | — |
| | — |
| | 29.8 |
| | 29.8 |
|
Other | 0.6 |
| | 4.6 |
| | 0.9 |
| | 2.5 |
| | 8.6 |
|
Total addbacks | (2.0 | ) | | 9.0 |
| | (1.1 | ) | | 39.8 |
| | 45.7 |
|
Adjusted EBITDA | $ | 129.2 |
| | $ | 122.0 |
| | $ | 88.6 |
| | $ | 80.0 |
| | $ | 419.8 |
|
Summary of Cash Flows
|
| | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions) | 2020 | | 2019 |
Net cash provided by (used by): | | | |
Operating activities - continuing operations | $ | 268.9 |
| | $ | 161.7 |
|
Operating activities - discontinued operations | — |
| | 155.8 |
|
Investing activities - continuing operations | 485.9 |
| | (268.9 | ) |
Investing activities - discontinued operations | — |
| | (37.4 | ) |
Financing activities - continuing operations | (279.9 | ) | | (1,387.6 | ) |
Financing activities - discontinued operations | — |
| | 1,317.6 |
|
Effect of exchange rate on cash | (17.3 | ) | | 10.8 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 457.6 |
| | $ | (48.0 | ) |
| | | | | | | | | | | |
| Six Months Ended June 30, |
(Dollars in millions) | 2021 | | 2020 |
Net cash provided by (used by): | | | |
Operating activities | $ | 295.7 | | | $ | 268.9 | |
Investing activities | (325.7) | | | 485.9 | |
Financing activities | (113.3) | | | (279.9) | |
Effect of exchange rate on cash | 6.4 | | | (17.3) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (136.9) | | | $ | 457.6 | |
Cash flow provided by operating activities (continuing operations) was $268.9$295.7 million for the six months ended June 30, 2020,2021, compared with $161.7$268.9 million for the six months ended June 30, 2019.2020. The increase in operating cash flow was primarily attributable to changes in operating assets and liabilities as a result of the timing of collections and the disbursement of funds to consignors for auctions held near period-ends, as well asincreased profitability, partially offset by a net increasedecrease in non-cash item adjustments, partially offset by decreased profitability attributable toadjustments. We had reduced operations beginning March 20, 2020, resulting from COVID-19 restrictions on our business.
Net cash used by investing activities was $325.7 million for the six months ended June 30, 2021, compared with net cash provided by investing activities (continuing operations) wasof $485.9 million for the six months ended June 30, 2020, compared with2020. The increase in net cash used by investing activities of $268.9 million for the six months ended June 30, 2019. The increase in net cash from investing activities was primarily attributable to:
a net decrease•an increase in the additional finance receivables held for investment of approximately $602.4$732.6 million;
a decrease•an increase in cash used for acquisitions of approximately $120.7$79.8 million; and
a reduction•an increase in capital expendituresinvestment in securities of approximately $31.7 million.$20.6 million;
partially offset by:
•proceeds from sale of investments of approximately $21.4 million.
Net cash used by financing activities (continuing operations) was $113.3 million for the six months ended June 30, 2021, compared with $279.9 million for the six months ended June 30, 2020, compared with $1,387.6 million for the six months ended June 30, 2019.2020. The decrease in net cash used by financing activities was primarily attributable to:
a decrease in payments on long-term debt. In the second quarter of 2019, the Company used net cash provided by financing activities from discontinued operations (cash received from IAA•an increase in the separation) to prepay approximately $1.3 billion of its term loan debt;
net proceedsadditional obligations collateralized by finance receivables of approximately $528.2 million received from the issuance of the Series A Preferred Stock in the second quarter of 2020;$777.5 million;
•a decrease in dividends paid to stockholders of approximately $90.8$49.0 million; and
a decrease in cash transferred to IAA of $50.9 million;
partially offset by:
•a net decrease in the obligations collateralized by finance receivables of approximately $689.5 million;
a net decrease in borrowings on lines of credit of approximately $95.4 million;
a net decreaseincrease in book overdrafts of approximately $39.1$40.4 million;
partially offset by:
•a decrease in net proceeds from Series A Preferred Stock of approximately $528.2 million; and
•an increase in cash used for paymentsthe repurchase of contingent considerationcommon stock of approximately $21.8$180.9 million.
Capital Expenditures
Capital expenditures for the six months ended June 30, 2021 and 2020 and 2019 approximated $46.7$50.7 million and $78.4$46.7 million, respectively. Capital expenditures were funded primarily from internally generated funds. We continue to invest in our core information technology capabilities and capacity expansion.our service locations. Capital expenditures are expected to be approximately $125 million for fiscal year 2021. Future capital expenditures could vary substantially based on capital project timing, the opening of new auction facilities, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies. The Company's capital expenditures for 2020 are dependent on when access to our facilities is available to employees and others. As a result, we are unable to estimate capital expenditures for 2020 at this time.
Dividends
The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $0.01 per share, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7% per annum, payable quarterly in arrears. Dividends 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 ofFor the six months ended June 30, 2020,2021, the holders of the Series A Preferred Stock had accumulatedreceived dividends in kind with a value in the aggregate of $2.1 million, which have not been declared.approximately $20.2 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 following common stock dividend information has been released for 2020:
On February 18, 2020, the Company announced a cash dividend of $0.19 per share that was paid on April 3, 2020, to stockholders of record at the close of business on March 20, 2020.
On November 5, 2019, the Company announced a cash dividend of $0.19 per share that was paid on January 3, 2020, to stockholders of record at the close of business on December 20, 2019.
The Company has temporarily suspended its quarterly common stock dividend in light of the impact of the COVID-19 pandemic on its operations and the limitation placed on certain payments during the financial covenant "holiday" provided by the Fourth Amendment.operations. Future dividend decisions will be based on and affected by a variety of factors, including our financial condition and results of operations, contractual restrictions, including restrictive covenants contained in our Credit Agreement and AFC's securitization facilities and the indenture governing our senior notes, capital requirements and other factors that our board of directors deems relevant. No assurance can be given as to whether any future dividends may be declared by our board of directors or the amount thereof.
Acquisition
In May 2021, ADESA acquired Auction Frontier, LLC (“Auction Frontier”). Auction Frontier is the owner and operator of the cloud-based auction simulcast solution Velocicast®. The acquisition is aligned with KAR’s strategy, as Velocicast powers ADESA Simulcast and Simulcast+ technologies, as well as other wholesale and retail auctions across North America and Australia.
The purchased assets included accounts receivable, software, customer relationships and tradenames. The purchase agreement also included additional payments contingent on certain terms and conditions. Financial results for Auction Frontier have been included in our consolidated financial statements from the date of acquisition.
The purchase price for Auction Frontier, net of cash acquired, was approximately $92.2 million, which included a net cash payment of $79.8 million and estimated contingent payments with a fair value of $12.4 million based on a probability model. The maximum amount of undiscounted contingent payment related to this acquisition could approximate $15.0 million. The acquired assets and assumed liabilities of Auction Frontier were recorded at fair value, including $17.9 million to intangible assets, representing the fair value of acquired customer relationships of $10.0 million, software of $7.6 million and tradenames of $0.3 million, which are being amortized over their expected useful lives. The acquired software and tradenames are reported in "Other intangible assets" in the accompanying consolidated balance sheet. The excess earnings method was used to value the customer relationships and the relief from royalty method was used to value the software and tradenames. Both of these methods require forward looking estimates to determine fair value, including among other assumptions, forecasted revenue growth and estimated royalty and license rates. The purchase accounting associated with this acquisition is preliminary, subject to obtaining information to determine the fair value of certain assets and liabilities. The acquisition resulted in a preliminary estimate of $73.8 million of goodwill. The factors contributing to the recognition of goodwill were strategic and synergistic benefits that are expected to be realized from the acquisition. The goodwill is recorded in the ADESA Auctions reportable segment and all of it is expected to be deductible for tax purposes. The financial impact of this acquisition, including pro forma financial results, was immaterial to the Company's consolidated results for the six months ended June 30, 2021.
Contractual Obligations
The Company's contractual cash obligations for long-term debt, interest payments related to long-term debt, finance lease obligations and operating leases are summarized in the table of contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. Since December 31, 2019,2020, there have been no material changes to the contractual obligations of the Company, with the exception of the following:
In June 2020, we completed the issuance and sale of 550,000 shares of the Company’s Series A Preferred Stock. 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.
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.
•Operating lease obligations change in the ordinary course of business. We lease most of our facilities, as well as other property and equipment under operating leases. Future operating lease obligations will continue to change if renewal options are exercised and/or if we enter into additional operating lease agreements.
See Note 7, Note 86 and Note 97 to the Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information about the items described above. Our contractual cash obligations as of December 31, 2019,2020, are discussed in the "Contractual Obligations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019,2020, as filed with the Securities and Exchange Commission (the "SEC").
Critical Accounting Estimates
Our critical accounting estimates are discussed in the "Critical Accounting Estimates" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019,2020, as filed with the SEC. A summary of significant accounting policies is discussed in Note 2 and elsewhere in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, which includes audited financial statements.
Off-Balance Sheet Arrangements
As of June 30, 2020,2021, we had no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation S-K under the Securities Exchange Act.Act of 1934, as amended (the "Exchange Act").
New Accounting Standards
For a description of new accounting standards that could affect the Company, reference the "New Accounting Standards" section of Note 1 to the Unaudited Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Our foreign currency exposure is limited and arises from transactions denominated in foreign currencies, particularly intercompany loans, as well as from translation of the results of operations from our Canadian and, to a much lesser extent, United Kingdom, Continental Europe and Mexican subsidiaries. However, fluctuations between U.S. and non-U.S. currency values may adversely affect our results of operations and financial position. We have not entered into any foreign exchange contracts to hedge changes in the Canadian dollar, British pound, euro or Mexican peso. Foreign currency losses on intercompany loans were approximately $0.4 million and $2.6 million for the three and six months ended June 30, 2021, respectively and approximately $2.7 million and $3.1 million for the three and six months ended June 30, 2020, respectively. Canadian currency translation positively affected net income by approximately $2.0 million and $1.9 million for the three and six months ended June 30, 2021 and negatively affected net income (loss) by approximately $0.1 million and $0.1 million for the three and six months ended June 30, 2020, respectively. A 1% decreasechange in the month-end Canadian exchange rate for the six months ended June 30, 2021 would have impacted foreign currency losses on intercompany loans by $0.8 million and net income by $0.5 million. A 1% change in the average Canadian exchange rate for the three and six months ended June 30, 20202021 would have impacted net income (loss) by approximately $0.1$0.2 million and $0.1$0.3 million, respectively. Currency exposure of our U.K., Continental Europe and Mexican operations is not material to the results of operations.
Interest Rates
We are exposed to interest rate risk on our variable rate borrowings. Accordingly, interest rate fluctuations affect the amount of interest expense we are obligated to pay. We currently use interest rate swap agreements to manage our exposure to interest rate changes. We have designated the interest rate swaps as cash flow hedges for accounting purposes. Accordingly, the earnings impact of the derivatives designated as cash flow hedges are recorded upon the recognition of the interest related to the hedged debt. There was no significant ineffectiveness in the six months ended June 30, 2020.
In January 2020, we entered into three pay-fixed interest rate swaps with an aggregate notional amount of $500 million to swap variable rate interest payments under our term loan for fixed interest payments bearing a weighted average interest rate of 1.44%. The interest rate swaps have a five-year term, each maturing on January 23, 2025.
Taking our interest rate swaps into account, a sensitivity analysis of the impact on our variable rate corporate debt instruments to a hypothetical 100 basis point increase in short-term rates (LIBOR) for the three and six months ended June 30, 20202021 would have resulted in an increase in interest expense of approximately $1.1 million and $2.2 million, respectively.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the quarter ended June 30, 2020,2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in litigation and disputes arising in the ordinary course of business, such as actions related to injuries; property damage; handling, storage or disposal of vehicles; environmental laws and regulations; and other litigation incidental to the business such as employment matters and dealer disputes. Such litigation is generally not, in the opinion of management, likely to have a material adverse effect on our financial condition, results of operations or cash flows.
Certain legal proceedings in which the Company is involved are discussed in Note 1718 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 20192020 and Part I, Item 3 of the same Annual Report. Unless otherwise indicated therein, all proceedings discussed in the Annual Report remain outstanding.
Item 1A. Risk Factors
In addition to the additional risk factor related to the COVID-19 pandemicother information set forth below,in this report, readers should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and the factors discussed in Part II, “Item 1A. Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 which could materially affect our business, financial condition or future results. Other than as set forth below, there were no material changes during the six months ended June 30, 2020 to the risk factors reported in our most recent Annual Report on Form 10-K and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. The risks described below and in our most recent Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The impact of COVID-19 implicatesmay implicate and exacerbatesexacerbate other risks discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, any of which could have a material effect on us.2020, including but not limited to risks relating to general economic conditions. This situation is changing rapidlycontinues to evolve and additional impacts may arise that we are not aware of currently. Due to the unprecedented nature of the COVID-19 pandemic and responses thereto, we cannot identify all of the risks we face from the pandemic and its aftermath.
The COVID-19 pandemic continues to create significant uncertainty and has had, and is expected to continue to have, an adverse impact on our business, results of operations and financial condition.
The extent of the impact of the COVID-19 pandemic on our business, results of operations and financial results will continue to depend on numerous evolving factors that we are not able to accurately predict, and some of which may be more than just temporary.
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 have begun easing restrictions only to return to tighter restrictions in the face of increases in new COVID-19 cases. These measures have not only negatively impacted consumer spending and business spending habits, they have also adversely impacted and are expected to continue to impact our workforce and operations and the operations of our customers, suppliers and business partners. The duration of these measures is unknown, may be extended and additional measures may be imposed, and they are likely to continue to adversely affect our business, results of operations and financial condition.
We are focused on attempting to mitigate the negative impacts of COVID-19 on our business, which has required and will continue to require a substantial investment of time and resources across our enterprise. 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 on our employees and our business, there can be no assurance that we will be successful in our efforts. Further, our enhanced reliance on remote access to our information systems continues to increase our exposure to cybersecurity attacks or data security incidents, along with other risks related to the reliability of technology to support remote operations.
COVID-19 has caused and may continue to cause us to modify our business practices. The extent to which the COVID-19 pandemic 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 or subsequent outbreaks, the severity of outbreaks, the actions to contain the virus or treat its impact, and the extent to which 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 impact.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
The information required by Item 701 of Regulation S-K was previously disclosed (for the sale of Series A Preferred Stock) in the Company’sCompany's Current Reports on Form 8-K, filed with the SEC on June 10, 2020 and June 30, 2020.
On November 12, 2020, we also issued 857,630 shares of our common stock to three individuals and one trust in connection with the BacklotCars acquisition in the fourth quarter of 2020. We received $15 million as consideration for the sale of such securities. The issuance of these securities was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering and/or the private offering safe harbor provision of Rule 506 of Regulation D promulgated under the Securities Act.
Issuer Purchases of Equity Securities
The following table provides information about purchases by KAR Auction Services of its shares of common stock during the quarter ended June 30, 2020:2021:
| | Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) (Dollars in millions) | Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) (Dollars in millions) |
April 1 - April 30 | | — |
| | $ | — |
| | — |
| | $ | 300.0 |
| April 1 - April 30 | | — | | | $ | — | | | — | | | $ | 209.0 | |
May 1 - May 31 | | — |
| | — |
| | — |
| | 300.0 |
| May 1 - May 31 | | 4,126,000 | | | 17.71 | | | 4,126,000 | | | 135.9 | |
June 1 - June 30 | | — |
| | — |
| | — |
| | 300.0 |
| June 1 - June 30 | | 1,502,000 | | | 17.94 | | | 1,502,000 | | | 109.0 | |
Total | | — |
| | $ | — |
| | — |
| | | Total | | 5,628,000 | | | $ | 17.77 | | | 5,628,000 | | |
In reviewing the agreements included as exhibits to this Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about KAR Auction Services, ADESA, AFC or other parties to the agreements.
The agreements included or incorporated by reference as exhibits to this Quarterly Report on Form 10-Q contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of "materiality" that are different from "materiality" under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Quarterly Report on Form 10-Q not misleading. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and KAR Auction Services, Inc.'s other public filings, which are available without charge through the SEC's website at http://www.sec.gov.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.