OPENLANE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-K that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should," "may," "will," "can," "of the opinion," "confident," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" "continues," "outlook," initiatives," "goals," "opportunities," and similar expressions identify forward-looking statements. Such statements, including statements regarding the potential impacts of 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 Item 1A. "Risk Factors" of this Annual Report on Form 10-K and those described from time to time in our future reports filed with theSecurities 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.
Impact of COVID-19
InMarch 2020 , theWorld Health Organization declared the COVID-19 outbreak a pandemic. Although governmental restrictions that were imposed at the outset of the pandemic to reduce the spread of COVID-19 have since been lifted or scaled back in many jurisdictions, increases in new COVID-19 cases, including new 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, onMarch 20, 2020 , we temporarily suspended on-premise sale operations acrossNorth America , including Simulcast-only sales, and resumed operation of Simulcast-only sales in select markets onApril 6, 2020 . We subsequently continued to expand the locations offering vehicles for sale via ADESA Simulcast, DealerBlock and Simulcast+, with all ADESA auction locations in theU.S. andCanada offering vehicles for sale by the end of the second quarter of 2020. We also took advantage of legislation introduced to assist companies during the pandemic. For the year endedDecember 31, 2021 , we recorded a total of approximately$5.8 million claimed under theCanada Emergency Wage Subsidy. These credits partially offset salaries paid inCanada . We will continue to monitor and assess the impact the Coronavirus Aid, Relief, and Economic Security Act ("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 production 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 and are expected to continue for the foreseeable future. While we 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 on our employees, customers and our business, the extent of the impact of the pandemic on our business and financial results will continue to depend on future developments that are uncertain and unpredictable. 30
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The broader implications for our business and results of operations remain uncertain and will depend on many factors outside our control, including, without limitation, the duration and severity of the COVID-19 pandemic, the degree to which governmental restrictions are relaxed or reimposed, the length of time it takes for normal economic and operating conditions to resume, the impact 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. Overview We provide whole car auction services inNorth America andEurope . Our business is divided into two reportable business segments, each of which is an integral part of the vehicle remarketing industry: ADESA Auctions and AFC. •The ADESA Auctions segment serves a domestic and international customer base through digital marketplaces for wholesale vehicles supported by more than 70 vehicle logistics center locations acrossNorth 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 on-premise marketplaces. Vehicles sold on ADESA's digital platforms are typically sold by commercial fleet operators, financial institutions, rental car companies, new and used vehicle dealers and vehicle manufacturers and their captive finance companies to franchise and independent used vehicle dealers. ADESA also provides value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. ADESA also includes BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized inthe United States , CARWAVE, an online dealer-to-dealer marketplace inthe United States , TradeRev, an online automotive remarketing platform inCanada 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 theUnited Kingdom andADESA 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 throughoutthe United States andCanada . Prior toDecember 2020 , the Company also sold vehicle service contracts throughPreferred Warranties, Inc. ("PWI"). Due to the spin-off of IAA in 2019 and the Company's transition from physical marketplaces to digital marketplaces, the Company has simplified its business and operations. Corporate expenses, previously reported as holding company expenses, are now included in the segments. Certain known expenses (e.g., information technology costs) were recorded directly to the ADESA and AFC segments. Interest expense previously reported by the holding 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. Industry Trends Whole Car Used vehicles sold inNorth America through whole car auctions, including off-premise volumes and mobile application volumes, were approximately 10.3 million and 12.0 million in 2020 and 2019, respectively. Data for the whole car auction industry is collected by the NAAA through an annual survey. NAAA industry volumes for 2021 have not yet been released, but we expect that volumes in 2021 were lower than in 2020. The NAAA industry volumes collected by the annual survey do not include off-premise volumes or mobile application volumes (e.g.,Openlane , BacklotCars, CARWAVE, TradeRev and their respective competitors), but we have included estimates of these volumes in our industry totals. In addition to the traditional whole car auction market and off-premise venues described above, we believe mobile applications, such as BacklotCars, CARWAVE and TradeRev, may provide an opportunity to expand our total addressable market for dealer-to-dealer transactions to as much as 15 million units from approximately 5 million units in 2019. BacklotCars, CARWAVE and TradeRev sold approximately 550,000 vehicles in the North American digital dealer-to-dealer marketplace for the year endedDecember 31, 2021 , compared with approximately 398,000 vehicles for the year endedDecember 31, 2020 . For the three months endedDecember 31, 2021 and 2020, vehicles sold by these companies in the North American digital dealer-to-dealer marketplace were approximately 135,000 and 111,000, respectively. This volume data includes vehicles sold by CARWAVE prior to its acquisition inOctober 2021 and vehicles sold by BacklotCars prior to its acquisition inNovember 2020 . The COVID-19 pandemic and current market conditions facing the automotive industry, including the disruption of new vehicle production, have had a material impact on the whole car auction industry and we are unable to estimate future volumes. 31
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Automotive Finance
AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverage 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 14,500 dealers in 2021, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.4 million in 2021. Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, access to consumer financing and increased used car retail activity of franchise and public dealerships (most of which do not utilize AFC or its competitors for floorplan financing), as well as the ability to operate in locations experiencing pandemic shelter-in-place orders. These same challenges, to the extent they occur, could result in a material negative impact on AFC's results of operations. A significant decline in used vehicle sales would result in a decrease in consumer auto loan originations and an increased number of dealers defaulting on their loans. In addition, volatility in wholesale vehicle pricing impacts the value of recovered collateral on defaulted loans and the resulting severity of credit losses at AFC. A decrease in wholesale used car pricing could lead to increased losses if dealers are unable to satisfy their obligations.
Seasonality
The volume of vehicles sold through our auctions generally fluctuates from quarter-to-quarter. This seasonality is caused by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affects the demand side of the auction industry. Used vehicle auction volumes tend to decline during prolonged periods of winter weather conditions. As a result, revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The fourth calendar quarter typically experiences lower used vehicle auction volume as well as additional costs associated with the holidays and winter weather.
Sources of Revenues and Expenses
Our revenue is derived from auction fees and various on-premise and off-premise
services, and from dealer financing fees, interest income and other revenue at
AFC. Although auction revenues primarily include the auction services and
related fees, our related receivables and payables include the gross value of
the vehicles sold.
Our operating expenses consist of cost of services, selling, general and
administrative and depreciation and amortization. Cost of services is composed
of payroll and related costs, subcontract services, the cost of vehicles
purchased, supplies, insurance, property taxes, utilities, service contract
claims, maintenance and lease expense related to the auction sites and loan
offices. Cost of services excludes depreciation and amortization. Selling,
general and administrative expenses are composed of payroll and related costs,
sales and marketing, information technology services and professional fees.
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Results of Operations
Overview of Results of
Year Ended
December 31,
(Dollars in millions except per share amounts) 2021 2020
Revenues
Auction fees $ 877.8 $ 887.7
Service revenue 707.2 737.4
Purchased vehicle sales 377.4 295.0
Finance-related revenue 289.2 267.6
Total revenues 2,251.6 2,187.7
Cost of services* 1,299.9 1,284.8
Gross profit* 951.7 902.9
Selling, general and administrative 558.1 545.4
Depreciation and amortization 183.0 191.3
Goodwill and other intangibles impairment - 29.8
Operating profit 210.6 136.4
Interest expense 126.6 128.9
Other (income) expense, net (17.5) 2.1
Income before income taxes 101.5 5.4
Income taxes 35.0 4.9
Net income $ 66.5 $ 0.5
Net income (loss) per share
Basic $ 0.16 $ (0.16)
Diluted $ 0.16 $ (0.16) * Exclusive of depreciation and amortization
Overview
For the year endedDecember 31, 2021 , we had revenue of$2,251.6 million compared with revenue of$2,187.7 million for the year endedDecember 31, 2020 , an increase of 3%. Businesses acquired since the fourth quarter of 2020 accounted for an increase in revenue of$139.1 million or 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 decreased$8.3 million , or 4%, to$183.0 million for the year endedDecember 31, 2021 , compared with$191.3 million for the year endedDecember 31, 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.
In the second quarter of 2020 a$25.5 million non-cash goodwill impairment charge and a$4.3 million non-cash customer relationship impairment charge were recorded in ourADESA Remarketing Limited reporting unit (doing business as ADESAU.K. ). The impairments resulted from the changes in economic circumstances which caused the outlook for the business to be significantly reduced. 33
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Interest Expense
Interest expense decreased$2.3 million , or 2%, to$126.6 million for the year endedDecember 31, 2021 , compared with$128.9 million for the year endedDecember 31, 2020 . The decrease was primarily attributable to a decrease in the weighted average interest rate on corporate debt and a decrease of approximately$9.2 million in the average outstanding balance of corporate debt for the year endedDecember 31, 2021 , as compared with the year endedDecember 31, 2020 . This was partially offset by an increase in interest expense at AFC of$0.4 million for the year endedDecember 31, 2021 , as compared with the year endedDecember 31, 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$32.0 million for the year endedDecember 31, 2021 . The Company had net unrealized gains of$1.4 million atDecember 31, 2021 , as a 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 year endedDecember 31, 2021 , we had other income of$17.5 million compared with other expenses of$2.1 million for the year endedDecember 31, 2020 . The increase in other income was primarily attributable to an increase in realized and unrealized gains on investment securities of approximately$33.4 million , a decrease in foreign currency losses of$1.1 million and an increase in other miscellaneous items aggregating$4.7 million , partially offset by an increase in contingent consideration valuation adjustments of$19.6 million .
Income Taxes
We had an effective tax rate of 34.5% for the year endedDecember 31, 2021 , compared with an effective tax rate of 90.7% for the year endedDecember 31, 2020 . The 2021 rate was unfavorably impacted by the expense for the increase in the estimated value of contingent consideration for which no tax benefits have been recorded, partially offset by the benefit of discrete items. The 2020 rate was unfavorably impacted by the goodwill and other intangibles impairment charge and expense for the increase in the estimated value of contingent consideration for which no tax benefits have been recorded, as well as significantly reduced earnings and a greater proportion of earnings in higher tax jurisdictions. These were partially offset by the tax benefit from law changes, deductions related to stock-based compensation expenses and other discrete benefits.
Impact of Foreign Currency
For the year endedDecember 31, 2021 , fluctuations in the Canadian exchange rate increased revenue by$20.0 million , operating profit by$6.7 million and net income by$3.6 million . For the year endedDecember 31, 2021 , fluctuations in the European exchange rate increased revenue by$7.7 million , operating profit by$0.4 million and decreased net income by$0.3 million .
Impact of COVID-19 on Our Operations
The Company has been subject to numerous orders and directives that have impacted our ability to operate our business throughoutNorth America and inEurope . 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 the various laws, regulations, mandates and directives in each of the markets in which we operate. In many cases, we have had to limit the number of employees and customers at our physical locations at any given time and modify the delivery of services to our customers. However, these adjustments have also resulted in improvements in our operations. During this challenging time, the Company has worked to meet the needs of the wholesale used car marketplace with its technology-based auction platforms throughoutNorth America and inEurope . The Company believes that certain changes to its business processes that were necessitated by the COVID-19 outbreak are sustainable going forward. For example, the Company has reduced the labor required to process wholesale auction transactions and reduced its selling, general and administrative expenses (excluding acquisitions). 34
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ADESA Results
Year Ended
December 31,
(Dollars in millions, except per vehicle amounts) 2021 2020
Auction fees $ 877.8 $ 887.7
Service revenue 707.2 737.4
Purchased vehicle sales 377.4 295.0
Total ADESA revenue 1,962.4 1,920.1
Cost of services* 1,244.5 1,205.7
Gross profit* 717.9 714.4
Selling, general and administrative 522.9 508.8
Depreciation and amortization 173.6
178.8
Goodwill and other intangibles impairment - 29.8 Operating profit (loss)$ 21.4 $ (3.0) Commercial vehicles sold 1,503,000 2,265,000 Dealer consignment vehicles sold 1,090,000
797,000
Total vehicles sold 2,593,000
3,062,000
Auction fees per vehicle sold$ 339 $
290
Gross profit per vehicle sold*$ 277 $
233
Gross profit percentage, excluding purchased vehicles* 45.3% 44.0% On-premise mix 47% 49% Off-premise mix 53% 51%
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased$42.3 million , or 2%, to$1,962.4 million for the year endedDecember 31, 2021 , compared with$1,920.1 million for the year endedDecember 31, 2020 . The increase 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. Businesses acquired since the fourth quarter of 2020 accounted for an increase in revenue of$139.1 million . The change in revenue included the impact of an increase in revenue of$18.5 million due to fluctuations in the Canadian exchange rate and an increase of$7.7 million due to fluctuations in the European exchange rate. On-premise marketplace sales are initiated online for vehicles at any of our locations acrossNorth America and include ADESA Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and includeOpenlane , BacklotCars, CARWAVE, TradeRev andADESA Europe sales. The 15% decrease in the number of vehicles sold was comprised of a decline in both on-premise and off-premise commercial volumes aggregating 34%, partially offset by an increase in both on-premise and off-premise dealer consignment volumes aggregating 37%. The decrease in the number of vehicles sold was driven by a lack of supply caused by high vehicle values. Auction fees per vehicle sold for the year endedDecember 31, 2021 increased$49 , or 17%, reflecting higher vehicle values and a smaller mix of lower-fee commercial off-premise vehicles. Service revenue for the year endedDecember 31, 2021 decreased$30.2 million , or 4%, primarily as a result of a decrease in transportation revenue resulting from the decrease in vehicles sold. Typically consigned vehicles located at our facilities utilize our service offerings at a higher rate than off-premise vehicles. 35
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Gross Profit
For the year endedDecember 31, 2021 , gross profit for ADESA increased$3.5 million , or less than 1%, to$717.9 million , compared with$714.4 million for the year endedDecember 31, 2020 . Gross profit for ADESA was 36.6% of revenue for the year endedDecember 31, 2021 , compared with 37.2% of revenue for the year endedDecember 31, 2020 . We have taken measures to reduce expenses to help protect our business and vehicles sold online require less labor. In 2021 we also recorded a benefit of$3.7 million taken under theCanada Emergency Wage Subsidy as compared with an aggregate of$14.2 million taken under the CARES Act and theCanada Emergency Wage Subsidy in 2020. OnMarch 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 percentage of revenue is impacted by purchased vehicles. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 45.3% and 44.0% for the years endedDecember 31, 2021 and 2020, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Businesses acquired since the fourth quarter of 2020 accounted for an increase in cost of services of$80.4 million for the year endedDecember 31, 2021 .
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased$14.1 million , or 3%, to$522.9 million for the year endedDecember 31, 2021 , compared with$508.8 million for the year endedDecember 31, 2020 , primarily due to increases in selling, general and administrative expenses associated with acquisitions of$77.3 million , fluctuations in the Canadian exchange rate of$4.6 million , stock-based compensation of$1.2 million and information technology costs of$1.1 million , partially offset by decreases in compensation expense of$35.9 million , incentive-based compensation of$10.9 million , professional fees of$6.4 million , telecom expenses of$4.2 million , severance of$3.8 million , marketing costs of$3.1 million , bad debt expense of$3.0 million , supplies expense of$1.8 million , travel expenses of$1.8 million and other miscellaneous expenses aggregating$1.4 million . In addition, the Employee Retention Credit provided under the CARES Act and theCanada Emergency Wage Subsidy was$7.7 million less for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 . Likewise, there were net gains on the sales of assets aggregating$4.2 million for the year endedDecember 31, 2021 , compared with net losses on the sales of assets aggregating$1.3 million for the year endedDecember 31, 2020 .
In the second quarter of 2020 a$25.5 million non-cash goodwill impairment charge and a$4.3 million non-cash customer relationship impairment charge were recorded in ourADESA Remarketing Limited reporting unit (doing business as ADESAU.K. ). The impairments resulted from the changes in economic circumstances which caused the outlook for the business to be significantly reduced. 36
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AFC Results
Year Ended
December 31,
(Dollars in millions except volumes and per loan amounts) 2021 2020
Finance-related revenue
Interest and fee income $ 284.1 $ 266.1
Other revenue 8.6 8.7
Provision for credit losses (3.5) (38.6)
Warranty contract revenue - 31.4
Total AFC revenue 289.2 267.6
Cost of services* 55.4 79.1
Gross profit* 233.8 188.5
Selling, general and administrative 35.2 36.6
Depreciation and amortization 9.4 12.5
Operating profit $ 189.2 $ 139.4
Loan transactions 1,421,000 1,519,000Revenue per loan transaction, excluding Warranty contract revenue $
204
* Exclusive of depreciation and amortization
Revenue
For the year endedDecember 31, 2021 , AFC revenue increased$21.6 million , or 8%, to$289.2 million , compared with$267.6 million for the year endedDecember 31, 2020 . The increase in revenue was primarily the result of a 31% increase in revenue per loan transaction, largely as a result of a decrease in the provision for credit losses, partially offset by a 6% decrease in loan transactions and the elimination of Warranty contract revenue as a result of the sale of PWI inDecember 2020 . Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased$48 , or 31%, primarily as a result of a decrease in provision for credit losses for the year endedDecember 31, 2021 , an increase in loan values and an increase in interest yields, partially offset by a decrease in average portfolio duration.
The provision for credit losses decreased to 0.2% of the average managed
receivables for the year ended
Gross Profit For the year endedDecember 31, 2021 , gross profit for the AFC segment increased$45.3 million , or 24%, to$233.8 million , or 80.8% of revenue, compared with$188.5 million , or 70.4% of revenue, for the year endedDecember 31, 2020 . Excluding PWI for the year endedDecember 31, 2020 , AFC's gross profit as a percent of revenue was 76.3%. The increase in gross profit as a percent of revenue was primarily the result of a 30% decrease in cost of services. The decrease in cost of services was primarily the result of decreases in PWI expenses of$23.1 million , compensation expense of$2.1 million and lot check expenses of$0.6 million , partially offset by increases in incentive-based compensation of$1.1 million , rent expense of$0.5 million , collection expenses of$0.4 million and other miscellaneous expenses aggregating$0.1 million .
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased$1.4 million , or 4%, to$35.2 million for the year endedDecember 31, 2021 , compared with$36.6 million for the year endedDecember 31, 2020 primarily as a result of decreases in PWI expenses of$2.7 million and other miscellaneous expenses aggregating$0.5 million , partially offset by increases in information technology costs of$1.3 million and compensation expense of$0.5 million . 37
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Overview of Results of
An overview of the results ofKAR Auction Services, Inc. for the year endedDecember 31, 2019 was included in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSEC onFebruary 18, 2021 . Overview of Results ofKAR Auction Services, Inc. for the Three Months EndedDecember 31, 2021 and 2020: Three Months Ended December 31, (Dollars in millions except per share amounts) 2021 2020 Revenues Auction fees$ 207.4 $ 207.0 Service revenue 168.2 173.5 Purchased vehicle sales 94.6 83.7 Finance-related revenue 79.2 65.4 Total revenues 549.4 529.6 Cost of services* 323.2 325.4 Gross profit* 226.2 204.2 Selling, general and administrative 134.8 139.7 Depreciation and amortization 45.9 50.6 Operating profit 45.5 13.9 Interest expense 32.3 30.5 Other (income) expense, net 4.6 3.9 Income (loss) before income taxes 8.6 (20.5) Income taxes 3.5 (3.4) Net income (loss)$ 5.1 $ (17.1) Net income (loss) per share Basic$ (0.04) $ (0.21) Diluted$ (0.04) $ (0.21)
* Exclusive of depreciation and amortization
Overview
For the three months endedDecember 31, 2021 , we had revenue of$549.4 million compared with revenue of$529.6 million for the three months endedDecember 31, 2020 , an increase of 4%. Businesses acquired since the fourth quarter of 2020 accounted for an increase in revenue of$35.4 million or 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 decreased$4.7 million , or 9%, to$45.9 million for the three months endedDecember 31, 2021 , compared with$50.6 million for the three months endedDecember 31, 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.
Interest Expense
Interest expense increased$1.8 million , or 6%, to$32.3 million for the three months endedDecember 31, 2021 , compared with$30.5 million for the three months endedDecember 31, 2020 . The increase was primarily attributable to an increase in interest expense at AFC of$1.7 million , which resulted from an increase in the average finance receivables balance for the three months endedDecember 31, 2021 , as compared with the three months endedDecember 31, 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
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investments were$4.8 million for the three months endedDecember 31, 2021 . The Company had a net reduction in unrealized gains of$9.3 million for the three months endedDecember 31, 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 endedDecember 31, 2021 , we had other expenses of$4.6 million compared with$3.9 million for the three months endedDecember 31, 2020 . The increase in other expense was primarily attributable to a net reduction in unrealized gains on investment securities of approximately$9.3 million , partially offset by increases in realized gains on investment securities of approximately$4.8 million , a decrease in foreign currency losses of$0.6 million , a decrease in contingent consideration valuation adjustments of$0.5 million and other miscellaneous items aggregating$2.7 million .
Income Taxes
We had an effective tax rate of 40.7% for the three months endedDecember 31, 2021 , compared with an effective tax rate of 16.6% on a pre-tax loss for the three months endedDecember 31, 2020 . The effective tax rate for the three months endedDecember 31, 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, partially offset by the benefit of discrete items. The effective tax rate for the three months endedDecember 31, 2020 was unfavorably impacted by expense for the increase in the estimated value of contingent consideration for which no tax benefit has been recorded, as well as a greater proportion of earnings in higher tax jurisdictions. These were partially offset by the tax benefit from deductions related to stock-based compensation expenses and other discrete benefits.
Impact of Foreign Currency
For the three months ended
ADESA Results
Three Months Ended
December 31,
(Dollars in millions, except per vehicle amounts) 2021 2020
Auction fees $ 207.4 $ 207.0
Service revenue 168.2 173.5
Purchased vehicle sales 94.6 83.7
Total ADESA revenue 470.2 464.2
Cost of services* 308.8 308.4
Gross profit* 161.4 155.8
Selling, general and administrative 125.7 130.6
Depreciation and amortization 43.6 47.7
Operating profit (loss) $ (7.9) $ (22.5)
Commercial vehicles sold 266,000 474,000
Dealer consignment vehicles sold 277,000 207,000
Total vehicles sold 543,000
681,000
Auction fees per vehicle sold$ 382 $ 304 Gross profit per vehicle sold*$ 297 $ 229 Gross profit percentage, excluding purchased vehicles* 43.0% 40.9% On-premise mix 47% 48% Off-premise mix 53% 52%
* Exclusive of depreciation and amortization
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Revenue
Revenue from ADESA increased$6.0 million , or 1%, to$470.2 million for the three months endedDecember 31, 2021 , compared with$464.2 million for the three months endedDecember 31, 2020 . The increase 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. Businesses acquired since the fourth quarter of 2020 accounted for an increase in revenue of$35.4 million . The change in revenue included the impact of an increase in revenue of$2.9 million due to fluctuations in the Canadian exchange rate and a decrease of$2.4 million due to fluctuations in the European exchange rate. On-premise marketplace sales are initiated online for vehicles at any of our locations acrossNorth America and include ADESA Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and includeOpenlane , BacklotCars, CARWAVE, TradeRev andADESA Europe sales. The 20% decrease in the number of vehicles sold was comprised of a decline in both on-premise and off-premise commercial volumes aggregating 44%, partially offset by an increase in both on-premise and off-premise dealer consignment volumes aggregating 34%. The decrease in the number of vehicles sold was driven by a lack of supply caused by high vehicle values.
Auction fees per vehicle sold for the three months ended
Service revenue for the three months endedDecember 31, 2021 decreased$5.3 million , or 3%, primarily as a result of a decrease in inspection service revenue and transportation revenue resulting from the decrease in vehicles sold, partially offset by an increase in reconditioning revenue. Typically consigned vehicles located at our facilities utilize our service offerings at a higher rate than off-premise vehicles.
Gross Profit
For the three months endedDecember 31, 2021 , gross profit for ADESA increased$5.6 million , or 4%, to$161.4 million , compared with$155.8 million for the three months endedDecember 31, 2020 . Cost of services increased less than 1% for the three months endedDecember 31, 2021 , while revenue increased 1% during the same period. Gross profit for ADESA was 34.3% of revenue for the three months endedDecember 31, 2021 , compared with 33.6% of revenue for the three months endedDecember 31, 2020 . Excluding purchased vehicle sales, gross profit as a percentage of revenue was 43.0% and 40.9% for the three months endedDecember 31, 2021 and 2020, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Businesses acquired since the fourth quarter of 2020 accounted for an increase in cost of services of$20.0 million for the three months endedDecember 31, 2021 .
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment decreased$4.9 million , or 4%, to$125.7 million for the three months endedDecember 31, 2021 , compared with$130.6 million for the three months endedDecember 31, 2020 , primarily due to decreases in incentive-based compensation of$14.0 million , compensation expense of$6.9 million , professional fees of$2.5 million , telecom expenses of$1.1 million and stock-based compensation of$1.0 million , partially offset by increases in selling, general and administrative expenses associated with acquisitions of$14.2 million , bad debt expense of$2.4 million , medical expenses of$2.1 million , travel expenses of$0.6 million , fluctuations in the Canadian exchange rate of$0.6 million and other miscellaneous expenses aggregating$1.3 million . In addition, the Employee Retention Credit provided under theCanada Emergency Wage Subsidy was$0.6 million less for the three months endedDecember 31, 2021 , compared with the three months endedDecember 31, 2020 . Likewise, there were net gains on the sales of assets aggregating$1.0 million for the three months endedDecember 31, 2021 , compared with net losses on the sales of assets aggregating$0.2 million for the three months endedDecember 31, 2020 . 40
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AFC Results
Three Months Ended
December 31,
(Dollars in millions except volumes and per loan amounts) 2021 2020
Finance-related revenue
Interest and fee income $ 76.1 $ 61.4
Other revenue 2.2 1.9
Net recovery (provision) for credit losses 0.9 (2.7)
Warranty contract revenue - 4.8
Total AFC revenue 79.2 65.4
Cost of services* 14.4 17.0
Gross profit* 64.8 48.4
Selling, general and administrative 9.1 9.1
Depreciation and amortization 2.3 2.9
Operating profit $ 53.4 $ 36.4
Loan transactions 342,000 327,000Revenue per loan transaction, excluding Warranty contract revenue $
232 $ 186 * Exclusive of depreciation and amortization
Revenue
For the three months endedDecember 31, 2021 , AFC revenue increased$13.8 million , or 21%, to$79.2 million , compared with$65.4 million for the three months endedDecember 31, 2020 . The increase in revenue was primarily the result of a 25% increase in revenue per loan transaction and a 5% increase in loan transactions, partially offset by the elimination of Warranty contract revenue as a result of the sale of PWI inDecember 2020 . Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased$46 , or 25%, primarily as a result of an increase in loan values, a decrease in provision for credit losses for the three months endedDecember 31, 2021 , an increase in floorplan fee and other fee income per unit and an increase in average portfolio duration. For the three months endedDecember 31, 2021 , recoveries and the decrease in the allowance for credit losses exceeded write-offs, resulting in the provision for credit losses decreasing to (0.2%) of the average managed receivables for the three months endedDecember 31, 2021 from 0.6% for the three months endedDecember 31, 2020 .
Gross Profit
For the three months endedDecember 31, 2021 , gross profit for the AFC segment increased$16.4 million , or 34%, to$64.8 million , or 81.8% of revenue, compared with$48.4 million , or 74.0% of revenue, for the three months endedDecember 31, 2020 . Excluding PWI for the three months endedDecember 31, 2020 , AFC's gross profit as a percent of revenue was 78.7%. The increase in gross profit as a percent of revenue was primarily the result of a 15% decrease in cost of services. The decrease in cost of services was primarily the result of a decrease in PWI expenses of$4.1 million , partially offset by increases in compensation expense of$0.5 million , incentive-based compensation of$0.4 million and other miscellaneous expenses aggregating$0.6 million .
Selling, General and Administrative
Selling, general and administrative expenses at AFC were$9.1 million for both the three months endedDecember 31, 2021 and 2020. Fluctuations between the periods included an increase in compensation expense of$1.0 million , an increase in other miscellaneous expenses aggregating$0.1 million , a decrease in incentive-based compensation of$0.6 million and a decrease in PWI expenses of$0.5 million . 41
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LIQUIDITY AND CAPITAL RESOURCES
We believe that the significant indicators of liquidity for our business are
cash on hand, cash flow from operations, working capital and amounts available
under our Credit Facility. Our principal sources of liquidity consist of cash
generated by operations and borrowings under our Revolving Credit Facility.
December 31,
(Dollars in millions) 2021 2020
Cash and cash equivalents $ 190.0 $ 752.1
Restricted cash 25.8 60.2
Working capital 382.5 924.6Amounts available under the Revolving Credit Facility* 325.0 325.0 Cash flow from operations for the year ended
413.2 384.4
* There were related outstanding letters of credit totaling approximately$27.6 million and$28.5 million atDecember 31, 2021 and 2020, respectively, which reduced the amount available for borrowings under the Revolving Credit Facility. In 2021, we used approximately$522 million of cash for business acquisitions. This includes CARWAVE and Auction Frontier. 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 continuing to have, an adverse impact on our business. As a result, during 2020 we implemented several measures that we believe will enhance liquidity for the foreseeable future. Some of these measures included 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. We also took advantage of legislation introduced to assist companies during the pandemic. For the year endedDecember 31, 2021 , we recorded a total of approximately$5.8 million claimed under theCanada Emergency Wage Subsidy. These credits partially offset salaries paid inCanada . We will continue to monitor and assess the impact 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. Most of the financial institutions place a temporary hold on the availability of the funds deposited that generally can range up to two business days, resulting in cash in our accounts and on our balance sheet that is unavailable for use until it is made available by the various financial institutions. There are outstanding checks (book overdrafts) to sellers and vendors included in current liabilities. Because a portion of these outstanding checks for operations in theU.S. are drawn upon bank accounts at financial institutions other than the financial institutions that hold the cash, we cannot offset all the cash and the outstanding checks on our balance sheet. Changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from auctions held near period end.
Approximately
AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 90 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
OnSeptember 2, 2020 , we entered into the Fifth Amendment Agreement (the "Fifth Amendment") to the Credit Agreement. The Fifth Amendment (1) eliminated the financial covenant "holiday" provided by the Fourth Amendment Agreement, dated as ofMay 29, 2020 (the "Fourth Amendment"); (2) eliminated the changes to the calculation of Consolidated EBITDA for the purposes of the financial covenant compliance for the fiscal quarters endingSeptember 30, 2021 andDecember 31, 2021 , as provided by the Fourth Amendment; (3) removed the monthly minimum liquidity covenant provided by the Fourth Amendment; and (4) eliminated the limitations imposed by the Fourth Amendment on the Company's ability to make certain investments, junior debt repayments, acquisitions and restricted payments and to incur additional secured indebtedness. 42 -------------------------------------------------------------------------------- Table of Contents OnMay 29, 2020 , we entered into the Fourth Amendment to the Credit Agreement (the "Fourth Amendment"). The Fourth Amendment (1) provided a financial covenant "holiday" through and includingJune 30, 2021 ; (2) for purposes of determining compliance with the financial covenant for the fiscal quarters endingSeptember 30, 2021 andDecember 31, 2021 , permitted the Consolidated EBITDA for the applicable test period to be calculated on an annualized basis, excluding results prior toApril 1, 2021 ; (3) established a monthly minimum liquidity covenant of$225.0 million through and includingSeptember 30, 2021 ; and (4) effectively placed certain limitations on the ability to make certain investments, junior debt repayments, acquisitions and restricted payments and to incur additional secured indebtedness untilOctober 1, 2021 . OnSeptember 19, 2019 , we entered into the Third Amendment Agreement (the "Third Amendment") to the Credit Agreement. The Third Amendment provided for, among other things, (1) the refinancing of the existing Term Loan B-4 and Term Loan B-5 with the new Term Loan B-6, (2) repayment of the 2017 Revolving Credit Facility and (3) the$325 million Revolving Credit Facility.
The Credit Facility is available for letters of credit, working capital,
permitted acquisitions and general corporate purposes. The Revolving Credit
Facility also includes a
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, Term Loan B-6 bears interest at an adjusted LIBOR rate plus 2.25% or at the Company's election, Base Rate (as defined in the Credit Agreement) plus 1.25%. Loans under the Revolving Credit Facility will bear interest at a rate calculated based on the type of borrowing (either adjusted LIBOR or Base Rate) and the Company's Consolidated Senior Secured Net Leverage Ratio (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 pays 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 2.38% atDecember 31, 2021 . OnDecember 31, 2021 ,$928.6 million was outstanding on Term Loan B-6 and there were no borrowings on the Revolving Credit Facility. We had related outstanding letters of credit in the aggregate amount of$27.6 million and$28.5 million atDecember 31, 2021 andDecember 31, 2020 , respectively, which reduce the amount available for borrowings under the Revolving Credit Facility. Our European operations have lines of credit aggregating$34.1 million (€30 million) of which$6.8 million was drawn atDecember 31, 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 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) 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 the lenders under the Credit Agreement to declare all amounts borrowed immediately due and payable. The Credit Agreement contains a financial covenant requiring compliance with a Consolidated Senior Secured Net Leverage Ratio not to exceed 3.5 as of the last day of each fiscal quarter if revolving loans are outstanding. The Consolidated Senior Secured Net Leverage Ratio is calculated as consolidated total debt (as defined in the Credit Agreement) divided by the last four quarters consolidated Adjusted EBITDA. Consolidated total debt includes term loan borrowings, revolving loans, finance lease liabilities and other obligations for borrowed money less unrestricted 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 1.8 atDecember 31, 2021 . 43
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In addition, the Credit Agreement and the indenture governing our senior notes (see Note 12, "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. We were in compliance with the covenants in the Credit Agreement and the indenture governing our senior notes atDecember 31, 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
OnMay 31, 2017 , we issued$950 million of 5.125% senior notes dueJune 1, 2025 . The Company pays interest on the senior notes semi-annually in arrears onJune 1 andDecember 1 of each year, which commenced onDecember 1, 2017 . We may redeem the senior notes, in whole or in part, at a premium that declines ratably to par in 2023. The senior notes are guaranteed by the Subsidiary Guarantors.
Securitization Facilities
AFC sells the majority of itsU.S. dollar denominated finance receivables on a revolving basis and without recourse toAFC Funding Corporation . A securitization agreement allows for the revolving sale byAFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires onJanuary 31, 2024 . InDecember 2021 ,AFC Funding Corporation's committed liquidity was increased from$1.60 billion to$1.70 billion forU.S. finance receivables. InSeptember 2020 ,AFC and AFC Funding Corporation entered into the Ninth Amended and Restated Receivables Purchase Agreement (the "Receivables Purchase Agreement"). The Receivables Purchase Agreement decreased AFC Funding'sU.S. committed liquidity from$1.70 billion to$1.60 billion and extended the facility's maturity date fromJanuary 28, 2022 toJanuary 31, 2024 . In addition, provisions designed to provide additional credit enhancement to the purchasers upon the occurrence of the certain events related to the payment rate and net spread on the receivables portfolio were added, certain portfolio performance metrics that could result in a requirement to increase the cash reserve or constitute a termination event were amended to the benefit of AFC Funding and provisions providing for a mechanism for determining an alternative rate of interest were added. We capitalized approximately$12.3 million of costs in connection with the Receivables Purchase Agreement. We also have an agreement for the securitization of AFCI's receivables. AFCI's committed facility is provided through a third-party conduit (separate from theU.S. facility) and was increased fromC$175 million toC$225 million onDecember 31, 2021 . InSeptember 2020 , AFCI entered into the Fifth Amended and Restated Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement"). The Canadian Receivables Purchase Agreement extended the facility's maturity date fromJanuary 28, 2022 toJanuary 31, 2024 . In addition, provisions designed to provide additional credit enhancement to the purchasers upon the occurrence of the certain events related to the payment rate and net spread on the receivables portfolio were added, certain portfolio performance metrics that could result in a requirement to increase the cash reserve or constitute a termination event were amended to the benefit of AFC Funding and provisions providing for a mechanism for determining an alternative rate of interest were added. We capitalized approximately$1.0 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both theU.S. and Canadian securitization agreements are accounted for as secured borrowings. AFC managed total finance receivables of$2,529.0 million and$1,911.0 million atDecember 31, 2021 andDecember 31, 2020 , respectively. AFC's allowance for losses was$23.0 million and$22.0 million atDecember 31, 2021 andDecember 31, 2020 , respectively. As ofDecember 31, 2021 andDecember 31, 2020 ,$2,482.2 million and$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$1,692.3 million and$1,261.2 million of obligations collateralized by finance receivables atDecember 31, 2021 andDecember 31, 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$15.1 million and$21.6 million atDecember 31, 2021 andDecember 31, 2020 , respectively. After the occurrence of a termination event, as defined in theU.S. securitization agreement, the banks may, and could, cause the stock ofAFC Funding Corporation to be transferred to the bank facility, though 44
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as a practical matter the bank facility would look to the liquidation of the receivables under the transaction documents as their primary remedy.
Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC,AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. AtDecember 31, 2021 , we were in compliance with the covenants in the securitization agreements.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA, as presented herein, are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles inthe United States , or GAAP. They are not measurements of our financial performance under GAAP and should not be considered substitutes for net income (loss) or any other performance measures derived in accordance with GAAP. EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings, as described above in the discussion of certain restrictive loan covenants under "Credit Facilities." Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
Three Months Ended December 31, 2021
(Dollars in millions) ADESA AFC Consolidated
Net income (loss) $ (23.9) $ 29.0 $ 5.1
Add back:
Income taxes (5.9) 9.4 3.5
Interest expense, net of interest income 21.5 10.5 32.0
Depreciation and amortization 43.6 2.3 45.9
Intercompany interest - - -
EBITDA 35.3 51.2 86.5
Non-cash stock-based compensation 1.6 0.3 1.9
Acquisition related costs 2.4 - 2.4
Securitization interest - (8.3) (8.3)
(Gain)/Loss on asset sales (0.8) - (0.8)
Severance 1.4 0.2 1.6
Foreign currency (gains)/losses 1.1 - 1.1
Contingent consideration adjustment 4.2 - 4.2
Net change in unrealized gains on investment securities - 9.3 9.3
Other 0.1 (0.1) -
Total addbacks/(deductions) 10.0 1.4 11.4
Adjusted EBITDA $ 45.3 $ 52.6 $ 97.9
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Three Months Ended December 31, 2020
(Dollars in millions) ADESA AFC Consolidated
Net income (loss) $ (38.5) $ 21.4 $ (17.1)
Add back:
Income taxes (9.7) 6.3 (3.4)
Interest expense, net of interest income 21.5 8.8 30.3
Depreciation and amortization 47.7 2.9 50.6
Intercompany interest 0.1 (0.1) -
EBITDA 21.1 39.3 60.4
Non-cash stock-based compensation 2.5 0.5 3.0
Acquisition related costs 4.1 - 4.1
Securitization interest - (6.2) (6.2)
Loss on asset sales 0.2 - 0.2
Severance 0.9 - 0.9
Foreign currency (gains)/losses 1.7 - 1.7
Contingent consideration adjustment 4.7 - 4.7
Other (1.7) 0.4 (1.3)
Total addbacks/(deductions) 12.4 (5.3) 7.1
Adjusted EBITDA $ 33.5 $ 34.0 $ 67.5
Year Ended December 31, 2021
(Dollars in millions) ADESA AFC Consolidated
Net income (loss) $ (58.9) $ 125.4 $ 66.5
Add back:
Income taxes (6.5) 41.5 35.0
Interest expense, net of interest income 86.2 39.5 125.7
Depreciation and amortization 173.6 9.4 183.0
Intercompany interest 0.2 (0.2) -
EBITDA 194.6 215.6 410.2
Non-cash stock-based compensation 14.5 2.2 16.7
Acquisition related costs 8.1 - 8.1
Securitization interest - (29.8) (29.8)
(Gain)/Loss on asset sales (3.6) (0.8) (4.4)
Severance 4.8 0.4 5.2
Foreign currency (gains)/losses 3.8 - 3.8
Contingent consideration adjustment 24.3 - 24.3
Net change in unrealized gains on investment securities - (1.4) (1.4)
Other 1.8 (0.3) 1.5
Total addbacks/(deductions) 53.7 (29.7) 24.0
Adjusted EBITDA $ 248.3 $ 185.9 $ 434.2
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Year Ended December 31, 2020
(Dollars in millions) ADESA AFC Consolidated
Net income (loss) $ (79.1) $ 79.6 $ 0.5
Add back:
Income taxes (17.0) 21.9 4.9
Interest expense, net of interest income 88.3 39.0 127.3
Depreciation and amortization 178.8 12.5 191.3
Intercompany interest 1.1 (1.1) -
EBITDA 172.1 151.9 324.0
Non-cash stock-based compensation 12.8 2.3 15.1
Acquisition related costs 8.8 - 8.8
Securitization interest - (27.3) (27.3)
Loss on asset sales 1.3 - 1.3
Severance 11.1 0.4 11.5
Foreign currency (gains)/losses 4.9 - 4.9
Goodwill and other intangibles impairment 29.8 - 29.8
Contingent consideration adjustment 4.7 - 4.7
Other 2.1 0.4 2.5
Total addbacks/(deductions) 75.5 (24.2) 51.3
Adjusted EBITDA $ 247.6 $ 127.7 $ 375.3
Certain of our loan covenant calculations utilize financial results for the most
recent four consecutive fiscal quarters. The following table reconciles EBITDA
and Adjusted EBITDA to net income (loss) for the periods presented:
Twelve
Months
Three Months Ended Ended
March 31, June 30, September 30, December 31, December 31,
(Dollars in millions) 2021 2021 2021 2021 2021
Net income (loss) $ 50.9 $ 11.5 $ (1.0) $ 5.1 $ 66.5
Add back:
Income taxes 23.6 9.1 (1.2) 3.5 35.0
Interest expense, net of interest income 30.7 31.0 32.0 32.0 125.7
Depreciation and amortization 47.0 45.4 44.7 45.9 183.0
EBITDA 152.2 97.0 74.5 86.5 410.2
Non-cash stock-based compensation 5.6 4.9 4.3 1.9 16.7
Acquisition related costs 1.5 1.8 2.4 2.4 8.1
Securitization interest (6.8) (6.8) (7.9) (8.3) (29.8)
(Gain)/Loss on asset sales 0.2 - (3.8) (0.8) (4.4)
Severance 0.7 1.2 1.7 1.6 5.2
Foreign currency (gains)/losses 2.2 0.4 0.1 1.1 3.8
Contingent consideration adjustment 11.2 4.5 4.4 4.2 24.3
Net change in unrealized gains on investment
securities (43.5) 11.9 20.9 9.3 (1.4)
Other (0.1) 1.6 - - 1.5
Total addbacks/(deductions) (29.0) 19.5 22.1 11.4 24.0
Adjusted EBITDA $ 123.2 $ 116.5 $ 96.6 $ 97.9 $ 434.2
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Summary of Cash Flows
Year Ended
December 31,
(Dollars in millions) 2021 2020
Net cash provided by (used by):
Operating activities $ 413.2 $ 384.4
Investing activities (1,218.6) (326.6)
Financing activities 210.4 194.8
Effect of exchange rate on cash (1.5) (1.2)
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash flow provided by operating activities was$413.2 million for the year endedDecember 31, 2021 , compared with$384.4 million for the year endedDecember 31, 2020 . The increase in operating cash flow was primarily attributable to increased profitability and 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, partially offset by a net decrease in non-cash item adjustments. Net cash used by investing activities was$1,218.6 million for the year endedDecember 31, 2021 , compared with$326.6 million for the year endedDecember 31, 2020 . The increase in net cash used by investing activities was primarily attributable to:
•an increase in the additional finance receivables held for investment of
approximately
•an increase in cash used for acquisitions of approximately
•an increase in investment in securities of approximately
•a decrease in the proceeds from the sale of businesses of
partially offset by:
•proceeds from sale of investments of approximately
•an increase in proceeds from the sale of property and equipment of
approximately
Net cash provided by financing activities was$210.4 million for the year endedDecember 31, 2021 , compared with$194.8 million for the year endedDecember 31, 2020 . The increase in net cash provided by financing activities was primarily attributable to:
•an increase in the additional obligations collateralized by finance receivables
of approximately
•a decrease in dividends paid to stockholders of approximately
•a decrease in payments for debt issuance costs of approximately
•an increase in proceeds from the issuance of common stock (private placement)
of approximately
•a net increase in book overdrafts of approximately
partially offset by:
•a decrease in net proceeds from Series A Preferred Stock of approximately
•an increase in the repurchase of common stock of approximately
Capital Expenditures
Capital expenditures for the years endedDecember 31, 2021 and 2020 approximated$108.5 million and$101.4 million , respectively. Capital expenditures were funded from internally generated funds. We continue to invest in our core information technology capabilities and our service locations. Capital expenditures are expected to be approximately$115 million for fiscal year 2022. Future capital expenditures could vary substantially based on capital project timing, the opening of new facilities, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies. 48
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Contractual Obligations
To provide a clear picture of matters potentially impacting our liquidity position, the table below sets forth a summary of our contractual obligations as ofDecember 31, 2021 . Some of the figures included in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal and other factors. Because these estimates and assumptions are necessarily subjective, the obligations we may actually pay in future periods could vary from those reflected in the table. This table does not include the obligations related to our Series A Preferred Stock discussed in Note 15 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The following summarizes our contractual cash obligations as ofDecember 31, 2021 (in millions): Payments Due by Period Contractual Obligations Total 1 year or Less More than 1 Year Long-term debt$325 million Revolving Credit Facility $ - $ - $ - Term Loan B-6 (a) 928.6 9.5 919.1 Senior notes (a) 950.0 - 950.0 European lines of credit 6.8 6.8 - Finance lease obligations (b) 11.3 5.9 5.4 Interest payments relating to long-term debt (c) 270.7 71.5 199.2 Operating leases (d) 460.1 57.9 402.2
Contingent consideration related to acquisitions (e) 45.6
30.6 15.0
Total contractual cash obligations $ 2,673.1 ________________________________________
(a)The table assumes the long-term debt is held to maturity.
(b)We have entered into finance leases for furniture, fixtures, equipment and software. The amounts include the interest portion of the finance leases. Future finance lease obligations would change if we entered into additional finance lease agreements. (c)Interest payments on long-term debt are projected based on the contractual rates of the debt securities. Interest rates for the variable rate term debt instruments were held constant at rates as ofDecember 31, 2021 . (d)Operating leases are entered into in the normal course of business. We lease most of our auction facilities, as well as other property and equipment under operating leases. Some lease agreements contain options to renew the lease or purchase the leased property. Future operating lease obligations would change if the renewal options were exercised and/or if we entered into additional operating lease agreements.
(e)Contingent consideration related to acquisitions represents the maximum amount of contingent payments.
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. For the years endedDecember 31, 2021 and 2020, the holders of the Series A Preferred Stock received dividends in kind with a value in the aggregate of approximately$41.1 million and$21.6 million , respectively. 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 Company has temporarily suspended its quarterly common stock dividend in light of the impact of the COVID-19 pandemic on its 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. 49
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Off-Balance Sheet Arrangements
As ofDecember 31, 2021 , we had no off-balance sheet arrangements pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows. AcquisitionsCARWAVE Holdings LLC InOctober 2021 , ADESA acquiredCARWAVE Holdings LLC ("CARWAVE"). CARWAVE is an online dealer-to-dealer marketplace featuring certified mechanical inspections, buyer guarantees and a 24/7, direct offer trading format with live auctions. The acquisition is expected to build on KAR's growth in the dealer-to-dealer space, enhance KAR's position in the highly fragmented wholesale used vehicle market and accelerate the Company's overall transformation to a digital marketplace company. The purchased assets included accounts receivable, other current assets, software, customer relationships and tradenames. Financial results for CARWAVE have been included in our consolidated financial statements from the date of acquisition. The purchase price for CARWAVE, net of cash acquired, was approximately$442.0 million . The acquired assets and assumed liabilities of CARWAVE were recorded at fair value, including$67.5 million to intangible assets, representing the fair value of acquired customer relationships of$62.5 million , software of$4.6 million and tradenames of$0.4 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, estimated customer attrition rates and estimated royalty and license rates. The acquisition resulted in$373.4 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 most 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 year endedDecember 31, 2021 . Acquisition costs are included in the consolidated statement of income within "Selling, general and administrative."Auction Frontier, LLC InMay 2021 , ADESA acquiredAuction 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 acrossNorth America andAustralia . 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 (based on Level 3 inputs). 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. A probability model, based on the expected retention of significant customers, was used to value the estimated contingent consideration. The acquisition resulted in$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 year endedDecember 31, 2021 . Acquisition costs are included in the consolidated statement of income within "Selling, general and administrative." 50
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Critical Accounting Estimates
In preparing the financial statements in accordance withU.S. generally accepted accounting principles, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex. Consequently, actual results could differ from those estimates. Accounting measurements that management believes are most critical to the reported results of our operations and financial condition include: (1) allowance for credit losses; (2) business combinations; (3) goodwill and other intangible assets; and (4) legal proceedings and other loss contingencies. In addition to the critical accounting estimates, there are other items used in the preparation of the consolidated financial statements that require estimation, but are not deemed critical. Changes in estimates used in these and other items could have a material impact on our financial statements. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. In cases where management estimates are used, they are based on historical experience, information from third-party professionals, and various other assumptions believed to be reasonable. In addition, our most significant accounting policies are discussed in Note 2 and elsewhere in the notes to the consolidated financial statements for the year endedDecember 31, 2021 , which are included in this Annual Report on Form 10-K.
Allowance for Credit Losses
We maintain an allowance for credit losses for estimated losses resulting from the inability of customers to make required payments. Delinquencies and losses are monitored on an ongoing basis and this historical experience provides the primary basis for estimating the allowance. The allowance for credit losses is also based on management's evaluation of the receivables portfolio under current economic conditions, the size of the portfolio, overall portfolio credit quality, review of specific collection matters and such other factors which, in management's judgment, deserve recognition in estimating losses. Specific collection matters can be impacted by the outcome of negotiations, litigation and bankruptcy proceedings with individual customers. AFC controls credit risk through credit approvals, credit limits, underwriting and collateral management monitoring procedures, including approximately 50,000 lot audits and holding vehicle titles where permitted. The estimates are based on management's evaluation of many factors, including AFC's historical credit loss experience, the value of the underlying collateral, delinquency trends and economic conditions. The estimates are based on information available as of each reporting date and reflect the expected credit losses over the entire expected term of the receivables. Actual losses may differ from the original estimates due to actual results varying from those assumed in our estimates. As a measure of sensitivity, if we had experienced a 10% increase in net charge-offs of finance receivables for the years endedDecember 31, 2021 and 2020, our provision for credit losses would have increased by approximately$0.2 million and$3.7 million in 2021 and 2020, respectively.
Business Combinations
When we acquire businesses, we estimate and recognize the fair values of tangible assets acquired, liabilities assumed and identifiable intangible assets acquired. The excess of the purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. The purchase accounting process requires management to make significant estimates and assumptions in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets and contingent consideration. Critical estimates are often developed using valuation models that are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, growth rates, the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which could affect the accuracy or validity of such estimates. Depending on the facts and circumstances, we may engage an independent valuation expert to assist in valuing significant assets and liabilities.
We assess goodwill for impairment annually during the second quarter or more
frequently if events or changes in circumstances indicate that impairment may
exist. Important factors that could trigger an impairment review include
significant under-performance relative to historical or projected future
operating results; significant negative industry or economic trends; and our
market valuation relative to our book value. When evaluating goodwill for
impairment, we may first perform a qualitative
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assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that a reporting unit's fair value is not more likely than not greater than its carrying value, then we calculate the estimated fair value of the reporting unit using discounted cash flows and market approaches. When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for a reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of a reporting unit's goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and apply judgment when estimating future cash flows and earnings, including projected revenue growth and operating expenses related to existing businesses, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate based on the estimated cost of capital that reflects the risk profile of the related business. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit's past performance and forecasted growth, strategic initiatives and changes in economic conditions. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approach are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. In 2021, we performed a qualitative impairment assessment for our reporting units and based on our assessment, the Company has not identified a reporting unit for which the goodwill was impaired in 2021. In 2020, we performed a quantitative impairment assessment for our reporting units and this assessment resulted in the impairment of goodwill totaling$25.5 million in ourADESA Remarketing Limited reporting unit (doing business as ADESAU.K. ). For additional information, see Note 9 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Based on our previous goodwill assessments, the Company did not identify a reporting unit for which the goodwill was impaired in 2019. As with goodwill, we assess indefinite-lived tradenames for impairment annually during the second quarter or more frequently if events or changes in circumstances indicate that impairment may exist. When assessing indefinite-lived tradenames for impairment using a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the tradename asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the tradename asset group's forecasted growth, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related assets. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. We review other intangible assets for possible impairment whenever circumstances indicate that their carrying amount may not be recoverable. If it is determined that the carrying amount of an other intangible asset exceeds the total amount of the estimated undiscounted future cash flows from that asset, we would recognize a loss to the extent that the carrying amount exceeds the fair value of the asset. Management judgment is involved in both deciding if testing for recovery is necessary and in estimating undiscounted cash flows. Our impairment analysis is based on the current business strategy, expected growth rates and estimated future economic conditions. In 2020, this analysis resulted in the impairment of customer relationships of approximately$4.3 million in ourADESA Remarketing Limited reporting unit (doing business as ADESAU.K. ). For additional information, see Note 9 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Legal Proceedings and Other Loss Contingencies
We are subject to the possibility of various legal proceedings and other loss
contingencies, many involving litigation incidental to the business and a
variety of environmental laws and regulations. Litigation and other loss
contingencies are subject to inherent uncertainties and the outcomes of such
matters are often very difficult to predict and generally are resolved over long
periods of time. We consider the likelihood of loss or the incurrence of a
liability, as well as the ability to reasonably estimate the amount of loss, in
determining loss contingencies. Estimating probable losses requires the analysis
of multiple possible outcomes that often are dependent on the judgment about
potential actions by third parties. Contingencies are recorded in the
consolidated financial statements, or otherwise disclosed, in accordance with
ASC 450, Contingencies. We accrue for an estimated loss contingency when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Management regularly evaluates current information
available to determine whether accrual amounts should be adjusted. If the amount
of an actual loss is greater than the amount accrued, this could have an adverse
impact on our operating results in that period.
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New Accounting Standards
For a description of new accounting standards that could affect the Company, reference the "New Accounting Standards" section of Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
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