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Dynamic quotes 
OFFON

KAR AUCTION SERVICES, INC.

(KAR)
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KAR AUCTION SERVICES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/04/2021 | 10:52am EDT
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 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 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, 2020, filed on February 18,
2021, and those described from time to time in our future reports filed with the
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.
Impact of COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a
pandemic. Although governmental restrictions that were imposed in 2020 to reduce
the spread of COVID-19 have since been lifted or scaled back in many
jurisdictions, increases in new COVID-19 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 on-premise sale
operations across North America, including Simulcast-only sales, and resumed
operation of Simulcast-only sales in select markets on April 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
the U.S. and Canada 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. In the first six months of 2021, we recorded a total of approximately
$5.8 million claimed under the Canada Emergency Wage Subsidy. These credits
partially 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 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 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.
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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
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.
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 digital 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 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 in the United
States, TradeRev, an online automotive remarketing platform 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 throughout
the United States and Canada. Prior to December 2020, the Company also sold
vehicle service contracts through Preferred Warranties, Inc. ("PWI").
Prior to 2020, the costs and expenses of the holding company were reported
separately from the reportable segments. 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. 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
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. The NAAA
industry volumes collected by the annual survey do not include off-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 off-premise venues
described above, we believe mobile applications, such as TradeRev and
BacklotCars, 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. 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.
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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 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 13,600 dealers in 2020, and loan
transactions, which includes both loans paid off and loans curtailed, were
approximately 1.5 million in 2020.
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 KAR Auction Services, Inc. for the Three Months Ended
June 30, 2021 and 2020:
                                                                               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)



* Exclusive of depreciation and amortization
Overview
For the three months ended June 30, 2021, we had revenue of $585.4 million
compared with revenue of $419.0 million for the three months ended June 30,
2020, an increase of 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 $1.1 million, or 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. 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.
Goodwill and Other Intangibles Impairment
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 our ADESA Remarketing Limited reporting unit (doing business as
ADESA U.K.). The impairments resulted from the changes in economic circumstances
which caused the outlook for the business to be significantly reduced.
Interest Expense
Interest expense increased $0.3 million, or 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. 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, 2021, as
compared with the three months ended June 30, 2020.
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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. The effective tax rate for the three months ended June 30, 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 was unfavorably impacted by the
goodwill and other intangibles impairment charge for which no tax benefit was
recorded, partially offset by the tax benefit from recording net operating
losses and deductions related to stock-based compensation expenses.
Impact of Foreign Currency
For the three months ended June 30, 2021, fluctuations in the Canadian exchange
rate increased revenue by $9.3 million, operating profit by $3.4 million and net
income by $2.0 million. For the three months ended June 30, 2021, fluctuations
in the European exchange rate increased revenue by $5.7 million, operating
profit by $0.2 million and decreased net income by $0.2 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 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 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
throughout North America and in Europe. 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.

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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%



* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased $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. The increase in revenue was the result of an
increase in the number of vehicles sold and an 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 change in revenue included the impact
of an increase in revenue of $8.7 million due to fluctuations in the Canadian
exchange rate and an 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 10% increase in the number of
vehicles sold was comprised of a 6% increase in on-premise vehicles sold and a
13% increase in off-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, 2021 compared with the three months ended
June 30, 2020. For the quarters ended June 30, 2021 and 2020, we conducted all
sales through digital marketplaces. All vehicles were offered online, cars were
not driven through the auction lanes and we limited access to our physical
locations to promote social distancing measures and help prevent the spread of
COVID-19.
Auction fees per vehicle sold for the three months ended June 30, 2021 increased
$59, or 22%, reflecting higher vehicle values and a changing mix of vehicles
sold.
Service revenue for the three months ended June 30, 2021 increased $47.4
million, or 35%, primarily as a result of all the Company's services being
available in 2021. A substantial amount of the Company's on-premise and
off-premise services were not available for a portion of the second quarter of
2020.
Gross Profit
For the three months ended June 30, 2021, gross profit for ADESA increased $52.3
million, or 36%, to $197.3 million, compared with $145.0 million for the three
months ended June 30, 2020. Gross profit for ADESA was 38.2% of revenue for the
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three months ended June 30, 2021, compared with 40.0% of revenue for the three
months ended June 30, 2020. Gross profit as a percentage of revenue decreased
for the three months ended June 30, 2021 as compared with the three months ended
June 30, 2020, primarily due to the impact of purchased vehicles. Excluding
purchased vehicle sales, gross profit as a percentage of revenue 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 vehicles sold. We 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 compared with an aggregate of
$10.1 million taken under the CARES Act and 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, 2021.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased
$27.7 million, or 27%, to $131.4 million for the three months ended June 30,
2021, compared with $103.7 million for the three months ended June 30, 2020,
primarily due to increases in selling, general and administrative expenses
associated with acquisitions of $24.3 million, incentive-based compensation of
$5.5 million, fluctuations in the Canadian exchange rate of $2.1 million,
stock-based compensation of $1.8 million and professional fees of $1.3 million,
partially offset by decreases in bad debt expense of $4.5 million, severance of
$2.3 million, medical expenses of $2.2 million and other miscellaneous expenses
aggregating $4.3 million. In addition, the Employee Retention Credit provided
under the CARES Act and the Canada Emergency Wage Subsidy was $6.0 million less
for the three months ended June 30, 2021, compared with the three months ended
June 30, 2020.
Goodwill and Other Intangibles Impairment
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 our ADESA Remarketing Limited reporting unit (doing business as
ADESA U.K.). The impairments resulted from the changes in economic circumstances
which caused the outlook for the 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



* Exclusive of depreciation and amortization
Revenue
For the three months ended June 30, 2021, AFC revenue increased $11.8 million,
or 21%, to $68.6 million, compared with $56.8 million for the three months ended
June 30, 2020. The increase in revenue was primarily the result of a 68%
increase in
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revenue per loan transaction, largely as a result of a decrease in the provision
for credit losses, partially offset by a 15% decrease in loan 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, increased $78, or 68%, primarily as a result of a decrease in
provision for credit losses for the three months ended June 30, 2021, an
increase in interest yields and an increase in loan values, partially offset by
a decrease in average portfolio duration. Revenue per loan transaction excludes
Warranty contract revenue in 2020.
The provision for credit losses decreased to 0.4% of the average managed
receivables for the three months ended June 30, 2021 from 4.3% for the three
months ended June 30, 2020.
Gross Profit
For the three months ended June 30, 2021, gross profit for the AFC segment
increased $16.0 million, or 41%, to $54.9 million, or 80.0% of revenue, compared
with $38.9 million, or 68.5% of revenue, for the three months ended June 30,
2020. Excluding PWI for the three months ended June 30, 2020, AFC's gross profit
as a percent of revenue was 74.3%. The increase in gross profit as a percent of
revenue was primarily the result of a 21% increase in revenue and an 23%
decrease in cost of services. The decrease in cost of services was primarily the
result of a decrease in PWI expenses of $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 $0.2 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $0.2 million, or
2%, to $8.8 million for the three months ended June 30, 2021, compared with $8.6
million for the three months ended June 30, 2020 primarily as a result of
increases in incentive-based compensation of $0.6 million and other
miscellaneous expenses aggregating $0.7 million, partially offset by decreases
in PWI expenses of $0.6 million and compensation expense of $0.5 million.
Overview of Results of KAR Auction Services, Inc. for the Six Months Ended
June 30, 2021 and 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)


* Exclusive of depreciation and amortization

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Overview
For the six months ended June 30, 2021, we had revenue of $1,167.0 million
compared with revenue of $1,064.5 million for the six months ended June 30,
2020, an increase of 10%. Businesses acquired in the last twelve months
accounted for an increase in revenue of $64.9 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 $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. 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.
Goodwill and Other Intangibles Impairment
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 our ADESA Remarketing Limited reporting unit (doing business as
ADESA U.K.). The impairments resulted from the changes in economic circumstances
which caused the outlook for the business to be significantly reduced.
Interest Expense
Interest expense decreased $6.8 million, or 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. 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 on corporate debt and a decrease of $8.8 million
in the average outstanding balance of corporate debt for the six months ended
June 30, 2021, compared with the six months ended June 30, 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 $17.2 million for the six months ended June 30,
2021. The Company had unrealized gains of $31.6 million at June 30, 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 six months ended June 30, 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. The effective tax rate for the six months ended June 30, 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 was unfavorably impacted by the goodwill
and other intangibles impairment charge for which no tax benefit was recorded.
This was partially offset by the tax benefit from recording net operating losses
and deductions related to stock-based compensation expenses.
Impact of Foreign Currency
For the six months ended June 30, 2021, fluctuations in the Canadian exchange
rate increased revenue by $12.6 million, operating profit by $4.3 million and
net income by $1.9 million. For the six months ended June 30, 2021, fluctuations
in the European exchange rate increased revenue by $11.3 million, operating
profit by $0.5 million and decreased net income by $0.5 million.
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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%



* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased $103.4 million, or 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. 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 in the last twelve months accounted for an
increase in revenue of $64.9 million. The change in revenue included the impact
of an increase in revenue of $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 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 3% decrease in the number of
vehicles sold was comprised of a 13% decrease in on-premise vehicles sold and a
7% increase in off-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, 2021 compared with the six
months ended June 30, 2020. For the six months ended June 30, 2021, we conducted
all sales through digital marketplaces. All vehicles were offered online, cars
were not driven through the auction lanes and we limited access to our physical
locations to promote social distancing measures and help prevent the spread of
COVID-19.
Auction fees per vehicle sold for the six months ended June 30, 2021 increased
$36, or 13%, reflecting higher vehicle values and a changing mix of vehicles
sold.
Service revenue for the six months ended June 30, 2021 decreased $1.2 million,
or less than 1%, primarily as a result of the decrease in vehicles sold.
Typically consigned vehicles located at our facilities utilize our service
offerings at a higher rate than off-premise vehicles.
Gross Profit
For the six months ended June 30, 2021, gross profit for ADESA increased $54.9
million, or 16%, to $396.2 million, compared with $341.3 million for the six
months ended June 30, 2020. Gross profit for ADESA was 38.4% of revenue for the
six months
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ended June 30, 2021, compared with 36.7% of revenue for the six months ended
June 30, 2020. Gross profit as a percentage of revenue increased for the six
months ended June 30, 2021 as compared with the six months ended June 30, 2020,
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 percentage of revenue is impacted by purchased vehicles.
Excluding purchased vehicle 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 vehicles sold. Businesses acquired in the last 12
months accounted for an increase in cost of services of $37.2 million for the
six months ended June 30, 2021.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased
$15.5 million, or 6%, to $271.6 million for the six months ended June 30, 2021,
compared with $256.1 million for the six months ended June 30, 2020, 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 $21.0 million, bad debt expense of $6.3 million, severance of $4.0
million, medical expenses of $3.9 million, marketing costs of $3.7 million,
telecom expenses of $2.7 million, travel expenses of $2.5 million, professional
fees of $2.4 million and other miscellaneous expenses aggregating $7.9 million.
In addition, the Employee Retention Credit provided under the CARES Act and the
Canada Emergency Wage Subsidy was $4.8 million less for the six months ended
June 30, 2021, compared with the six months ended June 30, 2020.
Goodwill and Other Intangibles Impairment
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 our ADESA Remarketing Limited reporting unit (doing business as
ADESA U.K.). The impairments resulted from the changes in economic circumstances
which caused the outlook for the 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




* Exclusive of depreciation and amortization
Revenue
For the six months ended June 30, 2021, AFC revenue decreased $0.9 million, or
1%, to $134.4 million, compared with $135.3 million for the six months ended
June 30, 2020. The decrease in revenue was primarily the result of a 16%
decrease in loan
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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, largely as a result of a decrease in the provision for credit
losses.
Revenue per loan transaction, which includes both loans paid off and loans
curtailed, increased $49, or 36%, primarily as a result of a decrease in
provision for credit losses for the six months ended June 30, 2021 and an
increase in loan values, partially offset by a decrease in average portfolio
duration. Revenue per loan transaction excludes Warranty contract revenue in
2020.
The provision for credit losses decreased to 0.7% of the average managed
receivables for the six months ended June 30, 2021 from 3.8% for the six months
ended June 30, 2020.
Gross Profit
For the six months ended June 30, 2021, gross profit for the AFC segment
increased $13.7 million, or 15%, to $107.2 million, or 79.8% of revenue,
compared with $93.5 million, or 69.1% of revenue, for the six months ended
June 30, 2020. Excluding PWI for the six months ended June 30, 2020, AFC's gross
profit as a percent of revenue was 75.0%. The increase in gross profit as a
percent of revenue was primarily the result of a 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 $2.5 million and lot
check expenses of $1.0 million, partially offset by increases in incentive-based
compensation of $1.0 million and other miscellaneous expenses aggregating $0.3
million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $1.0 million, or
5%, to $17.6 million for the six months ended June 30, 2021, compared with $18.6
million for the six months ended June 30, 2020 primarily as a result of
decreases in PWI expenses of $1.4 million, compensation expense of $0.8 million
and other miscellaneous expenses aggregating $0.3 million, partially offset by
an increase in incentive-based compensation of $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


*  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.
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. In the first six months of 2021, we recorded a total of approximately
$5.8 million claimed under the Canada Emergency Wage Subsidy. These credits
partially offset salaries recorded in 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.
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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 the U.S. are
drawn upon bank accounts at financial institutions other than the financial
institutions that hold the cash, we cannot offset all the cash and the
outstanding checks on our balance sheet. Changes in working capital vary from
quarter-to-quarter as a result of the timing of collections and disbursements of
funds to consignors from auctions held near period end.
Approximately $233.1 million of available cash was held by our foreign
subsidiaries at June 30, 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. For further discussion of
AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
On September 19, 2019, we entered into the seven-year, $950 million Term Loan
B-6 and 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, 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% at June 30, 2021.
On June 30, 2021, $933.4 million was outstanding on Term Loan B-6 and there were
no borrowings outstanding on the Revolving Credit Facility. We had related
outstanding letters of credit in the aggregate amount of $29.7 million and $28.5
million at June 30, 2021 and December 31, 2020, respectively, which reduce the
amount available for borrowings under the Revolving Credit Facility. Our
European operations have lines of credit aggregating $35.6 million (€30 million)
of which $13.2 million was drawn at June 30, 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 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
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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 0.8 at June 30, 2021.
In addition, the Credit Agreement and the indenture governing our senior notes
(see Note 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. We were in compliance with the covenants in the Credit
Agreement and the indenture governing our senior notes at June 30, 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 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 31, 2024. AFC Funding Corporation had committed liquidity of $1.60
billion for U.S. finance receivables at June 30, 2021.
We also have an agreement for the securitization of AFCI's receivables, which
expires on January 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, 2021. The receivables sold pursuant to both the U.S. and Canadian
securitization agreements are accounted for as secured borrowings.
AFC managed total finance receivables of $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 and $22.0 million at June 30, 2021 and December 31, 2020,
respectively.
As of June 30, 2021 and December 31, 2020, $2,058.3 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 $1,324.2 million and $1,261.2 million of obligations
collateralized by finance receivables at June 30, 2021 and December 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 $18.1 million and $21.6 million
at June 30, 2021 and December 31, 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, 2021, we were in compliance with the covenants in
the securitization agreements.
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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)
for the periods presented:

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