OPENLANE, INC. 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 endedDecember 31, 2020 , filed onFebruary 18, 2021 , 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 OnMarch 11, 2020 , theWorld Health Organization ("WHO") designated COVID-19 as a pandemic. Governments in various jurisdictions we operate have mandated, and continue to introduce, numerous and varying measures to slow the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter-in-place and safer-at-home orders, business shutdowns and closures. Certain jurisdictions began easing restrictions only to return to tighter restrictions in the face of increases in new COVID-19 cases. The COVID-19 pandemic and the related preventative measures taken to help slow the spread have caused, and may continue to cause, significant volatility, uncertainty and economic disruption. In response to these measures and for the protection of our employees and customers, we have 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 temporarily suspending the Company's quarterly dividend. In addition, onMarch 20, 2020 , we temporarily suspended on-premise sale operations, including Simulcast-only sales, acrossNorth America . We resumed operation of Simulcast-only sales in select markets onApril 6, 2020 and continued to expand the Simulcast-only sales each week thereafter as permitted by government directives. We began operating Simulcast+ auctions in select markets, a fully digital auction operated remotely with an automated auctioneer, sequential sales, audio and visual cues to simulate the live auction experience with all buyers and sellers interacting virtually through the Simulcast platform. All ADESA auction locations in theU.S. andCanada are offering vehicles for sale via ADESA Simulcast, DealerBlock and Simulcast+. Auction locations have resumed offering ancillary and related services, where possible and as permitted by government directives. However, given the evolving health, economic, social and governmental environments, the continuing impact that COVID-19 could have on our business remains uncertain. We have also taken advantage of legislation introduced to assist companies during this time. In the first quarter of 2021, we recorded a total of approximately$3.4 million claimed under theCanada Emergency Wage Subsidy. These credits partially offset salaries recorded 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. While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 on our employees, 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, including new information that may emerge concerning the severity and duration of the COVID-19 pandemic and the effectiveness of actions taken to contain the COVID-19 outbreak or treat its impact. 20 -------------------------------------------------------------------------------- Table of Contents 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 timing, extent, trajectory and duration of the pandemic, the imposition of protective public safety measures, the timing and number of people receiving vaccinations and effectiveness, and the timing to which normal economic and operating conditions resumes. 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 online auctions and it provides services from 74 facilities inNorth 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 , 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"). 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 toDecember 31, 2020 have been reclassified to conform to the current presentation. Industry Trends Whole Car Used vehicles sold inNorth America through whole car auctions, including off-premise volumes and mobile application volumes, were approximately 12.0 million and 11.5 million in 2019 and 2018, respectively. Data for the whole car auction industry is collected by the NAAA through an annual survey. NAAA industry volumes for 2020 have not yet been released, but we expect that volumes in 2020 were substantially lower than in 2019. 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 endedDecember 31, 2020 , compared with approximately 210,000 vehicles for the year endedDecember 31, 2019 . TradeRev and BacklotCars sold approximately 100,000 vehicles in the digital dealer-to-dealer marketplace for the three months endedMarch 31, 2021 , compared with approximately 55,000 vehicles for the three months endedMarch 31, 2020 . This volume data includes vehicles sold by BacklotCars prior to its acquisition inNovember 2020 . The COVID-19 pandemic has had a material impact on the whole car auction industry and we are unable to estimate future volumes. 21 -------------------------------------------------------------------------------- Table of Contents 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 floorplanned 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. 22 -------------------------------------------------------------------------------- Table of Contents Results of Operations Overview of Results ofKAR Auction Services, Inc. for the Three Months EndedMarch 31, 2021 and 2020: Three Months Ended March 31, (Dollars in millions except per share amounts) 2021 2020 Revenues Auction fees$ 235.5 $ 255.3 Service revenue 187.6 236.2 Purchased vehicle sales 92.7 75.5 Finance-related revenue 65.8 78.5 Total revenues 581.6 645.5 Cost of services* 330.4 394.6 Gross profit* 251.2 250.9 Selling, general and administrative 149.0 162.4 Depreciation and amortization 47.0 47.7 Operating profit 55.2 40.8 Interest expense 30.9 38.0 Other income, net (50.2) (2.0) Income before income taxes 74.5 4.8 Income taxes 23.6 2.0 Net income $ 50.9$ 2.8 Net income per share Basic $ 0.25$ 0.02 Diluted $ 0.25$ 0.02 * Exclusive of depreciation and amortization Overview For the three months endedMarch 31, 2021 , we had revenue of$581.6 million compared with revenue of$645.5 million for the three months endedMarch 31, 2020 , a decrease of 10%. Businesses acquired in 2020 accounted for an increase in revenue of$25.2 million or 4% 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$0.7 million , or 1%, to$47.0 million for the three months endedMarch 31, 2021 , compared with$47.7 million for the three months endedMarch 31, 2020 . The decrease in depreciation and amortization was primarily the result of a reduction in assets placed in service, resulting from a reduction in capital spending. Interest Expense Interest expense decreased$7.1 million , or 19%, to$30.9 million for the three months endedMarch 31, 2021 , compared with$38.0 million for the three months endedMarch 31, 2020 . The decrease was primarily attributable to a decrease in the weighted average interest rate of approximately 1% and a decrease of$9.5 million in the average outstanding balance of corporate debt for the three months endedMarch 31, 2021 , compared with the three months endedMarch 31, 2020 . In addition, there was a decrease in interest expense at AFC of$4.3 million , which resulted from a decrease in the average finance receivables balance for the three monthsMarch 31, 2021 , as compared with the three months endedMarch 31, 2020 . 23 -------------------------------------------------------------------------------- Table of Contents Other Income, 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$17.0 million for the three months endedMarch 31, 2021 . The Company had unrealized gains of$43.5 million atMarch 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 three months endedMarch 31, 2021 , we had other income of$50.2 million compared with$2.0 million for the three months endedMarch 31, 2020 . The increase in other income was primarily attributable to an increase in realized and unrealized gains on investment securities of approximately$60.5 million and other miscellaneous items aggregating$0.7 million , partially offset by an increase in contingent consideration valuation of$11.2 million and an increase in foreign currency losses of$1.8 million . Income Taxes We had an effective tax rate of 31.7% for the three months endedMarch 31, 2021 , compared with an effective tax rate of 41.7% for the three months endedMarch 31, 2020 . The effective tax rate for the three months endedMarch 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. The decrease in the effective tax rate was primarily attributable to lower pretax earnings for the three months endedMarch 31, 2020 . Our effective tax rate for the three months endedMarch 31, 2020 was calculated using the discrete-period computation method by applying the actual effective tax rate as ofMarch 31, 2020 to our pre-tax income. Impact of Foreign Currency For the three months endedMarch 31, 2021 , fluctuations in the European exchange rate increased revenue by$5.6 million , increased operating profit by$0.2 million , decreased net income by$0.3 million and had no impact on net income per diluted share. For the three months endedMarch 31, 2021 , fluctuations in the Canadian exchange rate increased revenue by$3.8 million , operating profit by$1.2 million , net income by$0.3 million and had no impact on net income per diluted share. Impact of COVID-19 on Our OperationsThe Company has been subject to numerous orders and directives that have impacted our ability to operate our business throughoutNorth America and inEurope . As a result of these COVID-19 related restrictions on our operations, we have adjusted our business processes so that we can continue to meet the needs of our customers while complying with the various laws, regulations, mandates and directives in each of the markets in which we operate. In many cases, we have had to limit the number of employees and customers at our physical locations at any given time and modify the delivery of services to our customers. However, these adjustments in our operations have also resulted in improvements in our performance. During this challenging time, the Company has worked to meet the needs of the wholesale used car marketplace with its technology-based auction platforms throughoutNorth America and inEurope . The Company believes that certain changes to its business processes that were necessitated by the COVID-19 outbreak are sustainable going forward. For example, the Company has reduced the labor required to process wholesale auction transactions and reduced its selling, general and administrative expenses. 24 -------------------------------------------------------------------------------- Table of Contents ADESA Results Three Months Ended March 31, (Dollars in millions, except per vehicle amounts) 2021 2020 Auction fees$ 235.5 $ 255.3 Service revenue 187.6 236.2 Purchased vehicle sales 92.7 75.5 Total ADESA revenue 515.8 567.0 Cost of services* 316.9 370.7 Gross profit* 198.9 196.3 Selling, general and administrative 140.2 152.4 Depreciation and amortization 44.6 44.4 Operating profit (loss) $ 14.1$ (0.5) On-premise vehicles sold 349,000 468,000 Off-premise vehicles sold 404,000 394,000 Total vehicles sold 753,000 862,000 Auction fees per vehicle sold $ 313$ 296 Gross profit per vehicle sold* $ 264$ 228 Gross profit percentage, excluding purchased vehicles* 47.0% 39.9% Dealer consignment mix 33% 26% Commercial mix 67% 74% * Exclusive of depreciation and amortization Revenue Revenue from ADESA decreased$51.2 million , or 9%, to$515.8 million for the three months endedMarch 31, 2021 , compared with$567.0 million for the three months endedMarch 31, 2020 . The decrease in revenue was the result of a decrease in the number of vehicles sold, partially offset by an increase in average revenue per vehicle sold. Businesses acquired in 2020 accounted for an increase in revenue of$25.2 million . The change in revenue included the impact of an increase in revenue of$5.6 million due to fluctuations in the European exchange rate and an increase of$3.5 million due to fluctuations in the Canadian exchange rate. On-premise marketplace sales are initiated online for vehicles at one of our locations acrossNorth America and include Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and includeOpenlane , TradeRev, BacklotCars andADESA Europe sales. The 13% decrease in the number of vehicles sold was comprised of a 25% decrease in on-premise vehicles sold and a 3% increase in off-premise vehicles sold. For the quarter endedMarch 31, 2021 , we conducted all sales through digital marketplaces to protect the health and well-being of our workforce and customers. 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 endedMarch 31, 2021 increased$17 , or 6%, primarily as a result of revenues related to higher vehicle values. Service revenue for the three months endedMarch 31, 2021 decreased$48.6 million , or 21%, 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 three months endedMarch 31, 2021 , gross profit for ADESA increased$2.6 million , or 1%, to$198.9 million , compared with$196.3 million for the three months endedMarch 31, 2020 . Gross profit for ADESA was 38.6% of revenue for the three months endedMarch 31, 2021 , compared with 34.6% of revenue for the three months endedMarch 31, 2020 . Gross profit as a percentage of revenue increased for the three months endedMarch 31, 2021 as compared with the three months 25 -------------------------------------------------------------------------------- Table of Contents endedMarch 31, 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 quarter of 2021 we also recorded a benefit of$2.2 million taken under theCanada Emergency Wage Subsidy. 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 47.0% and 39.9% for the three months endedMarch 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 in the last 12 months accounted for an increase in cost of services of$13.8 million for the three months endedMarch 31, 2021 . Selling, General and Administrative Selling, general and administrative expenses for the ADESA segment decreased$12.2 million , or 8%, to$140.2 million for the three months endedMarch 31, 2021 , compared with$152.4 million for the three months endedMarch 31, 2020 , primarily due to decreases in compensation expense of$21.4 million , professional fees of$3.6 million , marketing costs of$3.4 million , travel expenses of$2.8 million , supplies expense of$2.0 million , telecom expenses of$2.0 million , medical expenses of$1.8 million , severance of$1.7 million , bad debt expense of$1.5 million and the recording of a benefit under theCanada Emergency Wage Subsidy of$1.2 million , partially offset by selling, general and administrative expenses associated with acquisitions of$19.0 million , an increase in incentive-based compensation of$8.9 million and other miscellaneous expenses aggregating$1.3 million . AFC Results Three Months Ended March 31, (Dollars in millions except volumes and per loan amounts) 2021 2020 Finance-related revenue Interest and fee income $ 68.6$ 83.8 Other revenue 2.0 2.7 Provision for credit losses
(4.8) (16.9)
Warranty contract revenue - 8.9
Total AFC revenue 65.8 78.5
Cost of services* 13.5 23.9
Gross profit* 52.3 54.6
Selling, general and administrative 8.8 10.0
Depreciation and amortization 2.4 3.3
Operating profit $ 41.1 $ 41.3
Loan transactions 372,000 448,000Revenue per loan transaction, excluding Warranty contract revenue $
177 $ 155
* Exclusive of depreciation and amortization
Revenue
For the three months ended March 31, 2021 , AFC revenue decreased $12.7 million ,
or 16%, to $65.8 million , compared with $78.5 million for the three months ended
March 31, 2020 . The decrease in revenue was primarily the result of a 17%
decrease in loan transactions and the loss of Warranty contract revenue
resulting from the sale of PWI in December 2020 , partially offset by a 14%
increase in revenue per loan transaction.
Revenue per loan transaction, which includes both loans floorplanned and loans
curtailed, increased $22 , or 14%, primarily as a result of a decrease in
provision for credit losses for the three months ended March 31, 2021 and an
increase in loan values, partially offset by decreases in interest yield and
average portfolio duration. Revenue per loan transaction excludes Warranty
contract revenue.
The provision for credit losses decreased to 1.0% of the average managed
receivables for the three months ended March 31, 2021 from 3.3% for the three
months ended March 31, 2020 .
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Gross Profit
For the three months ended March 31, 2021 , gross profit for the AFC segment
decreased $2.3 million , or 4%, to $52.3 million , or 79.5% of revenue, compared
with $54.6 million , or 69.6% of revenue, for the three months ended March 31,
2020 . Excluding PWI for the three months ended March 31, 2020 , AFC's gross
profit as a percent of revenue was 75.5%. The increase in gross profit as a
percent of revenue was primarily the result of a 16% decrease in revenue and an
44% decrease in cost of services. The decrease in cost of services was primarily
the result of decreases in PWI expenses of $6.9 million , compensation expense of
$2.6 million , lot audits of $0.8 million and other miscellaneous expenses
aggregating $0.1 million .
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $1.2 million , or
12%, to $8.8 million for the three months ended March 31, 2021 , compared with
$10.0 million for the three months ended March 31, 2020 primarily as a result of
decreases in PWI expenses of $0.8 million , compensation expense of $0.5 million
and other miscellaneous expenses aggregating $0.8 million , partially offset by
an increase in incentive-based compensation of $0.9 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.
March 31, December 31, March 31,
(Dollars in millions) 2021 2020 2020
Cash and cash equivalents $ 759.0 $ 752.1 $ 293.1
Restricted cash 52.5 60.2 114.4
Working capital 869.5 924.6 694.1Amounts available under the Revolving Credit Facility* 325.0
325.0 325.0
Cash flow from operations for the three months ended 164.5
(49.2)
* There were related outstanding letters of credit totaling approximately $29.8
million , $28.5 million and $29.7 million at March 31, 2021 , December 31, 2020
and March 31, 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, we have 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 temporarily suspending the Company's
quarterly dividend.
We have also taken advantage of legislation introduced to assist companies
during this time. In the first quarter of 2021, we recorded a total of
approximately $3.4 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.
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.
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Approximately $180.4 million of available cash was held by our foreign
subsidiaries at March 31, 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 March 31, 2021 .
On March 31, 2021 , $935.7 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 $29.8 million and $28.5
million at March 31, 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 $35.2 million (€30 million)
of which $20.9 million was drawn at March 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
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 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 0.6 at March 31, 2021 .
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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 March 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
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 March 31, 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
March 31, 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 $1,984.4 million and $1,911.0 million
at March 31, 2021 and December 31, 2020 , respectively. AFC's allowance for
losses was $25.5 million and $22.0 million at March 31, 2021 and December 31,
2020 , respectively.
As of March 31, 2021 and December 31, 2020 , $1,930.7 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 $1,239.1 million and $1,261.2 million of obligations
collateralized by finance receivables at March 31, 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 $19.8 million and $21.6 million
at March 31, 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 March 31, 2021 , we were in compliance with the covenants in
the securitization agreements.
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Table of Contents 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:
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