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," "can," "of the opinion," "confident," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "continues," "outlook," initiatives," "goals," "opportunities" and similar expressions identify forward-looking statements. Such statements, including statements regarding the potential impacts of the COVID-19 pandemic and adverse market conditions; our future growth; anticipated cost savings, revenue increases, credit losses and capital expenditures; contractual obligations; dividend declarations and payments; common stock repurchases; tax rates and assumptions; strategic initiatives, acquisitions and dispositions; 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, 2022 , filed onMarch 9, 2023 , 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.
Automotive Industry and Economic Impacts on our Business
The automotive industry has experienced unprecedented market conditions, caused in part by supply chain issues, the shortage of semiconductors and associated delays in new vehicle production. These factors have resulted in significant fluctuations in used vehicle values and declines in vehicle volumes in the wholesale market. We expect this volatility to continue. In addition, macroeconomic factors, including inflationary pressures, rising interest rates, volatility of oil and natural gas prices and declining consumer confidence impact the affordability and demand for new and used vehicles. Declining economic conditions present a risk to our operations and the stability of the automotive industry. Given the nature of these factors, we cannot predict whether or for how long certain trends will continue, nor to what degree these trends will impact us in the future.
Overview
We are a leading digital marketplace for used vehicles, connecting sellers and buyers acrossNorth America andEurope to facilitate fast, easy and transparent transactions. Our business is divided into two reportable business segments, each of which is an integral part of the wholesale used vehicle remarketing industry: Marketplace and Finance. •The Marketplace segment serves a domestic and international customer base through digital marketplaces and vehicle logistics center locations acrossCanada . Powered with software developed byOPENLANE , comprehensive private label remarketing solutions are offered to automobile manufacturers, captive finance companies and other commercial customers to offer vehicles digitally. Vehicles sold on our 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. We also provide value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. Our digital marketplaces also include BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized inthe United States (CARWAVE was integrated with BacklotCars in the fourth quarter of 2022), TradeRev, an online automotive remarketing platform inCanada where dealers can sell and source used vehicle inventory at any time, ADESAU.K. , an online wholesale used vehicle remarketing business in theUnited Kingdom andADESA Europe , an online wholesale vehicle marketplace in Continental Europe. •Through AFC, the Finance segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers throughoutthe United States andCanada . In addition, AFC provides liquidity for customer trade-ins which encompasses settling lien holder payoffs. AFC also provides title services for their customers. These services are provided through AFC's digital servicing network as well as its physical locations throughoutNorth America . 20
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Beginning in the first quarter of 2022, results of the ADESA
Industry Trends
Wholesale Used Vehicle Industry
We believe theU.S. and Canadian wholesale used vehicle industry has a total addressable market of approximately 20 million vehicles, which can fluctuate depending on seasonality and a variety of other macro-economic factors. This wholesale used vehicle industry consists of the commercial market (commercial sellers that sell to franchise and independent dealers) and the dealer-to-dealer market (franchise and independent dealers that both buy and sell vehicles). The Company supports the majority of commercial sellers inNorth America through ourOPENLANE technology. We believe digital applications, such as BacklotCars and TradeRev, may provide an opportunity to expand the total addressable market for dealer-to-dealer transactions. The supply chain issues and current market conditions facing the automotive industry, including the disruption of new vehicle production, low new vehicle supply and historically high used vehicle pricing have had a material impact on the wholesale used vehicle industry.
Automotive Finance
AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverage its local presence of branches and in-market representatives, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 15,200 dealers in 2022. Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, access to consumer financing, increased interest rates and increased used car retail activity of franchise and public dealerships (most of which do not utilize AFC or its competitors for floorplan financing). 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 marketplaces 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. Wholesale used vehicle 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 volume as well as additional costs associated with the holidays and winter weather.
In addition, changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from marketplace sales held near period end.
Sources of Revenues and Expenses
The vehicles sold on our marketplaces generate auction fees from buyers and
sellers. The Company generally does not take title to these consigned vehicles
and records only its auction fees as revenue ("Auction fees" in the consolidated
statement of income) because it has no influence on the vehicle auction selling
price agreed to by the seller and the buyer at the auction. The Company does not
record the gross selling price of the consigned vehicles sold at auction as
revenue. The Company generally enforces its rights to payment for seller
transactions through net settlement provisions following the sale of a vehicle.
Marketplace services such as inbound and outbound transportation logistics,
reconditioning, vehicle inspection and certification, collateral recovery
services and technology solutions are generally recognized at the time of
service ("Service revenue" in the consolidated statement of income). The Company
also sells vehicles that have been purchased, which represent approximately 1%
of the total volume of vehicles sold. For these types of sales, the Company does
record the gross selling price of purchased vehicles sold at auction as revenue
("Purchased vehicle sales" in the consolidated statement of income) and the
gross purchase price of the vehicles as "Cost of services." AFC's revenue
("Finance-related revenue" in the consolidated statement of income) is comprised
of interest and fee income, provision for credit losses and other revenues
associated with our finance receivables.
Although Marketplace revenues primarily include auction fees and service revenue, our related receivables and payables include the gross value of the vehicles sold. Trade receivables include the unremitted purchase price of vehicles purchased by third parties through our marketplaces, fees to be collected from those buyers and amounts due for services provided by us
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related to certain consigned vehicles. The amounts due with respect to the
services provided by us related to certain consigned vehicles are generally
deducted from the sales proceeds upon the eventual auction or other disposition
of the related vehicles. Accounts payable include amounts due sellers from the
proceeds of the sale of their consigned vehicles less any fees.
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
Three Months Ended March 31,
(Dollars in millions except per share amounts) 2023 2022
Revenues from continuing operations
Auction fees $ 99.9 $ 101.4
Service revenue 165.6 137.5
Purchased vehicle sales 55.5 46.3
Finance-related revenue 99.6 84.2
Total revenues from continuing operations 420.6 369.4
Cost of services* 224.2 210.8
Gross profit* 196.4 158.6
Selling, general and administrative 108.0 118.9
Depreciation and amortization 23.0 26.0
Operating profit 65.4 13.7
Interest expense 38.3 25.6
Other (income) expense, net 7.1 1.2
Income (loss) from continuing operations before income taxes 20.0 (13.1)
Income taxes 7.3 (4.7)
Income (loss) from continuing operations 12.7 (8.4)
Income from discontinued operations, net of income taxes - 8.1
Net income (loss) $ 12.7 $ (0.3)
Income (loss) from continuing operations per share
Basic $ 0.01 $ (0.16)
Diluted $ 0.01 $ (0.16) * Exclusive of depreciation and amortization
Discontinued Operations
The financial performance of the ADESAU.S. physical auction business is presented as discontinued operations. As a result, revenue, cost of services and all costs of discontinued operations are presented as one line item in the above table as "Income from discontinued operations, net of income taxes."
Overview
For the three months endedMarch 31, 2023 , we had revenue of$420.6 million compared with revenue of$369.4 million for the three months endedMarch 31, 2022 , an increase of 14%. 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$3.0 million , or 12%, to$23.0 million for the three months endedMarch 31, 2023 , compared with$26.0 million for the three months endedMarch 31, 2022 . The decrease in depreciation and amortization was primarily the result of assets that have become fully depreciated and a reduction in assets placed in service. 23
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Interest Expense
Interest expense increased$12.7 million , or 50%, to$38.3 million for the three months endedMarch 31, 2023 , compared with$25.6 million for the three months endedMarch 31, 2022 . Interest expense increased$18.0 million at AFC and the increase was attributable to an increase in the average interest rate on the AFC securitization obligations to approximately 6.6% for the three months endedMarch 31, 2023 , as compared with approximately 2.3% for the three months endedMarch 31, 2022 . In addition, inMarch 2022 , there was an unrealized gain of$8.7 million related to the discontinuance of hedge accounting for the interest rate swaps. These items were partially offset by a decrease in interest expense resulting from repayments of term loan and senior note debt in 2022.
Other (Income) Expense, Net
For the three months endedMarch 31, 2023 , we had other expense of$7.1 million compared with$1.2 million for the three months endedMarch 31, 2022 . The increase in other expense was primarily attributable to the impairment of an equity security and note receivable with the same investee aggregating$11.0 million , partially offset by a$2.9 million decrease in unrealized losses on investment securities, a$1.1 million decrease in foreign currency losses on intercompany balances and an increase in other miscellaneous income aggregating$1.1 million . Income Taxes We had an effective tax rate of 36.5% for the three months endedMarch 31, 2023 , compared with an effective tax rate of 35.9% on a pre-tax loss for the three months endedMarch 31, 2022 .
Income from Discontinued Operations
InMay 2022 , Carvana acquired the ADESAU.S. physical auction business from KAR. As such, the financial results of the ADESAU.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the three months endedMarch 31, 2023 and 2022, the Company's financial statements included income from discontinued operations of$0.0 million and$8.1 million , respectively. For further discussion, reference the condensed notes to the consolidated financial statements.
Impact of Foreign Currency
For the three months endedMarch 31, 2023 compared with the three months endedMarch 31, 2022 , the change in the Canadian dollar exchange rate decreased revenue by$6.0 million , operating profit by$1.7 million and net income by$1.0 million . For the three months endedMarch 31, 2023 compared with the three months endedMarch 31, 2022 , the change in the euro exchange rate decreased revenue by$3.0 million , operating profit by$0.2 million and net income by$0.1 million . Marketplace Results Three Months Ended March 31, (Dollars in millions, except per vehicle amounts) 2023 2022 Auction fees $ 99.9$ 101.4 Service revenue 165.6 137.5 Purchased vehicle sales 55.5 46.3Total Marketplace revenue from continuing operations 321.0 285.2 Cost of services* 207.8 195.8 Gross profit* 113.2 89.4 Selling, general and administrative 95.6 108.4 Depreciation and amortization 21.2 23.9 Operating profit (loss) $ (3.6)$ (42.9) Commercial vehicles sold 167,000 174,000 Dealer consignment vehicles sold 163,000 177,000 Total vehicles sold 330,000 351,000 Gross profit percentage, excluding purchased vehicles* 42.6% 37.4%
* Exclusive of depreciation and amortization
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Total Marketplace Revenue
Revenue from the Marketplace segment increased$35.8 million , or 13%, to$321.0 million for the three months endedMarch 31, 2023 , compared with$285.2 million for the three months endedMarch 31, 2022 . The change in revenue included the impact of decreases in revenue of$5.2 million and$3.0 million due to fluctuations in the Canadian dollar exchange rate and the euro exchange rate, respectively. The increase in revenue was primarily attributable to the increases in service revenue and purchased vehicle sales (discussed below). The 6% decrease in the number of vehicles sold was comprised of a 4% decline in commercial volumes and an 8% decrease in dealer consignment volumes. The decrease in the number of vehicles sold was driven by an industry-wide lack of wholesale used vehicle supply.
Auction Fees
Auction fees decreased$1.5 million , or 1%, to$99.9 million for the three months endedMarch 31, 2023 , compared with$101.4 million for the three months endedMarch 31, 2022 . The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the three months endedMarch 31, 2023 increased$14 , or 5%, to$303 , compared with$289 for the three months endedMarch 31, 2022 . The increase in auction fees per vehicle sold reflects an increase in auction fees and a smaller mix of lower-fee commercial off-premise vehicles, partially offset by lower vehicle values.
Service Revenue
Service revenue increased$28.1 million , or 20%, to$165.6 million for the three months endedMarch 31, 2023 , compared with$137.5 million for the three months endedMarch 31, 2022 , primarily as a result of increases in repossession and remarketing fees of$10.5 million , transportation revenue of$8.2 million , third-party fees for platform services of$6.6 million , inspection service revenue of$2.3 million and a net increase in other miscellaneous service revenues aggregating approximately$0.5 million .
Purchased Vehicle Sales
Purchased vehicle sales, which include the entire selling price of the vehicle, increased$9.2 million , or 20%, to$55.5 million for the three months endedMarch 31, 2023 , compared with$46.3 million for the three months endedMarch 31, 2022 , primarily as a result of an increase in purchased vehicles sold and the average selling price of purchased vehicles sold inEurope .
Gross Profit
For the three months endedMarch 31, 2023 , gross profit from the Marketplace segment increased$23.8 million , or 27%, to$113.2 million , compared with$89.4 million for the three months endedMarch 31, 2022 . Revenue increased 13% for the three months endedMarch 31, 2023 , while cost of services increased 6% during the same period. Gross profit from the Marketplace segment was 35.3% of revenue for the three months endedMarch 31, 2023 , compared with 31.3% of revenue for the three months endedMarch 31, 2022 . Excluding purchased vehicle sales, gross profit as a percentage of revenue was 42.6% and 37.4% for the three months endedMarch 31, 2023 and 2022, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Gross profit as a percentage of revenue increased for the three endedMarch 31, 2023 as compared with the three months endedMarch 31, 2022 , primarily due to improved transportation margins, an increase in revenue for vehicles sold on dealer-to-dealer platforms and an increase in third-party fees for platform services.
Selling, General and Administrative
Selling, general and administrative expenses from the Marketplace segment decreased$12.8 million , or 12%, to$95.6 million for the three months endedMarch 31, 2023 , compared with$108.4 million for the three months endedMarch 31, 2022 , primarily as a result of decreases in professional fees of$6.3 million , information technology costs of$4.4 million , severance of$2.6 million , stock-based compensation of$1.6 million , fluctuations in the Canadian exchange rate of$1.4 million and telecom expenses of$0.8 million , partially offset by increases in bad debt expense of$0.7 million , marketing costs of$0.6 million , incentive-based compensation of$0.6 million and other miscellaneous expenses aggregating$2.4 million . 25
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Finance Results
Three Months Ended March 31,
(Dollars in millions except volumes and per loan amounts) 2023 2022
Finance-related revenue
Interest income $ 60.6 $ 43.2
Fee income 47.6 40.2
Other revenue 3.4 2.2
Provision for credit losses (12.0) (1.4)
Total Finance revenue 99.6 84.2
Cost of services* 16.4 15.0
Gross profit* 83.2 69.2
Selling, general and administrative 12.4 10.5
Depreciation and amortization 1.8 2.1
Operating profit $ 69.0 $ 56.6
Loan transactions 420,000 372,000Revenue per loan transaction $ 237$ 226
* Exclusive of depreciation and amortization
Revenue
For the three months endedMarch 31, 2023 , the Finance segment revenue increased$15.4 million , or 18%, to$99.6 million , compared with$84.2 million for the three months endedMarch 31, 2022 . The increase in revenue was primarily the result of a 13% increase in loan transactions and a 5% increase in revenue per loan transaction. Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased$11 , or 5%, primarily as a result of an increase in interest yields driven by an increase in prime rates (Federal Reserve raised interest rates 450 basis points sinceMarch 31, 2022 ), an increase in floorplan fees and other fee income per unit and an increase in average portfolio duration, partially offset by an increase in net credit losses and a decrease in loan values. The provision for credit losses increased to 2.0% of the average managed receivables for the three months endedMarch 31, 2023 from 0.2% for the three months endedMarch 31, 2022 . The provision for credit losses is expected to be 2% or under, annually, of the average managed receivables balance. However, the actual losses in any particular quarter could deviate from this range.
Gross Profit
For the three monthsMarch 31, 2023 , gross profit for the Finance segment increased$14.0 million , or 20%, to$83.2 million , or 83.5% of revenue, compared with$69.2 million , or 82.2% of revenue, for the three months endedMarch 31, 2022 . The increase in gross profit as a percent of revenue was primarily the result of an 18% increase in revenue, partially offset by a 9% increase in cost of services. The increase in cost of services was primarily the result of increases in compensation expense of$0.7 million , lot check expenses of$0.5 million and other miscellaneous expenses aggregating$0.2 million .
Selling, General and Administrative
Selling, general and administrative expenses for the Finance segment increased$1.9 million , or 18%, to$12.4 million for the three months endedMarch 31, 2023 , compared with$10.5 million for the three months endedMarch 31, 2022 primarily as a result of increases in information technology costs of$0.8 million , compensation expense of$0.5 million and other miscellaneous expenses aggregating$0.6 million . 26
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LIQUIDITY AND CAPITAL RESOURCES
We believe that the significant indicators of liquidity for our business are
cash on hand, cash flow from operations, working capital and amounts available
under our Credit Facility. Our principal sources of liquidity consist of cash
generated by operations and borrowings under our Revolving Credit Facility.
March 31, December 31, March 31,
(Dollars in millions) 2023 2022 2022
Cash and cash equivalents $ 219.6 $ 225.7 $ 134.2
Restricted cash 32.2 52.0 26.3
Working capital 408.6 379.2 1,023.2Amounts available under the Revolving Credit Facility 241.0
161.0 224.0
Cash provided by (used by) operating activities for the three months ended
96.1 (22.6)
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.
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 marketplace sales held near period end.
Approximately
AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 90 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
OnSeptember 19, 2019 , we entered into the seven-year,$950 million Term Loan B-6 and the$325 million , five-year Revolving Credit Facility. InMay 2022 , the Company prepaid the$926.2 million outstanding balance on Term Loan B-6 with proceeds from the Transaction. As a result of the prepayment, we incurred a non-cash loss on the extinguishment of debt of$7.7 million in the second quarter of 2022. The loss was primarily a result of the write-off of unamortized debt issuance costs/discounts associated with Term Loan B-6. The Revolving Credit Facility, with a maturity date ofSeptember 19, 2024 , 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. As set forth in the Credit Agreement, 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 Facility based on the Company's Consolidated Senior Secured Net Leverage Ratio, from time to time. 27
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As ofMarch 31, 2023 andDecember 31, 2022 ,$65.0 million and$145.0 million was drawn on the Revolving Credit Facility, respectively. We had related outstanding letters of credit in the aggregate amount of$19.0 million atMarch 31, 2023 andDecember 31, 2022 , respectively, which reduce the amount available for borrowings under the Revolving Credit Facility. Our European operations have lines of credit aggregating$32.5 million (€30 million) of which$20.8 million was drawn atMarch 31, 2023 . The obligations of the Company under the Credit Facilities are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority security interests in 100% of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and 65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions. Certain covenants contained within the Credit Agreement are critical to an investor's understanding of our financial liquidity, as the failure to maintain compliance with these covenants could result in a default and allow the lenders under the Credit Agreement to declare all amounts borrowed immediately due and payable. The Credit Agreement contains a financial covenant requiring compliance with a Consolidated Senior Secured Net Leverage Ratio not to exceed 3.5 as of the last day of each fiscal quarter if revolving loans are outstanding. The Consolidated Senior Secured Net Leverage Ratio is calculated as consolidated total debt (as defined in the Credit Agreement) divided by the last four quarters consolidated Adjusted EBITDA. Consolidated total debt includes term loan borrowings, revolving loans, finance lease liabilities and other obligations for borrowed money less unrestricted cash as defined in the Credit Agreement. Consolidated Adjusted EBITDA is EBITDA (earnings before interest expense, income taxes, depreciation and amortization) adjusted to exclude among other things (a) gains and losses from asset sales; (b) unrealized foreign currency translation gains and losses in respect of indebtedness; (c) certain non-recurring gains and losses; (d) stock-based compensation expense; (e) certain other non-cash amounts included in the determination of net income; (f) charges and revenue reductions resulting from purchase accounting; (g) minority interest; (h) consulting expenses incurred for cost reduction, operating restructuring and business improvement efforts; (i) expenses realized upon the termination of employees and the termination or cancellation of leases, software licenses or other contracts in connection with the operational restructuring and business improvement efforts; (j) expenses incurred in connection with permitted acquisitions; (k) any impairment charges or write-offs of intangibles; and (l) any extraordinary, unusual or non-recurring charges, expenses or losses. Our Consolidated Senior Secured Net Leverage Ratio was negative atMarch 31, 2023 . 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 atMarch 31, 2023 .
Senior Notes
OnMay 31, 2017 , we issued$950 million of 5.125% senior notes dueJune 1, 2025 . The Company pays interest on the senior notes semi-annually in arrears onJune 1 andDecember 1 of each year. The senior notes may be redeemed at 101.281% currently and at par as ofJune 1, 2023 . The senior notes are guaranteed by the Subsidiary Guarantors. InAugust 2022 , we conducted a cash tender offer to purchase up to$600 million principal amount of the senior notes. The tender offer was oversubscribed and as such,$600 million of the senior notes were accepted for prepayment and were prepaid inAugust 2022 with proceeds from the Transaction. We incurred a loss on the extinguishment of the senior notes of$9.5 million in 2022 primarily representative of the early repayment premium and the write-off of unamortized debt issuance costs associated with the portion of the senior notes repaid.
Use of Proceeds from the Transaction
The Company generated gross proceeds from the sale of theU.S. physical auction business of approximately$2.2 billion . The Transaction closed inMay 2022 . Under terms of the Credit Agreement, net cash proceeds from the Transaction were used to repay Term Loan B-6 within three days of the Transaction. The Company also prepaid$600 million of the senior notes inAugust 2022 . The terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. The Company is required to offer to redeem or repay approximately$140 million of senior notes within 10 business days ofMay 10, 2023 , subject to the terms of the indenture governing our senior notes. 28
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Liquidity
AtMarch 31, 2023 ,$140.0 million of the remaining senior notes are classified as current debt, as the terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. As ofMarch 31, 2023 ,$65.0 million was drawn on the Revolving Credit Facility and is classified as current debt based on the Company's past practice of using the Revolving Credit Facility for short term borrowings. However, the terms of the Revolving Credit Facility do not require repayment until maturity atSeptember 19, 2024 . AtMarch 31, 2023 , cash totaled$219.6 million and there was an additional$241.0 million available for borrowing under the Revolving Credit Facility (net of$19.0 million in outstanding letters of credit). Funds held by our foreign subsidiaries could be repatriated, at which point state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits. The Company's auction volumes have been adversely impacted by the supply chain disruptions and associated challenges in the automotive industry. We expect to see an improvement in the used vehicle market in the coming years, which is expected to increase the volume of vehicles entering our auction platforms and have a positive impact on our operating results. 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.
Securitization Facilities
AFC sells the majority of itsU.S. dollar denominated finance receivables on a revolving basis and without recourse toAFC Funding Corporation . A securitization agreement allows for the revolving sale byAFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires onJanuary 31, 2026 .AFC Funding Corporation had committed liquidity of$2.0 billion forU.S. finance receivables atMarch 31, 2023 . We also have an agreement for the securitization of AFCI's receivables, which expires onJanuary 31, 2026 . AFCI's committed facility is provided through a third-party conduit (separate from theU.S. facility) and wasC$300 million atMarch 31, 2023 . InMarch 2023 , AFCI entered into the Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement"). The Canadian Receivables Purchase Agreement increased AFCI's committed liquidity fromC$225 million toC$300 million and the facility's maturity date remainsJanuary 31, 2026 . In addition, provisions providing a mechanism for determining alternative rates of interest were added. We capitalized approximately$0.5 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both theU.S. and Canadian securitization agreements are accounted for as secured borrowings. AFC managed total finance receivables of$2,406.4 million and$2,416.6 million atMarch 31, 2023 andDecember 31, 2022 , respectively. AFC's allowance for losses was$21.0 million and$21.5 million atMarch 31, 2023 andDecember 31, 2022 , respectively. As ofMarch 31, 2023 andDecember 31, 2022 ,$2,373.6 million and$2,396.6 million , respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the$1,638.2 million and$1,677.6 million of obligations collateralized by finance receivables atMarch 31, 2023 andDecember 31, 2022 , 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$18.3 million and$19.4 million atMarch 31, 2023 andDecember 31, 2022 , respectively. After the occurrence of a termination event, as defined in theU.S. securitization agreement, the banks may, and could, cause the stock ofAFC Funding Corporation to be transferred to the bank facility, though 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. AtMarch 31, 2023 , we were in compliance with the covenants in the securitization agreements. 29
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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 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 income (loss) from continuing operations for the periods presented:
Three Months Ended March 31, 2023
(Dollars in millions) Marketplace Finance Consolidated
Income (loss) from continuing operations $ (21.1) $ 33.8 $ 12.7
Add back:
Income taxes (3.9) 11.2 7.3
Interest expense, net of interest income 7.1 30.3 37.4
Depreciation and amortization 21.2 1.8 23.0
Intercompany interest 6.4 (6.4) -
EBITDA 9.7 70.7 80.4
Non-cash stock-based compensation 2.7 1.1 3.8
Acquisition related costs 0.3 - 0.3
Securitization interest - (27.8) (27.8)
Severance 0.5 - 0.5
Foreign currency (gains)/losses (0.1) 0.2 0.1
Net change in unrealized (gains) losses on investment securities - 0.1 0.1
Professional fees related to business improvement efforts 0.6 0.1 0.7
Other 0.6 0.2 0.8
Total addbacks/(deductions) 4.6 (26.1) (21.5)
Adjusted EBITDA $ 14.3 $ 44.6 $ 58.9
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Three Months Ended March 31, 2022
(Dollars in millions) Marketplace Finance Consolidated
Income (loss) from continuing operations $ (39.4) $ 31.0 $ (8.4)
Add back:
Income taxes (15.1) 10.4 (4.7)
Interest expense, net of interest income 13.2 12.3 25.5
Depreciation and amortization 23.9 2.1 26.0
Intercompany interest 0.1 (0.1) -
EBITDA (17.3) 55.7 38.4
Non-cash stock-based compensation 4.4 0.8 5.2
Acquisition related costs 0.3 - 0.3
Securitization interest - (10.4) (10.4)
(Gain)/Loss on asset sales (0.1) - (0.1)
Severance 3.2 0.2 3.4
Foreign currency (gains)/losses 1.2 - 1.2
Net change in unrealized (gains) losses on investment securities - 3.0 3.0
Professional fees related to business improvement efforts 7.3 0.8 8.1
Total addbacks/(deductions) 16.3 (5.6) 10.7
Adjusted EBITDA $ (1.0) $ 50.1 $ 49.1
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Certain of our loan covenant calculations utilize financial results for the most
recent four consecutive fiscal quarters. The following table reconciles EBITDA
and Adjusted EBITDA to net income (loss) for the periods presented:
Twelve
Months
Three Months Ended Ended
June 30, September 30, December 31, March 31,
(Dollars in millions) 2022 2022 2022 2023 March 31, 2023
Net income (loss) $ 210.2 $
(5.8)
215.6 (6.3) (4.8) - 204.5
Income (loss) from continuing operations (5.4) 0.5 41.9 12.7 49.7
Add back:
Income taxes (9.9) 6.7 17.9 7.3 22.0
Interest expense, net of interest income 25.2 30.9 34.9 37.4 128.4
Depreciation and amortization 25.9 24.3 24.0 23.0 97.2
EBITDA 35.8 62.4 118.7 80.4 297.3
Non-cash stock-based compensation 14.5 3.5 (5.7) 3.8 16.1
Loss on extinguishment of debt 7.7 9.3 0.2 - 17.2
Acquisition related costs 0.3 0.3 0.3 0.3 1.2
Securitization interest (14.3) (20.2) (25.8) (27.8) (88.1)
Gain on sale of property - - (33.9) - (33.9)
Severance 3.3 1.5 4.2 0.5 9.5
Foreign currency (gains)/losses 3.3 4.1 (6.1) 0.1 1.4
Net change in unrealized (gains) losses on
investment securities 3.2 0.3 0.6 0.1 4.2
Professional fees related to business improvement
efforts 0.8 3.2 3.1 0.7 7.8
Other 1.5 5.1 0.9 0.8 8.3
Total addbacks/(deductions) 20.3 7.1 (62.2) (21.5) (56.3)
Adjusted EBITDA from continuing ops $ 56.1 $ 69.5 $ 56.5 $ 58.9 $ 241.0
Summary of Cash Flows
Three Months Ended March 31,
(Dollars in millions) 2023 2022
Net cash provided by (used by):
Operating activities - continuing operations $ 96.1 $ (22.6)
Operating activities - discontinued operations - (39.2)
Investing activities - continuing operations (13.6) (246.7)
Investing activities - discontinued operations 7.0 (11.8)
Financing activities - continuing operations (116.5) 276.7
Financing activities - discontinued operations - 22.0
Net change in cash balances of discontinued operations - (24.3)
Effect of exchange rate on cash 1.1 3.0
Net decrease in cash, cash equivalents and restricted cash $
(25.9)
Cash flow from operating activities (continuing operations) Net cash provided by operating activities (continuing operations) was$96.1 million for the three months endedMarch 31, 2023 , compared with net cash used by operating activities of$22.6 million for the three months endedMarch 31, 2022 . Cash provided by continuing operations for the three months endedMarch 31, 2023 consisted primarily of cash earnings and an increase in accounts payable and accrued expenses, partially offset by an increase in trade receivables and other assets. Cash used by continuing operations for the three months endedMarch 31 , 32
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2022 consisted primarily of an increase in trade receivables and other assets as well as payments of contingent consideration in excess of acquisition-date fair value, partially offset by cash earnings and an increase in accounts payable and accrued expenses. The increase in operating cash flow was primarily attributable to changes in operating assets and liabilities as a result of the timing of collections and the disbursement of funds to consignors for marketplace sales held near period-ends, as well as a decrease in payments of contingent consideration in excess of acquisition-date fair value.
Changes in AFC's accounts payable balance are presented in cash flows from operating activities while changes in AFC's finance receivables are presented in cash flows from investing activities. Changes in these balances can cause variations in operating and investing cash flows.
Cash flow from investing activities (continuing operations) Net cash used by investing activities (continuing operations) was$13.6 million for the three months endedMarch 31, 2023 , compared with$246.7 million for the three months endedMarch 31, 2022 . The cash used by investing activities for the three months endedMarch 31, 2023 was primarily from purchases of property and equipment and an increase in finance receivables held for investment. The cash used by investing activities for the three months endedMarch 31, 2022 was primarily due to an increase in finance receivables held for investments and purchases of property and equipment. Cash flow from financing activities (continuing operations) Net cash used by financing activities (continuing operations) was$116.5 million for the three months endedMarch 31, 2023 , compared with net cash provided by financing activities of$276.7 million for the three months endedMarch 31, 2022 . The cash used by financing activities for the three months endedMarch 31, 2023 was primarily due to a decrease in borrowings from lines of credit, a decrease in obligations collateralized by finance receivables and dividends paid on the Series A Preferred Stock. The cash provided by financing activities for the three months endedMarch 31, 2022 was primarily due to an increase in obligations collateralized by finance receivables and an increase in borrowings from lines of credit. Cash flow from operating activities (discontinued operations) There were no operating activities (discontinued operations) for the three months endedMarch 31, 2023 , compared with net cash used by operating activities of$39.2 million for the three months endedMarch 31, 2022 . The cash used by operating activities for the three months endedMarch 31, 2022 primarily consisted of an increase in trade receivables and other assets, partially offset by cash earnings and an increase in accounts payable and accrued expenses. Cash flow from investing activities (discontinued operations) Net cash provided by investing activities (discontinued operations) was$7.0 million for the three months endedMarch 31, 2023 , compared with net cash used by investing activities of$11.8 million for the three months endedMarch 31, 2022 . The cash provided by investing activities for the three months endedMarch 31, 2023 is attributable to the final proceeds from the sale of the ADESAU.S. physical auction business. The cash used by investing activities for the three months endedMarch 31, 2022 is primarily attributed to purchases of property and equipment.
Cash flow from financing activities (discontinued operations) There were no
financing activities (discontinued operations) for the three months ended
Capital Expenditures
Capital expenditures for the three months endedMarch 31, 2023 and 2022 approximated$12.0 million and$13.5 million , respectively. Capital expenditures were funded from internally generated funds. We continue to invest in our core information technology capabilities and our service locations. Capital expenditures related to continuing operations are expected to be approximately$65 million for fiscal year 2023. Future capital expenditures could vary substantially based on capital project timing, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies. 33
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Dividends
The Series A Preferred Stock ranks senior to the shares of the Company's common stock, par value$0.01 per share, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7% per annum, payable quarterly in arrears. Dividends were payable in kind through the issuance of additional shares of Series A Preferred Stock for the first eight dividend payments (throughJune 30, 2022 ), and thereafter, in cash or in kind, or in any combination of both, at the option of the Company. For the three months endedMarch 31, 2023 , the holders of the Series A Preferred Stock received cash dividends aggregating$11.1 million and for the three months endedMarch 31, 2022 , the holders of the Series A Preferred Stock received dividends in kind with a value in the aggregate of approximately$10.7 million . The holders of the Series A Preferred Stock are also entitled to participate in dividends declared or paid on our common stock on an as-converted basis. The Company has suspended its quarterly common stock dividend. Future dividend decisions will be based on and affected by a variety of factors, including our financial condition and results of operations, contractual restrictions, including restrictive covenants contained in our Credit Agreement and AFC's securitization facilities and the indenture governing our senior notes, capital requirements and other factors that our board of directors deems relevant. No assurance can be given as to whether any future dividends may be declared by our board of directors or the amount thereof.
Contractual Obligations
The Company's contractual cash obligations for long-term debt, interest payments related to long-term debt, finance lease obligations, operating leases and contingent consideration related to acquisitions are summarized in the table of contractual obligations in our Annual Report on Form 10-K for the year endedDecember 31, 2022 . SinceDecember 31, 2022 , the contractual obligations of the Company have changed as follows: •Operating lease obligations change in the ordinary course of business. We lease most of our facilities, as well as other property and equipment under operating leases. Future operating lease obligations will continue to change if renewal options are exercised and/or if we enter into additional operating lease agreements. See Note 6 to the Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information about the items described above. Our contractual cash obligations as ofDecember 31, 2022 , are discussed in the "Contractual Obligations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2022 , as filed with theSecurities and Exchange Commission (the "SEC").
Critical Accounting Estimates
Our critical accounting estimates are discussed in the "Critical Accounting Estimates" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2022 , as filed with theSEC . A summary of significant accounting policies is discussed in Note 2 and elsewhere in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2022 , which includes audited financial statements.
Off-Balance Sheet Arrangements
As ofMarch 31, 2023 , we had no off-balance sheet arrangements pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows. 34
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