KAR Auction Services, Inc. (NYSE:KAR) Q4 2020 Earnings Conference Call February 17, 2021 8:30 AM ET Company Participants Mike Eliason - Investor Relations Jim Hallett - CEO Eric Loughmiller - EVP and CFO Conference Call Participants Ryan Brinkman - JPMorgan John Murphy - Bank of America Merrill Lynch Craig Kennison - Robert W. Baird & Co. Stephanie Benjamin - Truist Securities Daniel Imbro - Stephens, Inc. Operator Good morning, ladies and gentlemen, and welcome to the KAR Auction Services, Incorporated Fou ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-34568 KAR Auction Services, Inc. (Exact name of Registrant as specified in its charter) Delaware 20-8744739 (State or other jurisdiction of incorporation or or ...

| --- | --- | --- | |-------|-------|-------| | | | | | | | | | | | | | | | | Disclaimer This presentation is for informational purposes only. Neither the company nor any of its affiliates or representatives makes any representation or warranty, expressed or implied, as to the accuracy or completeness of this presentation or any of the information contained herein. The company and its affiliates or representatives expressly disclaim to the fullest extent permitted by law any and all liability based, in whol ...

Financial Data and Key Metrics Changes - Revenue decreased by 15% year-over-year, with 9% less volume sold compared to the prior year [9] - Gross profit as a percentage of revenue increased to 44.5%, up 300 basis points from last year [9] - Gross profit was 52% of net revenue, compared to 47% the prior year [9][10] - The company has over $1.2 billion in cash and net leverage is down to 1.6 times [22] Business Line Data and Key Metrics Changes - TradeRev volumes grew by 22% in Q3, with September growth exceeding 30% [11] - OPENLANE and TradeRev saw growth in volumes sold, while services revenue declined year-over-year [9] - The company experienced increases in auction fee revenue per unit in all digital marketplaces except OPENLANE [9] Market Data and Key Metrics Changes - The wholesale marketplace faced a shortage of used car supply, impacting transaction volumes [16] - Off-lease vehicle transactions returned to normal levels, but the overall inventory shortage limited transactions [17] - Repossession volumes are expected to increase by 30% to 40% in 2021, as the industry anticipates a recovery in repo activity [18] Company Strategy and Development Direction - The company is focusing on a digital transformation, aiming to enhance its digital marketplace model [6][10] - The acquisition of BacklotCars is expected to significantly increase annual adjusted EBITDA by over $100 million within four years [13][14] - The company plans to simplify its reporting structure and metrics to better reflect its digital transformation [28][30] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, citing a commitment to maintaining a lower cost structure even as volumes return to normal [10][24] - The company anticipates a strong retail used car market, despite facing challenges with supply [16] - Management noted that the pandemic has accelerated the shift towards online vehicle purchasing [12] Other Important Information - The company is divesting Preferred Warranties, Inc. for less than $30 million, as it was not core to its business [25][26] - The company plans to repurchase shares under its existing $300 million share repurchase authorization [23] Q&A Session Summary Question: What are the current operating metrics for BacklotCars? - BacklotCars is on a run rate of about 160,000 vehicles, with revenue estimated between $50 million to $70 million, operating at a modest loss [37] Question: How many physical facilities will be needed in the future? - The company believes physical locations remain critical for vehicle inspection and ancillary services, even as it transitions to a digital model [38] Question: What is the outlook for ancillary services? - There is optimism for strong ancillary services revenue, particularly as off-lease vehicles and repossessions increase [42] Question: What is the expected timeline for the integration of BacklotCars? - The integration will proceed as quickly as possible, with no specific timeline provided [71] Question: How will the company handle increased repo volumes? - The company has the capacity to process increased repo volumes and is looking forward to serving this segment [86]

PART I—FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The unaudited consolidated financial statements for the period ended September 30, 2020, detail the company's financial performance, position, and cash flows, accompanied by condensed notes [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) In Q3 2020, total operating revenues declined by 15.4% year-over-year, while income from continuing operations increased, contrasting with a significant decline in both for the nine-month period Consolidated Income Statement Highlights (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | YoY Change | Nine Months 2020 | Nine Months 2019 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Total Operating Revenues** | $593.6 | $701.9 | -15.4% | $1,658.1 | $2,110.6 | -21.4% | | **Operating Profit** | $86.4 | $85.7 | +0.8% | $122.5 | $252.5 | -51.5% | | **Income from Continuing Operations** | $47.1 | $34.4 | +36.9% | $17.6 | $77.1 | -77.2% | | **Net Income** | $47.1 | $35.3 | +33.4% | $17.6 | $168.7 | -89.6% | | **Diluted EPS from Continuing Operations** | $0.23 | $0.26 | -11.5% | $0.04 | $0.58 | -93.1% | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to $6.91 billion as of September 30, 2020, primarily due to a significant rise in cash and cash equivalents, while total liabilities and stockholders' equity saw slight reductions Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Cash and cash equivalents** | $1,276.7 | $507.6 | | **Total current assets** | $3,674.6 | $3,244.5 | | **Total assets** | $6,909.9 | $6,581.2 | | **Total current liabilities** | $2,354.5 | $2,517.7 | | **Long-term debt** | $1,854.8 | $1,861.3 | | **Total liabilities** | $4,762.9 | $4,931.0 | | **Series A convertible preferred stock** | $540.0 | $— | | **Total stockholders' equity** | $1,607.0 | $1,650.2 | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities increased for the nine months ended September 30, 2020, with investing activities providing cash and financing activities shifting from a large use to a provision of cash Cash Flow Summary - Continuing Operations (Nine Months Ended, in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $431.9 | $291.1 | | **Net cash provided by (used by) investing activities** | $263.6 | $(367.3) | | **Net cash provided by (used by) financing activities** | $88.9 | $(1,140.5) | | **Net increase in cash, cash equivalents and restricted cash** | $770.5 | $227.2 | [Condensed Notes to Consolidated Financial Statements](index=12&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) These notes detail significant financial events and accounting policies, including a pending acquisition, the IAA spin-off, impairment charges, preferred stock issuance, and debt amendments - The company entered into an agreement to acquire BacklotCars, Inc. for **$425 million** in cash, expected to close in Q4 2020[47](index=47&type=chunk) - The financial results of the salvage auction business, IAA, which was spun-off on June 28, 2019, are accounted for as discontinued operations[48](index=48&type=chunk)[49](index=49&type=chunk) - A non-cash impairment charge of **$29.8 million** was recorded in Q2 2020, comprising **$25.5 million** for goodwill and **$4.3 million** for customer relationships in the ADESA Remarketing Limited reporting unit, due to the economic impact of COVID-19[69](index=69&type=chunk)[70](index=70&type=chunk) - In June 2020, the company issued **550,000 shares** of Series A Convertible Preferred Stock for an aggregate purchase price of approximately **$550 million**[90](index=90&type=chunk) - The company's two reportable business segments are ADESA Auctions (wholesale vehicle auctions) and AFC (floorplan financing for independent dealers)[103](index=103&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the financial results for Q3 and the first nine months of 2020, highlighting the COVID-19 impact, operational responses, segment performance, and strengthened liquidity [Impact of COVID-19](index=29&type=section&id=Impact%20of%20COVID-19) The company responded to COVID-19 by transitioning to all-digital auctions, implementing cost-saving measures, bolstering liquidity through preferred stock issuance, and utilizing government aid - Temporarily suspended physical sale operations on March 20, 2020, and transitioned to digital platforms like Simulcast-only and Simulcast+[118](index=118&type=chunk)[119](index=119&type=chunk) - Implemented significant cost-saving measures, including executive salary reductions, employee furloughs (approximately **11,000** initially), and suspension of the quarterly dividend[120](index=120&type=chunk)[143](index=143&type=chunk) - Strengthened liquidity by raising net proceeds of approximately **$528.2 million** from a convertible preferred stock issuance in June 2020[121](index=121&type=chunk) - Utilized government aid, recording approximately **$8.3 million** in employee retention credits under the CARES Act and **$14.3 million** under the Canada Emergency Wage Subsidy[121](index=121&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) Consolidated revenue declined in Q3 and the nine-month period of 2020, while ADESA's operating profit increased due to digital sales efficiencies, contrasting with declines in the AFC segment ADESA Segment Performance - Q3 2020 vs Q3 2019 | Metric | Q3 2020 | Q3 2019 | YoY Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $526.7M | $613.6M | -14% | | **Operating Profit** | $81.4M | $68.5M | +19% | | **Vehicles Sold** | 871,000 | 957,000 | -9% | | **Percentage of vehicles sold online** | 100% | 59% | +41 p.p. | | **Gross Profit % (excl. purchased vehicles)** | 49.3% | 42.5% | +6.8 p.p. | AFC Segment Performance - Q3 2020 vs Q3 2019 | Metric | Q3 2020 | Q3 2019 | YoY Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $66.9M | $88.3M | -24% | | **Operating Profit** | $38.2M | $55.1M | -31% | | **Loan Transactions** | 324,000 | 442,000 | -27% | | **Revenue per loan transaction** | $179 | $180 | -1% | [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) The company significantly improved its liquidity to **$1.28 billion** by September 30, 2020, through preferred stock issuance and credit facility amendments, ensuring compliance with debt covenants - Cash and cash equivalents increased to **$1.28 billion** at September 30, 2020, including approximately **$528.2 million** in net proceeds from the June 2020 issuance of perpetual convertible preferred stock[191](index=191&type=chunk)[192](index=192&type=chunk) - The Credit Agreement was amended twice in 2020, first providing a financial covenant 'holiday' in May, then eliminating it in September as business conditions improved[196](index=196&type=chunk)[197](index=197&type=chunk) - AFC's U.S. and Canadian securitization facilities were amended in September 2020, extending their maturity dates to January 2024[209](index=209&type=chunk)[210](index=210&type=chunk) - The company was in compliance with its Consolidated Senior Secured Net Leverage Ratio covenant, which was **negative 0.6** at September 30, 2020, well below the maximum of **3.5**[204](index=204&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=52&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are foreign currency fluctuations, mainly from Canadian operations, and interest rate changes on variable debt, mitigated by interest rate swaps - Foreign currency exposure is primarily from Canadian operations, with a **1%** decrease in the Canadian exchange rate estimated to impact net income by approximately **$0.3 million** for Q3 2020[238](index=238&type=chunk) - In January 2020, the company entered into interest rate swaps with an aggregate notional amount of **$500 million** to hedge against interest rate risk on its variable rate term loan[240](index=240&type=chunk) - A hypothetical **100 basis point** increase in short-term rates would have increased interest expense by approximately **$1.1 million** for Q3 2020, after accounting for the interest rate swaps[241](index=241&type=chunk) [Item 4. Controls and Procedures](index=52&type=section&id=Item%204.%20Controls%20and%20Procedures) As of September 30, 2020, the CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the period[242](index=242&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[243](index=243&type=chunk) PART II—OTHER INFORMATION [Item 1. Legal Proceedings](index=53&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal disputes not expected to materially affect its financial condition, results of operations, or cash flows - The company is involved in ordinary course litigation which is not expected to have a material adverse effect on its financial condition or results[246](index=246&type=chunk) [Item 1A. Risk Factors](index=53&type=section&id=Item%201A.%20Risk%20Factors) This section refers to previously disclosed risk factors, noting that the COVID-19 pandemic exacerbates many of these existing risks - The report directs readers to the risk factors in the 2019 Form 10-K and prior 2020 Form 10-Qs, stating that the COVID-19 pandemic exacerbates those risks[248](index=248&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=53&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No common stock was repurchased in Q3 2020, with the full **$300 million** authorized under the October 2019 share repurchase program remaining available - No shares of common stock were repurchased during the three months ended September 30, 2020[250](index=250&type=chunk) - As of September 30, 2020, the full **$300 million** authorized under the October 2019 share repurchase program was still available[250](index=250&type=chunk) [Item 6. Exhibits](index=54&type=section&id=Item%206.%20Exhibits) This section provides an index of all exhibits filed with the Form 10-Q, including amendments to credit agreements and certifications

Second Quarter 2020 Earnings Slides August 4, 2020 Forward-Looking Statements This presentation includes forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements are based on management's current expectations, are not guarantees of future performance and are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward-lookin ...

[PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) The company experienced significant revenue decline and a net loss in Q2 and H1 2020 due to COVID-19, offset by a $550 million preferred stock issuance and a $29.8 million impairment charge [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) Consolidated Income Statement Highlights (in millions, except per share data) | Metric | Q2 2020 | Q2 2019 | YoY Change | H1 2020 | H1 2019 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Total Operating Revenues** | $419.0 | $719.1 | -41.7% | $1,064.5 | $1,408.7 | -24.4% | | **Operating Profit (Loss)** | $(4.7) | $90.6 | - | $36.1 | $166.8 | -78.4% | | **Income (Loss) from Continuing Operations** | $(32.3) | $27.4 | - | $(29.5) | $42.7 | - | | **Net Income (Loss)** | $(32.3) | $55.6 | - | $(29.5) | $133.4 | - | | **Diluted EPS from Continuing Operations** | $(0.27) | $0.20 | - | $(0.24) | $0.32 | - | - The company recorded a goodwill and other intangibles impairment charge of **$29.8 million** in the second quarter and first half of 2020, which was not present in the prior year[9](index=9&type=chunk) - Dividends declared per common share were **suspended** in Q2 2020, compared to **$0.35** in Q2 2019 For the first half of the year, dividends were **$0.19** per share in 2020 versus **$0.70** in 2019[9](index=9&type=chunk) [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (in millions) | Metric | June 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | **Cash and cash equivalents** | $968.5 | $507.6 | +$460.9 | | **Finance receivables, net** | $1,526.3 | $2,100.2 | -$573.9 | | **Goodwill** | $1,790.9 | $1,821.7 | -$30.8 | | **Total Assets** | $6,494.0 | $6,581.2 | -$87.2 | | **Obligations collateralized by finance receivables** | $735.9 | $1,461.2 | -$725.3 | | **Long-term debt** | $1,856.9 | $1,861.3 | -$4.4 | | **Series A convertible preferred stock** | $528.2 | $— | +$528.2 | | **Total Stockholders' Equity** | $1,554.5 | $1,650.2 | -$95.7 | - The company's cash position **significantly increased**, largely due to the issuance of **$528.2 million** in Series A convertible preferred stock in Q2 2020[15](index=15&type=chunk)[18](index=18&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Cash Flow Highlights (in millions) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | **Net cash provided by operating activities - continuing** | $268.9 | $161.7 | | **Net cash provided by (used by) investing activities - continuing** | $485.9 | $(268.9) | | **Net cash used by financing activities - continuing** | $(279.9) | $(1,387.6) | | **Net increase (decrease) in cash** | $457.6 | $(48.0) | - Cash from investing activities was **positive** in H1 2020 primarily due to a net decrease in finance receivables held for investment of **$532.6 million**[27](index=27&type=chunk) - Financing activities in H1 2020 included proceeds of **$550.1 million** from the issuance of Series A Preferred Stock, offset by a **$720.5 million** net decrease in obligations collateralized by finance receivables In H1 2019, financing activities were dominated by a **$1.29 billion** payment on long-term debt[27](index=27&type=chunk) [Condensed Notes to Consolidated Financial Statements](index=10&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) Key notes detail business segments, the 2019 IAA spin-off, a **$29.8 million** goodwill impairment due to COVID-19, debt covenant amendments, and a **$550 million** preferred stock issuance to bolster liquidity - The company's operations are grouped into two reportable segments: **ADESA Auctions** (wholesale vehicle auctions) and **AFC** (floorplan financing for dealers)[30](index=30&type=chunk)[35](index=35&type=chunk)[101](index=101&type=chunk) - Due to the economic impact of the COVID-19 pandemic, the company recorded a non-cash goodwill impairment charge of **$25.5 million** and a customer relationship impairment of **$4.3 million** in its ADESA Remarketing Limited reporting unit during Q2 2020[67](index=67&type=chunk)[69](index=69&type=chunk) - In June 2020, the company issued 550,000 shares of Series A Convertible Preferred Stock for aggregate proceeds of approximately **$550 million** to affiliates of Apax and Periphas[87](index=87&type=chunk) - On May 29, 2020, the company amended its Credit Agreement to provide a financial covenant 'holiday' through **June 30, 2021**, and established a minimum liquidity covenant of **$225.0 million**[72](index=72&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant negative impact of COVID-19 on Q2 2020 operations, leading to a **42%** revenue decline, with responses including cost-cutting, liquidity enhancement, and a strong intra-quarter recovery in sales volumes [Impact of COVID-19](index=33&type=section&id=Impact%20of%20COVID-19) - In response to the pandemic, the company temporarily suspended physical auction operations on **March 20, 2020**, shifting to **Simulcast-only digital sales**[116](index=116&type=chunk) - Significant cost-saving measures were implemented, including furloughing approximately **11,000 employees** in April (about 5,000 have returned), reducing executive and board compensation, and **suspending the quarterly dividend**[124](index=124&type=chunk) - The company received government assistance, recording **$7.9 million** in employee retention credits under the CARES Act and **$9.7 million** under the Canada Emergency Wage Subsidy in Q2 2020[121](index=121&type=chunk) [Results of Operations](index=38&type=section&id=Results%20of%20Operations) Q2 2020 revenue fell **42%** to **$419.0 million**, resulting in an operating loss, with ADESA revenue down **43%** and AFC revenue down **34%**, despite a strong intra-quarter recovery in sales volumes - The company experienced a **significant business recovery** within Q2 2020 April vehicle sales were only **27%** of April 2019 levels, improving to **65%** in May, and exceeding prior year levels by **8%** in June 2020[145](index=145&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk) ADESA Segment Performance - Q2 2020 vs Q2 2019 | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $362.2M | $632.4M | -43% | | **Operating Profit (Loss)** | $(2.5)M | $79.6M | - | | **Vehicles Sold** | 648,000 | 994,000 | -35% | | **Percentage of vehicles sold online** | 100% | 59% | +41 p.p. | AFC Segment Performance - Q2 2020 vs Q2 2019 | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $56.8M | $86.7M | -34% | | **Operating Profit** | $30.7M | $53.2M | -42% | | **Provision for credit losses** | $(19.0)M | $(8.4)M | +126% | | **Loan Transactions** | 420,000 | 437,000 | -4% | [Liquidity and Capital Resources](index=51&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company significantly enhanced liquidity, with cash rising to **$968.5 million** due to a **$528.2 million** preferred stock issuance, alongside credit facility amendments and customer relief programs, ensuring sufficient operating funds - Cash and cash equivalents **increased** to **$968.5 million** at June 30, 2020, from **$507.6 million** at year-end 2019, bolstered by approximately **$528.2 million** in net proceeds from the issuance of perpetual convertible preferred stock[193](index=193&type=chunk)[195](index=195&type=chunk) - The company amended its Credit Agreement on May 29, 2020, to provide a financial covenant 'holiday' through **June 30, 2021**, and established a monthly minimum liquidity covenant of **$225.0 million**[199](index=199&type=chunk) - AFC's securitization facilities, with committed liquidity of **$1.70 billion** in the U.S. and **C$175 million** in Canada, were amended to permit a **Customer Relief Program**, allowing eligible customers to defer payments through June 30, 2020[210](index=210&type=chunk)[211](index=211&type=chunk)[215](index=215&type=chunk) Adjusted EBITDA Reconciliation (Consolidated, in millions) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | **Net Income (Loss) from Continuing Operations** | $(32.3) | $27.4 | $(29.5) | $42.7 | | **EBITDA** | $40.2 | $139.0 | $129.9 | $261.0 | | **Adjusted EBITDA** | $80.0 | $135.9 | $168.6 | $258.8 | [Quantitative and Qualitative Disclosures About Market Risk](index=62&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are foreign currency fluctuations from Canadian operations and interest rate risk on variable debt, mitigated by **$500 million** in interest rate swaps, with a **100 basis point** rate increase impacting Q2 2020 interest expense by **$1.1 million** - Foreign currency exposure is mainly from Canadian operations A **1% decrease** in the Canadian exchange rate would have impacted Q2 2020 net income by approximately **$0.1 million**[237](index=237&type=chunk) - To manage interest rate risk, the company entered into three pay-fixed interest rate swaps in January 2020 with an aggregate notional amount of **$500 million**, maturing in 2025[239](index=239&type=chunk) - A hypothetical **100 basis point increase** in LIBOR would have increased interest expense by approximately **$1.1 million** for Q2 2020 and **$2.2 million** for H1 2020[240](index=240&type=chunk) [Controls and Procedures](index=62&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were **effective** as of the end of the period covered by the report[241](index=241&type=chunk) - **No changes** in internal control over financial reporting occurred during the quarter ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[242](index=242&type=chunk) [PART II—OTHER INFORMATION](index=63&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Legal Proceedings](index=63&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings, which management believes are not likely to have a material adverse effect on its financial condition, results of operations, or cash flows - The company is involved in litigation and disputes arising in the ordinary course of business, which management believes are **not likely to have a material adverse effect** on its financial condition[245](index=245&type=chunk) [Risk Factors](index=63&type=section&id=Item%201A.%20Risk%20Factors) The primary risk factor is the ongoing and uncertain adverse impact of the COVID-19 pandemic on the company's business, operations, and financial condition, influenced by government measures and economic changes - The COVID-19 pandemic continues to create **significant uncertainty** and is expected to have an **ongoing adverse impact** on the business, results of operations, and financial condition[248](index=248&type=chunk) - The extent of the pandemic's impact depends on **highly uncertain future developments**, including the duration and spread of the outbreak, government actions, and the pace of economic recovery[251](index=251&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=64&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Unregistered equity sales were previously disclosed, and while a **$300 million** share repurchase program is authorized through October 2021, no shares were repurchased during the quarter ended June 30, 2020 - The company **did not repurchase** any of its common stock during the quarter ended June 30, 2020[253](index=253&type=chunk) - As of June 30, 2020, the full **$300 million** authorized under the current share repurchase program, which runs through October 30, 2021, **remains available**[253](index=253&type=chunk) [Exhibits](index=65&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including amendments to credit and receivables purchase agreements, the Employee Stock Purchase Plan, and CEO/CFO certifications - Key exhibits filed include the **Fourth Amendment to the Credit Agreement**, amendments to **AFC's Receivables Purchase Agreements**, and the **Amended and Restated Employee Stock Purchase Plan**[261](index=261&type=chunk)[263](index=263&type=chunk)[267](index=267&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-34568 KAR Auction Services, Inc. (Exact name of Registrant as specified in its charter) Delaware 20-8744739 (State or other jurisdiction of incorporation ...

Part I [Business](index=4&type=section&id=Item%201.%20Business) KAR Auction Services is a leading provider of used vehicle auctions and remarketing services, operating through its ADESA and AFC segments - The company operates as two reportable business segments: ADESA Auctions (**87% of 2019 revenue**) and AFC (**13% of 2019 revenue**)[30](index=30&type=chunk) - In 2019, KAR facilitated the sale of approximately **3.8 million used vehicles** through its 74 North American physical auction locations and various online platforms[12](index=12&type=chunk) - The company's strategic initiatives are centered on digital platforms, data and analytics, international expansion, mobility solutions, and the seamless integration of its businesses[21](index=21&type=chunk)[22](index=22&type=chunk) - In 2019, the company separated from its salvage auction business, IAA, through a tax-free spin-off; IAA now operates as a separate public entity[16](index=16&type=chunk) [Our Industry](index=5&type=section&id=Our%20Industry) The North American used vehicle auction market is a highly consolidated industry, with ADESA and its main competitor representing approximately 70% of the market share - The North American used vehicle auction market volume was estimated at approximately **12 million vehicles in 2019**, including online and mobile application volumes[18](index=18&type=chunk) - The market is largely consolidated, with Manheim and ADESA accounting for an estimated **70% of the North American whole car auction market**, with ADESA's share at **30%**[19](index=19&type=chunk) [Our Business Segments](index=7&type=section&id=Our%20Business%20Segments) The company's operations are divided into the ADESA segment for whole car auctions and the AFC segment for floorplan financing to independent dealers ADESA Online Sales Volume | Metric | 2019 | | :--- | :--- | | **Online Sales Volume (% of total)** | 58% | AFC Key Metrics (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | **Active Dealers** | ~12,900 | | **Average Line of Credit** | ~$270,000 | | **Average Vehicles Floorplanned per Dealer** | ~16 | | **Average Value Outstanding per Vehicle** | ~$10,000 | - AFC utilizes securitization facilities to fund its operations, with a committed facility of **$1.70 billion** for U.S. finance receivables and **C$175 million** for Canadian receivables as of December 31, 2019[54](index=54&type=chunk)[55](index=55&type=chunk) [Risk Factors](index=14&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from competition, technology, operations, economic conditions, a substantial debt load, and regulations - The company faces significant competition from direct competitors like Manheim, new online entrants (e.g., ACV Auctions, EBlock), and customers selling directly to end-users[70](index=70&type=chunk)[73](index=73&type=chunk)[74](index=74&type=chunk) - The business is exposed to information technology risks, including system disruptions and cyber-attacks, which could compromise confidential data and harm the company's reputation and operations[87](index=87&type=chunk)[88](index=88&type=chunk)[89](index=89&type=chunk) - A decrease in the supply of used vehicles, particularly off-lease vehicles, or a market shift towards online-only platforms could adversely affect revenues and profitability[91](index=91&type=chunk)[93](index=93&type=chunk) - As of December 31, 2019, the company had total corporate debt of approximately **$1.9 billion**, which could limit financial flexibility and expose it to interest rate fluctuation risks[110](index=110&type=chunk)[116](index=116&type=chunk) - If the spin-off of IAA fails to qualify as a tax-free transaction, the company and its stockholders could be subject to substantial U.S. federal income tax liabilities[126](index=126&type=chunk)[128](index=128&type=chunk) [Properties](index=27&type=section&id=Item%202.%20Properties) The company operates from a leased corporate headquarters and numerous owned or leased auction and financing locations across North America - ADESA operates **74 used vehicle auction facilities** in North America, with an average size of approximately 75 acres per site[142](index=142&type=chunk) - AFC has **121 locations** in North America, with 84 physically located at auction facilities (63 at ADESA sites); most AFC branches are leased[143](index=143&type=chunk) [Legal Proceedings](index=27&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings not expected to have a material adverse effect on its financial condition - The company is subject to routine litigation incidental to its business but does not expect these proceedings to have a **material adverse effect** on its financial condition[145](index=145&type=chunk)[519](index=519&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=28&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on the NYSE, with a $300 million share repurchase program authorized in October 2019 - In October 2019, the board of directors authorized a new share repurchase program of up to **$300 million** through October 30, 2021; no shares were repurchased under this authorization as of December 31, 2019[140](index=140&type=chunk)[147](index=147&type=chunk) Cumulative Total Stockholder Return (2014-2019) | Company/Index | 12/31/2014 | 12/31/2019 | | :--- | :--- | :--- | | **KAR Auction Services, Inc.** | $100 | $191.50 | | **S&P 400 Midcap Index** | $100 | $154.07 | | **S&P 500 Index** | $100 | $173.86 | [Selected Financial Data](index=30&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year summary of key financial data, showing 2019 revenues of $2.78 billion and total debt of $1.89 billion Selected Financial Data (Years Ended Dec 31) | (Dollars in millions) | 2019 | 2018 | | :--- | :--- | :--- | | **Total operating revenues** | $2,781.9 | $2,442.8 | | **Operating profit** | $314.1 | $340.1 | | **Income from continuing operations** | $92.4 | $117.6 | | **Total assets from continuing operations** | $6,581.2 | $5,699.4 | | **Total debt, net** | $1,890.1 | $2,667.4 | | **Net cash provided by operating activities - continuing operations** | $380.8 | $438.6 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2019, revenue grew 14% to $2.8 billion, while operating profit and net income from continuing operations declined Consolidated Results Overview (FY 2019 vs. FY 2018) | (Dollars in millions) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | **Total revenues** | $2,781.9 | $2,442.8 | +14% | | **Operating profit** | $314.1 | $340.1 | -8% | | **Net income from continuing operations** | $92.4 | $117.6 | -21% | - The spin-off of the salvage auction business, IAA, was completed on June 28, 2019; IAA's financial results are now reported as **discontinued operations**[180](index=180&type=chunk) - In September 2019, the company amended its Credit Agreement, refinancing existing term loans with a new **$950 million Term Loan B-6** and establishing a new **$325 million Revolving Credit Facility**[178](index=178&type=chunk)[229](index=229&type=chunk) [Results of Operations](index=37&type=section&id=Results%20of%20Operations) ADESA's revenue grew 16% while its operating profit declined, whereas AFC's revenue and operating profit both increased in 2019 ADESA Segment Performance (FY 2019 vs. FY 2018) | (Dollars in millions, except where noted) | 2019 | 2018 | | :--- | :--- | :--- | | **Total ADESA revenue** | $2,429.0 | $2,101.9 | | **Operating profit** | $264.1 | $307.8 | | **Vehicles sold (thousands)** | 3,784 | 3,472 | | **Percentage of vehicles sold online** | 58% | 54% | AFC Segment Performance (FY 2019 vs. FY 2018) | (Dollars in millions, except where noted) | 2019 | 2018 | | :--- | :--- | :--- | | **Total AFC revenue** | $352.9 | $340.9 | | **Operating profit** | $220.6 | $203.5 | | **Loan transactions (thousands)** | 1,783 | 1,760 | | **Revenue per loan transaction** | $178 | $175 | - TradeRev, a key digital growth initiative, incurred operating losses of **$71.5 million in 2019**, up from $53.0 million in 2018, reflecting continued investment[167](index=167&type=chunk) [Liquidity and Capital Resources](index=49&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company maintains liquidity through cash from operations and credit facilities, having prepaid $1.3 billion in debt after the IAA spin-off Liquidity Position (as of Dec 31) | (Dollars in millions) | 2019 | 2018 | | :--- | :--- | :--- | | **Cash and cash equivalents** | $507.6 | $277.1 | | **Working capital** | $726.8 | $450.3 | | **Available under revolving credit facility** | $325.0 | $350.0 | - In June 2019, the company prepaid approximately **$1.28 billion** of its Term Loan B-4 and Term Loan B-5 using cash received from the IAA separation[228](index=228&type=chunk) - AFC managed total finance receivables of **$2.12 billion** as of December 31, 2019, funded primarily through securitization facilities with committed liquidity of **$1.70 billion** in the U.S. and **C$175 million** in Canada[241](index=241&type=chunk)[242](index=242&type=chunk)[243](index=243&type=chunk) [Critical Accounting Estimates](index=58&type=section&id=Critical%20Accounting%20Estimates) Management identifies critical accounting estimates related to credit losses, business combinations, goodwill impairment, and legal contingencies - Key critical accounting estimates include: (1) allowance for credit losses, (2) business combinations, (3) goodwill and other intangible assets, and (4) legal proceedings and other loss contingencies[267](index=267&type=chunk) - The allowance for credit losses is sensitive to changes in charge-offs; a hypothetical **10% increase in net charge-offs** for 2019 would have increased the provision for credit losses by approximately **$3.4 million**[272](index=272&type=chunk) - Goodwill is tested for impairment annually in the second quarter; in 2019, the company performed a qualitative assessment and **did not identify any impairment**[275](index=275&type=chunk)[277](index=277&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=53&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is primarily exposed to market risks from foreign currency fluctuations, particularly the Canadian dollar, and interest rate changes - The company's primary foreign currency exposure is to the Canadian dollar; a **1% decrease in the average Canadian exchange rate** in 2019 would have impacted net income by approximately **$0.3 million**[104](index=104&type=chunk)[284](index=284&type=chunk) - The company is exposed to interest rate risk on its variable rate corporate debt; a hypothetical **100 basis point increase in LIBOR** for 2019 would have increased interest expense by approximately **$6.1 million**[288](index=288&type=chunk) [Financial Statements and Supplementary Data](index=55&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements and the independent auditor's unqualified opinion - The independent auditor, KPMG LLP, issued an **unqualified opinion** on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[301](index=301&type=chunk) - The company adopted new accounting standards for Leases (Topic 842) effective January 1, 2019, and for Revenue from Contracts with Customers (Topic 606) effective January 1, 2018[303](index=303&type=chunk)[304](index=304&type=chunk) [Consolidated Financial Statements](index=60&type=section&id=Consolidated%20Financial%20Statements) For 2019, the company reported total operating revenues of $2.8 billion and net income of $188.5 million, including discontinued operations Consolidated Statement of Income Highlights (FY 2019) | (In millions) | Amount | | :--- | :--- | | **Total operating revenues** | $2,781.9 | | **Operating profit** | $314.1 | | **Income from continuing operations** | $92.4 | | **Income from discontinued operations, net** | $96.1 | | **Net income** | $188.5 | Consolidated Balance Sheet Highlights (as of Dec 31, 2019) | (In millions) | Amount | | :--- | :--- | | **Total current assets** | $3,244.5 | | **Total assets** | $6,581.2 | | **Total current liabilities** | $2,517.7 | | **Long-term debt** | $1,861.3 | | **Total stockholders' equity** | $1,650.2 | Consolidated Statement of Cash Flows Highlights (FY 2019) | (In millions) | Amount | | :--- | :--- | | **Net cash provided by operating activities - continuing** | $380.8 | | **Net cash used by investing activities - continuing** | ($415.0) | | **Net cash used by financing activities - continuing** | ($1,163.8) | | **Net increase in cash** | $256.2 | [Notes to Consolidated Financial Statements](index=79&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, acquisitions, the IAA spin-off, and the company's long-term debt structure - In January 2019, the company acquired CarsOnTheWeb (an online auction company in Europe) and Dent-ology for an aggregate purchase price of **$169.2 million**, resulting in **$142.6 million of goodwill**[403](index=403&type=chunk)[404](index=404&type=chunk)[406](index=406&type=chunk) - The spin-off of IAA was completed on June 28, 2019; in connection with the separation, KAR received a cash distribution of approximately **$1.28 billion** from IAA, which was used to prepay a portion of KAR's term loans[420](index=420&type=chunk) - As of December 31, 2019, long-term debt consisted primarily of a **$947.6 million Term Loan B-6** due 2026 and **$950.0 million in 5.125% senior notes** due 2025[469](index=469&type=chunk) [Controls and Procedures](index=99&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were **effective** as of the end of the period covered by the report[538](index=538&type=chunk) - There were **no changes** in internal control over financial reporting during the fourth quarter of 2019 that materially affected, or are reasonably likely to materially affect, internal controls[540](index=540&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=100&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) This section lists the company's executive officers and confirms the adoption of a Code of Business Conduct and Ethics - The report lists the key executive officers of the company, including James P. Hallett (CEO), Eric M. Loughmiller (CFO), John C. Hammer (President of ADESA), and James E. Money (President of AFC)[543](index=543&type=chunk) - The company has adopted a Code of Business Conduct and Ethics and a Code of Ethics for Principal Executive and Senior Financial Officers, both available on its website[554](index=554&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=102&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section provides information on the company's equity compensation plans as of December 31, 2019 Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | **Equity compensation plans approved by security holder(s)** | 2,035,813 | $9.07 | 5,147,288 | Part IV [Exhibits, Financial Statement Schedules](index=103&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K - This section provides an index of all exhibits filed with the Form 10-K, including debt agreements, compensation plans, and material contracts[563](index=563&type=chunk)[564](index=564&type=chunk)

[PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for KAR Auction Services, Inc., covering financial performance, liquidity, and market risks [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) This section presents the unaudited condensed consolidated financial statements of KAR Auction Services, Inc. for the periods ended September 30, 2019, and December 31, 2018, including statements of income, comprehensive income, balance sheets, stockholders' equity, and cash flows, along with accompanying condensed notes detailing accounting policies, acquisitions, the IAA spin-off, stock-based compensation, finance receivables, debt, leases, and segment information [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) This section presents the unaudited consolidated statements of income for the three and nine months ended September 30, 2019 and 2018, detailing revenues, profits, and net income Consolidated Statements of Income (Three Months Ended September 30) | Metric | 2019 (Millions) | 2018 (Millions) | | :--------------------------------------- | :-------------- | :-------------- | | Total operating revenues | $701.9 | $612.4 | | Operating profit | $85.7 | $85.6 | | Income from continuing operations | $34.4 | $30.9 | | Income from discontinued operations, net | $0.9 | $46.6 | | Net income | $35.3 | $77.5 | | Net income per share - diluted (Continuing) | $0.26 | $0.23 | | Net income per share - diluted (Total) | $0.27 | $0.57 | | Dividends declared per common share | $0.19 | $0.35 | Consolidated Statements of Income (Nine Months Ended September 30) | Metric | 2019 (Millions) | 2018 (Millions) | | :--------------------------------------- | :-------------- | :-------------- | | Total operating revenues | $2,110.6 | $1,849.0 | | Operating profit | $252.5 | $269.9 | | Income from continuing operations | $77.1 | $102.5 | | Income from discontinued operations, net | $91.6 | $158.2 | | Net income | $168.7 | $260.7 | | Net income per share - diluted (Continuing) | $0.58 | $0.76 | | Net income per share - diluted (Total) | $1.26 | $1.92 | | Dividends declared per common share | $0.89 | $1.05 | [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents the unaudited consolidated statements of comprehensive income for the three and nine months ended September 30, 2019 and 2018, including net income and foreign currency translation adjustments Consolidated Statements of Comprehensive Income (Three Months Ended September 30) | Metric | 2019 (Millions) | 2018 (Millions) | | :-------------------------- | :-------------- | :-------------- | | Net income | $35.3 | $77.5 | | Foreign currency translation gain (loss) | $(10.8) | $6.3 | | Comprehensive income | $24.5 | $83.8 | Consolidated Statements of Comprehensive Income (Nine Months Ended September 30) | Metric | 2019 (Millions) | 2018 (Millions) | | :-------------------------- | :-------------- | :-------------- | | Net income | $168.7 | $260.7 | | Foreign currency translation gain (loss) | $5.7 | $(12.0) | | Comprehensive income | $174.4 | $248.7 | [Consolidated Balance Sheets](index=7&type=section&id=Consolidated%20Balance%20Sheets) This section presents the unaudited consolidated balance sheets as of September 30, 2019, and December 31, 2018, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheets (As of September 30, 2019 and December 31, 2018) | Asset/Liability/Equity | Sep 30, 2019 (Millions) | Dec 31, 2018 (Millions) | | :--------------------------------------- | :---------------------- | :---------------------- | | **Assets** | | | | Cash and cash equivalents | $508.6 | $277.1 | | Total current assets | $3,257.7 | $3,314.2 | | Goodwill | $1,810.3 | $1,676.9 | | Total assets | $6,579.7 | $7,206.2 | | **Liabilities** | | | | Total current liabilities | $2,516.2 | $2,624.8 | | Long-term debt | $1,863.0 | $2,654.3 | | Total non-current liabilities | $2,427.7 | $3,117.2 | | **Stockholders' Equity** | | | | Total stockholders' equity | $1,635.8 | $1,464.2 | | Total liabilities and stockholders' equity | $6,579.7 | $7,206.2 | [Consolidated Statements of Stockholders' Equity](index=10&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) This section presents the unaudited consolidated statements of stockholders' equity for the three and nine months ended September 30, 2019, detailing changes in common stock, retained earnings, and comprehensive loss Consolidated Statements of Stockholders' Equity (Three Months Ended September 30, 2019) | Metric | Common Stock Shares | Common Stock Amount (Millions) | Additional Paid-In Capital (Millions) | Retained Earnings (Millions) | Accumulated Other Comprehensive Loss (Millions) | Total (Millions) | | :--------------------------------------- | :------------------ | :----------------------------- | :------------------------------------ | :--------------------------- | :-------------------------------------- | :--------------- | | Balance at June 30, 2019 | 133.4 | $1.3 | $1,140.8 | $644.9 | $(34.4) | $1,752.6 | | Net income | | | | $35.3 | | $35.3 | | Other comprehensive income | | | | | $(10.8) | $(10.8) | | Issuance of common stock under stock plans | 0.2 | | $(1.3) | | | $(1.3) | | Surrender of RSUs for taxes | — | | $(0.1) | | | $(0.1) | | Repurchase and retirement of common stock | (4.8) | | $(119.7) | | | $(119.7) | | Stock-based compensation expense | | | $4.3 | | | $4.3 | | Cash dividends declared | | | | $(24.5) | | $(24.5) | | Balance at September 30, 2019 | 128.8 | $1.3 | $1,024.0 | $655.7 | $(45.2) | $1,635.8 | Consolidated Statements of Stockholders' Equity (Nine Months Ended September 30, 2019) | Metric | Common Stock Shares | Common Stock Amount (Millions) | Additional Paid-In Capital (Millions) | Retained Earnings (Millions) | Accumulated Other Comprehensive Loss (Millions) | Total (Millions) | | :--------------------------------------- | :------------------ | :----------------------------- | :------------------------------------ | :--------------------------- | :-------------------------------------- | :--------------- | | Balance at December 31, 2018 | 132.9 | $1.3 | $1,131.9 | $392.3 | $(61.3) | $1,464.2 | | Cumulative effect adjustment for adoption of ASC Topic 842, net of tax | | | | $1.1 | | $1.1 | | Net income | | | | $168.7 | | $168.7 | | Other comprehensive income | | | | | $5.7 | $5.7 | | Issuance of common stock under stock plans | 0.9 | | $4.1 | | | $4.1 | | Surrender of RSUs for taxes | (0.2) | | $(10.5) | | | $(10.5) | | Repurchase and retirement of common stock | (4.8) | | $(119.7) | | | $(119.7) | | Stock-based compensation expense | | | $16.4 | | | $16.4 | | Distribution of IAA | | | | $213.2 | $10.4 | $223.6 | | Dividends earned under stock plan | | | $1.8 | $(1.8) | | — | | Cash dividends declared | | | | $(117.8) | | $(117.8) | | Balance at September 30, 2019 | 128.8 | $1.3 | $1,024.0 | $655.7 | $(45.2) | $1,635.8 | [Consolidated Statements of Cash Flows](index=13&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents the unaudited consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, detailing cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Activity | 2019 (Millions) | 2018 (Millions) | | :--------------------------------------- | :-------------- | :-------------- | | Net cash provided by operating activities - continuing operations | $291.1 | $326.9 | | Net cash provided by operating activities - discontinued operations | $156.7 | $238.2 | | Net cash used by investing activities - continuing operations | $(367.3) | $(196.2) | | Net cash used by investing activities - discontinued operations | $(37.4) | $(37.9) | | Net cash used by financing activities - continuing operations | $(1,140.5) | $(199.0) | | Net cash provided by (used by) financing activities - discontinued operations | $1,317.6 | $(6.7) | | Net increase in cash, cash equivalents and restricted cash | $227.2 | $120.4 | | Cash, cash equivalents and restricted cash at end of period | $531.9 | $423.9 | [Condensed Notes to Consolidated Financial Statements](index=15&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes to the unaudited consolidated financial statements, covering accounting policies, acquisitions, the IAA spin-off, stock-based compensation, finance receivables, debt, leases, and segment information [Note 1—Basis of Presentation and Nature of Operations](index=15&type=section&id=Note%201%E2%80%94Basis%20of%20Presentation%20and%20Nature%20of%20Operations) This note describes the company's business segments, ADESA and AFC, and details the adoption of new accounting standards for leases, cloud computing costs, goodwill impairment, and credit losses - ADESA provides wholesale vehicle auctions and remarketing services, operating **74 North American sites** and online platforms including TradeRev and ADESA Europe (formerly CarsOnTheWeb) and acts as an agent, earning fees from sellers and buyers, and offers ancillary services like transportation and reconditioning[32](index=32&type=chunk)[34](index=34&type=chunk)[36](index=36&type=chunk) - AFC offers floorplan financing to independent used vehicle dealers through **122 locations** in the U.S. and Canada, supporting vehicle purchases at various auctions and non-auction sources, and also provides related services like vehicle service contracts[37](index=37&type=chunk) - The company adopted Topic 842 (Leases) in Q1 2019, recognizing a **$1.1 million increase to retained earnings** and adding approximately **$342 million in operating lease liabilities** with related ROU assets of **$314 million**[41](index=41&type=chunk)[43](index=43&type=chunk) - New accounting standards ASU 2018-15 (Cloud Computing Costs) and ASU 2017-04 (Goodwill Impairment) are effective after December 15, 2019, with ASU 2017-04 not expected to have a material impact, and ASU 2016-13 (Credit Losses) is also effective after December 15, 2019, and is expected to result in an immaterial increase in the allowance for credit losses[47](index=47&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk) [Note 2—Acquisitions](index=19&type=section&id=Note%202%E2%80%94Acquisitions) This note details the acquisitions of Dent-ology and CarsOnTheWeb in January 2019, outlining their strategic rationale and financial impact on the company's consolidated results - In January 2019, KAR Auction Services acquired Dent-ology to enhance mobile reconditioning and expand wheel repair and hail catastrophe response services[51](index=51&type=chunk) - Also in January 2019, the company acquired CarsOnTheWeb (COTW), an online auction company in Continental Europe, to advance its international strategy and expand its digital auction marketplaces[52](index=52&type=chunk) Acquisition Financial Summary (Nine Months Ended September 30, 2019) | Metric | Amount (Millions) | | :--------------------------------------- | :---------------- | | Aggregate purchase price (net of cash) | $169.2 | | Net cash payments | $120.7 | | Deferred payments (fair value) | $19.2 | | Estimated contingent payments (fair value) | $29.3 | | Allocated to intangible assets | $32.7 | | Goodwill recognized | $138.4 | - The financial impact of these acquisitions was immaterial to the Company's consolidated results for the nine months ended September 30, 2019[54](index=54&type=chunk) [Note 3—IAA Separation and Discontinued Operations](index=19&type=section&id=Note%203%E2%80%94IAA%20Separation%20and%20Discontinued%20Operations) This note describes the spin-off of IAA as a separate public company, the cash distribution received, and the reclassification of IAA's financial results as discontinued operations - On June 28, 2019, KAR Auction Services completed the spin-off of its salvage auction business, IAA, creating an independent publicly traded company, with KAR shareholders receiving one share of IAA common stock for every KAR share held[55](index=55&type=chunk) - In connection with the spin-off, KAR received a cash distribution of approximately **$1,278.0 million** from IAA, which was used to prepay a portion of KAR's term loans[55](index=55&type=chunk) - The financial results of IAA have been reclassified as discontinued operations for all periods presented, including **$31.3 million in one-time transaction costs** for the nine months ended September 30, 2019, related to consulting and professional fees for the spin-off[56](index=56&type=chunk) IAA Results of Operations (Discontinued Operations) | Metric (Millions) | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating revenues | $0.0 | $321.1 | $723.6 | $991.6 | | Operating profit | $0.0 | $63.1 | $139.1 | $212.2 | | Income from discontinued operations | $0.9 | $46.6 | $91.6 | $158.2 | IAA Assets and Liabilities (Discontinued Operations) | Metric (Millions) | June 28, 2019 | December 31, 2018 | | :--------------------------------------- | :------------ | :---------------- | | Total assets, discontinued operations | $2,015.6 | $1,506.8 | | Total liabilities, discontinued operations | $2,239.2 | $480.4 | [Note 4—Stock and Stock-Based Compensation Plans](index=21&type=section&id=Note%204%E2%80%94Stock%20and%20Stock-Based%20Compensation%20Plans) This note details stock-based compensation expenses by award type, the impact of the IAA spin-off on awards, and the company's common stock repurchase activities Stock-Based Compensation Expense by Award Type (Millions) | Award Type | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | PRSUs | $2.6 | $3.3 | $7.5 | $8.4 | | RSUs | $1.7 | $2.4 | $7.1 | $6.8 | | Service options | $0.0 | $0.0 | $0.0 | $0.1 | | Total | $4.3 | $5.7 | $14.6 | $15.3 | - In the first nine months of 2019, the company granted approximately **0.3 million PRSUs** and **0.3 million RSUs**, with weighted average grant date fair values of **$47.09** and **$47.37 per share**, respectively[62](index=62&type=chunk) - The company modified stock-based compensation awards due to the IAA spin-off to maintain economic value and anti-dilution protection, with **no incremental compensation expense recorded**[63](index=63&type=chunk) - Under a **$500 million repurchase authorization**, the company repurchased and retired **4,753,300 shares** of common stock for **$119.7 million** at a weighted average price of **$25.18 per share** during the three months ended September 30, 2019[64](index=64&type=chunk) [Note 5—Net Income from Continuing Operations Per Share](index=22&type=section&id=Note%205%E2%80%94Net%20Income%20from%20Continuing%20Operations%20Per%20Share) This note provides the calculation of net income from continuing operations per share, including weighted average common shares outstanding and the effect of dilutive awards Net Income from Continuing Operations Per Share (Millions, except per share amounts) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income from continuing operations | $34.4 | $30.9 | $77.1 | $102.5 | | Weighted average common shares outstanding | 131.2 | 134.5 | 132.5 | 134.5 | | Effect of dilutive stock options and restricted stock awards | 1.2 | 1.1 | 1.3 | 1.2 | | Diluted EPS from continuing operations | $0.26 | $0.23 | $0.58 | $0.76 | - Approximately **0.3 million PRSUs** were excluded from diluted EPS calculation for the three and nine months ended September 30, 2019, due to performance conditions not yet satisfied[66](index=66&type=chunk) [Note 6—Finance Receivables and Obligations Collateralized by Finance Receivables](index=22&type=section&id=Note%206%E2%80%94Finance%20Receivables%20and%20Obligations%20Collateralized%20by%20Finance%20Receivables) This note describes AFC's securitization agreements for finance receivables in the U.S. and Canada, detailing managed receivables, credit losses, and compliance with covenants - AFC sells most of its U.S. dollar finance receivables to AFC Funding Corporation, which then sells undivided interests to banks via a securitization agreement expiring January 28, 2022, with **$1.70 billion committed liquidity**[67](index=67&type=chunk) - AFCI also has a Canadian securitization agreement expiring January 28, 2022, with a **C$175 million committed facility**[68](index=68&type=chunk) Finance Receivables and Net Credit Losses (Millions) | Metric | Sep 30, 2019 | Dec 31, 2018 | Net Credit Losses (3 Months Sep 30, 2019) | Net Credit Losses (9 Months Sep 30, 2019) | Net Credit Losses (3 Months Sep 30, 2018) | Net Credit Losses (9 Months Sep 30, 2018) | | :-------------------------- | :----------- | :----------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total receivables managed | $2,110.4 | $2,014.8 | $8.6 | $24.8 | $7.1 | $21.3 | | Receivables delinquent (31+ days) | $15.6 | $15.9 | | | | | | Allowance for losses | $14.8 | $14.0 | | | | | - At September 30, 2019, **$2,064.6 million of finance receivables** and a **1% cash reserve** secured **$1,428.4 million in obligations** collateralized by finance receivables, and the company was in compliance with all securitization agreement covenants[72](index=72&type=chunk) [Note 7—Long-Term Debt](index=24&type=section&id=Note%207%E2%80%94Long-Term%20Debt) This note details the company's long-term debt, including term loans, revolving credit facilities, and senior notes, outlining refinancing activities, interest rates, and compliance with covenants Long-Term Debt (Millions) | Debt Type | Interest Rate | Maturity | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :------------ | :--------------- | :----------- | :----------- | | Term Loan B-4 | LIBOR + 2.25% | Mar 11, 2021 | $0.0 | $704.4 | | Term Loan B-5 | LIBOR + 2.50% | Mar 9, 2023 | $0.0 | $1,031.5 | | Term Loan B-6 | LIBOR + 2.25% | Sep 19, 2026 | $950.0 | $0.0 | | Revolving credit facility | LIBOR + 1.75% | Sep 19, 2024 | $0.0 | $0.0 | | Senior notes | 5.125% | Jun 1, 2025 | $950.0 | $950.0 | | European lines of credit | Euribor + 1.25% | Upon demand | $17.5 | $0.0 | | Total debt | | | $1,917.5 | $2,685.9 | | Long-term debt (net of issuance costs/current portion) | | | $1,863.0 | $2,654.3 | - In June 2019, the company prepaid **$518.6 million of Term Loan B-4** and **$759.4 million of Term Loan B-5** using cash from the IAA Separation, resulting in **$1.8 million in accelerated amortization** of debt issuance costs[75](index=75&type=chunk) - On September 19, 2019, the company refinanced Term Loan B-4 and B-5 with a new **$950 million Term Loan B-6** and a **$325 million Revolving Credit Facility**, incurring a **$2.2 million non-cash loss on extinguishment of debt**[76](index=76&type=chunk) - The Credit Facility is secured by substantially all company assets and guaranteed by domestic subsidiaries, containing covenants including a Consolidated Senior Secured Net Leverage Ratio not to exceed **3.5** (commencing Dec 31, 2019), and the company was in compliance at September 30, 2019[79](index=79&type=chunk)[81](index=81&type=chunk) - At September 30, 2019, there were no borrowings on the revolving credit facility, but **$27.7 million in outstanding letters of credit** reduced available borrowings[83](index=83&type=chunk) - The estimated fair value of long-term debt was **$1,954.4 million** as of September 30, 2019[85](index=85&type=chunk) [Note 8—Derivatives](index=25&type=section&id=Note%208%E2%80%94Derivatives) This note explains the company's use of interest rate cap agreements to manage variable interest rate exposure and the recognition of fair value changes in interest expense - The company uses interest rate cap agreements to manage exposure to variable interest rate borrowings, with changes in fair value recognized as 'Interest expense' in the consolidated statement of income[86](index=86&type=chunk)[89](index=89&type=chunk) Effect of Interest Rate Derivatives on Consolidated Statements of Income (Millions) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gain / (Loss) recognized in Interest expense | $0.0 | $0.2 | $(0.9) | $6.3 | - Two interest rate caps with an aggregate notional amount of **$800 million**, effective September 30, 2017, matured on September 30, 2019, and two other caps with **$400 million notional amount**, effective March 31, 2017, matured on March 31, 2019[87](index=87&type=chunk)[222](index=222&type=chunk)[223](index=223&type=chunk) [Note 9—Leases](index=26&type=section&id=Note%209%E2%80%94Leases) This note provides detailed information on lease expenses, cash flows, and balance sheet impacts following the adoption of Topic 842, including operating and finance lease liabilities and ROU assets Components of Lease Expense (Nine Months Ended September 30, 2019) | Lease Cost Component | Amount (Millions) | | :--------------------------------------- | :---------------- | | Operating lease cost | $45.3 | | Finance lease cost (Amortization of ROU assets) | $10.8 | | Finance lease cost (Interest on lease liabilities) | $1.0 | | Total finance lease cost | $11.8 | Supplemental Cash Flow Information Related to Leases (Nine Months Ended September 30, 2019) | Cash Flow Item | Amount (Millions) | | :--------------------------------------- | :---------------- | | Operating cash flows related to operating leases | $44.3 | | Operating cash flows related to finance leases | $1.0 | | Financing cash flows related to finance leases | $20.5 | | Right-of-use assets obtained (Operating leases) | $80.4 | | Right-of-use assets obtained (Finance leases) | $13.7 | Supplemental Balance Sheet Information Related to Leases (September 30, 2019) | Balance Sheet Item | Amount (Millions) | | :--------------------------------------- | :---------------- | | Operating lease right-of-use assets | $366.4 | | Operating lease liabilities | $361.1 | | Total operating lease liabilities | $394.8 | | Property and equipment, net (Finance Leases) | $21.5 | | Total finance lease liabilities | $26.6 | | Weighted Average Remaining Lease Term (Operating) | 11.0 years | | Weighted Average Remaining Lease Term (Finance) | 2.1 years | | Weighted Average Discount Rate (Operating) | 6.1% | | Weighted Average Discount Rate (Finance) | 5.1% | [Note 10—Commitments and Contingencies](index=28&type=section&id=Note%2010%E2%80%94Commitments%20and%20Contingencies) This note addresses the company's involvement in various litigation and disputes, stating that management believes these matters are not likely to have a material adverse effect on financial results - The company is involved in various litigation and disputes in the ordinary course of business, including actions related to injuries, property damage, environmental laws, and employment matters, which management believes are generally not likely to have a material adverse effect on financial condition, results of operations, or cash flows[96](index=96&type=chunk) [Note 11—Accumulated Other Comprehensive Loss](index=28&type=section&id=Note%2011%E2%80%94Accumulated%20Other%20Comprehensive%20Loss) This note presents the components of accumulated other comprehensive loss, primarily driven by foreign currency translation adjustments Accumulated Other Comprehensive Loss (Millions) | Component | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------- | :----------- | :----------- | | Foreign currency translation loss | $(45.2) | $(61.3) | | Total accumulated other comprehensive loss | $(45.2) | $(61.3) | [Note 12—Segment Information](index=28&type=section&id=Note%2012%E2%80%94Segment%20Information) This note provides financial information for the company's reportable segments, ADESA Auctions and AFC, including operating revenues, operating profit, and geographic revenue distribution - Following the IAA spin-off, KAR Auction Services operates with two reportable business segments: ADESA Auctions and AFC, with the former IAA segment results now reported as discontinued operations[98](index=98&type=chunk) - The holding company's expenses include corporate office costs, certain HR, IT, and accounting costs, and insurance, treasury, legal, and risk management costs, with holding company interest expense covering capital leases and corporate debt[99](index=99&type=chunk) Segment Operating Revenues (Millions) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | ADESA Auctions | $613.6 | $527.0 | $1,845.7 | $1,593.4 | | AFC | $88.3 | $85.4 | $264.9 | $255.6 | | Total Consolidated | $701.9 | $612.4 | $2,110.6 | $1,849.0 | Segment Operating Profit (Loss) (Millions) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | ADESA Auctions | $68.5 | $75.5 | $215.5 | $249.1 | | AFC | $55.1 | $52.1 | $165.4 | $150.2 | | Holding Company | $(37.9) | $(42.0) | $(128.4) | $(129.4) | | Total Consolidated | $85.7 | $85.6 | $252.5 | $269.9 | Geographic Operating Revenues (Millions) | Region | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | U.S. | $565.6 | $519.4 | $1,726.4 | $1,569.1 | | Foreign | $136.3 | $93.0 | $384.2 | $279.9 | | Total | $701.9 | $612.4 | $2,110.6 | $1,849.0 | - Foreign operating revenues for the three and nine months ended September 30, 2019, were approximately **60% and 64% from Canada**, respectively, and the 2019 acquisition of COTW increased the percentage of operating revenues from Europe[106](index=106&type=chunk) [Note 13—Subsequent Event](index=31&type=section&id=Note%2013%E2%80%94Subsequent%20Event) This note discloses a subsequent event where the board of directors authorized a new $300 million share repurchase program in October 2019 - On October 30, 2019, the board of directors authorized a new share repurchase program of up to **$300 million** of common stock through October 30, 2021[107](index=107&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting performance for the three and nine months ended September 30, 2019, compared to 2018. It covers revenue and profit drivers for ADESA Auctions and AFC segments, the impact of the IAA spin-off, and details on liquidity, capital resources, debt, and recent acquisitions. Key trends in the whole car and automotive finance industries are also discussed [Forward-Looking Statements](index=32&type=section&id=Forward-Looking%20Statements) This section cautions readers that the report contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially - This report contains forward-looking statements subject to risks and uncertainties, including future growth, cost savings, revenue increases, credit losses, capital expenditures, dividend payments, stock repurchases, tax rates, strategic initiatives, competitive position, and investments in information technology[109](index=109&type=chunk) - Factors that could cause actual results to differ materially include the ability to maintain IT systems, protect against cyber-attacks, manage competition and pricing pressures, implement business strategies, meet customer expectations, integrate acquisitions, and manage fluctuations in vehicle demand and supply[109](index=109&type=chunk) [Overview](index=34&type=section&id=Overview) This section provides an overview of KAR Auction Services' business, detailing its ADESA Auctions and AFC segments, their services, and the role of the holding company - KAR Auction Services provides whole car auction services in North America and Europe, operating through two reportable segments: ADESA Auctions and AFC[114](index=114&type=chunk) - ADESA Auctions offers live and online auctions through **74 North American facilities**, providing remarketing solutions to various consignors and value-added services like transportation and reconditioning, and includes TradeRev and ADESA Europe (formerly CarsOnTheWeb)[116](index=116&type=chunk) - AFC provides short-term, inventory-secured floorplan financing primarily to independent used vehicle dealers across **122 locations** in the U.S. and Canada, and also sells vehicle service contracts through Preferred Warranties, Inc. (PWI)[116](index=116&type=chunk) - The holding company manages corporate expenses, including salaries, benefits, IT, accounting, insurance, treasury, legal, and risk management costs, with intercompany charges primarily related to interest on intercompany debt and administrative allocations[118](index=118&type=chunk) [Industry Trends](index=36&type=section&id=Industry%20Trends) This section discusses key trends in the North American used vehicle auction and automotive finance industries, including market volumes, digital expansion, dealer challenges, and seasonality - North American used vehicle auction volumes (including online) were approximately **11.5 million in 2018** and are expected to exceed **11 million units in 2019, 2020, and 2021**[119](index=119&type=chunk) - Mobile applications like TradeRev could expand the total addressable market for whole car auctions by approximately **5 million units**, though TradeRev incurred operating losses of **$51.6 million** and **$37.3 million** for the nine months ended September 30, 2019 and 2018, respectively[120](index=120&type=chunk) - AFC's North American dealer base was approximately **15,800 in 2018**, with **1.8 million loan transactions**, but key challenges for independent used vehicle dealers include demand, pricing volatility, access to consumer financing, and increased competition, which could negatively impact AFC's results[121](index=121&type=chunk)[122](index=122&type=chunk) - Auction volumes are seasonal, typically declining in the fourth calendar quarter due to weather, holidays, and retail market seasonality, affecting revenues and operating expenses[123](index=123&type=chunk) - Revenue is derived from auction fees and related services for whole car auctions, and from dealer financing fees, interest income, and other service revenue at AFC, while operating expenses include cost of services, selling, general and administrative, and depreciation and amortization[124](index=124&type=chunk)[125](index=125&type=chunk) [Results of Operations - Three Months Ended September 30, 2019 and 2018](index=38&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20September%2030%2C%202019%20and%202018) This section analyzes the company's consolidated and segment-specific financial performance for the three months ended September 30, 2019, compared to the prior year, detailing revenue, profit, and expense drivers [Overall Performance](index=38&type=section&id=Overall%20Performance_3M) This section summarizes the consolidated financial performance for the three months ended September 30, 2019, highlighting changes in revenue, operating profit, net income, and the impact of the IAA spin-off Consolidated Financial Highlights (Three Months Ended September 30) | Metric (Millions) | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Total revenues | $701.9 | $612.4 | $89.5 | 15% | | Operating profit | $85.7 | $85.6 | $0.1 | 0.1% | | Net income from continuing operations | $34.4 | $30.9 | $3.5 | 11.3% | | Net income from discontinued operations | $0.9 | $46.6 | $(45.7) | -98.1% | | Net income | $35.3 | $77.5 | $(42.2) | -54.4% | | Diluted EPS from continuing operations | $0.26 | $0.23 | $0.03 | 13.0% | - Revenue increased by **15% to $701.9 million**, with acquired businesses contributing **$54.8 million (8%)**, and excluding purchased vehicles, revenue increased by **7%**[127](index=127&type=chunk) - Depreciation and amortization increased by **$5.0 million (12%) to $46.4 million**, primarily due to new assets and acquisitions[128](index=128&type=chunk) - Interest expense decreased by **$11.1 million (23%) to $37.9 million**, mainly due to a **$1.13 billion decrease in average corporate debt balance** following the IAA spin-off debt paydown, partially offset by a **0.30% increase in weighted average interest rate**[129](index=129&type=chunk) - A **$2.2 million pretax charge** was recorded for loss on extinguishment of debt in September 2019 due to refinancing Term Loan B-4 and B-5[132](index=132&type=chunk) - The effective tax rate increased to **27.7% from 22.0%**, as the prior year benefited from higher tax deductions from stock option exercises[133](index=133&type=chunk) - Income from discontinued operations (IAA) significantly decreased from **$46.6 million in 2018 to $0.9 million in 2019** due to the spin-off[134](index=134&type=chunk) - Foreign currency fluctuations (Canadian exchange rate) decreased revenue by **$0.8 million** and operating profit by **$0.2 million**[135](index=135&type=chunk) [ADESA Results](index=40&type=section&id=ADESA%20Results_3M) This section details ADESA's financial and operational performance for the three months ended September 30, 2019, focusing on revenue growth, vehicle sales volume, online penetration, and gross profit margins ADESA Financial and Operational Highlights (Three Months Ended September 30) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue (Millions) | $613.6 | $527.0 | $86.6 | 16% | | Operating profit (Millions) | $68.5 | $75.5 | $(7.0) | -9.3% | | Vehicles sold (Thousands) | 957 | 876 | 81 | 9% | | Physical auction vehicles sold (North America, Thousands) | 526 | 522 | 4 | 1% | | Online only vehicles sold (North America, Thousands) | 396 | 343 | 53 | 15.5% | | Vehicles sold in Europe (Thousands) | 35 | 11 | 24 | 218.2% | | Online sales volume (% of total) | 59% | 54% | 5% | | | Physical auction revenue per vehicle sold (excl. purchased) | $893 | $850 | $43 | 5% | | Online only revenue per vehicle sold (excl. purchased) | $151 | $126 | $25 | 19.8% | | Gross profit as % of revenue | 37.1% | 41.6% | -4.5% | | - Revenue increased by **16%** due to a **9% increase in vehicles sold** (**7% excluding acquisitions**) and a **6% increase in average revenue per vehicle**, with acquisitions contributing **$54.8 million** to revenue[137](index=137&type=chunk) - Online sales volume grew to **59% of total vehicles sold** (from 54%), with upstream, midstream, and TradeRev sales accounting for **75% of North American online sales volume**[138](index=138&type=chunk) - Gross profit as a percentage of revenue decreased from **41.6% to 37.1%**, primarily due to increased purchased vehicles (COTW acquisition, ADESA Assurance) and higher lower-margin ancillary services[141](index=141&type=chunk) - Selling, general and administrative expenses increased by **$9.9 million (9%) to $121.7 million**, driven by TradeRev costs (**$5.9 million**), acquisitions (**$5.8 million**), and IT costs (**$2.2 million**), partially offset by decreases in compensation and marketing[142](index=142&type=chunk) [AFC Results](index=43&type=section&id=AFC%20Results_3M) This section details AFC's financial and operational performance for the three months ended September 30, 2019, focusing on revenue growth, loan transactions, credit loss provision, and gross profit margins AFC Financial and Operational Highlights (Three Months Ended September 30) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue (Millions) | $88.3 | $85.4 | $2.9 | 3% | | Operating profit (Millions) | $55.1 | $52.1 | $3.0 | 5.8% | | Loan transactions (Thousands) | 442 | 433 | 9 | 2% | | Revenue per loan transaction (excl. Warranty) | $180 | $177 | $3 | 2% | | Provision for credit losses (% of average managed receivables) | 1.7% | 1.5% | 0.2% | | | Gross profit as % of revenue | 72.0% | 73.2% | -1.2% | | - Revenue increased by **3%** due to a **2% increase in loan transactions** and a **2% increase in revenue per loan transaction**, driven by higher interest yield from prime rate increases and average loan values[144](index=144&type=chunk)[145](index=145&type=chunk) - The provision for credit losses increased to **1.7% of average managed receivables** from 1.5%[145](index=145&type=chunk) - Gross profit as a percentage of revenue decreased to **72.0% from 73.2%** due to an **8% increase in cost of services**, mainly from PWI expenses and compensation[146](index=146&type=chunk) - Selling, general and administrative expenses decreased by **$2.2 million (27%) to $5.9 million**, primarily due to lower compensation and travel expenses[147](index=147&type=chunk) [Holding Company Results](index=44&type=section&id=Holding%20Company%20Results_3M) This section details the Holding Company's financial performance for the three months ended September 30, 2019, focusing on selling, general, and administrative expenses and operating loss Holding Company Financial Highlights (Three Months Ended September 30) | Metric (Millions) | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Selling, general and administrative | $31.3 | $34.8 | $(3.5) | -10% | | Operating loss | $(37.9) | $(42.0) | $4.1 | 9.8% | - Selling, general and administrative expenses decreased by **$3.5 million (10%) to $31.3 million**, mainly due to lower incentive-based compensation and medical expenses, partially offset by increased IT and telecom costs, and **$1.5 million in fees from IAA** for services[149](index=149&type=chunk) [Results of Operations - Nine Months Ended September 30, 2019 and 2018](index=44&type=section&id=Results%20of%20Operations%20-%20Nine%20Months%20Ended%20September%2030%2C%202019%20and%202018) This section analyzes the company's consolidated and segment-specific financial performance for the nine months ended September 30, 2019, compared to the prior year, detailing revenue, profit, and expense drivers [Overall Performance](index=44&type=section&id=Overall%20Performance_9M) This section summarizes the consolidated financial performance for the nine months ended September 30, 2019, highlighting changes in revenue, operating profit, net income, and the impact of the IAA spin-off Consolidated Financial Highlights (Nine Months Ended September 30) | Metric (Millions) | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Total revenues | $2,110.6 | $1,849.0 | $261.6 | 14% | | Operating profit | $252.5 | $269.9 | $(17.4) | -6.4% | | Net income from continuing operations | $77.1 | $102.5 | $(25.4) | -24.8% | | Net income from discontinued operations | $91.6 | $158.2 | $(66.6) | -42.1% | | Net income | $168.7 | $260.7 | $(92.0) | -35.3% | | Diluted EPS from continuing operations | $0.58 | $0.76 | $(0.18) | -23.7% | - Revenue increased by **14% to $2,110.6 million**, with acquired businesses contributing **$137.9 million (7%)**, and excluding purchased vehicles, revenue increased by **7%**[151](index=151&type=chunk) - Depreciation and amortization increased by **$8.8 million (7%) to $138.6 million**, primarily due to new assets and acquisitions[153](index=153&type=chunk) - Interest expense increased by **$11.3 million (8%) to $150.0 million**, driven by borrowings on revolving credit and European lines, **$1.8 million from accelerated debt issuance cost amortization**, and a **$5.8 million increase at AFC** due to higher interest rates, partially offset by **$4.3 million from interest rate cap agreements**[154](index=154&type=chunk) - A **$2.2 million pretax charge** was recorded for loss on extinguishment of debt in September 2019 due to refinancing Term Loan B-4 and B-5[155](index=155&type=chunk) - The effective tax rate increased to **26.9% from 24.1%**, as the prior year benefited from higher tax deductions from stock option exercises[156](index=156&type=chunk) - Income from discontinued operations (IAA) decreased from **$158.2 million in 2018 to $91.6 million in 2019**, including **$31.3 million in one-time transaction costs** for the spin-off[157](index=157&type=chunk) - Foreign currency fluctuations (Canadian exchange rate) decreased revenue by **$7.4 million**, operating profit by **$1.8 million**, and net income by **$0.7 million**[158](index=158&type=chunk) [ADESA Results](index=47&type=section&id=ADESA%20Results_9M) This section details ADESA's financial and operational performance for the nine months ended September 30, 2019, focusing on revenue growth, vehicle sales volume, online penetration, and gross profit margins ADESA Financial and Operational Highlights (Nine Months Ended September 30) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue (Millions) | $1,845.7 | $1,593.4 | $252.3 | 16% | | Operating profit (Millions) | $215.5 | $249.1 | $(33.6) | -13.5% | | Vehicles sold (Thousands) | 2,897 | 2,661 | 236 | 9% | | Physical auction vehicles sold (North America, Thousands) | 1,635 | 1,629 | 6 | 0.4% | | Online only vehicles sold (North America, Thousands) | 1,179 | 998 | 181 | 18.1% | | Vehicles sold in Europe (Thousands) | 83 | 34 | 49 | 144.1% | | Online sales volume (% of total) | 58% | 54% | 4% | | | Physical auction revenue per vehicle sold (excl. purchased) | $883 | $836 | $47 | 6% | | Online only revenue per vehicle sold (excl. purchased) | $149 | $120 | $29 | 24.2% | | Gross profit as % of revenue | 37.7% | 42.2% | -4.5% | | - Revenue increased by **16%** due to a **9% increase in vehicles sold** (**7% excluding acquisitions**) and a **6% increase in average revenue per vehicle**, with acquisitions contributing **$137.9 million** to revenue[161](index=161&type=chunk) - Online sales volume grew to **58% of total vehicles sold** (from 54%), with upstream, midstream, and TradeRev sales accounting for **74% of North American online sales volume**[162](index=162&type=chunk) - Gross profit as a percentage of revenue decreased from **42.2% to 37.7%**, primarily due to increased purchased vehicles (COTW acquisition, ADESA Assurance) and higher lower-margin ancillary services, with an inventory loss of **$5.4 million at High Tech Locksmiths** also contributing to the decline[165](index=165&type=chunk)[166](index=166&type=chunk) - Selling, general and administrative expenses increased by **$41.3 million (13%) to $370.2 million**, driven by TradeRev costs (**$19.8 million**), acquisitions (**$16.5 million**), and IT costs (**$5.5 million**), partially offset by foreign exchange fluctuations and decreases in stock-based compensation and marketing[167](index=167&type=chunk) [AFC Results](index=49&type=section&id=AFC%20Results_9M) This section details AFC's financial and operational performance for the nine months ended September 30, 2019, focusing on revenue growth, loan transactions, credit loss provision, and gross profit margins AFC Financial and Operational Highlights (Nine Months Ended September 30) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Revenue (Millions) | $264.9 | $255.6 | $9.3 | 4% | | Operating profit (Millions) | $165.4 | $150.2 | $15.2 | 10.1% | | Loan transactions (Thousands) | 1,340 | 1,332 | 8 | 0.6% | | Revenue per loan transaction (excl. Warranty) | $178 | $173 | $5 | 3% | | Provision for credit losses (% of average managed receivables) | 1.7% | 1.5% | 0.2% | | | Gross profit as % of revenue | 72.7% | 73.3% | -0.6% | | - Revenue increased by **4%** due to a **3% increase in revenue per loan transaction**, driven by higher interest yield from prime rate increases and average loan values[170](index=170&type=chunk)[171](index=171&type=chunk) - The provision for credit losses increased to **1.7% of average managed receivables** from 1.5%[171](index=171&type=chunk) - Gross profit as a percentage of revenue decreased to **72.7% from 73.3%** due to a **6% increase in cost of services**, mainly from PWI expenses, compensation, and travel[172](index=172&type=chunk) - Selling, general and administrative expenses decreased by **$4.1 million (17%) to $19.5 million**, primarily due to lower compensation, incentive-based compensation, and travel expenses[173](index=173&type=chunk) [Holding Company Results](index=50&type=section&id=Holding%20Company%20Results_9M) This section details the Holding Company's financial performance for the nine months ended September 30, 2019, focusing on selling, general, and administrative expenses and operating loss Holding Company Financial Highlights (Nine Months Ended September 30) | Metric (Millions) | 2019 | 2018 | Change ($) | Change (%) | | :--------------------------------------- | :--- | :--- | :--------- | :--------- | | Selling, general and administrative | $107.6 | $107.6 | $0.0 | 0% | | Operating loss | $(128.4) | $(129.4) | $1.0 | 0.8% | - Selling, general and administrative expenses remained flat at **$107.6 million**, with a decrease in incentive-based compensation offset by increases in IT costs and other miscellaneous expenses[175](index=175&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=50&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) This section analyzes the company's liquidity and capital resources, including cash flow, working capital, credit facilities, senior notes, securitization, and non-GAAP measures like EBITDA [Overview of Liquidity](index=50&type=section&id=Overview%20of%20Liquidity) This section provides an overview of the company's liquidity, highlighting key indicators such as cash, working capital, and available credit facilities - Key liquidity indicators include cash on hand, cash flow from operations, working capital, and available amounts under the Credit Facility, with principal sources being cash from operations and revolving credit facility borrowings[176](index=176&type=chunk) Liquidity Indicators (Millions) | Metric | Sep 30, 2019 | Dec 31, 2018 | Sep 30, 2018 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Cash and cash equivalents | $508.6 | $277.1 | $401.3 | | Restricted cash | $23.3 | $27.6 | $22.6 | | Working capital | $741.5 | $450.3 | $615.3 | | Amounts available under Credit Facility | $325.0 | $350.0 | $350.0 | | Cash flow from operations (9 months) | $291.1 | | $326.9 | [Working Capital](index=50&type=section&id=Working%20Capital) This section discusses the company's working capital generation, the impact of the IAA spin-off on debt prepayment, and the cash held by foreign subsidiaries - Working capital is largely generated from service payments, with most needs being short-term (less than a week), and the IAA spin-off involved raising **$1.3 billion in debt**, transferred to IAA, which then paid a **$1.278 billion cash dividend to KAR** to prepay term loans[179](index=179&type=chunk)[180](index=180&type=chunk) - Approximately **$152.1 million of available cash** was held by foreign subsidiaries at September 30, 2019, with expected repatriation tax less than **$7 million**[181](index=181&type=chunk) [Credit Facilities](index=51&type=section&id=Credit%20Facilities) This section details the company's credit facilities, including term loan prepayments, refinancing activities, and compliance with financial covenants - In June 2019, KAR prepaid **$518.6 million of Term Loan B-4** and **$759.4 million of Term Loan B-5** using cash from the IAA Separation[182](index=182&type=chunk) - On September 19, 2019, the company refinanced existing term loans with a new **$950 million Term Loan B-6** and a **$325 million Revolving Credit Facility**[183](index=183&type=chunk) - The Credit Facility is secured by company assets and guaranteed by domestic subsidiaries, with covenants including a Consolidated Senior Secured Net Leverage Ratio not to exceed **3.5** (commencing Dec 31, 2019), and KAR's ratio was **1.74** at September 30, 2019, indicating compliance[188](index=188&type=chunk)[189](index=189&type=chunk) - At September 30, 2019, **$950.0 million** was outstanding on Term Loan B-6, with no borrowings on the revolving credit facility, but **$27.7 million in outstanding letters of credit**[187](index=187&type=chunk) [Senior Notes](index=52&type=section&id=Senior%20Notes) This section describes the company's $950 million senior notes, including their interest rate, maturity date, and redemption terms - The company has **$950 million of 5.125% senior notes** due June 1, 2025, with interest paid semi-annually, and these notes are redeemable prior to June 1, 2020, at 100% principal plus a make-whole premium, and thereafter at a declining premium[192](index=192&type=chunk) [Securitization Facilities](index=52&type=section&id=Securitization%20Facilities) This section explains AFC's securitization agreements for floorplan financing, detailing managed receivables, allowance for losses, and covenant compliance - AFC funds its floorplan financing through securitization agreements, selling U.S. dollar finance receivables to AFC Funding Corporation and Canadian receivables to a third-party conduit, which are accounted for as secured borrowings[193](index=193&type=chunk)[194](index=194&type=chunk) - AFC managed **$2,110.4 million in finance receivables** at September 30, 2019, with an allowance for losses of **$14.8 million**, and **$2,064.6 million of receivables** and a **1% cash reserve** secured **$1,428.4 million in obligations**[195](index=195&type=chunk)[196](index=196&type=chunk) - AFC, AFC Funding Corporation, and AFCI must maintain financial covenants, including debt limits and minimum tangible net worth, and were in compliance at September 30, 2019[197](index=197&type=chunk) [EBITDA and Adjusted EBITDA](index=53&type=section&id=EBITDA%20and%20Adjusted%20EBITDA) This section defines and presents the company's non-GAAP measures, EBITDA and Adjusted EBITDA, used by management and creditors to evaluate financial performance - EBITDA and Adjusted EBITDA are non-GAAP measures used by management and creditors to evaluate performance, with EBITDA being net income plus interest, taxes, depreciation, and amortization, and Adjusted EBITDA further adjusting for specific income/expense items and expected revenue/cost savings[198](index=198&type=chunk)[199](index=199&type=chunk) Consolidated EBITDA and Adjusted EBITDA (Three Months Ended September 30) | Metric (Millions) | 2019 | 2018 | | :-------------------------- | :--- | :--- | | Net income (loss) from continuing operations | $34.4 | $30.9 | | EBITDA | $131.2 | $128.7 | | Adjusted EBITDA | $129.2 | $126.4 | Consolidated EBITDA and Adjusted EBITDA (Nine Months Ended September 30) | Metric (Millions) | 2019 | 2018 | | :-------------------------- | :--- | :--- | | Net income (loss) from continuing operations | $77.1 | $102.5 | | EBITDA | $392.2 | $400.9 | | Adjusted EBITDA | $388.0 | $394.7 | Consolidated EBITDA and Adjusted EBITDA (Twelve Months Ended September 30, 2019) | Metric (Millions) | Amount | | :-------------------------- | :----- | | Net income (loss) from continuing operations | $92.2 | | EBITDA | $502.9 | | Adjusted EBITDA | $498.5 | [Summary of Cash Flows](index=56&type=section&id=Summary%20of%20Cash%20Flows) This section summarizes the company's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2019, highlighting significant changes Summary of Cash Flows (Nine Months Ended September 30) | Activity (Millions) | 2019 | 2018 | | :--------------------------------------- | :----- | :----- | | Operating activities - continuing operations | $291.1 | $326.9 | | Operating activities - discontinued operations | $156.7 | $238.2 | | Investing activities - continuing operations | $(367.3) | $(196.2) | | Investing activities - discontinued operations | $(37.4) | $(37.9) | | Financing activities - continuing operations | $(1,140.5) | $(199.0) | | Financing activities - discontinued operations | $1,317.6 | $(6.7) | | Net increase in cash, cash equivalents and restricted cash | $227.2 | $120.4 | - Cash flow from continuing operating activities decreased to **$291.1 million from $326.9 million**, primarily due to changes in operating assets and liabilities and decreased profitability[203](index=203&type=chunk) - Net cash used by continuing investing activities increased to **$367.3 million from $196.2 million**, driven by higher cash used for acquisitions (**$97.4 million**), capital expenditures (**$44.9 million**), and a net increase in finance receivables (**$28.8 million**)[204](index=204&type=chunk)[205](index=205&type=chunk) - Net cash used by continuing financing activities increased significantly to **$1,140.5 million from $199.0 million**, mainly due to increased net debt payments (including **$1.3 billion prepayment from IAA cash**), higher common stock repurchases (**$69.7 million**), and cash transferred to IAA (**$50.9 million**)[204](index=204&type=chunk)[205](index=205&type=chunk) [Capital Expenditures](index=57&type=section&id=Capital%20Expenditures) This section details the company's capital expenditures for the nine months ended September 30, 2019, and provides the full fiscal year 2019 forecast, emphasizing technology investments - Capital expenditures for the nine months ended September 30, 2019, were **$127.6 million**, up from **$82.7 million in 2018**, and fiscal year 2019 capital expenditures are expected to be approximately **$160 million**, with about half allocated to technology-based investments[206](index=206&type=chunk) [Dividends](index=57&type=section&id=Dividends) This section outlines the cash dividends declared by the company, including the most recent declaration and previous payments in 2019 - The company declared a cash dividend of **$0.19 per share** payable on January 3, 2020, with previous dividends in 2019 including **$0.19 per share** (paid Oct 3, 2019) and two **$0.35 per share dividends** (paid June 17, 2019, and April 4, 2019)[207](index=207&type=chunk) [Acquisitions](index=57&type=section&id=Acquisitions_MD%26A) This section details the 2019 acquisitions of Dent-ology and CarsOnTheWeb, outlining their strategic rationale, aggregate purchase price, and impact on goodwill - In January 2019, KAR acquired Dent-ology to enhance mobile reconditioning and expand wheel repair and hail catastrophe response services[208](index=208&type=chunk) - Also in January 2019, the company acquired CarsOnTheWeb (COTW), an online auction company in Continental Europe, to advance its international strategy[209](index=209&type=chunk) - The aggregate purchase price for 2019 acquisitions was **$169.2 million** (net of cash acquired), including **$120.7 million in net cash payments**, resulting in **$138.4 million in goodwill**, recorded in the ADESA Auctions segment, and were immaterial to consolidated results for the nine months ended September 30, 2019[211](index=211&type=chunk) [Contractual Obligations](index=59&type=section&id=Contractual%20Obligations) This section discusses material changes to the company's contractual obligations since December 31, 2018, including debt repayments and refinancing activities - Material changes to contractual obligations since December 31, 2018, include the repayment of approximately **$1,280.4 million of term loans** in the first six months of 2019 (mostly from IAA spin-off cash) and the refinancing of Term Loan B-4 and B-5 with the new Term Loan B-6 (maturity September 2026), reducing expected interest payments[214](index=214&type=chunk) - Operating and capital lease obligations were reduced due to the IAA separation and also change in the ordinary course of business[214](index=214&type=chunk) [Critical Accounting Estimates](index=59&type=section&id=Critical%20Accounting%20Estimates) This section refers readers to the Annual Report on Form 10-K for a discussion of critical accounting estimates, noting no new material changes in this quarterly report - Critical accounting estimates are discussed in the Annual Report on Form 10-K for the year ended December 31, 2018, with no new material changes noted in this quarterly report[216](index=216&type=chunk) [Off-Balance Sheet Arrangements](index=59&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms that the company had no off-balance sheet arrangements as of September 30, 2019 - As of September 30, 2019, the company had no off-balance sheet arrangements[217](index=217&type=chunk) [New Accounting Standards](index=59&type=section&id=New%20Accounting%20Standards_MD%26A) This section directs readers to Note 1 of the financial statements for a description of new accounting standards that could affect the company - For a description of new accounting standards that could affect the Company, refer to the 'New Accounting Standards' section of Note 1 to the Unaudited Consolidated Financial Statements[218](index=218&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=60&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses the company's exposure to market risks, specifically foreign currency and interest rate risks. It details the impact of currency fluctuations on Canadian operations and the use of interest rate caps to manage variable rate debt exposure, along with a sensitivity analysis for interest rate changes - Foreign currency exposure is limited, primarily from Canadian operations, with fluctuations in the Canadian exchange rate negatively affecting net income by approximately **$0.7 million** for the nine months ended September 30, 2019, and a **1% decrease** in the average Canadian exchange rate would have resulted in an increase in interest expense of approximately **$0.3 million** and **$3.7 million** for the three and nine months ended September 30, 2019, respectively[220](index=220&type=chunk)[224](index=224&type=chunk) - The company uses interest rate cap agreements to manage exposure to variable interest rate borrowings, with changes in fair value recognized as 'Interest expense', and two **$800 million notional caps** matured on September 30, 2019, while two **$400 million notional caps** matured on March 31, 2019[221](index=221&type=chunk)[222](index=222&type=chunk)[223](index=223&type=chunk) [Item 4. Controls and Procedures](index=60&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2019, concluding they were effective. No material changes in internal control over financial reporting occurred during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[225](index=225&type=chunk) - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2019[226](index=226&type=chunk) [PART II—OTHER INFORMATION](index=61&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) This section provides additional information beyond the financial statements, covering legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report [Item 1. Legal Proceedings](index=61&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings and disputes arising in the ordinary course of business, which management believes are generally not likely to have a material adverse effect on its financial condition, results of operations, or cash flows. No significant changes to legal proceedings related to continuing operations were reported since the 2018 Annual Report on Form 10-K - The company is involved in ordinary course litigation (injuries, property damage, environmental, employment, dealer disputes) which management believes will not materially adversely affect financial condition, results of operations, or cash flows[228](index=228&type=chunk) - There has been no significant change in legal and regulatory proceedings related to continuing operations since the Annual Report on Form 10-K for the year ended December 31, 2018[96](index=96&type=chunk)[229](index=229&type=chunk) [Item 1A. Risk Factors](index=61&type=section&id=Item%201A.%20Risk%20Factors) Readers should consider the risk factors discussed in the company's Annual Report on Form 10-K for the year ended December 31, 2018, as these factors could materially affect the business, financial condition, or future results. The company also acknowledges that additional unknown or currently immaterial risks may adversely affect its operations - Readers should carefully consider the risk factors outlined in the Annual Report on Form 10-K for the year ended December 31, 2018, as they could materially affect the company's business, financial condition, or future results[230](index=230&type=chunk) - Additional risks and uncertainties not currently known or deemed immaterial may also adversely affect the business[230](index=230&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=61&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's common stock repurchases during the quarter ended September 30, 2019. The company completed its $500 million repurchase authorization by repurchasing 4,753,300 shares for $119.7 million in August 2019. A new $300 million repurchase program was authorized in October 2019 Issuer Purchases of Equity Securities (Quarter Ended September 30, 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (Millions) | | :-------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | July 1 - July 31 | — | $— | — | $119.7 | | August 1 - August 31 | 4,753,300 | $25.18 | 4,753,300 | — | | September 1 - September 30 | — | $— | — | — | | Total | 4,753,300 | $25.18 | 4,753,300 | | - The company completed its **$500 million share repurchase authorization** (through