OPENLANE, Inc. (NYSE:KAR) Q2 2023 Earnings Conference Call August 3, 2023 8:30 AM ET Company Participants Mike Eliason - Treasurer and VP, IR Peter Kelly - CEO Brad Lakhia - EVP and CFO Conference Call Participants Rajat Gupta - JPMorgan John Murphy - Bank of America Bob Labick - CJS Securities Bret Jordan - Jefferies Daniel Imbro - Stephens Operator Good morning, and welcome to the OPENLANE Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] P ...

| --- | --- | --- | |----------------------------------------------------------|-------|-------| | | | | | | | | | | | | | Second Quarter 2023 Earnings Slides // August 2, 2023 | | | | | | | 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 ...

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 June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-34568 OPENLANE, Inc. (Exact name of Registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer ...

Financial Data and Key Metrics Changes - The company generated approximately $421 million in revenue for Q1, a 14% increase compared to the same quarter last year [52] - Adjusted EBITDA was $59 million, representing a 20% increase year-on-year, but included an $11 million one-time charge; excluding this charge, adjusted EBITDA would have been $70 million, a 42% increase [61] - Total gross profit was $196 million, a 24% increase from Q1 of the prior year, with gross profit representing 54% of revenue excluding purchased vehicles [92] Business Line Data and Key Metrics Changes - Marketplace revenues, excluding purchased vehicle sales, increased 11% to $266 million, accounting for approximately 73% of consolidated revenues [70] - Marketplace gross profit performance increased 27% year-on-year, representing 35% of revenue, with gross margin in the marketplace segment at 43% of revenue excluding purchased vehicles [54] - The finance segment's revenue grew 18% over the prior year, accounting for 27% of consolidated revenues, driven by loan transaction unit increases and fee and interest income growth [72] Market Data and Key Metrics Changes - The company sold 330,000 vehicles in Q1, a decline of 6% compared to Q1 of last year, but this was the lowest percentage decline in over a year [62] - Off-lease vehicle volumes remain scarce, with over 80% of off-lease vehicles selling upstream before reaching physical auctions [42][171] - New vehicle production and inventory on dealer lots increased during the quarter, which is expected to help balance supply and demand in the used vehicle market over time [66] Company Strategy and Development Direction - The company is transitioning to a single brand, OPENLANE, to simplify customer experience and consolidate technology platforms, which is expected to enhance marketplace efficiency [78][115] - The focus is on building a digital marketplace that integrates various vehicle types and enhances customer interactions, aiming for a 15% to 20% CAGR in adjusted EBITDA over the next several years [145][168] - The company plans to combine dealer inventory with off-lease and rental vehicles into a single OPENLANE branded marketplace experience by the end of the year [117] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about the recovery of commercial seller volumes and the potential increase in off-lease vehicle supply in the second half of the year [149] - The company is managing a conservative portfolio in the finance segment, with expectations of credit losses returning to a more normalized range [68][105] - Management noted that the current market environment remains challenging, but they are seeing signs of improvement in buyer activity and conversion rates [15][39] Other Important Information - The company has a strong balance sheet with low debt and ample liquidity, generating $96 million in cash flows from operating activities in Q1 [100][107] - The transition to OPENLANE is not expected to impact guidance or projections significantly, with modest branding costs [121] - The company is focusing on cost management, with SG&A expenses declining by $11 million or 9% compared to Q1 of last year [73][97] Q&A Session Summary Question: What are the impacts of the rebranding exercise? - Management indicated that the rebranding to OPENLANE will not significantly impact guidance or projections, with modest branding costs expected [121] Question: How does the company view the future of AFC and credit risk? - Management expects credit risk losses to decline slightly as the year progresses, but anticipates AFC's total performance may be below last year's levels [123] Question: Can you provide insights on dealer recruitment efforts? - Management noted that they are actively working on dealer recruitment and have rolled out auction formats in several states, with positive results [129] Question: What is the current state of off-lease vehicle sales? - Management highlighted that over 80% of off-lease vehicles are currently being sold upstream, indicating a scarcity in the market [171] Question: How does the company plan to address repo volumes? - Management acknowledged that while repo volumes are increasing, they are still primarily flowing to physical auctions, but there are initiatives to sell some of these vehicles in a digital format [162]

First Quarter 2023 Earnings Slides May 2, 2023 2 3 KAR Q1 2023 Highlights* | --- | --- | --- | |---------------------------------------------------------------------------------------|---------|---------| | KAR | Q1 2023 | Q1 2022 | | Total operating revenues from continuing operations | $420.6 | $369.4 | | Gross profit** | $196.4 | $158.6 | | % of revenue** | 46.7% | 42.9% | | SG&A | $108.0 | $118.9 | | Other (income) expense, net*** | $7.1 | $1.2 | | EBITDA | $80.4 | $38.4 | | Adjusted EBITDA | $58.9 | $4 ...

[PART I—FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%E2%80%94FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents KAR Auction Services, Inc.'s unaudited consolidated financial statements for the three months ended March 31, 2023 and 2022, including statements of income, comprehensive income, balance sheets, stockholders' equity, and cash flows, along with condensed notes providing detailed explanations of accounting policies, business operations, segment information, and significant financial events [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) Consolidated Statements of Income (Three Months Ended March 31) | Metric (in millions) | 2023 | 2022 | | :------------------- | :--- | :--- | | Total operating revenues | $420.6 | $369.4 | | Total operating expenses | $355.2 | $355.7 | | Operating profit | $65.4 | $13.7 | | Interest expense | $38.3 | $25.6 | | Other (income) expense, net | $7.1 | $1.2 | | Income (loss) from continuing operations before income taxes | $20.0 | $(13.1) | | Income taxes | $7.3 | $(4.7) | | Income (loss) from continuing operations | $12.7 | $(8.4) | | Income from discontinued operations, net of income taxes | — | $8.1 | | Net income (loss) | $12.7 | $(0.3) | | Net income (loss) per share - basic | $0.01 | $(0.09) | | Net income (loss) per share - diluted | $0.01 | $(0.09) | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Consolidated Statements of Comprehensive Income (Three Months Ended March 31) | Metric (in millions) | 2023 | 2022 | | :------------------- | :--- | :--- | | Net income (loss) | $12.7 | $(0.3) | | Other comprehensive income, net of tax | | Foreign currency translation gain | $2.4 | $1.1 | | Unrealized gain on interest rate derivatives, net of tax | — | $9.1 | | Total other comprehensive income, net of tax | $2.4 | $10.2 | | Comprehensive income | $15.1 | $9.9 | [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheets (as of) | Metric (in millions) | March 31, 2023 | December 31, 2022 | | :------------------- | :------------- | :---------------- | | **Assets** | | Cash and cash equivalents | $219.6 | $225.7 | | Restricted cash | $32.2 | $52.0 | | Trade receivables, net | $340.3 | $270.7 | | Finance receivables, net | $2,385.4 | $2,395.1 | | Total current assets | $3,075.0 | $3,022.4 | | Goodwill | $1,466.3 | $1,464.5 | | Total assets | $5,147.9 | $5,119.8 | | **Liabilities, Temporary Equity and Stockholders' Equity** | | Accounts payable | $683.8 | $551.2 | | Obligations collateralized by finance receivables | $1,638.2 | $1,677.6 | | Current maturities of long-term debt | $225.8 | $288.7 | | Total current liabilities | $2,666.4 | $2,643.2 | | Long-term debt | $206.0 | $205.3 | | Total non-current liabilities | $343.1 | $345.8 | | Series A convertible preferred stock | $612.5 | $612.5 | | Total stockholders' equity | $1,525.9 | $1,518.3 | | Total liabilities, temporary equity and stockholders' equity | $5,147.9 | $5,119.8 | [Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Consolidated Statements of Stockholders' Equity (Three Months Ended March 31) | Metric (in millions) | Dec 31, 2022 | Net Income | Other Comprehensive Income | Stock Issuance | RSU Surrender | Stock-based Comp | Preferred Dividends | Mar 31, 2023 | | :------------------- | :----------- | :--------- | :------------------------- | :------------- | :------------ | :--------------- | :------------------ | :----------- | | Total Equity | $1,518.3 | $12.7 | $2.4 | $1.3 | $(1.3) | $3.6 | $(11.1) | $1,525.9 | **Key Changes (Q1 2023):** * Net income contributed **$12.7 million** * Other comprehensive income added **$2.4 million**, primarily from foreign currency translation gain * Dividends on preferred stock totaled **$11.1 million** * Stock-based compensation expense was **$3.6 million** [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows (Three Months Ended March 31) | Activity (in millions) | 2023 | 2022 | | :--------------------- | :--- | :--- | | Net cash provided by (used by) operating activities - continuing operations | $96.1 | $(22.6) | | Net cash provided by (used by) operating activities - discontinued operations | — | $(39.2) | | Net cash used by investing activities - continuing operations | $(13.6) | $(246.7) | | Net cash provided by (used by) investing activities - discontinued operations | $7.0 | $(11.8) | | Net cash (used by) provided by financing activities - continuing operations | $(116.5) | $276.7 | | Net cash provided by financing activities - discontinued operations | — | $22.0 | | Net decrease in cash, cash equivalents and restricted cash | $(25.9) | $(42.9) | | Cash, cash equivalents and restricted cash at end of period | $251.8 | $160.5 | [Condensed Notes to Consolidated Financial Statements](index=11&type=section&id=Condensed%20Notes%20to%20Consolidated%20Financial%20Statements) [Note 1—Basis of Presentation and Nature of Operations](index=11&type=section&id=Note%201%E2%80%94Basis%20of%20Presentation%20and%20Nature%20of%20Operations) - KAR is a leading digital marketplace for used vehicles, connecting sellers and buyers across North America and Europe. Its portfolio includes integrated technology, data analytics, financing, logistics, reconditioning, and remarketing solutions, supported by vehicle logistics centers in Canada[28](index=28&type=chunk) - The Marketplace segment serves commercial sellers via the OPENLANE platform and dealer customers through BacklotCars and TradeRev digital marketplaces. AFC (Finance segment) provides floorplan financing to independent used vehicle dealers[29](index=29&type=chunk)[31](index=31&type=chunk)[35](index=35&type=chunk) [Note 2—Sale of ADESA U.S. Physical Auction Business and Discontinued Operations](index=13&type=section&id=Note%202%E2%80%94Sale%20of%20ADESA%20U.S.%20Physical%20Auction%20Business%20and%20Discontinued%20Operations) - The ADESA U.S. physical auction business was sold to Carvana in May 2022 for approximately **$2.2 billion** in cash. Its financial results are reported as discontinued operations for all periods presented[39](index=39&type=chunk)[41](index=41&type=chunk) - For the three months ended March 31, 2023, KAR received a net cash inflow of approximately **$30.0 million** from commercial and transition services agreements with Carvana[39](index=39&type=chunk) Income from Discontinued Operations (Three Months Ended March 31, in millions) | Metric | 2023 | 2022 | | :----- | :--- | :--- | | Operating revenues | $— | $220.0 | | Operating profit (loss) | $— | $6.3 | | Income from discontinued operations | $— | $8.1 | [Note 3—Stock and Stock-Based Compensation Plans](index=14&type=section&id=Note%203%E2%80%94Stock%20and%20Stock-Based%20Compensation%20Plans) Stock-Based Compensation Expense (Three Months Ended March 31, in millions) | Award Type | 2023 | 2022 | | :--------- | :--- | :--- | | PRSUs | $(0.1) | $1.9 | | RSUs | $2.8 | $1.4 | | Service options | $0.2 | $0.2 | | Market options | $0.7 | $1.5 | | Total | $3.6 | $5.0 | - In Q1 2023, approximately **0.5 million** PRSUs were granted, vesting based on three-year cumulative Adjusted EBITDA and relative TSR. Approximately **0.6 million** RSUs were granted, vesting in three equal annual installments contingent on continued employment[46](index=46&type=chunk)[47](index=47&type=chunk) - The share repurchase program was extended through December 31, 2023, with approximately **$126.9 million** remaining available. No shares were repurchased during the three months ended March 31, 2023 and 2022[48](index=48&type=chunk) [Note 4—Income (Loss) from Continuing Operations Per Share](index=15&type=section&id=Note%204%E2%80%94Income%20(Loss)%20from%20Continuing%20Operations%20Per%20Share) Income (Loss) from Continuing Operations Per Share (Three Months Ended March 31, in millions except per share amounts) | Metric | 2023 | 2022 | | :------------------------------------------------ | :--- | :--- | | Income (loss) from continuing operations | $12.7 | $(8.4) | | Series A Preferred Stock dividends | $(11.1) | $(10.7) | | Income (loss) from continuing operations attributable to common stockholders | $1.2 | $(19.1) | | Weighted average common shares outstanding | 109.3 | 121.4 | | Effect of dilutive stock options and restricted stock awards | 0.6 | — | | Weighted average common shares outstanding and potential common shares | 109.9 | 121.4 | | Basic EPS from continuing operations | $0.01 | $(0.16) | | Diluted EPS from continuing operations | $0.01 | $(0.16) | - Diluted EPS for Q1 2022 excluded potential common shares due to an anti-dilutive effect from the period's undistributed loss[51](index=51&type=chunk) [Note 5—Finance Receivables and Obligations Collateralized by Finance Receivables](index=15&type=section&id=Note%205%E2%80%94Finance%20Receivables%20and%20Obligations%20Collateralized%20by%20Finance%20Receivables) - AFC sells most of its U.S. dollar-denominated finance receivables on a revolving, non-recourse basis to AFC Funding Corporation, with committed liquidity of **$2.0 billion** at March 31, 2023. AFCI's Canadian facility increased to **C$300 million** in March 2023[52](index=52&type=chunk)[53](index=53&type=chunk)[142](index=142&type=chunk) Finance Receivables and Net Credit Losses (in millions) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Total receivables managed | $2,406.4 | $2,416.6 | | Receivables delinquent (31+ days past due) | $19.6 | $17.5 | | Net Credit Losses (3 months ended March 31) | $12.5 | $1.4 | | Allowance for Credit Losses (end of period) | $21.0 | $21.5 | - AFC, AFC Funding Corporation, and AFCI were in compliance with all financial covenants in their securitization agreements as of March 31, 2023[59](index=59&type=chunk)[145](index=145&type=chunk) [Note 6—Long-Term Debt](index=17&type=section&id=Note%206%E2%80%94Long-Term%20Debt) Long-Term Debt (in millions) | Debt Type | Interest Rate | Maturity | March 31, 2023 | December 31, 2022 | | :------------------------ | :------------ | :------- | :------------- | :---------------- | | Term Loan B-6 | Adjusted LIBOR + 2.25% | Sep 19, 2026 | $— | $— | | Revolving Credit Facility | Adjusted LIBOR + 1.75% | Sep 19, 2024 | $65.0 | $145.0 | | Senior notes | 5.125% | Jun 1, 2025 | $350.0 | $350.0 | | European lines of credit | Euribor + 1.25% | Upon demand | $20.8 | $3.7 | | Total debt | | | $435.8 | $498.7 | | Current portion of long-term debt | | | $(225.8) | $(288.7) | | Long-term debt | | | $206.0 | $205.3 | - The **$950 million** Term Loan B-6 was fully prepaid in May 2022 using proceeds from the ADESA U.S. physical auction business sale, resulting in a **$7.7 million** non-cash loss on extinguishment of debt[61](index=61&type=chunk) - In August 2022, **$600 million** of the 5.125% senior notes due 2025 were prepaid via a cash tender offer, also using Transaction proceeds, incurring a **$9.5 million** loss on extinguishment[66](index=66&type=chunk) - As of March 31, 2023, **$140.0 million** of the remaining senior notes are classified as current debt, as the Company is required to offer to redeem or repay them within 365 days of the Transaction close[67](index=67&type=chunk)[137](index=137&type=chunk) - The estimated fair value of long-term debt was **$430.6 million** at March 31, 2023, based on Level 2 broker-dealer quotes[69](index=69&type=chunk) [Note 7—Derivatives](index=18&type=section&id=Note%207%E2%80%94Derivatives) - In January 2020, the Company entered into three pay-fixed interest rate swaps with an aggregate notional amount of **$500 million**, maturing January 23, 2025, to hedge variable rate interest payments[70](index=70&type=chunk) - Hedge accounting was discontinued in February 2022 due to the expected repayment of Term Loan B-6. The swaps were terminated in May 2022, resulting in a **$16.7 million** realized gain recognized in interest expense[71](index=71&type=chunk) [Note 8—Other (Income) Expense, Net](index=19&type=section&id=Note%208%E2%80%94Other%20(Income)%20Expense,%20Net) Other (Income) Expense, Net (Three Months Ended March 31, in millions) | Item | 2023 | 2022 | | :------------------------------------------------ | :--- | :--- | | Change in realized and unrealized (gains) losses on investment securities, net | $0.1 | $3.0 | | Foreign currency (gains) losses | $0.1 | $1.2 | | Investment and note receivable impairment | $11.0 | — | | Other | $(4.1) | $(3.0) | | Total Other (income) expense, net | $7.1 | $1.2 | - The increase in other expense in Q1 2023 was primarily due to an **$11.0 million** impairment of an equity security and note receivable with a single investee that filed for bankruptcy[73](index=73&type=chunk)[76](index=76&type=chunk) [Note 9—Commitments and Contingencies](index=19&type=section&id=Note%209%E2%80%94Commitments%20and%20Contingencies) - The Company is involved in various litigation and disputes in the ordinary course of business. Management does not currently believe the ultimate resolution of these actions will have a material adverse effect on financial condition, results of operations, or cash flows[77](index=77&type=chunk) [Note 10—Accumulated Other Comprehensive Loss](index=20&type=section&id=Note%2010%E2%80%94Accumulated%20Other%20Comprehensive%20Loss) Accumulated Other Comprehensive Loss (in millions) | Item | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Foreign currency translation loss | $(47.1) | $(49.5) | | Accumulated other comprehensive loss | $(47.1) | $(49.5) | [Note 11—Segment Information](index=20&type=section&id=Note%2011%E2%80%94Segment%20Information) - KAR operates in two reportable segments: Marketplace and Finance. Results of the ADESA U.S. physical auctions are reported as discontinued operations[80](index=80&type=chunk) Segment Financial Information (Three Months Ended March 31, 2023, in millions) | Metric | Marketplace | Finance | Consolidated | | :------------------------------------------ | :---------- | :------ | :----------- | | Operating revenues | $321.0 | $99.6 | $420.6 | | Operating profit (loss) | $(3.6) | $69.0 | $65.4 | | Income (loss) from continuing operations | $(21.1) | $33.8 | $12.7 | | Total assets | $2,376.5 | $2,771.4 | $5,147.9 | Segment Financial Information (Three Months Ended March 31, 2022, in millions) | Metric | Marketplace | Finance | Consolidated | | :------------------------------------------ | :---------- | :------ | :----------- | | Operating revenues | $285.2 | $84.2 | $369.4 | | Operating profit (loss) | $(42.9) | $56.6 | $13.7 | | Income (loss) from continuing operations | $(39.4) | $31.0 | $(8.4) | | Total assets | $2,630.3 | $3,103.5 | $5,733.8 | - Approximately **60%** of foreign operating revenues for Q1 2023 were from Canada, with most of the remainder from Continental Europe[84](index=84&type=chunk) [Note 12—Subsequent Event](index=21&type=section&id=Note%2012%E2%80%94Subsequent%20Event) - Effective May 15, 2023, the Company will change its name to OPENLANE, Inc., reflecting a transformation to an asset-light, digital marketplace company. OPENLANE will serve as both the parent company and go-to-market brand[85](index=85&type=chunk) - The name change may result in a potential non-cash impairment charge in Q2 2023 for the **$122.8 million** ADESA tradename and other definite-lived tradenames, and the useful life of the ADESA tradename will be reassessed[85](index=85&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on KAR Auction Services, Inc.'s financial condition and results of operations for the three months ended March 31, 2023, compared to the same period in 2022. It covers industry trends, segment performance, liquidity, capital resources, and non-GAAP financial measures like EBITDA and Adjusted EBITDA [Forward-Looking Statements](index=22&type=section&id=Forward-Looking%20Statements) - The report contains forward-looking statements regarding future performance, growth, cost savings, revenue, credit losses, capital expenditures, and strategic initiatives, which are subject to risks and uncertainties[86](index=86&type=chunk) [Automotive Industry and Economic Impacts on our Business](index=22&type=section&id=Automotive%20Industry%20and%20Economic%20Impacts%20on%20our%20Business) - The automotive industry faces unprecedented market conditions due to supply chain issues, semiconductor shortages, and new vehicle production delays, leading to significant fluctuations in used vehicle values and declining wholesale market volumes[87](index=87&type=chunk) - Macroeconomic factors like inflation, rising interest rates, and volatile energy prices impact vehicle affordability and demand, posing risks to operations and industry stability[88](index=88&type=chunk) [Overview](index=22&type=section&id=Overview) - KAR is a digital marketplace for used vehicles, operating two segments: Marketplace (digital platforms, logistics, reconditioning) and Finance (floorplan financing for dealers)[89](index=89&type=chunk)[90](index=90&type=chunk) - The ADESA U.S. physical auctions are now reported as discontinued operations[91](index=91&type=chunk) [Industry Trends](index=23&type=section&id=Industry%20Trends) - The U.S. and Canadian wholesale used vehicle market is approximately **20 million** vehicles, with digital applications like BacklotCars and TradeRev expanding the dealer-to-dealer segment[92](index=92&type=chunk) - AFC's independent used vehicle dealer base was approximately **15,200** in 2022. Key challenges include demand, pricing volatility, consumer financing access, and increased interest rates, which could negatively impact AFC's results[93](index=93&type=chunk)[94](index=94&type=chunk) - Wholesale used vehicle volumes are seasonal, typically declining in Q4 due to holidays and winter weather, affecting revenues and operating expenses[95](index=95&type=chunk) [Sources of Revenues and Expenses](index=23&type=section&id=Sources%20of%20Revenues%20and%20Expenses) - Marketplace revenues primarily consist of auction fees from buyers and sellers for consigned vehicles (where KAR does not take title) and service revenue from logistics, reconditioning, and inspection. Purchased vehicle sales (where KAR takes title) are recorded at gross selling price[97](index=97&type=chunk) - AFC's Finance-related revenue includes interest and fee income, provision for credit losses, and other revenues from finance receivables[97](index=97&type=chunk) - Operating expenses include cost of services (payroll, subcontract, purchased vehicles, supplies) and selling, general and administrative expenses (payroll, sales & marketing, IT, professional fees)[100](index=100&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) Consolidated Results of Operations (Three Months Ended March 31, in millions except per share amounts) | Metric | 2023 | 2022 | Change (%) | | :------------------------------------------ | :--- | :--- | :--------- | | Total revenues from continuing operations | $420.6 | $369.4 | 13.9% | | Operating profit | $65.4 | $13.7 | 377.4% | | Net income (loss) | $12.7 | $(0.3) | N/A | | Basic EPS from continuing operations | $0.01 | $(0.16) | N/A | | Diluted EPS from continuing operations | $0.01 | $(0.16) | N/A | - Depreciation and amortization decreased by **$3.0 million (12%)** to **$23.0 million**, primarily due to fully depreciated assets and a reduction in assets placed in service[104](index=104&type=chunk) - Interest expense increased by **$12.7 million (50%)** to **$38.3 million**, mainly due to an increase in the average interest rate on AFC securitization obligations to **6.6%** (from **2.3%** in 2022), partially offset by debt repayments[105](index=105&type=chunk) - Other expense, net, increased to **$7.1 million** from **$1.2 million**, primarily due to an **$11.0 million** impairment of an equity security and note receivable[106](index=106&type=chunk) - The effective tax rate was **36.5%** for Q1 2023, compared to **35.9%** on a pre-tax loss for Q1 2022[107](index=107&type=chunk) - Foreign currency fluctuations (Canadian dollar and Euro) negatively impacted revenue by **$9.0 million** and net income by **$1.1 million** for Q1 2023[109](index=109&type=chunk) [Marketplace Results](index=26&type=section&id=Marketplace%20Results) Marketplace Segment Results (Three Months Ended March 31, in millions except per vehicle amounts) | Metric | 2023 | 2022 | Change (%) | | :------------------------------------------ | :--- | :--- | :--------- | | Total Marketplace revenue | $321.0 | $285.2 | 12.6% | | Auction fees | $99.9 | $101.4 | -1.5% | | Service revenue | $165.6 | $137.5 | 20.4% | | Purchased vehicle sales | $55.5 | $46.3 | 19.9% | | Operating profit (loss) | $(3.6) | $(42.9) | N/A | | Total vehicles sold | 330,000 | 351,000 | -6.0% | | Auction fees per vehicle sold | $303 | $289 | 4.8% | | Gross profit percentage, excluding purchased vehicles | 42.6% | 37.4% | +5.2 pp | - The **6%** decrease in total vehicles sold was due to an industry-wide lack of wholesale used vehicle supply, affecting both commercial (down **4%**) and dealer consignment (down **8%**) volumes[112](index=112&type=chunk) - Service revenue increased by **$28.1 million (20%)**, driven by higher repossession and remarketing fees (**$10.5M**), transportation revenue (**$8.2M**), and third-party platform fees (**$6.6M**)[114](index=114&type=chunk) - Selling, general and administrative expenses decreased by **$12.8 million (12%)** to **$95.6 million**, primarily due to lower professional fees, IT costs, severance, and stock-based compensation[118](index=118&type=chunk) [Finance Results](index=28&type=section&id=Finance%20Results) Finance Segment Results (Three Months Ended March 31, in millions except volumes and per loan amounts) | Metric | 2023 | 2022 | Change (%) | | :------------------------------------------ | :--- | :--- | :--------- | | Total Finance revenue | $99.6 | $84.2 | 18.3% | | Interest income | $60.6 | $43.2 | 40.3% | | Fee income | $47.6 | $40.2 | 18.4% | | Provision for credit losses | $(12.0) | $(1.4) | N/A | | Operating profit | $69.0 | $56.6 | 21.9% | | Loan transactions | 420,000 | 372,000 | 12.9% | | Revenue per loan transaction | $237 | $226 | 4.9% | | Provision for credit losses (% of average managed receivables) | 2.0% | 0.2% | +1.8 pp | - Revenue per loan transaction increased by **$11 (5%)**, driven by higher interest yields due to a **450 basis point** increase in prime rates since March 31, 2022, and increased floorplan and other fee income[121](index=121&type=chunk) - Gross profit as a percentage of revenue increased to **83.5%** from **82.2%**, primarily due to the **18%** revenue increase outpacing the **9%** increase in cost of services[123](index=123&type=chunk) - Selling, general and administrative expenses increased by **$1.9 million (18%)** to **$12.4 million**, mainly due to higher information technology costs and compensation expense[124](index=124&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=29&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Liquidity Indicators (in millions) | Metric | March 31, 2023 | December 31, 2022 | March 31, 2022 | | :------------------------------------------ | :------------- | :---------------- | :------------- | | Cash and cash equivalents | $219.6 | $225.7 | $134.2 | | Restricted cash | $32.2 | $52.0 | $26.3 | | Working capital | $408.6 | $379.2 | $1,023.2 | | Amounts available under the Revolving Credit Facility | $241.0 | $161.0 | $224.0 | | Cash provided by (used by) operating activities (3 months ended) | $96.1 | | $(22.6) | - The Company believes its liquidity sources (cash, working capital, operating cash flow, and Credit Facility availability) are sufficient to meet operating needs, capital requirements, and debt service for the foreseeable future[140](index=140&type=chunk) - The Revolving Credit Facility had **$65.0 million** drawn at March 31, 2023, with **$241.0 million** available for borrowing (net of **$19.0 million** in outstanding letters of credit)[132](index=132&type=chunk)[139](index=139&type=chunk) - AFC's securitization facilities provide committed liquidity of **$2.0 billion** for U.S. finance receivables and **C$300 million** for Canadian receivables, both expiring January 31, 2026[141](index=141&type=chunk)[142](index=142&type=chunk) [EBITDA and Adjusted EBITDA](index=32&type=section&id=EBITDA%20and%20Adjusted%20EBITDA) - EBITDA and Adjusted EBITDA are non-GAAP measures used by management and creditors to evaluate performance, with Adjusted EBITDA including specific adjustments for non-recurring items, stock-based compensation, and other non-cash amounts[146](index=146&type=chunk)[147](index=147&type=chunk) Consolidated EBITDA and Adjusted EBITDA (Three Months Ended March 31, in millions) | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Income (loss) from continuing operations | $12.7 | $(8.4) | | EBITDA | $80.4 | $38.4 | | Adjusted EBITDA | $58.9 | $49.1 | Consolidated Adjusted EBITDA from Continuing Operations (Twelve Months Ended March 31, 2023, in millions) | Metric | Amount | | :------------------------------------------ | :----- | | Adjusted EBITDA from continuing ops | $241.0 | [Summary of Cash Flows](index=34&type=section&id=Summary%20of%20Cash%20Flows) Summary of Cash Flows (Three Months Ended March 31, in millions) | Activity | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Operating activities - continuing operations | $96.1 | $(22.6) | | Investing activities - continuing operations | $(13.6) | $(246.7) | | Financing activities - continuing operations | $(116.5) | $276.7 | | Net decrease in cash, cash equivalents and restricted cash | $(25.9) | $(42.9) | - Operating cash flow from continuing operations significantly improved to **$96.1 million** (provided) in Q1 2023 from **$(22.6) million** (used) in Q1 2022, driven by changes in operating assets and liabilities and reduced contingent consideration payments[152](index=152&type=chunk)[153](index=153&type=chunk) - Investing cash flow from continuing operations decreased to **$(13.6) million** (used) in Q1 2023 from **$(246.7) million** (used) in Q1 2022, primarily due to a smaller increase in finance receivables held for investment[155](index=155&type=chunk) - Financing cash flow from continuing operations shifted to **$(116.5) million** (used) in Q1 2023 from **$276.7 million** (provided) in Q1 2022, mainly due to decreased borrowings from lines of credit and obligations collateralized by finance receivables, and preferred stock dividends[156](index=156&type=chunk) [Capital Expenditures](index=35&type=section&id=Capital%20Expenditures) - Capital expenditures for Q1 2023 were **$12.0 million**, down from **$13.5 million** in Q1 2022. Expected capital expenditures for fiscal year 2023 related to continuing operations are approximately **$65 million**[160](index=160&type=chunk) [Dividends](index=36&type=section&id=Dividends) - Holders of Series A Preferred Stock received **$11.1 million** in cash dividends for Q1 2023, compared to **$10.7 million** in in-kind dividends for Q1 2022[161](index=161&type=chunk) - The Company has suspended its quarterly common stock dividend, with future decisions dependent on financial condition, contractual restrictions, and capital requirements[162](index=162&type=chunk) [Contractual Obligations](index=36&type=section&id=Contractual%20Obligations) - Contractual obligations for long-term debt, interest, finance leases, operating leases, and contingent consideration are detailed in the Annual Report on Form 10-K for December 31, 2022, with operating lease obligations changing in the ordinary course of business[163](index=163&type=chunk) [Critical Accounting Estimates](index=36&type=section&id=Critical%20Accounting%20Estimates) - Critical accounting estimates are discussed in the Annual Report on Form 10-K for December 31, 2022[164](index=164&type=chunk) [Off-Balance Sheet Arrangements](index=36&type=section&id=Off-Balance%20Sheet%20Arrangements) - As of March 31, 2023, the Company had no off-balance sheet arrangements deemed reasonably likely to have a material current or future effect on its financial condition, results of operations, or cash flows[165](index=165&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details KAR Auction Services, Inc.'s exposure to market risks, specifically foreign currency and interest rate fluctuations, and the strategies used to manage these risks [Foreign Currency](index=37&type=section&id=Foreign%20Currency) - Foreign currency exposure primarily arises from transactions in Canadian dollars, British pounds, and Euros. Foreign currency losses on intercompany loans were **$0.1 million** in Q1 2023, down from **$1.2 million** in Q1 2022[167](index=167&type=chunk) - A **1%** change in the month-end Canadian dollar exchange rate would impact foreign currency losses on intercompany loans by **$0.8 million** and net income by **$0.5 million**[167](index=167&type=chunk) [Interest Rates](index=37&type=section&id=Interest%20Rates) - The Company is exposed to interest rate risk on variable rate borrowings. Interest rate swap agreements were previously used to manage this exposure but were terminated in May 2022 following the repayment of Term Loan B-6[168](index=168&type=chunk)[170](index=170&type=chunk) - A hypothetical **100 basis point** increase in short-term rates (LIBOR) would have increased interest expense by approximately **$0.3 million** for the three months ended March 31, 2023[171](index=171&type=chunk) [Item 4. Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) This section outlines the evaluation of the Company's disclosure controls and procedures, the remediation of a previously identified material weakness, and any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=38&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - As of March 31, 2023, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective[173](index=173&type=chunk) [Remediation of Material Weakness](index=38&type=section&id=Remediation%20of%20Material%20Weakness) - A material weakness in internal controls over financial reporting related to cash flow presentation for discontinued operations and contingent consideration was identified in Q4 2022[174](index=174&type=chunk) - Management performed a risk assessment and implemented controls, successfully remediating the material weakness during Q1 2023[174](index=174&type=chunk) [Changes in Internal Control over Financial Reporting](index=38&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - Except for the remediation efforts, there were no other changes in internal control over financial reporting during Q1 2023 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[175](index=175&type=chunk) [PART II—OTHER INFORMATION](index=39&type=section&id=PART%20II%E2%80%94OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) This section addresses the Company's involvement in legal proceedings and disputes arising in the ordinary course of business - Management does not believe that the ultimate resolution of current litigation and disputes will have a material adverse effect on the Company's financial condition, results of operations, or cash flows[177](index=177&type=chunk) [Item 1A. Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) This section refers investors to the comprehensive discussion of risk factors in the Company's Annual Report on Form 10-K, along with additional risks that may arise - Investors should carefully consider the risk factors discussed in the Annual Report on Form 10-K for December 31, 2022, and other filings, as these could materially and adversely affect the business[179](index=179&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides information on the Company's unregistered sales of equity securities and details of its share repurchase program - The Company previously issued common stock in connection with the BacklotCars (857,630 shares for **$15 million**) and CARWAVE (1,953,124 shares for **$30 million**) acquisitions, exempt from registration under Section 4(a)(2) of the Securities Act[181](index=181&type=chunk) Issuer Purchases of Equity Securities (Three Months Ended March 31, 2023) | 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 (in millions) | | :------------------- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------- | :------------------------------------------------------------------------------------------------- | | January 1 - January 31 | — | $— | — | $126.9 | | February 1 - February 28 | — | — | — | $126.9 | | March 1 - March 31 | — | — | — | $126.9 | | Total | — | $— | — | | - The share repurchase program, authorized for up to **$500 million**, was extended through December 31, 2023, with approximately **$126.9 million** remaining available for repurchase. No shares were repurchased during Q1 2023[182](index=182&type=chunk)[183](index=183&type=chunk) [Item 6. Exhibits](index=40&type=section&id=Item%206.%20Exhibits) This section provides a comprehensive index of exhibits filed with the Quarterly Report on Form 10-Q, including agreements, certificates, and other documents incorporated by reference or filed herewith - The exhibit index lists various agreements, including separation, merger, and purchase agreements, as well as corporate governance documents, debt instruments, and compensation plans[186](index=186&type=chunk)[187](index=187&type=chunk)[188](index=188&type=chunk)[189](index=189&type=chunk)[190](index=190&type=chunk) [Signature](index=45&type=section&id=Signature) This section contains the signature of the duly authorized officer, confirming the filing of the report - The report was signed by Brad S. Lakhia, Executive Vice President and Chief Financial Officer, on May 3, 2023[195](index=195&type=chunk)

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, 2022 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) (State or other jurisdiction of incorporation or organization) (I.R.S. ...

Financial Data and Key Metrics Changes - For Q4 2022, consolidated revenues excluding purchase vehicle sales increased by 7% to $327.8 million, with total revenue for the full year reaching over $1.5 billion, a 5% increase compared to 2021 [4][99][108] - The finance segment generated Q4 revenue of $101 million, a 27% increase year-over-year, driven by a 15% growth in transactions and an 11% increase in revenue per transaction [4][99] - Total gross profit for Q4 was $171 million, a 4% increase from the prior year, with gross profit representing 62.1% of revenue excluding purchase vehicles [30][99] Business Line Data and Key Metrics Changes - The marketplace segment revenues excluding purchase vehicle sales were flat at $227.1 million, accounting for approximately 69% of consolidated revenues, while marketplace vehicles sold declined by 15% to 289,000 units [38][90] - Service revenues increased by 16% due to growth in repossession, transportation, and technology services, highlighting diversified revenue streams [38] - The finance segment accounted for 31% of consolidated revenues, with a significant increase in volume fee and interest income [95] Market Data and Key Metrics Changes - Used vehicle values experienced significant declines in the second half of 2022, with expectations for some downward pressure on conversion rates in 2023 [7][9] - The wholesale marketplace volumes are expected to remain below normal in 2023, with new vehicle production still below typical levels [9][102] - The company anticipates a gradual recovery in commercial volumes, with expectations of increased new vehicle production and inventory on dealer lots [102][103] Company Strategy and Development Direction - The company is focused on cost management, having achieved a $30 million cost reduction target by the end of 2022, with ongoing initiatives to continue this trend [5][37] - A strategic focus on digital transformation is evident, with plans to consolidate platforms and enhance customer experience through a single digital marketplace [6][31][109] - The company aims to roll out auction formats across all U.S. markets and integrate commercial and dealer-owned vehicles into one digital marketplace [6][111] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding the operating environment, noting that while challenges remain, there are signs of recovery in commercial volumes and vehicle production [9][102] - The company expects adjusted EBITDA for 2023 to be between $250 million and $270 million, with a commitment to achieving this goal [14][114] - Management believes that the secular shift towards digital will continue to benefit the company, with a focus on expanding customer relationships and unlocking new revenue streams [86][101] Other Important Information - The company completed a major divestiture in 2022, simplifying its business and allowing for debt repayment and share repurchases [10][118] - The company ended 2022 with $180 million in available cash and $161 million in available revolving credit, providing ample liquidity for strategic initiatives [118] - The company plans to continue investing in its digital strategy, with capital expenditures expected to be approximately $65 million in 2023 [14][115] Q&A Session Summary Question: What drove the decline in gross profit per unit in Q4? - Management indicated that the decline in used vehicle values and lower conversion rates were the principal factors affecting gross profit per unit [16][146] Question: How does the company view the growth opportunities in the AFC business? - Management expressed confidence in the growth opportunities for AFC, emphasizing a disciplined approach to growth while managing risks [26][35] Question: What are the expectations for conversion rates moving forward? - Management noted that conversion rates were down across the industry but have shown signs of recovery as 2023 began, with expectations for improved performance [134]

Forward-Looking Statements | --- | --- | |-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------| | | | | * The company uses the two-class method of calculating income from continuing operations per dilu ...

KAR Auction Services, Inc. (NYSE:KAR) Q3 2022 Results Conference Call November 2, 2022 8:30 AM ET Company Participants Mike Eliason - IR Peter Kelly - CEO Eric Loughmiller - EVP and CFO Conference Call Participants John Murphy - Bank of America Rajat Gupta - JP Morgan Gary Prestopino - Barrington Research Bob Labick - CJS Securities Ali Faghri - Guggenheim Operator Good day, and welcome to the KAR Auction Services Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode [O ...