Form 8-K KAR Auction Services, For: Oct 31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 31, 2017
KAR Auction Services, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 001-34568 | 20-8744739 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||
13085 Hamilton Crossing Boulevard
Carmel, Indiana 46032
(Address of principal executive offices)
(Zip Code)
(800) 923-3725
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Item 2.02 Results of Operations and Financial Condition.
On October 31, 2017, KAR Auction Services, Inc. issued a press release announcing its financial results for the three and nine months ended September 30, 2017. KAR Auction Services, Inc. will host an earnings conference call and webcast, Wednesday, November 1, 2017 at 11:00 a.m., Eastern Daylight Time. The conference call may be accessed by calling 1-844-778-4145 and entering participant passcode 95364956 and the live webcast may be accessed at the investor relations section of www.karauctionservices.com. The call will be hosted by KAR Auction Services, Inc. Chief Executive Officer and Chairman of the Board, Jim Hallett, and Executive Vice President and Chief Financial Officer, Eric Loughmiller. The call will feature a review of operating highlights and financial results for the three and nine months ended September 30, 2017. The press release dated October 31, 2017 is attached to this Current Report on Form 8-K as Exhibit 99.1 and is incorporated herein by reference in its entirety.
On October 31, 2017, KAR Auction Services, Inc. also posted supplemental financial information for the three and nine months ended September 30, 2017, and Earnings Slides for the three and nine months ended September 30, 2017. The supplemental financial information and Earnings Slides can be located at the investor relations section of www.karauctionservices.com under the quarterly results page. The supplemental financial information and Earnings Slides posted on October 31, 2017 are attached to this Current Report on Form 8-K as Exhibits 99.2 and 99.3, respectively, and are incorporated herein by reference in their entirety.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
99.1 Press release dated October 31, 2017 – “KAR Auction Services, Inc. Reports Third Quarter 2017 Financial Results”
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: October 31, 2017 KAR Auction Services, Inc.
/s/ Eric M. Loughmiller
Eric M. Loughmiller
Executive Vice President and Chief Financial Officer
EXHIBIT 99.1
EARNINGS RELEASE |
For Immediate Release
Analyst Inquiries: Media Inquiries:
Mike Eliason Tobin Richer
(317) 249-4559 (317) 249-4521
KAR Auction Services, Inc. Reports Third Quarter 2017 Financial Results
Board Announces Quarterly Dividend Increase to $0.35 per Common Share
• | Fourth quarter 2017 dividend of $0.35 represents 9.4% increase over the previous dividend. |
• | Third quarter 2017 revenue increased to $843.0 million with 46% incremental margins based on increased volume, decreased loan loss rate, and SG&A control. |
• | Net Income Per Share increased 18%, Operating Adjusted Net Income Per Share increased 14% and Adjusted EBITDA increased 13% over the quarter ended September 30, 2016. |
• | Company increases guidance for full year 2017 Net Income Per Share and Operating Adjusted Net Income Per Share. |
Carmel, IN, October 31, 2017 — KAR Auction Services, Inc. (NYSE: KAR), today reported its third quarter financial results for the period ended September 30, 2017. For the third quarter of 2017, the company reported revenue of $843.0 million as compared with revenue of $789.6 million for the third quarter of 2016, an increase of 7%. Net income for the third quarter of 2017 increased 15% to $62.8 million, or $0.46 per diluted share, as compared with net income of $54.4 million, or $0.39 per diluted share, in the third quarter of 2016. Adjusted EBITDA for the quarter ended September 30, 2017 increased 13% to $209.3 million, as compared with Adjusted EBITDA of $184.8 million for the quarter ended September 30, 2016. Operating adjusted net income per diluted share increased 14% to $0.57 for the quarter ended September 30, 2017, as compared with operating adjusted net income per diluted share of $0.50 for the quarter ended September 30, 2016.
For the nine months ended September 30, 2017, the company reported revenue of $2,567.6 million as compared with revenue of $2,336.4 million for the nine months ended September 30, 2016, an increase of 10%. Net income for the nine months ended September 30, 2017 increased 7% to $189.2 million, or $1.37 per diluted share, as compared with net income of $176.9 million, or $1.27 per diluted share, in the first nine months of 2016. Adjusted EBITDA for the nine months ended September 30, 2017 increased 13% to $643.4 million, as compared with Adjusted EBITDA of $571.4 million for the nine months ended September 30, 2016. Operating adjusted net income per diluted share increased 15% to $1.85 for the nine months ended September 30, 2017, as compared with operating adjusted net income per diluted share of $1.61 for the nine months ended September 30, 2016.
"I am very pleased with KAR’s consolidated performance and our ability to navigate the events encountered during the third quarter,” said Jim Hallett, chairman and CEO of KAR Auction Services. “KAR’s performance, operational strategy and capital allocation approach position us well for the fourth quarter and the future.”
Dividend Announcement
The company announced a cash dividend today of $0.35 per share on the company’s common stock, an increase of $0.03 per share from the previous dividend. The dividend is payable on January 5, 2018, to stockholders of record as of the close of business on December 20, 2017.
2017 Outlook
KAR Auction Services' has updated its previous outlook to reflect the impact of recent acquisitions and a reduction of our effective tax rate.
(in millions, except per share amounts) | Previous Guidance | Current Guidance | |
Net income | $218.4 - $232.4 | $231.4 - $246.0 | |
Income taxes | $128.2 - $136.4 | $119.2 - $126.8 | |
Interest expense, net of interest income | $170 | $170 | |
Depreciation and amortization | $278 | $274 | |
EBITDA | $794.6 - $816.8 | $794.6 - $816.8 | |
Addbacks | $30.4 - $33.2 | $30.4 - $33.2 | |
Adjusted EBITDA | $825 - $850 | $825 - $850 | |
Capital expenditures | $145 | $150 | |
Cash taxes | $145 | $140 | |
Cash interest on corporate debt | $120 | $120 | |
Free cash flow | $415 - $440 | $415 - $440 | |
Effective tax rate | 37% | 34% | |
Net income per share | $1.57 - $1.67 | $1.68 - $1.78 | |
Operating adjusted net income per share | $2.15 - $2.25 | $2.30 - $2.40 | |
Weighted average diluted shares | 139 | 138 | |
Earnings guidance does not contemplate future items such as business development activities, strategic developments (such as restructurings or dispositions of assets or investments), gains/losses associated with step acquisitions, significant expenses related to litigation and changes in applicable laws and regulations (including significant accounting and tax matters). The timing and amounts of these items are highly variable, difficult to predict, and of a potential size that could have a substantial impact on the company’s reported results for any given period. Prospective quantification of these items is generally not practicable. Forward-looking non-GAAP guidance excludes amortization expense associated with acquired intangible assets, as well as one-time charges, net of taxes. See reconciliations of the company's guidance on pages 8 and 9.
Earnings Conference Call Information
KAR Auction Services, Inc. will be hosting an earnings conference call and webcast on Wednesday, November 1, 2017 at 11:00 a.m. EDT (10:00 a.m. CDT). The call will be hosted by KAR Auction Services, Inc.’s Chief Executive Officer and Chairman of the Board, Jim Hallett, and Executive Vice President and Chief Financial Officer, Eric Loughmiller. The conference call may be accessed by calling 1-844-778-4145 and entering participant passcode 95364956 while the live web cast will be available at the investor relations section of www.karauctionservices.com. Supplemental financial information for KAR Auction Services’ third quarter 2017 results is available at the investor relations section of www.karauctionservices.com under the quarterly results page.
A replay of the call will be available for two weeks via telephone starting approximately 2 hours after the completion of the call. The replay may be accessed by calling 1-855-859-2056 and entering passcode 95364956. The archive of the web cast will also be available following the call and will be available at the investor relations section of www.karauctionservices.com for a limited time.
About KAR Auction Services
KAR Auction Services (NYSE: KAR) provides sellers and buyers across the global wholesale used vehicle industry with innovative, technology-driven remarketing solutions. KAR’s unique end-to-end platform supports whole car, salvage, financing, logistics and other ancillary and related services, including the sale of more than 5 million units valued at over $40 billion through our auctions. Our integrated physical, online and mobile marketplaces reduce risk, improve transparency and streamline transactions for customers in 110 countries. Headquartered in Carmel, Ind., KAR has approximately 17,600 employees across the United States, Canada, Mexico and the United Kingdom. www.karauctionservices.com
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Forward Looking Statements
Certain statements contained in this release include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made that are not historical facts may be forward-looking statements. Words such as “should,” “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify forward-looking statements. Such statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include those matters disclosed in the Company’s Securities and Exchange Commission filings. The Company does not undertake any obligation to update any forward-looking statements.
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KAR Auction Services, Inc.
Condensed Consolidated Statements of Income
(In millions) (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Operating revenues | |||||||||||||||
ADESA Auction Services | $ | 477.1 | $ | 457.4 | $ | 1,464.3 | $ | 1,323.0 | |||||||
IAA Salvage Services | 287.7 | 261.0 | 883.8 | 795.4 | |||||||||||
AFC | 78.2 | 71.2 | 219.5 | 218.0 | |||||||||||
Total operating revenues | 843.0 | 789.6 | 2,567.6 | 2,336.4 | |||||||||||
Operating expenses | |||||||||||||||
Cost of services (exclusive of depreciation and amortization) | 479.2 | 459.5 | 1,462.1 | 1,339.1 | |||||||||||
Selling, general and administrative | 155.7 | 146.3 | 467.7 | 434.3 | |||||||||||
Depreciation and amortization | 66.2 | 60.5 | 195.2 | 175.9 | |||||||||||
Total operating expenses | 701.1 | 666.3 | 2,125.0 | 1,949.3 | |||||||||||
Operating profit | 141.9 | 123.3 | 442.6 | 387.1 | |||||||||||
Interest expense | 41.5 | 36.3 | 121.9 | 100.8 | |||||||||||
Other (income) expense, net | (0.1 | ) | 0.8 | (1.7 | ) | (0.8 | ) | ||||||||
Loss on extinguishment of debt | — | — | 27.5 | 4.0 | |||||||||||
Income before income taxes | 100.5 | 86.2 | 294.9 | 283.1 | |||||||||||
Income taxes | 37.7 | 31.8 | 105.7 | 106.2 | |||||||||||
Net income | $ | 62.8 | $ | 54.4 | $ | 189.2 | $ | 176.9 | |||||||
Net income per share | |||||||||||||||
Basic | $ | 0.46 | $ | 0.39 | $ | 1.38 | $ | 1.29 | |||||||
Diluted | $ | 0.46 | $ | 0.39 | $ | 1.37 | $ | 1.27 | |||||||
Dividends declared per common share | $ | 0.32 | $ | 0.29 | $ | 0.96 | $ | 0.87 | |||||||
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KAR Auction Services, Inc.
Condensed Consolidated Balance Sheets
(In millions) (Unaudited)
September 30, 2017 | December 31, 2016 | ||||||
Cash and cash equivalents | $ | 432.1 | $ | 201.8 | |||
Restricted cash | 18.6 | 17.9 | |||||
Trade receivables, net of allowances | 761.9 | 682.9 | |||||
Finance receivables, net of allowances | 1,796.4 | 1,780.2 | |||||
Other current assets | 165.1 | 158.4 | |||||
Total current assets | 3,174.1 | 2,841.2 | |||||
Goodwill | 2,096.8 | 2,057.0 | |||||
Customer relationships, net of accumulated amortization | 395.9 | 461.0 | |||||
Intangible and other assets | 368.3 | 355.9 | |||||
Property and equipment, net of accumulated depreciation | 870.5 | 842.5 | |||||
Total assets | $ | 6,905.6 | $ | 6,557.6 | |||
Current liabilities, excluding obligations collateralized by finance receivables and current maturities of debt | $ | 1,071.5 | $ | 949.5 | |||
Obligations collateralized by finance receivables | 1,259.3 | 1,280.3 | |||||
Current maturities of debt | 16.8 | 105.2 | |||||
Total current liabilities | 2,347.6 | 2,335.0 | |||||
Long-term debt | 2,671.0 | 2,365.1 | |||||
Other non-current liabilities | 484.3 | 460.2 | |||||
Stockholders’ equity | 1,402.7 | 1,397.3 | |||||
Total liabilities and stockholders’ equity | $ | 6,905.6 | $ | 6,557.6 | |||
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KAR Auction Services, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions) (Unaudited)
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Operating activities | |||||||
Net income | $ | 189.2 | $ | 176.9 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 195.2 | 175.9 | |||||
Provision for credit losses | 30.8 | 23.5 | |||||
Deferred income taxes | 7.9 | (11.8 | ) | ||||
Amortization of debt issuance costs | 7.8 | 6.5 | |||||
Stock-based compensation | 16.8 | 14.2 | |||||
(Gain) loss on disposal of fixed assets | (0.5 | ) | 0.1 | ||||
Loss on extinguishment of debt | 27.5 | 4.0 | |||||
Other non-cash, net | 7.4 | 6.4 | |||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||
Trade receivables and other assets | (91.7 | ) | (178.5 | ) | |||
Accounts payable and accrued expenses | 97.5 | 73.7 | |||||
Net cash provided by operating activities | 487.9 | 290.9 | |||||
Investing activities | |||||||
Net increase in finance receivables held for investment | (38.5 | ) | (158.7 | ) | |||
Acquisition of businesses (net of cash acquired) | (47.0 | ) | (354.5 | ) | |||
Purchases of property, equipment and computer software | (110.1 | ) | (118.5 | ) | |||
Advance to equity method investee | (5.0 | ) | — | ||||
Proceeds from the sale of property and equipment | 0.3 | — | |||||
(Increase) decrease in restricted cash | (0.7 | ) | 0.8 | ||||
Net cash used by investing activities | (201.0 | ) | (630.9 | ) | |||
Financing activities | |||||||
Net increase in book overdrafts | 31.7 | 29.6 | |||||
Net decrease in borrowings from lines of credit | (80.5 | ) | (140.0 | ) | |||
Net (decrease) increase in obligations collateralized by finance receivables | (33.0 | ) | 78.8 | ||||
Proceeds from long-term debt | 2,717.0 | 1,336.5 | |||||
Payments for debt issuance costs/amendments | (22.6 | ) | (19.5 | ) | |||
Payments on long-term debt | (2,427.9 | ) | (654.4 | ) | |||
Payments on capital leases | (21.7 | ) | (18.8 | ) | |||
Payments of contingent consideration and deferred acquisition costs | (7.0 | ) | (3.6 | ) | |||
Initial net investment for interest rate caps | (1.7 | ) | — | ||||
Issuance of common stock under stock plans | 9.8 | 14.8 | |||||
Tax withholding payments for vested RSUs | (5.7 | ) | (1.0 | ) | |||
Repurchase and retirement of common stock | (100.0 | ) | — | ||||
Dividends paid to stockholders | (131.5 | ) | (117.0 | ) | |||
Net cash (used by) provided by financing activities | (73.1 | ) | 505.4 | ||||
Effect of exchange rate changes on cash | 16.5 | 2.7 | |||||
Net increase in cash and cash equivalents | 230.3 | 168.1 | |||||
Cash and cash equivalents at beginning of period | 201.8 | 155.0 | |||||
Cash and cash equivalents at end of period | $ | 432.1 | $ | 323.1 | |||
Cash paid for interest | $ | 95.6 | $ | 91.0 | |||
Cash paid for taxes, net of refunds | $ | 91.8 | $ | 99.9 | |||
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KAR Auction Services, Inc.
Reconciliation of Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA, free cash flow, operating adjusted net income and operating adjusted net income per share as presented herein are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). They are not measurements of our financial performance under GAAP and should not be considered as substitutes for net income (loss) or any other performance measures derived in accordance with GAAP. Management believes that these measures provide investors additional meaningful methods to evaluate certain aspects of the company’s results period over period and for the other reasons set forth below.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings as described in our senior secured credit agreement covenant calculations. Free cash flow is defined as Adjusted EBITDA less cash interest expense on corporate debt (Credit Facility), capital expenditures and cash taxes related to the calendar year. Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA, Adjusted EBITDA and free cash flow to evaluate our performance.
Depreciation expense for property and equipment and amortization expense of capitalized internally developed software costs relate to ongoing capital expenditures; however, amortization expense associated with acquired intangible assets, such as customer relationships, software, tradenames and noncompete agreements are not representative of ongoing capital expenditures, but have a continuing effect on our reported results. Non-GAAP financial measures of operating adjusted net income and operating adjusted net income per share, in the opinion of the company, provide comparability of the company's performance to other companies that may not have incurred these types of non-cash expenses or that report a similar measure. In addition, operating adjusted net income and operating adjusted net income per share may include adjustments for certain other charges.
EBITDA, Adjusted EBITDA, free cash flow, operating adjusted net income and operating adjusted net income per share have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions), (unaudited) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net income | $ | 62.8 | $ | 54.4 | $ | 189.2 | $ | 176.9 | |||||||
Add back: | |||||||||||||||
Income taxes | 37.7 | 31.8 | 105.7 | 106.2 | |||||||||||
Interest expense, net of interest income | 40.7 | 36.1 | 120.8 | 100.5 | |||||||||||
Depreciation and amortization | 66.2 | 60.5 | 195.2 | 175.9 | |||||||||||
EBITDA | 207.4 | 182.8 | 610.9 | 559.5 | |||||||||||
Non-cash stock-based compensation | 6.1 | 4.7 | 17.5 | 15.1 | |||||||||||
Loss on extinguishment of debt | — | — | 27.5 | 4.0 | |||||||||||
Acquisition related costs | 1.5 | 1.3 | 5.1 | 7.2 | |||||||||||
Securitization interest | (8.7 | ) | (7.2 | ) | (25.0 | ) | (20.3 | ) | |||||||
Minority interest | 1.6 | 1.1 | 4.3 | 2.7 | |||||||||||
(Gain)/Loss on asset sales | 0.4 | 1.3 | 1.0 | 2.1 | |||||||||||
Other | 1.0 | 0.8 | 2.1 | 1.1 | |||||||||||
Total addbacks | 1.9 | 2.0 | 32.5 | 11.9 | |||||||||||
Adjusted EBITDA | $ | 209.3 | $ | 184.8 | $ | 643.4 | $ | 571.4 | |||||||
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The following table reconciles operating adjusted net income and operating adjusted net income per share to net income and net income per share for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in millions, except per share amounts), (unaudited) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net income | $ | 62.8 | $ | 54.4 | $ | 189.2 | $ | 176.9 | |||||||
Acquired amortization expense (1) | 25.8 | 24.7 | 76.7 | 71.3 | |||||||||||
Loss on extinguishment of debt (2) | — | — | 27.5 | 4.0 | |||||||||||
Income taxes (3) | (9.7 | ) | (9.1 | ) | (37.3 | ) | (28.2 | ) | |||||||
Operating adjusted net income | $ | 78.9 | $ | 70.0 | $ | 256.1 | $ | 224.0 | |||||||
Net income per share – diluted | $ | 0.46 | $ | 0.39 | $ | 1.37 | $ | 1.27 | |||||||
Acquired amortization expense | 0.19 | 0.18 | 0.55 | 0.51 | |||||||||||
Loss on extinguishment of debt | — | — | 0.20 | 0.03 | |||||||||||
Income taxes | (0.08 | ) | (0.07 | ) | (0.27 | ) | (0.20 | ) | |||||||
Operating adjusted net income per share – diluted | $ | 0.57 | $ | 0.50 | $ | 1.85 | $ | 1.61 | |||||||
Weighted average diluted shares | 137.7 | 139.7 | 138.3 | 139.4 | |||||||||||
(1) | Acquired amortization expense was $25.8 million ($16.1 million net of tax) and $24.7 million ($15.6 million net of tax) for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, acquired amortization expense was $76.7 million ($49.2 million net of tax) and $71.3 million ($44.6 million net of tax), respectively. |
(2) | For the nine months ended September 30, 2017 and 2016, we incurred a loss on the extinguishment of debt totaling $27.5 million ($17.7 million net of tax) and $4.0 million ($2.5 million net of tax), respectively. |
(3) | The effective tax rate at the end of each period presented was used to determine the amount of income tax on the adjustments to net income. |
The following table reconciles EBITDA, Adjusted EBITDA and free cash flow to net income for the 2017 guidance presented:
2017 Outlook | |||||||
(in millions), (unaudited) | Low | High | |||||
Net income | $ | 231.4 | $ | 246.0 | |||
Add back: | |||||||
Income taxes | 119.2 | 126.8 | |||||
Interest expense, net of interest income | 170.0 | 170.0 | |||||
Depreciation and amortization | 274.0 | 274.0 | |||||
EBITDA | 794.6 | 816.8 | |||||
Total addbacks | 30.4 | 33.2 | |||||
Adjusted EBITDA | $ | 825.0 | $ | 850.0 | |||
Cash interest expense on corporate debt | (120.0 | ) | (120.0 | ) | |||
Capital expenditures | (150.0 | ) | (150.0 | ) | |||
Cash taxes related to calendar year | (140.0 | ) | (140.0 | ) | |||
Free cash flow | $ | 415.0 | $ | 440.0 | |||
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The following table reconciles operating adjusted net income and operating adjusted net income per share to net income and net income per share for the 2017 guidance presented:
2017 Outlook | |||||||
(in millions, except per share amounts), (unaudited) | Low | High | |||||
Net income | $ | 231.4 | $ | 246.0 | |||
Acquired amortization expense | 102.0 | 102.0 | |||||
Loss on extinguishment of debt | 27.5 | 27.5 | |||||
Income taxes | (44.0 | ) | (44.0 | ) | |||
Operating adjusted net income | $ | 316.9 | $ | 331.5 | |||
Net income per share – diluted | $ | 1.68 | $ | 1.78 | |||
Acquired amortization expense | 0.74 | 0.74 | |||||
Loss on extinguishment of debt | 0.20 | 0.20 | |||||
Income taxes | (0.32 | ) | (0.32 | ) | |||
Operating adjusted net income per share – diluted | $ | 2.30 | $ | 2.40 | |||
Weighted average diluted shares | 138 | 138 | |||||
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EXHIBIT 99.2
KAR Auction Services, Inc.
Q3 2017 Supplemental Financial Information
October 31, 2017
KAR Auction Services, Inc.
EBITDA and Adjusted EBITDA Measures
EBITDA and Adjusted EBITDA as presented herein are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). They are not measurements of our financial performance under GAAP and should not be considered as substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings as described in our senior secured credit agreement covenant calculations. Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
Three Months Ended September 30, 2017 | |||||||||||||||||||
(Dollars in millions), (Unaudited) | ADESA | IAA | AFC | Corporate | Consolidated | ||||||||||||||
Net income (loss) | $ | 47.0 | $ | 28.0 | $ | 20.4 | $ | (32.6 | ) | $ | 62.8 | ||||||||
Add back: | |||||||||||||||||||
Income taxes | 29.6 | 15.9 | 11.6 | (19.4 | ) | 37.7 | |||||||||||||
Interest expense, net of interest income | (0.4 | ) | — | 11.0 | 30.1 | 40.7 | |||||||||||||
Depreciation and amortization | 28.5 | 23.1 | 7.9 | 6.7 | 66.2 | ||||||||||||||
Intercompany interest | 8.9 | 9.5 | (1.6 | ) | (16.8 | ) | — | ||||||||||||
EBITDA | 113.6 | 76.5 | 49.3 | (32.0 | ) | 207.4 | |||||||||||||
Intercompany charges | 2.5 | — | — | (2.5 | ) | — | |||||||||||||
Non-cash stock-based compensation | 1.9 | 1.0 | 0.7 | 2.5 | 6.1 | ||||||||||||||
Acquisition related costs | 1.3 | — | — | 0.2 | 1.5 | ||||||||||||||
Securitization interest | — | — | (8.7 | ) | — | (8.7 | ) | ||||||||||||
Minority interest | 1.6 | — | — | — | 1.6 | ||||||||||||||
Other | 1.1 | 0.3 | — | — | 1.4 | ||||||||||||||
Total addbacks | 8.4 | 1.3 | (8.0 | ) | 0.2 | 1.9 | |||||||||||||
Adjusted EBITDA | $ | 122.0 | $ | 77.8 | $ | 41.3 | $ | (31.8 | ) | $ | 209.3 | ||||||||
Three Months Ended September 30, 2016 | |||||||||||||||||||
(Dollars in millions), (Unaudited) | ADESA | IAA | AFC | Corporate | Consolidated | ||||||||||||||
Net income (loss) | $ | 43.5 | $ | 22.0 | $ | 21.6 | $ | (32.7 | ) | $ | 54.4 | ||||||||
Add back: | |||||||||||||||||||
Income taxes | 26.3 | 12.5 | 13.2 | (20.2 | ) | 31.8 | |||||||||||||
Interest expense, net of interest income | (0.2 | ) | — | 8.7 | 27.6 | 36.1 | |||||||||||||
Depreciation and amortization | 25.3 | 21.9 | 7.8 | 5.5 | 60.5 | ||||||||||||||
Intercompany interest | 9.4 | 9.4 | (8.7 | ) | (10.1 | ) | — | ||||||||||||
EBITDA | 104.3 | 65.8 | 42.6 | (29.9 | ) | 182.8 | |||||||||||||
Intercompany charges | 2.3 | — | — | (2.3 | ) | — | |||||||||||||
Non-cash stock-based compensation | 1.1 | 0.6 | 0.5 | 2.5 | 4.7 | ||||||||||||||
Acquisition related costs | 1.2 | 0.1 | — | — | 1.3 | ||||||||||||||
Securitization interest | — | — | (7.2 | ) | — | (7.2 | ) | ||||||||||||
Minority interest | 1.1 | — | — | — | 1.1 | ||||||||||||||
(Gain)/Loss on asset sales | 0.4 | 0.1 | — | 0.8 | 1.3 | ||||||||||||||
Other | 1.2 | (0.4 | ) | — | — | 0.8 | |||||||||||||
Total addbacks | 7.3 | 0.4 | (6.7 | ) | 1.0 | 2.0 | |||||||||||||
Adjusted EBITDA | $ | 111.6 | $ | 66.2 | $ | 35.9 | $ | (28.9 | ) | $ | 184.8 | ||||||||
2
Nine Months Ended September 30, 2017 | |||||||||||||||||||
(Dollars in millions), (Unaudited) | ADESA | IAA | AFC | Corporate | Consolidated | ||||||||||||||
Net income (loss) | $ | 152.0 | $ | 97.5 | $ | 61.6 | $ | (121.9 | ) | $ | 189.2 | ||||||||
Add back: | |||||||||||||||||||
Income taxes | 92.4 | 54.5 | 35.9 | (77.1 | ) | 105.7 | |||||||||||||
Interest expense, net of interest income | (0.4 | ) | — | 31.8 | 89.4 | 120.8 | |||||||||||||
Depreciation and amortization | 82.5 | 69.2 | 23.5 | 20.0 | 195.2 | ||||||||||||||
Intercompany interest | 27.1 | 28.3 | (20.1 | ) | (35.3 | ) | — | ||||||||||||
EBITDA | 353.6 | 249.5 | 132.7 | (124.9 | ) | 610.9 | |||||||||||||
Intercompany charges | 7.6 | — | — | (7.6 | ) | — | |||||||||||||
Non-cash stock-based compensation | 5.1 | 2.8 | 1.8 | 7.8 | 17.5 | ||||||||||||||
Loss on extinguishment of debt | — | — | — | 27.5 | 27.5 | ||||||||||||||
Acquisition related costs | 3.8 | — | — | 1.3 | 5.1 | ||||||||||||||
Securitization interest | — | — | (25.0 | ) | — | (25.0 | ) | ||||||||||||
Minority interest | 4.3 | — | — | — | 4.3 | ||||||||||||||
Other | 3.2 | (0.2 | ) | 0.1 | — | 3.1 | |||||||||||||
Total addbacks | 24.0 | 2.6 | (23.1 | ) | 29.0 | 32.5 | |||||||||||||
Adjusted EBITDA | $ | 377.6 | $ | 252.1 | $ | 109.6 | $ | (95.9 | ) | $ | 643.4 | ||||||||
Nine Months Ended September 30, 2016 | |||||||||||||||||||
(Dollars in millions), (Unaudited) | ADESA | IAA | AFC | Corporate | Consolidated | ||||||||||||||
Net income (loss) | $ | 129.0 | $ | 72.1 | $ | 68.6 | $ | (92.8 | ) | $ | 176.9 | ||||||||
Add back: | |||||||||||||||||||
Income taxes | 76.7 | 42.5 | 41.8 | (54.8 | ) | 106.2 | |||||||||||||
Interest expense, net of interest income | (0.1 | ) | — | 24.7 | 75.9 | 100.5 | |||||||||||||
Depreciation and amortization | 72.6 | 64.4 | 23.4 | 15.5 | 175.9 | ||||||||||||||
Intercompany interest | 32.4 | 28.3 | (25.1 | ) | (35.6 | ) | — | ||||||||||||
EBITDA | 310.6 | 207.3 | 133.4 | (91.8 | ) | 559.5 | |||||||||||||
Intercompany charges | 7.8 | 0.3 | — | (8.1 | ) | — | |||||||||||||
Non-cash stock-based compensation | 3.4 | 1.9 | 1.4 | 8.4 | 15.1 | ||||||||||||||
Loss on extinguishment of debt | — | — | — | 4.0 | 4.0 | ||||||||||||||
Acquisition related costs | 3.6 | 0.2 | 0.1 | 3.3 | 7.2 | ||||||||||||||
Securitization interest | — | — | (20.3 | ) | — | (20.3 | ) | ||||||||||||
Minority interest | 2.7 | — | — | — | 2.7 | ||||||||||||||
(Gain)/Loss on asset sales | 1.1 | 0.2 | — | 0.8 | 2.1 | ||||||||||||||
Other | 2.3 | (1.2 | ) | — | — | 1.1 | |||||||||||||
Total addbacks | 20.9 | 1.4 | (18.8 | ) | 8.4 | 11.9 | |||||||||||||
Adjusted EBITDA | $ | 331.5 | $ | 208.7 | $ | 114.6 | $ | (83.4 | ) | $ | 571.4 | ||||||||
3
Certain of our loan covenant calculations utilize financial results for the most recent four consecutive fiscal quarters. The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented:
Three Months Ended | Twelve Months Ended | ||||||||||||||||||
(Dollars in millions), (Unaudited) | December 31, 2016 | March 31, 2017 | June 30, 2017 | September 30, 2017 | September 30, 2017 | ||||||||||||||
Net income (loss) | $ | 45.5 | $ | 69.2 | $ | 57.2 | $ | 62.8 | $ | 234.7 | |||||||||
Add back: | |||||||||||||||||||
Income taxes | 26.7 | 34.1 | 33.9 | 37.7 | 132.4 | ||||||||||||||
Interest expense, net of interest income | 37.9 | 40.2 | 39.9 | 40.7 | 158.7 | ||||||||||||||
Depreciation and amortization | 64.7 | 64.5 | 64.5 | 66.2 | 259.9 | ||||||||||||||
EBITDA | 174.8 | 208.0 | 195.5 | 207.4 | 785.7 | ||||||||||||||
Non-cash stock-based compensation | 4.0 | 6.0 | 5.4 | 6.1 | 21.5 | ||||||||||||||
Loss on extinguishment of debt | 1.4 | — | 27.5 | — | 28.9 | ||||||||||||||
Acquisition related costs | 1.4 | 2.1 | 1.5 | 1.5 | 6.5 | ||||||||||||||
Securitization interest | (7.7 | ) | (8.1 | ) | (8.2 | ) | (8.7 | ) | (32.7 | ) | |||||||||
Minority interest | 1.1 | 1.7 | 1.0 | 1.6 | 5.4 | ||||||||||||||
(Gain)/Loss on asset sales | 0.3 | 0.5 | 0.2 | 0.3 | 1.3 | ||||||||||||||
Other | 1.2 | 0.4 | 0.6 | 1.1 | 3.3 | ||||||||||||||
Total addbacks | 1.7 | 2.6 | 28.0 | 1.9 | 34.2 | ||||||||||||||
Adjusted EBITDA | $ | 176.5 | $ | 210.6 | $ | 223.5 | $ | 209.3 | $ | 819.9 | |||||||||
4
Segment Results
Impact of Foreign Currency
The strengthening of the Canadian dollar has impacted the reporting of our Canadian operations in U.S. dollars. For the three months ended September 30, 2017, fluctuations in the Canadian exchange rate increased revenue by $3.9 million, operating profit by $1.4 million, net income by $0.8 million and net income per diluted share by less than $0.01. For the nine months ended September 30, 2017, fluctuations in the Canadian exchange rate increased revenue by $2.8 million, operating profit by $1.0 million, net income by $0.6 million and net income per diluted share by less than $0.01.
ADESA Results
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(Dollars in millions, except per vehicle amounts) | 2017 | 2016 | 2017 | 2016 | |||||||||||
ADESA revenue | $ | 477.1 | $ | 457.4 | $ | 1,464.3 | $ | 1,323.0 | |||||||
Cost of services* | 272.6 | 269.5 | 842.2 | 767.1 | |||||||||||
Gross profit* | 204.5 | 187.9 | 622.1 | 555.9 | |||||||||||
Selling, general and administrative | 87.6 | 80.6 | 260.1 | 237.8 | |||||||||||
Depreciation and amortization | 28.5 | 25.3 | 82.5 | 72.6 | |||||||||||
Operating profit | $ | 88.4 | $ | 82.0 | $ | 279.5 | $ | 245.5 | |||||||
Vehicles sold | 788,000 | 732,000 | 2,436,000 | 2,185,000 | |||||||||||
Physical auction vehicles sold | 547,000 | 552,000 | 1,735,000 | 1,619,000 | |||||||||||
Online only vehicles sold | 241,000 | 180,000 | 701,000 | 566,000 | |||||||||||
Dealer consignment mix at physical auctions | 47 | % | 50 | % | 46 | % | 48 | % | |||||||
Conversion rate at North American physical auctions | 61.3 | % | 57.2 | % | 61.4 | % | 59.0 | % | |||||||
Physical auction revenue per vehicle sold, excluding purchased vehicles | $ | 781 | $ | 758 | $ | 761 | $ | 746 | |||||||
Online only revenue per vehicle sold, excluding ADESA Assurance Program vehicles | $ | 112 | $ | 108 | $ | 109 | $ | 109 | |||||||
* Exclusive of depreciation and amortization
Overview of ADESA Results for the Three Months Ended September 30, 2017 and 2016
Revenue
Revenue from ADESA increased $19.7 million, or 4%, to $477.1 million for the three months ended September 30, 2017, compared with $457.4 million for the three months ended September 30, 2016. The increase in revenue was primarily a result of an 8% increase in the number of vehicles sold (5% increase excluding acquisitions), partially offset by a 3% decrease in average revenue per vehicle sold as the mix of vehicles sold online increased as compared to the number of vehicles sold at physical auction. Businesses acquired in the last 12 months accounted for an increase in revenue of $12.9 million. Revenue increased $2.8 million due to fluctuations in the Canadian exchange rate.
The increase in volume sold was primarily attributable to a 16% increase in institutional volume (15% increase excluding acquisitions), including vehicles sold on our online only platform, partially offset by a 6% decrease in dealer consignment units sold (9% decrease excluding acquisitions) for the three months ended September 30, 2017 compared with the three months ended September 30, 2016. Online sales volume for ADESA represented approximately 45% of the total vehicles sold in the third quarter of 2017, compared with approximately 40% in the third quarter of 2016. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location (upstream selling); (ii) online solutions that offer vehicles for sale while in transit to auction locations (midstream selling); (iii) simultaneously broadcasting video and audio of the physical auctions to online bidders (LiveBlock®); and (iv) bulletin-board or real-time online auctions (DealerBlock®). Upstream and midstream selling represent online only sales, which accounted for approximately 69% of ADESA's online sales volume.
5
ADESA sold approximately 241,000 and 180,000 vehicles through its online only offerings in the third quarter of 2017 and 2016, respectively, of which approximately 120,000 and 101,000 represented vehicle sales to grounding dealers in the third quarter of 2017 and 2016, respectively. For the three months ended September 30, 2017, dealer consignment vehicles represented approximately 47% of used vehicles sold at ADESA physical auction locations, compared with approximately 50% for the three months ended September 30, 2016. Vehicles sold at physical auction locations decreased 1% (4% decrease excluding acquisitions) in the third quarter of 2017, compared with the third quarter of 2016. The used vehicle conversion percentage at North American physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, increased to 61.3% for the three months ended September 30, 2017, compared with 57.2% for the three months ended September 30, 2016.
Physical auction revenue per vehicle sold increased $23, or 3%, to $781 for the three months ended September 30, 2017, compared with $758 for the three months ended September 30, 2016. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services and excludes the sale of purchased vehicles. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in auction fees related to higher average transaction prices, revenue from certain businesses acquired and an increase in physical auction revenue per vehicle sold of $5 due to fluctuations in the Canadian exchange rate.
Online only auction revenue per vehicle sold increased $1 to $128 for the three months ended September 30, 2017, compared with $127 for the three months ended September 30, 2016. The increase in online only auction revenue per vehicle sold was attributable to fluctuations in the Canadian exchange rate. Excluding vehicles purchased as part of the ADESA Assurance Program, online only revenue per vehicle sold increased to $112 from $108 for the three months ended September 30, 2017 and 2016, respectively.
Gross Profit
For the three months ended September 30, 2017, gross profit for ADESA increased $16.6 million, or 9%, to $204.5 million, compared with $187.9 million for the three months ended September 30, 2016. Gross profit for ADESA was 42.9% of revenue for the three months ended September 30, 2017, compared with 41.1% of revenue for the three months ended September 30, 2016. The increase in gross profit percentage was mainly attributable to the increase in online only volume and reduction in physical auction volumes. Online only sales have a higher gross profit percentage than physical auction sales.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $7.0 million, or 9%, to $87.6 million for the three months ended September 30, 2017, compared with $80.6 million for the three months ended September 30, 2016, primarily due to increases in selling, general and administrative expenses associated with acquired businesses of $3.6 million, non-income based taxes of $0.8 million, stock-based compensation expense of $0.8 million, compensation expense of $0.6 million, fluctuations in the Canadian exchange rate of $0.5 million and other expenses aggregating $1.6 million, partially offset by a decrease in marketing expenses of $0.9 million.
Overview of ADESA Results for the Nine Months Ended September 30, 2017 and 2016
Revenue
Revenue from ADESA increased $141.3 million, or 11%, to $1,464.3 million for the nine months ended September 30, 2017, compared with $1,323.0 million for the nine months ended September 30, 2016. The increase in revenue was primarily a result of an 11% increase in the number of vehicles sold (5% increase excluding acquisitions), partially offset by a 1% decrease in average revenue per vehicle sold as the mix of vehicles sold online increased as compared to the number of vehicles sold at physical auction. Businesses acquired accounted for an increase in revenue of $79.6 million. Revenue increased $2.1 million due to fluctuations in the Canadian exchange rate.
The increase in volume sold was primarily attributable to an 18% increase in institutional volume (13% increase excluding acquisitions), including vehicles sold on our online only platform, as well as a 1% increase in dealer consignment units sold (7% decrease excluding acquisitions) for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. Online sales volume for ADESA represented approximately 44% of the total vehicles sold in the first nine months of 2017, compared with approximately 39% in the first nine months of 2016. Upstream and midstream selling represent online only sales, which accounted for approximately 66% of ADESA's online sales volume. ADESA sold approximately 701,000 and 566,000 vehicles
6
through its online only offerings in the first nine months of 2017 and 2016, respectively, of which approximately 355,000 and 298,000 represented vehicle sales to grounding dealers in the first nine months of 2017 and 2016, respectively. For the nine months ended September 30, 2017, dealer consignment vehicles represented approximately 46% of used vehicles sold at ADESA physical auction locations, compared with approximately 48% for the nine months ended September 30, 2016. Vehicles sold at physical auction locations increased 7% (1% decrease excluding acquisitions) in the first nine months of 2017, compared with the first nine months of 2016. The used vehicle conversion percentage at North American physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, increased to 61.4% for the nine months ended September 30, 2017, compared with 59.0% for the nine months ended September 30, 2016.
Physical auction revenue per vehicle sold increased $15, or 2%, to $761 for the nine months ended September 30, 2017, compared with $746 for the nine months ended September 30, 2016. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services and excludes the sale of purchased vehicles. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in auction fees related to higher average transaction prices and an increase in lower margin ancillary and other related services revenue, and an increase in physical auction revenue per vehicle sold of $1 due to fluctuations in the Canadian exchange rate.
Online only auction revenue per vehicle sold increased $2 to $124 for the nine months ended September 30, 2017, compared with $122 for the nine months ended September 30, 2016. The increase in online only auction revenue per vehicle sold was attributable to an increase in purchased vehicles associated with the ADESA Assurance Program. Excluding vehicles purchased as part of the ADESA Assurance Program, online only revenue per vehicle sold was $109 for the nine months ended September 30, 2017 and 2016.
Gross Profit
For the nine months ended September 30, 2017, gross profit for ADESA increased $66.2 million, or 12%, to $622.1 million, compared with $555.9 million for the nine months ended September 30, 2016. Gross profit for ADESA was 42.5% of revenue for the nine months ended September 30, 2017, compared with 42.0% of revenue for the nine months ended September 30, 2016. The increase in gross profit percentage was mainly attributable to the increased mix of online only volume. Online only sales have a higher gross profit percentage than physical auction sales.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $22.3 million, or 9%, to $260.1 million for the nine months ended September 30, 2017, compared with $237.8 million for the nine months ended September 30, 2016, primarily due to increases in selling, general and administrative expenses associated with acquired businesses of $16.8 million, compensation expense of $6.7 million, stock-based compensation expense of $1.7 million, information technology costs of $0.9 million, benefit-related expenses of $0.8 million, non-income based taxes of $0.7 million and other expenses aggregating $4.0 million, partially offset by decreases in incentive-based compensation expense of $5.6 million, marketing expenses of $1.7 million, professional fees of $1.1 million and bad debt expense of $0.9 million.
7
IAA Results
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2017 | 2016 | |||||||||||
IAA revenue | $ | 287.7 | $ | 261.0 | $ | 883.8 | $ | 795.4 | |||||||
Cost of services* | 184.8 | 168.5 | 555.4 | 509.3 | |||||||||||
Gross profit* | 102.9 | 92.5 | 328.4 | 286.1 | |||||||||||
Selling, general and administrative | 26.5 | 26.7 | 79.9 | 78.9 | |||||||||||
Depreciation and amortization | 23.1 | 21.9 | 69.2 | 64.4 | |||||||||||
Operating profit | $ | 53.3 | $ | 43.9 | $ | 179.3 | $ | 142.8 | |||||||
Vehicles sold | 562,000 | 516,000 | 1,733,000 | 1,573,000 | |||||||||||
* Exclusive of depreciation and amortization
Overview of IAA Results for the Three Months Ended September 30, 2017 and 2016
Revenue
Revenue from IAA increased $26.7 million, or 10%, to $287.7 million for the three months ended September 30, 2017, compared with $261.0 million for the three months ended September 30, 2016. The increase in revenue was a result of an increase in vehicles sold of approximately 9% for the three months ended September 30, 2017 and an increase in revenue of $0.8 million due to fluctuations in the Canadian exchange rate, partially offset by a decrease of $5.0 million from HBC and a decrease in revenue of $0.1 million due to fluctuations in the U.K. exchange rate. Revenue per vehicle sold increased 1% for the three months ended September 30, 2017 compared with the three months ended September 30, 2016. IAA's North American same-store total loss vehicle inventory increased approximately 12% (3% increase excluding catastrophe vehicles) at September 30, 2017, as compared to September 30, 2016. Vehicles sold under purchase agreements were approximately 5% and 7% of total salvage vehicles sold for the three months ended September 30, 2017 and 2016, respectively. Online sales volumes for IAA for the three months ended September 30, 2017 and 2016 represented approximately 60% of the total vehicles sold by IAA.
Gross Profit
For the three months ended September 30, 2017, gross profit at IAA increased to $102.9 million, or 35.8% of revenue, compared with $92.5 million, or 35.4% of revenue, for the three months ended September 30, 2016. The increase in gross profit was mainly attributable to a 10% increase in revenue, partially offset by an 10% increase in cost of services, which included costs associated with purchase contract vehicles, Hurricanes Harvey and Irma and volume growth.
Excluding HBC, IAA's gross profit margin was 36.3% and 36.6% for the three months ended September 30, 2017 and 2016, respectively. For the three months ended September 30, 2017 and 2016, HBC had revenue of approximately $7.3 million and $12.3 million, respectively, and cost of services of approximately $6.3 million and $10.8 million, respectively, as the majority of HBC's vehicles are sold under purchase contracts.
IAA incurred approximately $4.3 million in extra costs, net of revenue, in the third quarter of 2017 related to catastrophic events in Texas and Florida. Excluding these extra costs (and HBC as noted above), IAA's gross profit margin was 37.9% for the three months ended September 30, 2017. IAA incurred significant costs in Texas and Florida in response to Hurricanes Harvey and Irma. Costs were incurred for real estate, security, lot operations and related support. These costs were incurred in advance of revenue, which will be realized in subsequent quarters as the total loss vehicles are sold. IAA expects to recover the excess costs incurred in the third quarter of 2017 as vehicles are sold in the fourth quarter of 2017 and first quarter of 2018.
Selling, General and Administrative
Selling, general and administrative expenses at IAA decreased $0.2 million, or 1%, to $26.5 million for the three months ended September 30, 2017, compared with $26.7 million for the three months ended September 30, 2016. The decrease in selling, general and administrative expenses was primarily attributable to decreases in employee related and marketing expenses in the aggregate of $0.9 million, professional fees of $0.4 million and other
8
expenses aggregating $0.9 million, partially offset by increases in compensation expense of $1.0 million, incentive-based compensation expense of $0.6 million and stock-based compensation expense of $0.4 million.
Overview of IAA Results for the Nine Months Ended September 30, 2017 and 2016
Revenue
Revenue from IAA increased $88.4 million, or 11%, to $883.8 million for the nine months ended September 30, 2017, compared with $795.4 million for the nine months ended September 30, 2016. The increase in revenue was a result of an increase in vehicles sold of approximately 10% for the nine months ended September 30, 2017 and an increase in revenue of $0.6 million due to fluctuations in the Canadian exchange rate, partially offset by a decrease of $9.3 million from HBC and a decrease in revenue of $2.9 million due to fluctuations in the U.K. exchange rate. Revenue per vehicle sold increased 1% for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. Vehicles sold under purchase agreements were approximately 5% and 7% of total salvage vehicles sold for the nine months ended September 30, 2017 and 2016, respectively. Online sales volumes for IAA for the nine months ended September 30, 2017 and 2016 represented approximately 60% of the total vehicles sold by IAA.
Gross Profit
For the nine months ended September 30, 2017, gross profit at IAA increased to $328.4 million, or 37.2% of revenue, compared with $286.1 million, or 36.0% of revenue, for the nine months ended September 30, 2016. The increase in gross profit was mainly attributable to an 11% increase in revenue, partially offset by a 9% increase in cost of services, which included costs associated with purchase contract vehicles, Hurricanes Harvey and Irma and volume growth.
Excluding HBC, IAA's gross profit margin was 38.0% and 37.3% for the nine months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, HBC had revenue of approximately $30.3 million and $39.6 million, respectively, and cost of services of approximately $26.1 million and $35.7 million, respectively, as the majority of HBC's vehicles are sold under purchase contracts.
IAA incurred approximately $4.3 million in extra costs, net of revenue, for the nine months ended September 30, 2017 related to catastrophic events in Texas and Florida. Excluding these extra costs (and HBC as noted above), IAA's gross profit margin was 38.5% for the nine months ended September 30, 2017. IAA incurred significant costs in Texas and Florida in response to Hurricanes Harvey and Irma. Costs were incurred for real estate, security, lot operations and related support. These costs were incurred in advance of revenue, which will be realized in subsequent quarters as the total loss vehicles are sold. IAA expects to recover the excess costs incurred in the third quarter of 2017 as vehicles are sold in the fourth quarter of 2017 and first quarter of 2018.
Selling, General and Administrative
Selling, general and administrative expenses at IAA increased $1.0 million, or 1%, to $79.9 million for the nine months ended September 30, 2017, compared with $78.9 million for the nine months ended September 30, 2016. The increase in selling, general and administrative expenses was primarily attributable to increases in compensation expense of $2.8 million, incentive-based compensation expense of $1.5 million and stock-based compensation expense of $0.8 million, partially offset by decreases in employee related and marketing expenses in the aggregate of $1.0 million, professional fees of $1.2 million, bad debt expense of $0.4 million, non-income based taxes of $0.4 million and other expenses aggregating $1.1 million.
9
AFC Results
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(Dollars in millions except volumes and per loan amounts) | 2017 | 2016 | 2017 | 2016 | |||||||||||
AFC revenue | $ | 78.2 | $ | 71.2 | $ | 219.5 | $ | 218.0 | |||||||
Cost of services* | 21.8 | 21.5 | 64.5 | 62.7 | |||||||||||
Gross profit* | 56.4 | 49.7 | 155.0 | 155.3 | |||||||||||
Selling, general and administrative | 7.2 | 7.1 | 22.4 | 21.9 | |||||||||||
Depreciation and amortization | 7.9 | 7.8 | 23.5 | 23.4 | |||||||||||
Operating profit | $ | 41.3 | $ | 34.8 | $ | 109.1 | $ | 110.0 | |||||||
Loan transactions | 402,000 | 426,000 | 1,274,000 | 1,301,000 | |||||||||||
Revenue per loan transaction, excluding “Other service revenue” | $ | 174 | $ | 148 | $ | 153 | $ | 149 | |||||||
* Exclusive of depreciation and amortization
Overview of AFC Results for the Three Months Ended September 30, 2017 and 2016
Revenue
For the three months ended September 30, 2017, AFC revenue increased $7.0 million, or 10%, to $78.2 million, compared with $71.2 million for the three months ended September 30, 2016. The increase in revenue was the result of a decrease in the provision for credit losses to 1.1% of the average managed receivables for the three months ended September 30, 2017 and a 4% increase in "Other service revenue" generated by PWI. In addition, managed receivables increased to $1,809.2 million at September 30, 2017 from $1,785.4 million at September 30, 2016.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $26, or 18%. The decrease in provision for credit losses, which is a reduction of revenue, resulted in an increase in revenue per loan transaction of $7 for the three months ended September 30, 2017. The remaining $19 increase in revenue per loan transaction was primarily the result of increases in fee revenue and interest yield as a result of prime rate increases. Revenue per loan transaction excludes "Other service revenue."
The provision for credit losses decreased to 1.1% from 1.8% of the average managed receivables for the three months ended September 30, 2017 compared with the three months ended September 30, 2016. The provision for credit losses is expected to be approximately 1.75% to 2.25% of the average managed receivables balance for 2017. For 2017, the provision for credit losses was above the stated range for the first half of the year, with continued improvement expected in the second half of the year.
Gross Profit
For the three months ended September 30, 2017, gross profit for the AFC segment increased $6.7 million, or 13%, to $56.4 million, or 72.1% of revenue, compared with $49.7 million, or 69.8% of revenue, for the three months ended September 30, 2016, primarily as a result of a 10% increase in revenue, related to the decreased provision for credit losses, partially offset by a 1% increase in cost of services. The increase in cost of services was the result of increases in incentive based compensation expense of $0.4 million, collection costs of $0.3 million and other expenses aggregating $0.2 million, partially offset by decreases in PWI expenses of $0.6 million. The floorplan lending business gross profit margin percentage increased from 76.7% to 77.7%. The floorplan lending business excludes PWI.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $0.1 million, or 1%, to $7.2 million for the three months ended September 30, 2017, compared with $7.1 million for the three months ended September 30, 2016. Increases in compensation expense and stock-based compensation expense aggregating $0.4 million were partially offset by a decrease in other expenses aggregating $0.3 million.
10
Overview of AFC Results for the Nine Months Ended September 30, 2017 and 2016
Revenue
For the nine months ended September 30, 2017, AFC revenue increased $1.5 million, or 1%, to $219.5 million, compared with $218.0 million for the nine months ended September 30, 2016. The increase in revenue was the result of a 3% increase in revenue per loan transaction and a 5% increase in "Other service revenue" generated by PWI, partially offset by an increase in the provision for credit losses to 2.1% of the average managed receivables for the nine months ended September 30, 2017. In addition, managed receivables increased to $1,809.2 million at September 30, 2017 from $1,785.4 million at September 30, 2016.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $4, or 3%. The provision for credit losses, which is a reduction of revenue, resulted in a reduction of revenue per loan transaction of $7 for the nine months ended September 30, 2017. The remaining $11 increase in revenue per loan transaction was primarily the result of increases in fee revenue and interest yield as a result of prime rate increases. Revenue per loan transaction excludes "Other service revenue."
The provision for credit losses increased to 2.1% from 1.5% of the average managed receivables for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. The provision for credit losses is expected to be approximately 1.75% to 2.25% of the average managed receivables balance for 2017. For 2017, the provision for credit losses was above the stated range for the first half of the year, with continued improvement expected in the second half of the year.
Gross Profit
For the nine months ended September 30, 2017, gross profit for the AFC segment decreased $0.3 million, or less than 1%, to $155.0 million, or 70.6% of revenue, compared with $155.3 million, or 71.2% of revenue, for the nine months ended September 30, 2016, primarily as a result of a 3% increase in cost of services, partially offset by a 1% increase in revenue, which includes the increased provision for credit losses. The increase in cost of services was the result of increases in compensation expense of $1.0 million, lot checks of $0.9 million, collection costs of $0.6 million and other expenses aggregating $0.1 million, partially offset by decreases in PWI expenses of $0.8 million. The floorplan lending business gross profit margin percentage decreased from 78.0% to 76.7%. The floorplan lending business excludes PWI.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $0.5 million, or 2%, to $22.4 million for the nine months ended September 30, 2017, compared with $21.9 million for the nine months ended September 30, 2016. The increase was primarily attributable to increases in compensation expense and stock-based compensation expense aggregating $1.1 million and other expenses aggregating $0.1 million, partially offset by a decrease in incentive-based compensation expense of $0.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The company believes that the significant indicators of liquidity for its business are cash on hand, cash flow from operations, working capital and amounts available under its Credit Facility. The company's principal sources of liquidity consist of cash generated by operations and borrowings under its revolving credit facility.
(Dollars in millions) | September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||
Cash and cash equivalents | $ | 432.1 | $ | 201.8 | $ | 323.1 | |||||
Restricted cash | 18.6 | 17.9 | 15.4 | ||||||||
Working capital | 826.5 | 506.2 | 650.4 | ||||||||
Amounts available under Credit Facility* | 350.0 | 219.5 | 300.0 | ||||||||
Cash flow from operations for the nine months ended | 487.9 | 290.9 | |||||||||
* KAR Auction Services, Inc. has a $350 million revolving line of credit as part of the company's Credit Agreement. There were related outstanding letters of credit totaling approximately $35.9 million, $29.7 million, and $29.7 million at September 30, 2017, December 31, 2016 and September 30, 2016, respectively, which reduced the amount available for borrowings under the revolving credit facility.
11
We regularly evaluate alternatives for our capital structure and liquidity given our expected cash flows, growth and operating capital requirements as well as capital market conditions. For the nine months ended September 30, 2017, the company used cash of $110.1 million to purchase property, plant, equipment and computer software.
Summary of Cash Flows
Nine Months Ended September 30, | |||||||
(Dollars in millions) | 2017 | 2016 | |||||
Net cash provided by (used by): | |||||||
Operating activities | $ | 487.9 | $ | 290.9 | |||
Investing activities | (201.0 | ) | (630.9 | ) | |||
Financing activities | (73.1 | ) | 505.4 | ||||
Effect of exchange rate on cash | 16.5 | 2.7 | |||||
Net increase in cash and cash equivalents | $ | 230.3 | $ | 168.1 | |||
Cash flow from operating activities was $487.9 million for the nine months ended September 30, 2017, compared with $290.9 million for the nine months ended September 30, 2016. The increase in operating cash flow was primarily attributable to changes in operating assets and liabilities as a result of the timing of collections and the disbursement of funds to consignors for auctions held near period-ends and increased profitability adjusted for non-cash items.
Net cash used by investing activities was $201.0 million for the nine months ended September 30, 2017, compared with $630.9 million for the nine months ended September 30, 2016. The decrease in net cash used by investing activities was primarily attributable to:
• | a decrease in cash used for acquisitions of approximately $307.5 million; and |
• | a decrease in the additional finance receivables held for investment of approximately $120.2 million. |
Net cash used by financing activities was $73.1 million for the nine months ended September 30, 2017, compared with net cash provided by financing activities of $505.4 million for the nine months ended September 30, 2016. The decrease in net cash from financing activities was primarily attributable to:
• | a decrease in net cash received of $333.5 million from the refinancing and repayment activities in 2017 compared with 2016; |
• | a decrease in the additional obligations collateralized by finance receivables of approximately $111.8 million; |
• | common stock repurchases in 2017 of approximately $100.0 million; and |
• | an increase in dividend payments of $14.5 million. |
Non-GAAP Financial Measures
The company provides the following non-GAAP measures on a forward-looking basis: Adjusted EBITDA, free cash flow and operating adjusted net income per share. Management believes that these measures provide investors additional meaningful methods to evaluate certain aspects of the company’s results period over period and for the other reasons set forth previously.
Earnings guidance also does not contemplate future items such as business development activities, strategic developments (such as restructurings or dispositions of assets or investments), gains/losses associated with step acquisitions, significant expenses related to litigation and changes in applicable laws and regulations (including significant accounting and tax matters). The timing and amounts of these items are highly variable, difficult to predict, and of a potential size that could have a substantial impact on the company’s reported results for any given period. Prospective quantification of these items is generally not practicable. Forward-looking non-GAAP guidance excludes amortization expenses associated with acquired intangible assets, as well as one-time charges, net of taxes.
12
Q3 2017 & Year-to-Date Earnings Slides
October 31, 2017
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 subject to certain risks, trends, and uncertainties that
could cause actual results to differ materially from those projected,
expressed or implied by such forward-looking statements. Many of these
risk factors are outside of the company’s control, and as such, they involve
risks which are not currently known to the company that could cause actual
results to differ materially from forecasted results. Factors that could cause
or contribute to such differences include those matters disclosed in the
company’s Securities and Exchange Commission filings. The forward-
looking statements in this document are made as of the date hereof and the
company does not undertake to update its forward-looking statements.
2
Q3 2017 Highlights
3
Revenues Highlights Fundamentals
KAR
• Revenue growth +7%
• Adjusted EBITDA +13%
• Operating Adjusted EPS +14%
• Adjusted EBITDA margin grew to
25% from 23% in prior year
• Diversified and complementary
business services model
• Controlling SG&A
ADESA
• Adjusted EBITDA +9%
• Strong volume growth +8%
• Physical volumes -1%
• Physical auction RPU +$23
• Incremental operating profit 90%
• Off-lease supply driving volume
and physical auction fee growth
• Commercial vehicle mix at
physical auctions increased to
53% from 50% in prior year
IAA
• Revenue +10%
• North American volume growth +9%
• North American inv growth +12%
• Adjusted EBITDA +18%
• Total Loss 18.8% Q3 2017
vs.16.8% Q3 2016 (CCC)
• Scrap pricing -4.9% (American
Recycler, Q3 2017 vs. Q3 2016)
• Miles driven +1.5% (FHWA, YTD
through July 2017 vs. 2016)
AFC
• Adjusted EBITDA +15%
• LTU growth -6%
• Provision for credit losses as a
percent of managed receivables
1.1%
• Conservative portfolio
management
• Increasing gross revenue per
loan transaction excluding
provision for credit losses due to
higher average loan balances
[VAL
UE]
477.1
[VAL
UE]
287.7
71.2 78.2
2016 2017
789.6
843.0
ADE
SA
57%
IAA
34%
AFC
9%
ADE
SA
57%
IAA
34%
AFC
9%
ADE
SA
57%
IAA
34%
AFC
9%
2017 Outlook
4
KAR Auction Services' has updated its previous outlook to reflect the impact of recent acquisitions and a reduction of our
effective tax rate.
Previous Guidance Current Guidance
2017 Low 2017 High 2017 Low 2017 High
Net income $218.4 $232.4 $231.4 $246.0
Add back:
Income taxes $128.2 $136.4 $119.2 $126.8
Interest expense, net of interest income $170.0 $170.0 $170.0 $170.0
Depreciation and amortization $278.0 $278.0 $274.0 $274.0
EBITDA $794.6 $816.8 $794.6 $816.8
Total addbacks $30.4 $33.2 $30.4 $33.2
Adjusted EBITDA $825.0 $850.0 $825.0 $850.0
Capital expenditures $145.0 $145.0 $150.0 $150.0
Cash taxes related to calendar year $145.0 $145.0 $140.0 $140.0
Cash interest expense on corporate debt $120.0 $120.0 $120.0 $120.0
Free cash flow $415.0 $440.0 $415.0 $440.0
Effective tax rate 37% 37% 34% 34%
Net income per share - diluted $1.57 $1.67 $1.68 $1.78
Operating adjusted net income per share -
diluted
$2.15 $2.25 $2.30 $2.40
Weighted average diluted shares 139 139 138 138
Key Operating Metrics
5
3Q17 3Q16
ADESA
Total Vehicles Sold Growth
Physical Vehicles Sold Growth1
8%
-4%
17%
1%
Online Only Vehicles Sold Growth 34% 23%
Physical RPU Growth 3% 8%
IAA
Vehicles Sold Growth (includes HBC) 9% 5%
Inventory Growth (excludes HBC) 12% 22%
RPU Growth (includes HBC) 1% 1%
AFC
LTU Growth -6% 5%
Provision for Credit Losses 1.1% 1.8%
Revenue per loan transaction
excluding “Other service revenue”
$174 $148
Revenue per loan transaction before
provision for credit losses
$186 $167
1 Excluding acquisitions
Capital Allocation Framework
6
Priorities
Historically ~18% - 20% of
Adjusted EBITDA, plus
strategic investments
Technology ~50%
Physical ~50%
45% - 50% of FCF
Highlights consistency &
strength of free cash flow
Acquisitions that leverage
wholecar auction cyclical
recovery (indep auctions)
Complementary technology
New geographies
Tool for managing cash and
leverage
2015 $135M Spent $152M Paid $118M Acquisitions $228M Repurchased
2015
Technology $63M
Physical $56M
Chicago Greenfield $16M
$1.08 per share paid
Pittsburgh (Indep Auction)
DataScan (Veh Inspections)
Autoniq (Price Guide
Aggregator)
MobileTrac (Veh History)
HBC (UK Salvage)
$300M two year
authorization approved in
October 2014
6.2M shares repurchased
2016 $155M Spent $157M Paid $432M Acquisitions $80M Repurchased
2016
Technology $77M
Physical $51M
Chicago Greenfield $27M
$1.14 per share paid Brashers (8 Ind Auctions)
Orlando (Indep Auction)
GRS (UK Online Auctions)
Flint (Indep Auction)
$500M three year
authorization approved in
October 2016
1.9M shares repurchased
2017 $150M Estimated $175M Paid Q1 – Q4 $97M Acquisitions $100M Repurchased
2017
$150M Annual Estimate $0.32 per share paid
January, April, July, &
October
$0.35 per share announced
for January 2018 payment
DRIVIN (Data Analytics)
(April 2017)
DAS (Transportation)
(May 2017)
TradeRev (Online Sales)
(October 2017)
2.2M shares repurchased
$320M Authorization
Remaining
Capex Dividends
Strategic
Investments
Share
Repurchases
TradeRev
7
TradeRev is an innovative digital mobile app
that facilitates automotive exchanges
between used car dealers
• Headquartered in Toronto, Ontario and
Carmel, Indiana
• 200 employees across the U.S., Canada
and United Kingdom
• Thousands of registered dealers
KAR Q3 2017 Highlights
8
($ in millions, except per share amounts)
KAR Q3 2017 Q3 2016 Highlights*
Total operating revenues $843.0 $789.6
Gross profit** $363.8 $330.1
SG&A $155.7 $146.3 +$3.6M acquired SG&A
EBITDA $207.4 $182.8
Adjusted EBITDA $209.3 $184.8
Net Income $62.8 $54.4
Net income per share - diluted $0.46 $0.39
Operating adjusted net income per share - diluted $0.57 $0.50
Weighted average diluted shares 137.7 139.7
Dividends declared per common share $0.32 $0.29
Effective tax rate 37.5% 36.9%
Capital expenditures $34.7 $43.0
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the three months ended September 30, 2017.
** Exclusive of depreciation and amortization
ADESA Q3 2017 Highlights
9
($ in millions, except RPU)
ADESA Q3 2017 Q3 2016 Highlights*
Revenue $477.1 $457.4 +$12.9M acquisitions
Gross profit** $204.5 $187.9
% of revenue 42.9% 41.1%
SG&A $87.6 $80.6 +$3.6M acquired SG&A
EBITDA $113.6 $104.3
Adjusted EBITDA $122.0 $111.6
% of revenue 25.6% 24.4%
Vehicles sold 788,000 732,000 8% growth; 5% excluding acquisitions
Physical vehicles sold 547,000 552,000 -1% growth; -4% excluding acquisitions
Online only volume 241,000 180,000
Dealer consignment mix % (physical only) 47% 50%
Conversion rate (N.A. physical) 61.3% 57.2%
Physical RPU $781 $758 Excludes purchased vehicles
Online only RPU $112 $108 Excludes ADESA Assurance
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the three months ended September 30, 2017.
** Exclusive of depreciation and amortization
Used Vehicle Value Indices
10
YoY Index Change Age 1Q17 2Q17 3Q17 YTD17
Industry All +4.1% +3.7% +1.9% +3.2%
NADA 0-8 yrs -7.0% -7.3% -5.7% -6.7%
Black Book 2-6 yrs -5.9% -5.1% -3.5% -4.8%
RVI 2-5 yrs -6.1% -5.6% -2.7% -4.5%
Increased industry (commercial) volumes are driving average industry
transaction wholesale prices higher (ADESA)
Revenue per unit sold has increased as a result of increased commercial
mix (ADESA)
Declining used car values increase likelihood of total losses (IAA)
IAA Q3 2017 Highlights
11
($ in millions)
IAA Q3 2017 Q3 2016 Highlights*
Revenue $287.7 $261.0 +9% volume
Gross profit** $102.9 $92.5
% of revenue 35.8% 35.4%
SG&A $26.5 $26.7
EBITDA $76.5 $65.8
Adjusted EBITDA $77.8 $66.2
% of revenue 27.0% 25.4%
Vehicles sold 562,000 516,000
Inventory growth (N.A.) 12% 22% +3% excluding catastrophe vehicles
% Purchased contract vehiclces 5% 7%
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the three months ended September 30, 2017.
** Exclusive of depreciation and amortization
IAA Q3 2017 Gross Profit
12
($ in millions)
IAA HBC Total IAA HBC Total
Revenue $280.4 $7.3 $287.7 $248.7 $12.3 $261.0
Cost of Services** 178.5 6.3 184.8 157.7 10.8 168.5
Gross Profit** $101.9 $1.0 $102.9 $91.0 $1.5 $92.5
% of Revenue 36.3% 13.7% 35.8% 36.6% 12.2% 35.4%
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial
information and Form 10-Q, both for the three months ended September 30, 2017.
** Exclusive of depreciation and amortization
Three Months Ended
September 30, 2017
Three Months Ended
September 30, 2016
AFC Q3 2017 Highlights
13
($ in millions, except for revenue per loan transaction)
AFC Q3 2017 Q3 2016 Highlights*
Interest and fee income $71.8 $68.4
Other revenue $3.0 $2.7
Provision for credit losses ($5.0) ($8.0)
Other service revenue $8.4 $8.1
Total AFC revenue $78.2 $71.2 +18% revenue per LTU
Gross profit** $56.4 $49.7
% of revenue 72.1% 69.8%
SG&A $7.2 $7.1
EBITDA $49.3 $42.6
Adjusted EBITDA $41.3 $35.9
Loan transactions 402,000 426,000
Revenue per loan transaction unit (LTU)*** $174 $148
Provision for credit losses % of finance receivables 1.1% 1.8%
Managed receivables $1,809.2 $1,785.4
Obl gations collateralized by finance receivables $1,259.3 $1,275.1
*** Excludes "Other service revenue"
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the three months ended September 30, 2017.
** Exclusive of depreciation and amortization
AFC Provision for Credit Losses
14
3Q17 2Q17 1Q17 4Q16 3Q16 2Q16 1Q16 4Q15 3Q15
Ending
Managed
Receivables
$1,809.2 $1,736.5 $1,760.7 $1,792.2 $1,785.4 $1,738.6 $1,705.5 $1,641.0 $1,529.6
Average
Managed
Receivables
$1,772.9 $1,748.6 $1,776.5 $1,788.8 $1,762.0 $1,722.1 $1,673.3 $1,585.3 $1,503.3
Provision for
Credit Losses
$5.0 $11.4 $11.1 $11.7 $8.0 $5.5 $5.5 $5.5 $2.7
% of Managed
Receivables
1.1% 2.6% 2.5% 2.6% 1.8% 1.3% 1.3% 1.4% 0.7%
Year-to-Date Slides
KAR Nine Months Ended September 30, 2017
Highlights
16
($ in millions, except per share amounts)
KAR YTD 2017 YTD 2016 Highlights*
Total operating revenues $2,567.6 $2,336.4
Gross profit** $1,105.5 $997.3
SG&A $467.7 $434.3 +$16.8M acquired SG&A
EBITDA $610.9 $559.5
Adjusted EBITDA $643.4 $571.4
Net Income $189.2 $176.9
Net income per share - diluted $1.37 $1.27
Operating adjusted net income per share - diluted $1.85 $1.61
Weighted average diluted shares 138.3 139.4
Dividends declared per common share $0.96 $0.87
Effective tax rate 35.8% 37.5%
Capital expenditures $110.1 $118.5
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the nine months ended September 30, 2017.
** Exclusive of depreciation and amortization
ADESA Nine Months Ended September 30, 2017
Highlights
17
($ in millions, except RPU)
ADESA YTD 2017 YTD 2016 Highlights*
Revenue $1,464.3 $1,323.0 +$79.6M acquisitions
Gross profit** $622.1 $555.9
% of revenue 42.5% 42.0%
SG&A $260.1 $237.8 +$16.8M acquired SG&A
EBITDA $353.6 $310.6
Adjusted EBITDA $377.6 $331.5
% of revenue 25.8% 25.1%
Vehicles sold 2,436,000 2,185,000 11% growth; 5% excluding acquisitions
Physical vehicles sold 1,735,000 1,619,000 7% growth; -1% excluding acquisitions
Online only volume 701,000 566,000
Dealer consignment mix % (physical only) 46% 48%
Conversion rate (N.A. physical) 61.4% 59.0%
Physical RPU $761 $746 Excludes purchased vehicles
Online only RPU $109 $109 Excludes ADESA Assurance
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the nine months ended September 30, 2017.
** Exclusive of depreciation and amortization
IAA Nine Months Ended September 30, 2017
Highlights
18
($ in millions)
IAA YTD 2017 YTD 2016 Highlights*
Revenue $883.8 $795.4 +10% volume
Gross profit** $328.4 $286.1
% of revenue 37.2% 36.0%
SG&A $79.9 $78.9
EBITDA $249.5 $207.3
Adjusted EBITDA $252.1 $208.7
% of revenue 28.5% 26.2%
Vehicles sold 1,733,000 1,573,000
Inventory growth (N.A.) 12% 22% +3% excluding catastrophe vehicles
% Purchased contract vehiclces 5% 7%
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the nine months ended September 30, 2017.
** Exclusive of depreciation and amortization
IAA Nine Months Ended September 30, 2017
Gross Profit
19
($ in millions)
IAA HBC Total IAA HBC Total
Revenue $853.5 $30.3 $883.8 $755.8 $39.6 $795.4
Cost of Services** 529.3 26.1 555.4 473.6 35.7 509.3
Gross Profit** $324.2 $4.2 $328.4 $282.2 $3.9 $286.1
% of Revenue 38.0% 13.9% 37.2% 37.3% 9.8% 36.0%
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial
information and Form 10-Q, both for the nine months ended September 30, 2017.
** Exclusive of depreciation and amortization
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
AFC Nine Months Ended September 30, 2017
Highlights
20
($ in millions, except for revenue per loan transaction)
AFC YTD 2017 YTD 2016 Highlights*
Interest and fee income $213.1 $205.5
Other revenue $8.9 $7.7
Provision for credit losses ($27.5) ($19.0)
Other service revenue $25.0 $23.8
Total AFC revenue $219.5 $218.0 +3% revenue per LTU
Gross profit** $155.0 $155.3
% of revenue 70.6% 71.2%
SG&A $22.4 $21.9
EBITDA $132.7 $133.4
Adjusted EBITDA $109.6 $114.6
Loan transactions 1,274,000 1,301,000
Revenue per loan transaction unit (LTU)*** $153 $149
Provision for credit losses % of finance receivables 2.1% 1.5%
Managed receivables $1,809.2 $1,785.4
Obligations collateralized by finance receivables $1,259.3 $1,275.1
*** Excludes "Other service revenue"
* For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information
and Form 10-Q, both for the nine months ended September 30, 2017.
** Exclusive of depreciation and amortization
Appendix
Non-GAAP Financial Measures
22
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit),
depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and
expected incremental revenue and cost savings as described in the company's senior secured credit agreement
covenant calculations. Free cash flow is defined as Adjusted EBITDA less cash interest expense on corporate debt
(Credit Facility), capital expenditures and cash taxes related to the calendar year. Management believes that the
inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide
additional information to investors about one of the principal measures of performance used by the company’s creditors.
In addition, management uses EBITDA, Adjusted EBITDA and free cash flow to evaluate the company’s performance.
Depreciation expense for property and equipment and amortization expense of capitalized internally developed
software costs relate to ongoing capital expenditures; however, amortization expense associated with acquired
intangible assets, such as customer relationships, software, tradenames and noncompete agreements are not
representative of ongoing capital expenditures, but have a continuing effect on our reported results. Non-GAAP
financial measures of operating adjusted net income and operating adjusted net income per share, in the opinion of the
company, provide comparability to other companies that may not have incurred these types of non-cash expenses or
that report a similar measure. In addition, net income and net income per share have been adjusted for certain other
charges, as seen in the following reconciliation.
EBITDA, Adjusted EBITDA, free cash flow, operating adjusted net income and operating adjusted net income per share
have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the
results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other
companies.
Q3 2017 Adjusted EBITDA Reconciliation
23
($ in millions)
Three Months ended September 30, 2017
ADESA IAA AFC Corporate Consolidated
Net income (loss) $47.0 $28.0 $20.4 ($32.6) $62.8
Add back:
Income taxes 29.6 15.9 11.6 (19.4) 37.7
Interest expense, net of interest income (0.4) – 11.0 30.1 40.7
Depreciation and amortization 28.5 23.1 7.9 6.7 66.2
Intercompany interest 8.9 9.5 (1.6) (16.8) –
EBITDA $113.6 $76.5 $49.3 ($32.0) $207.4
Intercompany charges 2.5 – – (2.5) –
Non-cash stock-based compensation 1.9 1.0 0.7 2.5 6.1
Acquisition related costs 1.3 – – 0.2 1.5
Securitization interest – – (8.7) – (8.7)
Minority interest 1.6 – – – 1.6
Other 1.1 0.3 – – 1.4
Total Addbacks 8.4 1.3 (8.0) 0.2 1.9
Adjusted EBITDA $122.0 $77.8 $41.3 ($31.8) $209.3
Revenue $477.1 $287.7 $78.2 – $843.0
Adjusted EBITDA % margin 25.6% 27.0% 52.8% 24.8%
Q3 2016 Adjusted EBITDA Reconciliation
24
($ in millions)
Three Months ended September 30, 2016
ADESA IAA AFC Corporate Consolidated
Net income (loss) $43.5 $22.0 $21.6 ($32.7) $54.4
Add back:
Income taxes 26.3 12.5 13.2 (20.2) 31.8
Interest expense, net of interest income (0.2) – 8.7 27.6 36.1
Depreciation and amortization 25.3 21.9 7.8 5.5 60.5
Intercompany interest 9.4 9.4 (8.7) (10.1) –
EBITDA $104.3 $65.8 $42.6 ($29.9) $182.8
Intercompany charges 2.3 – – (2.3) –
Non-cash stock-based compensation 1.1 0.6 0.5 2.5 4.7
Acquisition related costs 1.2 0.1 – – 1.3
Securitization interest – – (7.2) – (7.2)
Minority interest 1.1 – – – 1.1
(Gain)/Loss on asset sales 0.4 0.1 – 0.8 1.3
Other 1.2 (0.4) – – 0.8
Total Addbacks 7.3 0.4 (6.7) 1.0 2.0
Adjusted EBITDA $111.6 $66.2 $35.9 ($28.9) $184.8
Revenue $457.4 $261.0 $71.2 – $789.6
Adjusted EBITDA % margin 24.4% 25.4% 50.4% 23.4%
YTD 2017 Adjusted EBITDA Reconciliation
25
($ in millions)
Nine Months ended September 30, 2017
ADESA IAA AFC Corporate Consolidated
Net income (loss) $152.0 $97.5 $61.6 ($121.9) $189.2
Add back:
Income taxes 92.4 54.5 35.9 (77.1) 105.7
Interest expense, net of interest income (0.4) – 31.8 89.4 120.8
Depreciation and amortization 82.5 69.2 23.5 20.0 195.2
Intercompany interest 27.1 28.3 (20.1) (35.3) –
EBITDA $353.6 $249.5 $132.7 ($124.9) $610.9
Intercompany charges 7.6 – – (7.6) –
Non-cash stock-based compensation 5.1 2.8 1.8 7.8 17.5
Loss on extinguishment of debt – – – 27.5 27.5
Acquisition related costs 3.8 – – 1.3 5.1
Securitization interest – – (25.0) – (25.0)
Minority interest 4.3 – – – 4.3
Other 3.2 (0.2) 0.1 – 3.1
Total Addbacks 24.0 2.6 (23.1) 29.0 32.5
Adjusted EBITDA $377.6 $252.1 $109.6 ($95.9) $643.4
Revenue $1,464.3 $883.8 $219.5 – $2,567.6
Adjusted EBITDA % margin 25.8% 28.5% 49.9% 25.1%
YTD 2016 Adjusted EBITDA Reconciliation
26
($ in millions)
Nine Months ended September 30, 2016
ADESA IAA AFC Corporate Consolidated
Net income (loss) $129.0 $72.1 $68.6 ($92.8) $176.9
Add back:
Income taxes 76.7 42.5 41.8 (54.8) 106.2
Interest expense, net of interest income (0.1) – 24.7 75.9 100.5
Depreciation and amortization 72.6 64.4 23.4 15.5 175.9
Intercompany interest 32.4 28.3 (25.1) (35.6) –
EBITDA $310.6 $207.3 $133.4 ($91.8) $559.5
Intercompany charges 7.8 0.3 – (8.1) –
Non-cash stock-based compensation 3.4 1.9 1.4 8.4 15.1
Loss on extinguishment of debt – – – 4.0 4.0
Acquisition related costs 3.6 0.2 0.1 3.3 7.2
Securitization interest – – (20.3) – (20.3)
Minority interest 2.7 – – – 2.7
(Gain)/Loss on asset sales 1.1 0.2 – 0.8 2.1
Other 2.3 (1.2) – – 1.1
Total Addbacks 20.9 1.4 (18.8) 8.4 11.9
Adjusted EBITDA $331.5 $208.7 $114.6 ($83.4) $571.4
Revenue $1,323.0 $795.4 $218.0 – $2,336.4
Adjusted EBITDA % margin 25.1% 26.2% 52.6% 24.5%
Operating Adjusted Net Income
per Share Reconciliation
27
($ in millions, except per share amounts), (unaudited)
2017 2016 2017 2016
Net income $62.8 $54.4 $189.2 $176.9
Acquired amortization expense
(1) 25.8 24.7 76.7 71.3
Loss on extinguishment of debt
(2) – – 27.5 4.0
Income taxes
(3) (9.7) (9.1) (37.3) (28.2)
Operating adjusted net income $78.9 $70.0 $256.1 $224.0
Net income per share − diluted $0.46 $0.39 $1.37 $1.27
Acquired amortization expense 0.19 0.18 0.55 0.51
Loss on extinguishment of debt – – 0.20 0.03
Income taxes (0.08) (0.07) (0.27) (0.20)
Operating adjusted net income per share −
diluted
$0.57 $0.50 $1.85 $1.61
Weighted average diluted shares 137.7 139.7 138.3 139.4
Three Months ended
September 30,
Nine Months ended
September 30,
(1)Acquired amortization expense was $25.8 million ($16.1 million net of tax) and $24.7 million ($15.6 million net of tax) for the three
months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, acquired
amortization expense was $76.7 million ($49.2 million net of tax) and $71.3 million ($44.6 million net of tax), respectively.
(2)For the nine months ended September 30, 2017 and 2016 we incurred a loss on the extinguishment of debt totaling $27.5 million
($17.7 million net of tax) and $4.0 million ($2.5 million net of tax), respectively.
(3)The effective tax rate at the end of each period presented was used to determine the amount of income tax on the adjustments to net
income.