OPENLANE, Inc. - Quarter Report: 2022 September (Form 10-Q)

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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 September 30, 2022


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34568

KAR Auction Services, Inc.

(Exact name of Registrant as specified in its charter)


Delaware			20-8744739
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

11299 N. Illinois Street, Carmel, Indiana 46032

(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (800) 923-3725

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

KAR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of October 31, 2022, 108,907,844 shares of the registrant's common stock, par value $0.01 per share, were outstanding.

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KAR Auction Services, Inc.

Table of Contents


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Income	3

	Consolidated Statements of Comprehensive Income	4

	Consolidated Balance Sheets	5

	Consolidated Statements of Stockholders' Equity	7

	Consolidated Statements of Cash Flows	9

	Condensed Notes to Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures	46

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 6.	Exhibits	48

Signature		53

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

KAR Auction Services, Inc.

Consolidated Statements of Income

(In millions, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating revenues
Auction fees	$	88.9	$	89.6	$	289.5	$	298.4
Service revenue	159.2		128.2		444.0		415.5
Purchased vehicle sales	45.8		53.7		137.9		169.0
Finance-related revenue	99.1		75.6		275.2		210.0
Total operating revenues	393.0		347.1		1,146.6		1,092.9
Operating expenses
Cost of services (exclusive of depreciation and amortization)	209.6		185.7		632.3		598.3
Selling, general and administrative	109.1		104.8		352.1		318.5
Depreciation and amortization	24.3		27.4		76.2		81.7
Total operating expenses	343.0		317.9		1,060.6		998.5
Operating profit	50.0		29.2		86.0		94.4
Interest expense	32.3		31.9		83.8		93.7
Other (income) expense, net	1.2		13.9		6.4		(20.5)
Loss on extinguishment of debt	9.3		—		17.0		—
Income (loss) from continuing operations before income taxes	7.2		(16.6)		(21.2)		21.2
Income taxes	6.7		10.3		(7.9)		37.2
Income (loss) from continuing operations	0.5		(26.9)		(13.3)		(16.0)
Income (loss) from discontinued operations, net of income taxes	(6.3)		25.9		217.4		77.4
Net income (loss)	$	(5.8)	$	(1.0)	$	204.1	$	61.4
Net income (loss) per share - basic
Income (loss) from continuing operations	$	(0.09)	$	(0.31)	$	(0.30)	$	(0.30)
Income (loss) from discontinued operations	(0.06)		0.21		1.41		0.50
Net income (loss) per share - basic	$	(0.15)	$	(0.10)	$	1.11	$	0.20
Net income (loss) per share - diluted
Income (loss) from continuing operations	$	(0.09)	$	(0.31)	$	(0.30)	$	(0.30)
Income (loss) from discontinued operations	(0.06)		0.21		1.41		0.50
Net income (loss) per share - diluted	$	(0.15)	$	(0.10)	$	1.11	$	0.20

See accompanying condensed notes to consolidated financial statements

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KAR Auction Services, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In millions)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income (loss)	$	(5.8)	$	(1.0)	$	204.1	$	61.4
Other comprehensive income (loss), net of tax
Foreign currency translation loss	(31.0)		(13.4)		(45.3)		(4.7)
Unrealized gain on interest rate derivatives, net of tax	—		2.0		5.7		9.0
Total other comprehensive income (loss), net of tax	(31.0)		(11.4)		(39.6)		4.3
Comprehensive income (loss)	$	(36.8)	$	(12.4)	$	164.5	$	65.7

See accompanying condensed notes to consolidated financial statements

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KAR Auction Services, Inc.

Consolidated Balance Sheets

(In millions)

(Unaudited)


	September 30, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	148.7	$	177.6
Restricted cash	28.9		25.8
Trade receivables, net of allowances of $14.2 and $9.5	419.9		381.3
Finance receivables, net of allowances of $21.5 and $23.0	2,533.6		2,506.0
Other current assets	71.8		87.9
Current assets of discontinued operations	—		213.2
Total current assets	3,202.9		3,391.8
Other assets
Goodwill	1,452.3		1,598.0
Customer relationships, net of accumulated amortization of $409.2 and $401.5	141.1		159.1
Other intangible assets, net of accumulated amortization of $390.5 and $350.0	231.3		243.3
Operating lease right-of-use assets	85.9		94.7
Property and equipment, net of accumulated depreciation of $205.2 and $201.6	131.3		143.5
Other assets	56.5		53.7
Non-current assets of discontinued operations	—		1,766.6
Total other assets	2,098.4		4,058.9
Total assets	$	5,301.3	$	7,450.7

See accompanying condensed notes to consolidated financial statements

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KAR Auction Services, Inc.

Consolidated Balance Sheets

(In millions, except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021
Liabilities, Temporary Equity and Stockholders' Equity
Current liabilities
Accounts payable	$	645.6	$	785.3
Accrued employee benefits and compensation expenses	27.4		32.3
Accrued interest	10.1		6.1
Other accrued expenses	86.9		107.4
Income taxes payable	59.0		7.9
Obligations collateralized by finance receivables	1,707.8		1,692.3
Current maturities of long-term debt	283.6		16.3
Current liabilities of discontinued operations	—		361.7
Total current liabilities	2,820.4		3,009.3
Non-current liabilities
Long-term debt	194.7		1,849.7
Deferred income tax liabilities	50.6		55.9
Operating lease liabilities	80.7		88.1
Other liabilities	8.0		30.0
Non-current liabilities of discontinued operations	—		313.8
Total non-current liabilities	334.0		2,337.5
Commitments and contingencies (Note 9)
Temporary equity
Series A convertible preferred stock	612.5		590.9
Stockholders' equity
Common stock, $0.01 par value:
Authorized shares: 400,000,000
Issued and outstanding shares:
September 30, 2022: 112,816,976
December 31, 2021: 121,163,050	1.1		1.2
Additional paid-in capital	800.7		910.8
Retained earnings	796.9		625.7
Accumulated other comprehensive loss	(64.3)		(24.7)
Total stockholders' equity	1,534.4		1,513.0
Total liabilities, temporary equity and stockholders' equity	$	5,301.3	$	7,450.7

See accompanying condensed notes to consolidated financial statements

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KAR Auction Services, Inc.

Consolidated Statements of Stockholders' Equity

(In millions)

(Unaudited)


	Common Stock Shares	Common Stock Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at June 30, 2022	116.1	$	1.2	$	847.2	$	813.8	$	(33.3)	$	1,628.9
Net loss						(5.8)				(5.8)
Other comprehensive loss								(31.0)		(31.0)
Issuance of common stock under stock plans				0.2						0.2
Stock-based compensation expense				3.3						3.3
Repurchase and retirement of common stock	(3.3)	(0.1)		(50.0)						(50.1)
Dividends on preferred stock						(11.1)				(11.1)
Balance at September 30, 2022	112.8	$	1.1	$	800.7	$	796.9	$	(64.3)	$	1,534.4

	Common Stock Shares	Common Stock Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at December 31, 2021	121.2	$	1.2	$	910.8	$	625.7	$	(24.7)	$	1,513.0
Net income						204.1				204.1
Other comprehensive loss								(39.6)		(39.6)
Issuance of common stock under stock plans	0.5			1.1						1.1
Surrender of RSUs for taxes	(0.2)			(2.5)						(2.5)
Stock-based compensation expense				23.3						23.3
Repurchase and retirement of common stock	(8.7)	(0.1)		(132.1)						(132.2)
Dividends earned under stock plans				0.1		(0.2)				(0.1)
Dividends on preferred stock						(32.7)				(32.7)
Balance at September 30, 2022	112.8	$	1.1	$	800.7	$	796.9	$	(64.3)	$	1,534.4

See accompanying condensed notes to consolidated financial statements

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KAR Auction Services, Inc.

Consolidated Statements of Stockholders' Equity

(In millions)

(Unaudited)


	Common Stock Shares	Common Stock Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at June 30, 2021	119.2	$	1.2	$	874.6	$	642.5	$	(17.0)	$	1,501.3
Net loss						(1.0)				(1.0)
Other comprehensive loss								(11.4)		(11.4)
Issuance of common stock under stock plans				0.2						0.2
Stock-based compensation expense				4.0						4.0
Dividends on preferred stock						(10.4)				(10.4)
Balance at September 30, 2021	119.2	$	1.2	$	878.8	$	631.1	$	(28.4)	$	1,482.7

	Common Stock Shares	Common Stock Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total
Balance at December 31, 2020	129.7	$	1.3	$	1,046.5	$	600.7	$	(32.7)	$	1,615.8
Net income						61.4				61.4
Other comprehensive income								4.3		4.3
Issuance of common stock under stock plans	0.4			1.2						1.2
Surrender of RSUs for taxes	(0.1)			(2.2)						(2.2)
Stock-based compensation expense				13.9						13.9
Repurchase and retirement of common stock	(10.8)	(0.1)		(180.8)						(180.9)
Dividends earned under stock plans				0.2		(0.4)				(0.2)
Dividends on preferred stock						(30.6)				(30.6)
Balance at September 30, 2021	119.2	$	1.2	$	878.8	$	631.1	$	(28.4)	$	1,482.7

See accompanying condensed notes to consolidated financial statements

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KAR Auction Services, Inc.

Consolidated Statements of Cash Flows

(In millions)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
Operating activities
Net income	$	204.1	$	61.4
Net income from discontinued operations	(217.4)		(77.4)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	76.2		81.7
Provision for credit losses	9.7		6.5
Deferred income taxes	(4.3)		5.3
Amortization of debt issuance costs	8.5		9.1
Stock-based compensation	22.6		12.1
Contingent consideration adjustment	—		20.1
Net change in unrealized (gain) loss on investment securities	6.5		(10.7)
Loss on extinguishment of debt	17.0		—
Other non-cash, net	0.3		1.7
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables and other assets	(23.2)		(180.5)
Accounts payable and accrued expenses	(86.5)		283.8
Net cash provided by operating activities - continuing operations	13.5		213.1
Net cash (used by) provided by operating activities - discontinued operations	(435.6)		142.4
Investing activities
Net increase in finance receivables held for investment	(34.9)		(281.4)
Acquisition of businesses (net of cash acquired)	(0.4)		(79.8)
Purchases of property, equipment and computer software	(45.8)		(47.6)
Investments in securities	(6.6)		(22.0)
Proceeds from sale of investments	0.3		32.7
Proceeds from the sale of business	—		2.1
Net cash used by investing activities - continuing operations	(87.4)		(396.0)
Net cash provided by (used by) investing activities - discontinued operations	2,066.4		(19.0)
Financing activities
Net decrease in book overdrafts	(5.8)		(2.7)
Net increase (decrease) in borrowings from lines of credit	126.8		(5.2)
Net increase in obligations collateralized by finance receivables	36.6		119.6
Payments for debt issuance costs/amendments	(11.6)		—
Payments on long-term debt	(928.6)		(7.1)
Payment for early extinguishment of debt	(606.1)		—
Payments on finance leases	(3.1)		(4.4)
Payments of contingent consideration and deferred acquisition costs	(29.6)		(21.3)
Issuance of common stock under stock plans	1.1		1.2
Tax withholding payments for vested RSUs	(2.5)		(2.2)
Repurchase and retirement of common stock	(132.2)		(180.9)
Dividends paid on Series A Preferred Stock	(11.1)		—
Net cash used by financing activities - continuing operations	(1,566.1)		(103.0)
Net cash provided by financing activities - discontinued operations	10.8		40.2
Effect of exchange rate changes on cash	(27.4)		(3.0)
Net decrease in cash, cash equivalents and restricted cash	(25.8)		(125.3)
Cash, cash equivalents and restricted cash at beginning of period	203.4		784.3
Cash, cash equivalents and restricted cash at end of period	$	177.6	$	659.0
Cash paid for interest, net of proceeds from interest rate derivatives	$	71.0	$	71.6
Cash paid for taxes, net of refunds	$	325.2	$	22.1

See accompanying condensed notes to consolidated financial statements

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements

September 30, 2022 (Unaudited)

Note 1—Basis of Presentation and Nature of Operations

Defined Terms

Unless otherwise indicated or unless the context otherwise requires, the following terms used herein shall have the following meanings:

•"we," "us," "our," "KAR" and "the Company" refer, collectively, to KAR Auction Services, Inc. and all of its subsidiaries;

•"ADESA" or "ADESA Auctions" refer, collectively, to ADESA, Inc., a wholly-owned subsidiary of KAR Auction Services, and ADESA, Inc.'s subsidiaries, including Openlane, Inc. (together with Openlane, Inc.'s subsidiaries, "Openlane"), BacklotCars, Inc. ("BacklotCars"), CARWAVE LLC ("CARWAVE"), Nth Gen Software Inc. ("TradeRev"), ADESA Remarketing Limited and ADESA Europe;

•"AFC" refers, collectively, to Automotive Finance Corporation, a wholly-owned subsidiary of ADESA, and Automotive Finance Corporation's subsidiaries and other related entities, including PWI Holdings, Inc. (which was sold on December 1, 2020);

•"Credit Agreement" refers to the Amended and Restated Credit Agreement, dated March 11, 2014 (as amended, amended and restated, modified or supplemented from time to time), among KAR Auction Services, Inc., as the borrower, the several banks and other financial institutions or entities from time to time parties thereto and JPMorgan Chase Bank N.A., as administrative agent;

•"Credit Facility" refers to the $950 million, senior secured term loan B-6 facility due September 19, 2026 ("Term Loan B-6") and the $325 million, senior secured revolving credit facility due September 19, 2024 (the "Revolving Credit Facility"), the terms of which are set forth in the Credit Agreement;

•"IAA" refers, collectively, to Insurance Auto Auctions, Inc., formerly a wholly-owned subsidiary of KAR Auction Services, and Insurance Auto Auctions, Inc.'s subsidiaries and other related entities;

•"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries;

•"Senior notes" refers to the 5.125% senior notes due 2025 ($350 million aggregate principal was outstanding at September 30, 2022); and

•"Series A Preferred Stock" refers to the Series A Convertible Preferred Stock, par value $0.01 per share (634,305 and 612,676 shares of Series A Preferred Stock were outstanding at September 30, 2022 and December 31, 2021, respectively).

Business and Nature of Operations

KAR is a leading provider of wholesale vehicle auctions and related vehicle remarketing services for the automotive industry. As of September 30, 2022, the Marketplace segment (formerly referenced as ADESA Auctions) serves a domestic and international customer base through digital marketplaces and 14 vehicle logistics center locations across Canada. Our digital marketplaces include BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized in the United States, CARWAVE, an online dealer-to-dealer marketplace in the United States, TradeRev, an online automotive remarketing platform in Canada where dealers can launch and participate in real-time vehicle auctions at any time, ADESA Remarketing Limited, an online whole car vehicle remarketing business in the United Kingdom and ADESA Europe, an online wholesale vehicle auction marketplace in Continental Europe. Our auctions facilitate the sale of used vehicles through on-premise and off-premise marketplaces. Our online service offerings include customized private label solutions powered with software developed by Openlane, that allow our commercial consignors (automobile manufacturers, captive finance companies and other institutions) to offer vehicles via the Internet prior to arrival at on-premise marketplaces. Remarketing services include a variety of activities designed to facilitate the transfer of used vehicles between sellers and buyers throughout the vehicle life cycle. We facilitate the exchange of these vehicles through an auction marketplace, which aligns sellers and buyers. As an agent for customers, the Company generally does not take title to or ownership of vehicles sold at the auctions. Generally, fees are earned from the seller and buyer on each successful auction transaction in addition to fees earned for ancillary services.

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

We also provide services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. We are able to serve the diverse and multi-faceted needs of our customers through the wide range of services offered.

AFC is a leading provider of floorplan financing to independent used vehicle dealers and this financing is provided through approximately 100 locations throughout the United States and Canada as of September 30, 2022. Floorplan financing supports independent used vehicle dealers in North America who purchase vehicles at ADESA, BacklotCars, CARWAVE, TradeRev, and other used vehicle and salvage auctions. In addition, AFC provides financing for dealer inventory purchased directly from wholesalers, other dealers and directly from consumers, as well as providing liquidity for customer trade-ins which encompasses settling lien holder payoffs. AFC also provides title services for their customers.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with

generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and

with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information

and notes required by U.S. GAAP for annual financial statements. Operating results for interim periods are not necessarily

indicative of results that may be expected for the year as a whole. In the opinion of management, the consolidated financial

statements reflect all adjustments, generally consisting of normal recurring accruals, necessary for a fair statement of our results

of operations, cash flows and financial position for the periods presented. These consolidated financial statements and

condensed notes to consolidated financial statements are unaudited and should be read in conjunction with the audited

consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended

December 31, 2021, as filed with the Securities and Exchange Commission on February 23, 2022. The 2021 year-end

consolidated balance sheet data included in this Form 10-Q was derived from the audited financial statements referenced above

and does not include all disclosures required by U.S. GAAP for annual financial statements.

Reclassifications

Beginning in 2022, the Company has classified the ADESA U.S. physical auctions (vehicle logistics centers) as discontinued operations. Certain amounts reported in the consolidated financial statements and related notes prior to March 2022 have been reclassified to discontinued operations to reflect the sale of the Company’s ADESA U.S. physical auction business. The assets and liabilities of the ADESA U.S. physical auctions have been reclassified to "Current assets of discontinued operations," "Non-current assets of discontinued operations," "Current liabilities of discontinued operations" and "Non-current liabilities of discontinued operations" in the consolidated balance sheets for all periods presented. Likewise, certain amounts reported for segment results in the consolidated financial statements prior to March 2022 have been reclassified to conform to the discontinued operations presentation. See Note 2 for a further discussion.

In addition, KAR provided transportation services of $20.6 million and $56.7 million to the ADESA U.S. physical auctions for the three and nine months ended September 30, 2022, respectively, and $18.0 million and $63.7 million for the three and nine months ended September 30, 2021, respectively. The revenue and cost of services for these transportation services provided to the ADESA U.S. physical auctions was previously eliminated in consolidation, but this revenue and the related costs are now included in the Company's consolidated statements of income.

AFC also had accounts payable to customers of the ADESA U.S. physical auctions related to auction proceeds financed. Previously, these accounts were eliminated in consolidation, but are now included in "Current assets of discontinued operations" on the consolidated balance sheet and were $33.5 million at December 31, 2021.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates based in part on assumptions about current, and for some estimates, future economic and market conditions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Although the current estimates contemplate current conditions and expected future changes, as appropriate, it is reasonably possible that future conditions could differ from these estimates, which could materially affect our results of operations and financial position. Among other effects, such changes could result in future impairments of goodwill, intangible assets and long-lived assets, incremental losses on finance receivables, additional allowances on accounts receivable and deferred tax assets and changes in litigation and other loss contingencies.

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

New Accounting Standards

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. The update also requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. The new guidance is effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. This update can be adopted on either a fully retrospective or a modified retrospective basis. The adoption of ASU 2020-06 did not have a material impact on the consolidated financial statements.

Note 2—Sale of ADESA U.S. Physical Auction Business and Discontinued Operations

In February 2022, the Company announced that it had entered into a definitive agreement with Carvana Group, LLC ("Carvana") and Carvana Co., pursuant to which Carvana would acquire the ADESA U.S. physical auction business from KAR (the "Transaction"). The Transaction was completed in May 2022 for approximately $2.2 billion in cash and included all auction sales, operations and staff at ADESA’s U.S. vehicle logistic centers and use of the ADESA.com marketplace in the U.S. The net proceeds received in connection with the Transaction are included in "Net cash provided by investing activities - discontinued operations" in the consolidated statement of cash flow. In connection with the Transaction, the Company and Carvana entered into various agreements to provide a framework for their relationship after the Transaction, including a transition services agreement for a transitional period and a commercial agreement for a term of 7 years that provides for platform and other fees for services rendered. In addition, KAR will continue to own the ADESA tradename and the ADESA U.S. physical auctions will continue to utilize the tradename, which has an indefinite life. From the completion of the Transaction through September 30, 2022, KAR has received a net cash inflow from the commercial agreement and transition services agreement of approximately $33.5 million.

The financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. The business was formerly included in the Company’s Marketplace reportable segment (formerly referenced as ADESA Auctions). The "Goodwill" shown in the balance sheet below was allocated to the ADESA U.S. physical auctions based on relative fair value. Discontinued operations included transaction costs of approximately $37.1 million for the nine months ended September 30, 2022, in connection with the Transaction. These costs consisted of consulting and professional fees associated with the Transaction. As shown below, the Transaction resulted in a pretax gain on disposal of approximately $521.8 million. The change in the pretax gain on disposal for the three months ended September 30, 2022 occurred as a result of a net working capital adjustment and additional transaction costs.

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

The following table presents the results of operations for the ADESA U.S. physical auction business that have been reclassified to discontinued operations for all periods presented (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating revenues	$	—	$	206.2	$	305.9	$	673.1
Operating expenses
Cost of services (exclusive of depreciation and amortization)	—		144.2		224.9		438.3
Selling, general and administrative	—		32.1		68.8		113.2
Depreciation and amortization	—		17.3		11.2		55.3
Total operating expenses	—		193.6		304.9		606.8
Operating profit (loss)	—		12.6		1.0		66.3
Interest expense	—		0.3		0.1		0.6
Other (income) expense, net	—		(2.1)		(8.4)		(6.0)
Income (loss) from discontinued operations before gain on disposal and income taxes	—		14.4		9.3		71.7
Pretax gain on disposal of discontinued operations	(11.9)		—		521.8		—
Income taxes	(5.6)		(11.5)		313.7		(5.7)
Income from discontinued operations	$	(6.3)	$	25.9	$	217.4	$	77.4

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

The following table summarizes the major classes of assets and liabilities of the ADESA U.S. physical auction business that have been classified as discontinued operations for the period presented (in millions):


	December 31, 2021
Assets
Cash and cash equivalents	$	12.4
Trade receivables, net of allowances	179.3
Inventory	15.7
Other current assets	5.8
Current assets of discontinued operations	213.2
Goodwill	980.5
Customer relationships, net of accumulated amortization	84.2
Other intangible assets, net of accumulated amortization	32.6
Operating lease right-of-use assets	231.0
Property and equipment, net of accumulated depreciation	435.7
Other assets	2.6
Non-current assets of discontinued operations	1,766.6
Total assets of discontinued operations	$	1,979.8

Liabilities
Accounts payable	$	271.7
Accrued employee benefits and compensation expenses	27.2
Other accrued expenses	35.3
Current portion of operating lease liabilities	27.5
Current liabilities of discontinued operations	361.7
Deferred income tax liabilities	82.5
Operating lease liabilities	229.0
Other liabilities	2.3
Non-current liabilities of discontinued operations	313.8
Total liabilities of discontinued operations	$	675.5

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

Note 3—Stock and Stock-Based Compensation Plans

The KAR Auction Services, Inc. Amended and Restated 2009 Omnibus Stock and Incentive Plan ("Omnibus Plan") is intended to provide equity and/or cash-based awards to our executive officers and key employees. Our stock-based compensation expense includes expense associated with KAR Auction Services service-based options ("service options"), market-based options ("market options"), performance-based restricted stock units ("PRSUs") and service-based restricted stock units ("RSUs"). We have determined that the KAR Auction Services service options, market options, PRSUs and RSUs should be classified as equity awards.

The following table summarizes our stock-based compensation expense by type of award (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
PRSUs	$	1.3	$	0.6	$	15.1	$	3.4
RSUs	0.9		1.2		3.4		3.8
Service options	0.2		0.2		0.6		0.8
Market options	0.9		1.4		3.5		4.1
Total stock-based compensation expense	$	3.3	$	3.4	$	22.6	$	12.1

PRSUs and RSUs

In the first nine months of 2022, we granted a target amount of approximately 0.5 million PRSUs to certain executive officers of the Company. The PRSUs granted in 2022 were set to vest if and to the extent that the Company's three-year cumulative operating adjusted net income per share attains certain specified goals. Following the Transaction, in September 2022 the performance targets and the related award agreements for the 2022 PRSUs were amended to modify the performance metric from operating adjusted net income per share to Adjusted EBITDA. The modification of the 2022 PRSUs affected 13 participants and there was no incremental compensation cost resulting from the modification. In addition, in the first nine months of 2022, approximately 0.3 million RSUs were granted to certain management members of the Company. The RSUs are contingent upon continued employment and generally vest in three equal annual installments. The weighted average grant date fair value of the PRSUs and the RSUs was $18.46 per share and $18.39 per share, respectively, which was determined using the closing price of the Company's common stock on the dates of grant.

Share Repurchase Program

In October 2019, the board of directors authorized a repurchase of up to $300 million of the Company's outstanding common stock, par value $0.01 per share, through October 30, 2021. In October 2021, the board of directors authorized an extension of the Company’s share repurchase program through December 31, 2022. On April 27, 2022, the board of directors authorized an increase in the size of the Company’s $300 million share repurchase program by an additional $200 million and an extension of the share repurchase program through December 31, 2023. At September 30, 2022, approximately $176.9 million of the Company's outstanding common stock remained available for repurchase under the 2019 share repurchase program. Repurchases may be made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases is subject to market and other conditions. This program does not oblige the Company to repurchase any dollar amount or any number of shares under the authorization, and the program may be suspended, discontinued or modified at any time, for any reason and without notice. For the three and nine months ended September 30, 2022, we repurchased and retired 3,309,527 shares and 8,740,316 shares of common stock, respectively, in the open market at a weighted average price of $15.11 per share and $15.11 per share, respectively. For the nine months ended September 30, 2021, we repurchased and retired 10,847,800 shares of common stock in the open market at a weighted average price of $16.66 per share. No shares of common stock were repurchased during the three months ended September 30, 2021.

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

Note 4—Income (Loss) from Continuing Operations Per Share

The following table sets forth the computation of income (loss) from continuing operations per share (in millions except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Income (loss) from continuing operations	$	0.5	$	(26.9)	$	(13.3)	$	(16.0)
Series A Preferred Stock dividends	(11.1)		(10.4)		(32.7)		(30.6)
Loss from continuing operations attributable to participating securities	—		—		10.6		9.9
Income (loss) from continuing operations attributable to common stockholders	$	(10.6)	$	(37.3)	$	(35.4)	$	(36.7)
Weighted average common shares outstanding	114.6		119.3		118.5		123.7
Effect of dilutive stock options and restricted stock awards	—		—		—		—
Weighted average common shares outstanding and potential common shares	114.6		119.3		118.5		123.7
Income (loss) from continuing operations per share
Basic	$	(0.09)	$	(0.31)	$	(0.30)	$	(0.30)
Diluted	$	(0.09)	$	(0.31)	$	(0.30)	$	(0.30)

The Company includes participating securities (Series A Preferred Stock) in the computation of income from continuing operations per share pursuant to the two-class method. The two-class method of calculating income from continuing operations per share is an allocation method that calculates earnings per share for common stock and participating securities. Under the two-class method, total dividends provided to the holders of the Series A Preferred Stock and undistributed earnings allocated to participating securities are subtracted from income from continuing operations in determining income attributable to common stockholders.

The effect of stock options and restricted stock on income from continuing operations per share-diluted is determined through the application of the treasury stock method, whereby net proceeds received by the Company based on assumed exercises are hypothetically used to repurchase our common stock at the average market price during the period. As a result of the spin-off, there are IAA employees who hold KAR equity awards included in the calculation. Stock options that would have an anti-dilutive effect on income from continuing operations per diluted share, unexercisable market options and PRSUs subject to performance conditions which have not yet been satisfied are excluded from the calculations. In accordance with U.S. GAAP, no potential common shares were included in the computation of diluted income from continuing operations per share for the three or nine months ended September 30, 2022 and 2021 because to do so would have been anti-dilutive based on the period undistributed loss from continuing operations. Total options outstanding at September 30, 2022 and 2021 were 5.0 million and 5.4 million, respectively.

Note 5—Finance Receivables and Obligations Collateralized by Finance Receivables

AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to a wholly-owned, bankruptcy remote, consolidated, special purpose subsidiary ("AFC Funding Corporation"), established for the purpose of purchasing AFC's finance receivables. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. AFC Funding Corporation had committed liquidity of $2.0 billion for U.S. finance receivables at September 30, 2022.

In September 2022, AFC and AFC Funding Corporation entered into the Tenth Amended and Restated Receivables Purchase Agreement (the "Receivables Purchase Agreement"). The Receivables Purchase Agreement increased AFC Funding's U.S. committed liquidity from $1.70 billion to $2.0 billion and extended the facility's maturity date from January 31, 2024 to January 31, 2026. In addition, the discount rate is now based on the SOFR reference rate, provisions designed to provide additional lending and operational flexibility were modified or added and provisions providing for a mechanism for determining an

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

alternative rate of interest were modified. We capitalized approximately $10.5 million of costs in connection with the Receivables Purchase Agreement.

We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") receivables. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$225 million at September 30, 2022. In September 2022, AFCI entered into the Sixth Amended and Restated Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement"). The Canadian Receivables Purchase Agreement extended the facility's maturity date from January 31, 2024 to January 31, 2026. In addition, provisions designed to provide additional lending and operational flexibility were modified or added. We capitalized approximately $1.1 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.

The following tables present quantitative information about delinquencies, credit loss charge-offs less recoveries ("net credit losses") and components of securitized financial assets and other related assets managed. For purposes of this illustration, delinquent receivables are defined as receivables 31 days or more past due.


	September 30, 2022				Net Credit Losses Three Months Ended September 30, 2022		Net Credit Losses Nine Months Ended September 30, 2022
	Total Amount of:
(in millions)	Receivables		Receivables Delinquent
Floorplan receivables	$	2,548.4	$	11.1	$	1.2	$	4.0
Other loans	6.7		—		—		—
Total receivables managed	$	2,555.1	$	11.1	$	1.2	$	4.0


	December 31, 2021				Net Credit Losses (Recoveries) Three Months Ended September 30, 2021		Net Credit Losses Nine Months Ended September 30, 2021
	Total Amount of:
(in millions)	Receivables		Receivables Delinquent
Floorplan receivables	$	2,519.7	$	7.3	$	(2.2)	$	2.4
Other loans	9.3		—		—		—
Total receivables managed	$	2,529.0	$	7.3	$	(2.2)	$	2.4

The following is a summary of the changes in the allowance for credit losses related to finance receivables (in millions):


	September 30, 2022		September 30, 2021
Allowance for Credit Losses
Balance at December 31	$	23.0	$	22.0
Provision for credit losses	2.8		4.4
Recoveries	7.2		10.3
Less charge-offs	(11.2)		(12.7)
Other	(0.3)		—
Balance at end of period	$	21.5	$	24.0

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

As of September 30, 2022 and December 31, 2021, $2,529.1 million and $2,482.2 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the obligations collateralized by finance receivables. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. Obligations collateralized by finance receivables consisted of the following (in millions):


	September 30, 2022		December 31, 2021
Obligations collateralized by finance receivables, gross	$	1,728.7	$	1,707.4
Unamortized securitization issuance costs	(20.9)		(15.1)
Obligations collateralized by finance receivables	$	1,707.8	$	1,692.3

Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At September 30, 2022, we were in compliance with the covenants in the securitization agreements.

Note 6—Long-Term Debt

Long-term debt consisted of the following (in millions):


	Interest Rate*		Maturity	September 30, 2022		December 31, 2021
Term Loan B-6	Adjusted LIBOR	+ 2.25%	September 19, 2026	$	—	$	928.6
Revolving Credit Facility	Adjusted LIBOR	+ 1.75%	September 19, 2024	116.0		—
Senior notes		5.125%	June 1, 2025	350.0		950.0
European lines of credit	Euribor	+ 1.25%	Repayable upon demand	17.6		6.8
Total debt				483.6		1,885.4
Unamortized debt issuance costs/discounts				(5.3)		(19.4)
Current portion of long-term debt				(283.6)		(16.3)
Long-term debt				$	194.7	$	1,849.7

*The interest rates presented in the table above represent the rates in place at September 30, 2022.

Credit Facilities

On September 19, 2019, we entered into the seven-year, $950 million Term Loan B-6 and the $325 million, five-year Revolving Credit Facility. In May 2022, the Company prepaid the $926.2 million outstanding balance on Term Loan B-6 with proceeds from the Transaction. As a result of the prepayment, we incurred a non-cash loss on the extinguishment of debt of $7.7 million in the second quarter of 2022. The loss was primarily a result of the write-off of unamortized debt issuance costs/discounts associated with Term Loan B-6.

The Revolving Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline loans. The Company also pays a commitment fee between 25 to 35 basis points, payable quarterly, on the average daily unused amount of the Revolving Credit Facility based on the Company’s Consolidated Senior Secured Net Leverage Ratio, from time to time.

The obligations of the Company under the Credit Facilities are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority security interests in 100% of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and 65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions. The Credit

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

Agreement contains affirmative and negative covenants that we believe are usual and customary for a senior secured credit agreement. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with our affiliates. The Credit Agreement also requires us to maintain a Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), not to exceed 3.5 as of the last day of each fiscal quarter, if there are revolving loans outstanding. We were in compliance with the applicable covenants in the Credit Agreement at September 30, 2022.

As of September 30, 2022, $116.0 million was drawn on the Revolving Credit Facility and there were no borrowings outstanding on the Revolving Credit Facility at December 31, 2021. We had related outstanding letters of credit in the aggregate amount of $19.0 million and $27.6 million at September 30, 2022 and December 31, 2021, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility.

Senior Notes

On May 31, 2017, we issued $950 million of 5.125% senior notes due June 1, 2025. The Company pays interest on the senior notes semi-annually in arrears on June 1 and December 1 of each year. In August 2022, we conducted a cash tender offer to purchase up to $600 million principal amount of the senior notes. The tender offer was oversubscribed and as such, $600 million of the senior notes were accepted for prepayment and were prepaid in August 2022 with proceeds from the Transaction. We incurred a loss on the extinguishment of the senior notes of $9.3 million in the third quarter of 2022 primarily representative of the early repayment premium and the write-off of unamortized debt issuance costs associated with the portion of the senior notes repaid.

The Company expects to use the remaining proceeds from the Transaction after the repayment of Term Loan B-6 to redeem or repay a portion of the senior notes within 365 days of the close of the Transaction. The terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. Therefore, at September 30, 2022, $150.0 million of the remaining senior notes are classified as current debt.

European Lines of Credit

ADESA Europe has lines of credit aggregating $29.4 million (€30 million). The lines of credit had an aggregate $17.6 million and $6.8 million of borrowings outstanding at September 30, 2022 and December 31, 2021, respectively. The lines of credit are secured by certain inventory and receivables at ADESA Europe subsidiaries.

Fair Value of Debt

As of September 30, 2022, the estimated fair value of our long-term debt amounted to $470.5 million. The estimates of fair value were based on broker-dealer quotes (Level 2 inputs) for our debt as of September 30, 2022. The estimates presented on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.

Note 7—Derivatives

In January 2020, we entered into three pay-fixed interest rate swaps with an aggregate notional amount of $500 million to swap variable rate interest payments under our term loan for fixed interest payments bearing a weighted average interest rate of 1.44%, for a total interest rate of 3.69%. The interest rate swaps had a five-year term, each maturing on January 23, 2025.

We originally designated the interest rate swaps as cash flow hedges. The changes in the fair value of the interest rate swaps that are included in the assessment of hedge effectiveness are recorded as a component of "Accumulated other comprehensive income." For the nine months ended September 30, 2022, the Company recorded an unrealized gain on the interest rate swaps of $5.7 million, net of tax of $1.8 million in "Accumulated other comprehensive income." For the three and nine months ended September 30, 2021, the Company recorded an unrealized gain on the interest rate swaps of $2.0 million, net of tax of $0.6 million, and $9.0 million, net of tax of $2.9 million, respectively, in "Accumulated other comprehensive income." The earnings impact of the interest rate derivatives designated as cash flow hedges is recorded upon the recognition of the interest related to the hedged debt. In February 2022, we discontinued hedge accounting as we concluded that the forecasted interest rate payments were no longer probable of occurring in consideration of the Transaction and expected repayment of Term Loan B-6. As a result, the increase in the fair value of the swaps from the time of hedge accounting discontinuance to March 31, 2022 was recognized as an $8.7 million unrealized gain in "Interest expense" in the consolidated statement of income for the three months ended March 31, 2022. In connection with the repayment of Term Loan B-6 in May 2022, we entered into swap

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

termination agreements. We received $16.7 million to settle and terminate the swaps, which was recognized as a realized gain in "Interest expense" in the consolidated statement of income for the three months ended June 30, 2022.

When derivatives are used, we are exposed to credit loss in the event of non-performance by the counterparties; however, non-performance is not anticipated and was considered immaterial to the fair value estimates. ASC 815, Derivatives and Hedging, requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. The fair values of the interest rate derivatives are based on quoted market prices for similar instruments from commercial banks (based on significant observable inputs - Level 2 inputs). The following table presents the fair value of our interest rate derivatives included in the consolidated balance sheets for the periods presented (in millions):

Asset/Liability Derivatives

September 30, 2022

December 31, 2021

Derivatives Designated as Hedging Instruments

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

2020 Interest rate swaps

Other assets

N/A

Other liabilities

7.5

Derivatives Not Designated as Hedging Instruments

2020 Interest rate swaps

Other assets

N/A

Other liabilities

N/A

Note 8—Other (Income) Expense, Net

Other (income) expense, net consisted of the following (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Change in realized and unrealized (gains) losses on investment securities, net	$	0.3	$	10.9	$	6.5	$	(37.9)
Contingent consideration valuation	—		4.4		—		20.1
Foreign currency (gains) losses	4.1		0.1		8.6		2.7
Other	(3.2)		(1.5)		(8.7)		(5.4)
Other (income) expense, net	$	1.2	$	13.9	$	6.4	$	(20.5)

Fair Value Measurement of Investments

The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. There were no realized gains on these investments for the three and nine months ended September 30, 2022. Realized gains on these investments were $10.0 million and $27.2 million for the three and nine months ended September 30, 2021, respectively. The Company had unrealized losses of $0.3 million and $6.5 million for the three and nine months ended September 30, 2022, respectively. The Company had unrealized losses of $20.9 million for the three months ended September 30, 2021, and unrealized gains of $10.7 million for the nine months ended September 30, 2021.

ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A small portion of finance receivables for one entity were converted to investment securities during the first quarter of 2021. This entity became publicly traded during the first quarter of 2021 and now has a readily determinable fair value. As of September 30, 2022, the fair value of investment securities are based on quoted market prices for identical assets (Level 1 of the fair value hierarchy) and approximated $1.0 million. The net unrealized loss on these investment securities was $6.5 million for the nine months ended September 30, 2022. The remaining investments held of $28.6 million do not have readily determinable fair values and the Company has elected to apply the measurement alternative to these investments and present them at cost. Investments are reported in "Other assets" in the accompanying consolidated balance sheets. Realized and unrealized gains and losses are reported in "Other (income) expense, net" in the consolidated statements of income.

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

Note 9—Commitments and Contingencies

We are involved in litigation and disputes arising in the ordinary course of business, such as actions related to injuries; property damage; handling, storage or disposal of vehicles; environmental laws and regulations; and other litigation incidental to the business such as employment matters and dealer disputes. Management considers the likelihood of loss or the incurrence of a liability, as well as the ability to reasonably estimate the amount of loss, in determining loss contingencies. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss (or range of possible losses) can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. Accruals for contingencies including litigation and environmental matters are included in "Other accrued expenses" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information becomes available. If the amount of an actual loss is greater than the amount accrued, this could have an adverse impact on our operating results in that period. Such matters are generally not, in the opinion of management, likely to have a material adverse effect on our financial condition, results of operations or cash flows. Legal fees are expensed as incurred. There has been no significant change in the legal and regulatory proceedings which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Note 10—Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following (in millions):


	September 30, 2022		December 31, 2021
Foreign currency translation loss	$	(64.3)	$	(19.0)
Unrealized gain (loss) on interest rate derivatives, net of tax	—		(5.7)
Accumulated other comprehensive loss	$	(64.3)	$	(24.7)

Note 11—Segment Information

ASC 280, Segment Reporting, requires reporting of segment information that is consistent with the manner in which the chief operating decision maker operates and views the Company. Our operations are grouped into two operating segments: Marketplace (formerly referenced as ADESA Auctions) and Finance (formerly referenced as AFC), which also serve as our reportable business segments. These reportable business segments offer different services and have fundamental differences in their operations. Beginning in the first quarter of 2022, results of the ADESA U.S. physical auctions are now reported as discontinued operations (see Note 2). Segment results for prior periods have been reclassified to conform with the new presentation.

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

Financial information regarding our reportable segments is set forth below as of and for the three months ended September 30, 2022 (in millions):


	Marketplace		Finance		Consolidated
Operating revenues	$	293.9	$	99.1	$	393.0
Operating expenses
Cost of services (exclusive of depreciation and amortization)	193.4		16.2		209.6
Selling, general and administrative	96.9		12.2		109.1
Depreciation and amortization	22.4		1.9		24.3
Total operating expenses	312.7		30.3		343.0
Operating profit (loss)	(18.8)		68.8		50.0
Interest expense	10.0		22.3		32.3
Other (income) expense, net	0.9		0.3		1.2
Loss on extinguishment of debt	9.3		—		9.3
Intercompany expense (income)	2.4		(2.4)		—
Income (loss) from continuing operations before income taxes	(41.4)		48.6		7.2
Income taxes	(5.6)		12.3		6.7
Income (loss) from continuing operations	$	(35.8)	$	36.3	$	0.5
Total assets	$	2,381.8	$	2,919.5	$	5,301.3

Financial information regarding our reportable segments is set forth below as of and for the three months ended September 30, 2021 (in millions):


	Marketplace		Finance		Consolidated
Operating revenues	$	271.5	$	75.6	$	347.1
Operating expenses
Cost of services (exclusive of depreciation and amortization)	171.9		13.8		185.7
Selling, general and administrative	96.3		8.5		104.8
Depreciation and amortization	25.2		2.2		27.4
Total operating expenses	293.4		24.5		317.9
Operating profit (loss)	(21.9)		51.1		29.2
Interest expense	21.6		10.3		31.9
Other (income) expense, net	3.0		10.9		13.9
Intercompany expense (income)	—		—		—
Income (loss) from continuing operations before income taxes	(46.5)		29.9		(16.6)
Income taxes	3.4		6.9		10.3
Income (loss) from continuing operations	$	(49.9)	$	23.0	$	(26.9)
Total assets	$	2,603.4	$	2,565.6	$	5,169.0

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

Financial information regarding our reportable segments is set forth below for the nine months ended September 30, 2022 (in millions):


	Marketplace		Finance		Consolidated
Operating revenues	$	871.4	$	275.2	$	1,146.6
Operating expenses
Cost of services (exclusive of depreciation and amortization)	584.9		47.4		632.3
Selling, general and administrative	315.8		36.3		352.1
Depreciation and amortization	70.1		6.1		76.2
Total operating expenses	970.8		89.8		1,060.6
Operating profit (loss)	(99.4)		185.4		86.0
Interest expense	33.0		50.8		83.8
Other (income) expense, net	(0.1)		6.5		6.4
Loss on extinguishment of debt	17.0		—		17.0
Intercompany expense (income)	3.1		(3.1)		—
Income (loss) from continuing operations before income taxes	(152.4)		131.2		(21.2)
Income taxes	(40.9)		33.0		(7.9)
Income (loss) from continuing operations	$	(111.5)	$	98.2	$	(13.3)

Financial information regarding our reportable segments is set forth below for the nine months ended September 30, 2021 (in millions):


	Marketplace		Finance		Consolidated
Operating revenues	$	882.9	$	210.0	$	1,092.9
Operating expenses
Cost of services (exclusive of depreciation and amortization)	557.3		41.0		598.3
Selling, general and administrative	292.4		26.1		318.5
Depreciation and amortization	74.6		7.1		81.7
Total operating expenses	924.3		74.2		998.5
Operating profit (loss)	(41.4)		135.8		94.4
Interest expense	64.7		29.0		93.7
Other (income) expense, net	1.0		(21.5)		(20.5)
Intercompany expense (income)	0.2		(0.2)		—
Income (loss) from continuing operations before income taxes	(107.3)		128.5		21.2
Income taxes	5.1		32.1		37.2
Income (loss) from continuing operations	$	(112.4)	$	96.4	$	(16.0)

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KAR Auction Services, Inc.

Condensed Notes to Consolidated Financial Statements (Continued)

September 30, 2022 (Unaudited)

Geographic Information

Our foreign operations include Canada, Mexico, Continental Europe and the U.K. Approximately 60% and 63% of our foreign operating revenues were from Canada for the three and nine months ended September 30, 2022, respectively, and approximately 56% and 55% of our foreign operating revenues were from Canada for the three and nine months ended September 30, 2021, respectively. Most of the remaining foreign operating revenues were generated from Continental Europe. Information regarding the geographic areas of our operations is set forth below (in millions):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Operating revenues
U.S.	$	264.3	$	199.6	$	744.1	$	638.4
Foreign	128.7		147.5		402.5		454.5
	$	393.0	$	347.1	$	1,146.6	$	1,092.9

Note 12—Subsequent Event

In October 2022, we repurchased and retired 3,909,406 shares of common stock in the open market at a weighted average price of $12.79 per share, aggregating $50 million, pursuant to the 2019 share repurchase program described in Note 3.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should," "may," "will," "can," "of the opinion," "confident," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "continues," "outlook," initiatives," "goals," "opportunities" and similar expressions identify forward-looking statements. Such statements, including statements regarding the potential impacts of the COVID-19 pandemic; our future growth; anticipated cost savings, revenue increases, credit losses and capital expenditures; contractual obligations; dividend declarations and payments; common stock repurchases; tax rates and assumptions; strategic initiatives, acquisitions and dispositions; our competitive position and retention of customers; and our continued investment in information technology, are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021, filed on February 23, 2022, and those described from time to time in our future reports filed with the Securities and Exchange Commission. Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.

Sale of ADESA U.S. Physical Auction Business and Discontinued Operations

In February 2022, the Company announced that it had entered into a definitive agreement with Carvana Group, LLC (“Carvana”) and Carvana Co., pursuant to which Carvana would acquire the ADESA U.S. physical auction business from KAR (the “Transaction”). The Transaction was completed in May 2022 for approximately $2.2 billion in cash and included all auction sales, operations and staff at ADESA’s U.S. vehicle logistic centers and use of the ADESA.com marketplace in the U.S. The net proceeds received in connection with the Transaction are included in "Net cash provided by investing activities - discontinued operations" in the consolidated statement of cash flow. In connection with the Transaction, the Company and Carvana entered into various agreements to provide a framework for their relationship after the Transaction, including a transition services agreement for a transitional period and a commercial agreement for a term of 7 years that provides for platform and other fees for services rendered. In addition, KAR will continue to own the ADESA tradename and the ADESA U.S. physical auctions will continue to utilize the tradename, which has an indefinite life.

The financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. The business was formerly included in the Company’s Marketplace reportable segment (formerly referenced as ADESA Auctions). Goodwill was allocated to the ADESA U.S. physical auctions based on relative fair value. Discontinued operations included transaction costs of approximately $37.1 million for the nine months ended September 30, 2022, in connection with the Transaction. These costs consisted of consulting and professional fees associated with the Transaction. The Transaction resulted in a pretax gain on disposal of approximately $521.8 million. The change in the pretax gain on disposal for the three months ended September 30, 2022 occurred as a result of a net working capital adjustment and additional transaction costs. The results presented in the "Results of Operations" discussion below only include continuing operations and do not include the results of the ADESA U.S. physical auction business.

Automotive Industry and Economic Impacts on our Business

The automotive industry has experienced unprecedented market conditions, caused in part by supply chain issues, the shortage of semiconductors and associated delays in new vehicle production. This reduction in supply of new vehicles has caused increased new and used vehicle prices, as well as increased demand for used vehicles. More lessees and dealers are therefore purchasing vehicles at residual value, thus decreasing the number of off-lease vehicles coming to auction. These factors have contributed to our commercial vehicle volumes declining in 2021 and 2022 and are expected to continue for the foreseeable future.

In addition, macroeconomic factors, including inflationary pressures, rising interest rates, volatility of oil and natural gas prices and declining consumer confidence impact the affordability and demand for new and used vehicles. Declining economic conditions present a risk to our operations and the stability of the automotive industry. Given the nature of these factors, we cannot predict whether or for how long certain trends will continue, nor to what degree these trends will impact us in the future.

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Overview

We provide whole car auction services in North America and Europe. Our business is divided into two reportable business segments, each of which is an integral part of the vehicle remarketing industry: Marketplace (formerly referenced as ADESA Auctions) and Finance (formerly referenced as AFC).

•The Marketplace segment serves a domestic and international customer base through digital marketplaces for wholesale vehicles and 14 vehicle logistics center locations across Canada that are developed and strategically located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Powered with software developed by Openlane, comprehensive private label remarketing solutions are offered to automobile manufacturers, captive finance companies and other institutions to offer vehicles via the Internet prior to arrival at on-premise marketplaces. Vehicles sold on our digital platforms are typically sold by commercial fleet operators, financial institutions, rental car companies, new and used vehicle dealers and vehicle manufacturers and their captive finance companies to franchise and independent used vehicle dealers. We also provide value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. Our digital marketplaces include BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized in the United States, CARWAVE, an online dealer-to-dealer marketplace in the United States, TradeRev, an online automotive remarketing platform in Canada where dealers can launch and participate in real-time vehicle auctions at any time, ADESA Remarketing Limited, an online whole car vehicle remarketing business in the United Kingdom and ADESA Europe, an online wholesale vehicle auction marketplace in Continental Europe.

•As noted above, the Marketplace segment results no longer include the 56 ADESA U.S. physical auction locations.

•Through AFC, the Finance segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers throughout the United States and Canada. In addition, AFC provides liquidity for customer trade-ins which encompasses settling lien holder payoffs. AFC also provides title services for their customers. These services are provided through AFC's digital servicing network as well as its physical locations throughout North America.

Beginning in the first quarter of 2022, results of the ADESA U.S. physical auctions are now reported as discontinued operations (see Note 2). Segment results for prior periods have been reclassified to conform with the new presentation.

Industry Trends

Whole Car

We believe the North American wholesale used vehicle marketplace has a total addressable market of approximately 22 million vehicles. This wholesale used vehicle marketplace consists of the dealer-to-dealer market (franchise and independent dealers that both buy and sell vehicles) and the commercial market (commercial sellers). We believe digital applications, such as BacklotCars, CARWAVE and TradeRev, may provide an opportunity to expand our total addressable market for dealer-to-dealer transactions to 15 million units from approximately 5 million units in 2019. Commercial seller vehicles are estimated at approximately 8 million vehicles per year.

BacklotCars, CARWAVE and TradeRev sold approximately 550,000 vehicles in the North American digital dealer-to-dealer marketplace for the year ended December 31, 2021, compared with approximately 398,000 vehicles for the year ended December 31, 2020. For the three months ended September 30, 2022 and 2021, vehicles sold by these companies in the North American digital dealer-to-dealer marketplace were approximately 121,000 and 143,000, respectively. For the nine months ended September 30, 2022 and 2021, vehicles sold by these companies in the North American digital dealer-to-dealer marketplace were approximately 380,000 and 415,000, respectively. This volume data includes vehicles sold by CARWAVE prior to its acquisition in October 2021 and vehicles sold by BacklotCars prior to its acquisition in November 2020. The supply chain issues and current market conditions facing the automotive industry, including the disruption of new vehicle production, have had a material impact on the whole car auction industry and we are unable to estimate future volumes.

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Automotive Finance

AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverage its local presence of branches and in-market representatives, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 14,500 dealers in 2021, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.4 million in 2021.

Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, access to consumer financing and increased used car retail activity of franchise and public dealerships (most of which do not utilize AFC or its competitors for floorplan financing). These same challenges, to the extent they occur, could result in a material negative impact on AFC's results of operations. A significant decline in used vehicle sales would result in a decrease in consumer auto loan originations and an increased number of dealers defaulting on their loans. In addition, volatility in wholesale vehicle pricing impacts the value of recovered collateral on defaulted loans and the resulting severity of credit losses at AFC. A decrease in wholesale used car pricing could lead to increased losses if dealers are unable to satisfy their obligations.

Seasonality

The volume of vehicles sold through our auctions generally fluctuates from quarter-to-quarter. This seasonality is caused by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affects the demand side of the auction industry. Used vehicle auction volumes tend to decline during prolonged periods of winter weather conditions. As a result, revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The fourth calendar quarter typically experiences lower used vehicle auction volume as well as additional costs associated with the holidays and winter weather.

Sources of Revenues and Expenses

Our revenue is derived from auction fees and various on-premise and off-premise services, and from dealer financing fees, interest income and other revenue at AFC. Although auction revenues primarily include the auction services and related fees, our related receivables and payables include the gross value of the vehicles sold.

Our operating expenses consist of cost of services, selling, general and administrative and depreciation and amortization. Cost of services is composed of payroll and related costs, subcontract services, the cost of vehicles purchased, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites and loan offices. Cost of services excludes depreciation and amortization. Selling, general and administrative expenses are composed of payroll and related costs, sales and marketing, information technology services and professional fees.

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Results of Operations

Overview of Results of KAR Auction Services, Inc. for the Three Months Ended September 30, 2022 and 2021:


	Three Months Ended September 30,
(Dollars in millions except per share amounts)	2022		2021
Revenues from continuing operations
Auction fees	$	88.9	$	89.6
Service revenue	159.2		128.2
Purchased vehicle sales	45.8		53.7
Finance-related revenue	99.1		75.6
Total revenues from continuing operations	393.0		347.1
Cost of services*	209.6		185.7
Gross profit*	183.4		161.4
Selling, general and administrative	109.1		104.8
Depreciation and amortization	24.3		27.4
Operating profit	50.0		29.2
Interest expense	32.3		31.9
Other (income) expense, net	1.2		13.9
Loss on extinguishment of debt	9.3		—
Income (loss) from continuing operations before income taxes	7.2		(16.6)
Income taxes	6.7		10.3
Income (loss) from continuing operations	0.5		(26.9)
Income (loss) from discontinued operations, net of income taxes	(6.3)		25.9
Net income (loss)	$	(5.8)	$	(1.0)
Income (loss) from continuing operations per share
Basic	$	(0.09)	$	(0.31)
Diluted	$	(0.09)	$	(0.31)

* Exclusive of depreciation and amortization

Discontinued Operations

The financial performance of the ADESA U.S. physical auction business is presented as discontinued operations. As a result, revenue, cost of services and all costs of discontinued operations (including the gain on sale) are presented as one line item in the above table as "Income (loss) from discontinued operations, net of income taxes."

Overview

For the three months ended September 30, 2022, we had revenue of $393.0 million compared with revenue of $347.1 million for the three months ended September 30, 2021, an increase of 13%. Businesses acquired in the last 12 months accounted for an increase in revenue of $15.2 million or 4% of revenue. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.

Depreciation and Amortization

Depreciation and amortization decreased $3.1 million, or 11%, to $24.3 million for the three months ended September 30, 2022, compared with $27.4 million for the three months ended September 30, 2021. The decrease in depreciation and amortization was primarily the result of assets that have become fully depreciated and a reduction in assets placed in service.

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Interest Expense

Interest expense increased $0.4 million, or 1%, to $32.3 million for the three months ended September 30, 2022, compared with $31.9 million for the three months ended September 30, 2021. The increase was attributable to an increase in the average balance on the AFC securitization obligations and an increase in the average interest rate on the AFC securitization obligations to approximately 4.7% for the three months ended September 30, 2022, as compared with approximately 2.5% for the three months ended September 30, 2021. This was partially offset by a decrease in interest expense resulting from the prepayment of Term Loan B-6 and $600 million of the senior notes.

Other (Income) Expense, Net

For the three months ended September 30, 2022, we had other expense of $1.2 million compared with $13.9 million for the three months ended September 30, 2021. The decrease in other expense was primarily attributable to a decrease in unrealized losses on investment securities of approximately $20.6 million, a decrease in contingent consideration valuation adjustments of $4.4 million and an increase in other miscellaneous income aggregating $1.7 million, partially offset by a reduction in realized gains of approximately $10.0 million and an increase in foreign currency losses of $4.0 million.

The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. There were no realized gains on these investments for the three months ended September 30, 2022. The Company had unrealized losses of $0.3 million for the three months ended September 30, 2022. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.

Income Taxes

We had an effective tax rate of 93.1% for the three months ended September 30, 2022, compared with an effective tax rate of -62.0% resulting in expense on a pre-tax loss for the three months ended September 30, 2021. The effective tax rate for the three months ended September 30, 2022 was unfavorably impacted by the change in the effective tax rate estimate for the year, driven by an anticipated land sale that drove a decrease in the tax rate applicable to our international tax operations. The effective tax rate for the three months ended September 30, 2021 was unfavorably impacted by the expense for the increase in the estimated value of contingent consideration for which no tax benefit has been recorded.

Income from Discontinued Operations

In May 2022, Carvana acquired the ADESA U.S. physical auction business from KAR. As such, the financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the three months ended September 30, 2022, the Company's financial statements included a loss from discontinued operations of $6.3 million. For the three months ended September 30, 2021, the Company's financial statements included income from discontinued operations of $25.9 million. For further discussion, reference the condensed notes to the consolidated financial statements.

Impact of Foreign Currency

For the three months ended September 30, 2022 compared with the three months ended September 30, 2021, the change in the euro exchange rate decreased revenue by $8.4 million, operating profit by $0.3 million and net income by $0.3 million. For the three months ended September 30, 2022 compared with the three months ended September 30, 2021, the change in the Canadian exchange rate decreased revenue by $2.8 million, operating profit by $0.7 million and net income by $0.5 million.

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Marketplace Results


	Three Months Ended September 30,
(Dollars in millions, except per vehicle amounts)	2022		2021
Auction fees	$	88.9	$	89.6
Service revenue	159.2		128.2
Purchased vehicle sales	45.8		53.7
Total Marketplace revenue from continuing operations	293.9		271.5
Cost of services*	193.4		171.9
Gross profit*	100.5		99.6
Selling, general and administrative	96.9		96.3
Depreciation and amortization	22.4		25.2
Operating profit (loss)	$	(18.8)	$	(21.9)
Commercial vehicles sold	159,000		192,000
Dealer consignment vehicles sold	155,000		165,000
Total vehicles sold	314,000		357,000
Auction fees per vehicle sold	$	283	$	252
Gross profit per vehicle sold*	$	320	$	280
Gross profit percentage, excluding purchased vehicles*	40.5%		45.7%
On-premise mix	13%		16%
Off-premise mix	87%		84%

* Exclusive of depreciation and amortization

Revenue

Revenue from the Marketplace segment increased $22.4 million, or 8%, to $293.9 million for the three months ended September 30, 2022, compared with $271.5 million for the three months ended September 30, 2021. The increase in revenue was the result of an increase in average revenue per vehicle sold, partially offset by a decrease in the number of vehicles sold. Businesses acquired in the last 12 months accounted for an increase in revenue of $15.2 million. The change in revenue included the impact of decreases in revenue of $8.4 million and $2.4 million due to fluctuations in the euro exchange rate and the Canadian exchange rate, respectively.

On-premise marketplace sales are initiated online for vehicles at any of our locations across Canada and include ADESA Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and include Openlane, BacklotCars, CARWAVE, TradeRev and ADESA Europe sales. The 12% decrease in the number of vehicles sold was comprised of a 17% decline in commercial volumes and a 6% decrease in dealer consignment volumes.

Auction fees per vehicle sold for the three months ended September 30, 2022 increased $31, or 12%, reflecting higher vehicle values, the introduction of new dealer off-premise auction fees and a smaller mix of lower-fee commercial off-premise vehicles.

Service revenue for the three months ended September 30, 2022 increased $31.0 million, or 24%, primarily as a result of an increase in transportation revenue, repossession fees and platform fees provided by third-parties, partially offset by a decrease in inspection service revenue resulting from the decrease in commercial vehicles sold.

Gross Profit

For the three months ended September 30, 2022, gross profit for the Marketplace segment increased $0.9 million, or 1%, to $100.5 million, compared with $99.6 million for the three months ended September 30, 2021. Gross profit for the Marketplace segment was 34.2% of revenue for the three months ended September 30, 2022, compared with 36.7% of revenue for the three months ended September 30, 2021. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 40.5% and 45.7% for the three months ended September 30, 2022 and 2021, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Businesses acquired in the last 12 months accounted for an increase in cost of services of $9.7 million for the three months ended September 30, 2022.

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Gross profit as a percentage of revenue decreased for the three months ended September 30, 2022 as compared with the three months ended September 30, 2021, primarily due to an increase in lower margin transportation revenue and an increase in arbitration costs for vehicles sold on dealer-to-dealer platforms, as well as a decrease in on-premise auction revenue in Canada without a corresponding decrease in direct costs.

Selling, General and Administrative

Selling, general and administrative expenses for the Marketplace segment increased $0.6 million, or 1%, to $96.9 million for the three months ended September 30, 2022, compared with $96.3 million for the three months ended September 30, 2021, primarily as a result of increases in selling, general and administrative expenses associated with acquisitions of $4.1 million, information technology costs of $2.0 million, professional fees of $1.9 million and incentive-based compensation of $1.7 million, partially offset by decreases in compensation expense of $2.4 million, medical expenses of $1.9 million, fluctuations in the Canadian exchange rate of $0.7 million and reductions in other miscellaneous expenses aggregating $4.1 million.

Finance Results


	Three Months Ended September 30,
(Dollars in millions except volumes and per loan amounts)	2022		2021
Finance-related revenue
Interest income	$	53.4	$	35.4
Fee income	44.3		35.8
Other revenue	2.9		2.2
Net recovery (provision) for credit losses	(1.5)		2.2
Total Finance revenue	99.1		75.6
Cost of services*	16.2		13.8
Gross profit*	82.9		61.8
Selling, general and administrative	12.2		8.5
Depreciation and amortization	1.9		2.2
Operating profit	$	68.8	$	51.1
Loan transactions	397,000		351,000
Revenue per loan transaction	$	250	$	215

* Exclusive of depreciation and amortization

Revenue

For the three months ended September 30, 2022, the Finance segment revenue increased $23.5 million, or 31%, to $99.1 million, compared with $75.6 million for the three months ended September 30, 2021. The increase in revenue was primarily the result of a 16% increase in revenue per loan transaction and a 13% increase in loan transactions.

Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $35, or 16%, primarily as a result of an increase in interest yields driven by an increase in prime rates (Federal Reserve raised interest rates 150 basis points in the third quarter), an increase in average portfolio duration, an increase in floorplan fees and other fee income per unit and an increase in loan values, partially offset by an increase in net credit losses.

The provision for credit losses increased to 0.2% of the average managed receivables for the three months ended September 30, 2022 from (0.4%) for the three months ended September 30, 2021.

Gross Profit

For the three months ended September 30, 2022, gross profit for the Finance segment increased $21.1 million, or 34%, to $82.9 million, or 83.7% of revenue, compared with $61.8 million, or 81.7% of revenue, for the three months ended September 30, 2021. The increase in gross profit as a percent of revenue was primarily the result of a 31% increase in revenue, partially offset by an 17% increase in cost of services. The increase in cost of services was primarily the result of increases in compensation expense of $1.1 million, incentive-based compensation of $0.7 million and lot check expenses of $0.6 million.

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Selling, General and Administrative

Selling, general and administrative expenses for the Finance segment increased $3.7 million, or 44%, to $12.2 million for the three months ended September 30, 2022, compared with $8.5 million for the three months ended September 30, 2021 primarily as a result of increases in incentive-based compensation of $0.8 million, information technology costs of $0.6 million, professional fees of $0.4 million, compensation expense of $0.4 million and other miscellaneous expenses aggregating $1.5 million.

Overview of Results of KAR Auction Services, Inc. for the Nine Months Ended September 30, 2022 and 2021:


	Nine Months Ended September 30,
(Dollars in millions except per share amounts)	2022		2021
Revenues from continuing operations
Auction fees	$	289.5	$	298.4
Service revenue	444.0		415.5
Purchased vehicle sales	137.9		169.0
Finance-related revenue	275.2		210.0
Total revenues from continuing operations	1,146.6		1,092.9
Cost of services*	632.3		598.3
Gross profit*	514.3		494.6
Selling, general and administrative	352.1		318.5
Depreciation and amortization	76.2		81.7
Operating profit	86.0		94.4
Interest expense	83.8		93.7
Other (income) expense, net	6.4		(20.5)
Loss on extinguishment of debt	17.0		—
Income (loss) from continuing operations before income taxes	(21.2)		21.2
Income taxes	(7.9)		37.2
Income (loss) from continuing operations	(13.3)		(16.0)
Income from discontinued operations, net of income taxes	217.4		77.4
Net income	$	204.1	$	61.4
Income (loss) from continuing operations per share
Basic	$	(0.30)	$	(0.30)
Diluted	$	(0.30)	$	(0.30)

* Exclusive of depreciation and amortization

Discontinued Operations

The financial performance of the ADESA U.S. physical auction business is presented as discontinued operations. As a result, revenue, cost of services and all costs of discontinued operations (including the gain on sale) are presented as one line item in the above table as "Income from discontinued operations, net of income taxes."

Overview

For the nine months ended September 30, 2022, we had revenue of $1,146.6 million compared with revenue of $1,092.9 million for the nine months ended September 30, 2021, an increase of 5%. Businesses acquired in the last 12 months accounted for an increase in revenue of $49.8 million or 4% of revenue. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.

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Depreciation and Amortization

Depreciation and amortization decreased $5.5 million, or 7%, to $76.2 million for the nine months ended September 30, 2022, compared with $81.7 million for the nine months ended September 30, 2021. The decrease in depreciation and amortization was primarily the result of assets that have become fully depreciated and a reduction in assets placed in service.

Interest Expense

Interest expense decreased $9.9 million, or 11%, to $83.8 million for the nine months ended September 30, 2022, compared with $93.7 million for the nine months ended September 30, 2021. The decrease was primarily attributable to a realized gain of $16.7 million related to the discontinuance of hedge accounting and termination of the interest rate swaps, as well as the prepayment of Term Loan B-6 and prepayment of $600 million of senior notes, partially offset by an increase in AFC interest. The average balance on the AFC securitization obligations increased and the average interest rate on the AFC securitization obligations increased to approximately 3.4% for the nine months ended September 30, 2022, as compared with approximately 2.4% for the nine months ended September 30, 2021.

Other (Income) Expense, Net

For the nine months ended September 30, 2022, we had other expense of $6.4 million compared with other income of $20.5 million for the nine months ended September 30, 2021. The increase in other expense was primarily attributable to unrealized losses on investment securities of approximately $6.5 million for the nine months ended September 30, 2022, compared with unrealized gains on investment securities of approximately $10.7 million for the nine months ended September 30, 2021, as well as a reduction in realized gains of approximately $27.2 million and an increase in foreign currency losses of $5.9 million, partially offset by a decrease in contingent consideration valuation adjustments of $20.1 million and a decrease in other miscellaneous items aggregating $3.3 million.

The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. There were no realized gains on these investments for the nine months ended September 30, 2022. The Company had unrealized losses of $6.5 million for the nine months ended September 30, 2022. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.

Income Taxes

We had an effective tax rate of 37.3% resulting in a benefit on a pre-tax loss for the nine months ended September 30, 2022, compared with an effective tax rate of 175.5% for the nine months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was favorably impacted by the state rate change impact on deferred taxes. The effective tax rate for the nine months ended September 30, 2021 was unfavorably impacted by the expense for the increase in the estimated value of contingent consideration for which no tax benefit has been recorded.

Income from Discontinued Operations

In May 2022, Carvana acquired the ADESA U.S. physical auction business from KAR. As such, the financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the nine months ended September 30, 2022 and 2021, the Company's financial statements included income from discontinued operations of $217.4 million and $77.4 million, respectively. For further discussion, reference the condensed notes to the consolidated financial statements.

Impact of Foreign Currency

For the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021, the change in the euro exchange rate decreased revenue by $18.1 million, operating profit by $0.6 million and net income by $0.3 million. For the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021, the change in the Canadian exchange rate decreased revenue by $6.3 million, operating profit by $1.6 million and net income by $1.1 million.

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Marketplace Results


	Nine Months Ended September 30,
(Dollars in millions, except per vehicle amounts)	2022		2021
Auction fees	$	289.5	$	298.4
Service revenue	444.0		415.5
Purchased vehicle sales	137.9		169.0
Total Marketplace revenue from continuing operations	871.4		882.9
Cost of services*	584.9		557.3
Gross profit*	286.5		325.6
Selling, general and administrative	315.8		292.4
Depreciation and amortization	70.1		74.6
Operating profit (loss)	$	(99.4)	$	(41.4)
Commercial vehicles sold	510,000		786,000
Dealer consignment vehicles sold	498,000		471,000
Total vehicles sold	1,008,000		1,257,000
Auction fees per vehicle sold	$	287	$	237
Gross profit per vehicle sold*	$	284	$	259
Gross profit percentage, excluding purchased vehicles*	39.1%		45.6%
On-premise mix	13%		14%
Off-premise mix	87%		86%

* Exclusive of depreciation and amortization

Revenue

Revenue from the Marketplace segment decreased $11.5 million, or 1%, to $871.4 million for the nine months ended September 30, 2022, compared with $882.9 million for the nine months ended September 30, 2021. The decrease in revenue was the result of a decrease in the number of vehicles sold, partially offset by an increase in average revenue per vehicle sold. Businesses acquired in the last 12 months accounted for an increase in revenue of $49.8 million. The change in revenue included the impact of decreases in revenue of $18.1 million and $5.6 million due to fluctuations in the euro exchange rate and the Canadian exchange rate, respectively.

On-premise marketplace sales are initiated online for vehicles at any of our locations across Canada and include ADESA Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and include Openlane, BacklotCars, CARWAVE, TradeRev and ADESA Europe sales. The 20% decrease in the number of vehicles sold was comprised of a 35% decline in commercial volumes, partially offset by a 6% increase in dealer consignment volumes.

Auction fees per vehicle sold for the nine months ended September 30, 2022 increased $50, or 21%, reflecting higher vehicle values, the introduction of new dealer off-premise auction fees and a smaller mix of lower-fee commercial off-premise vehicles.

Service revenue for the nine months ended September 30, 2022 increased $28.5 million, or 7%, primarily as a result of an increase in repossession fees, platform fees provided by third-parties and transportation revenue, partially offset by a decrease in inspection service revenue resulting from the decrease in commercial vehicles sold.

Gross Profit

For the nine months ended September 30, 2022, gross profit for the Marketplace segment decreased $39.1 million, or 12%, to $286.5 million, compared with $325.6 million for the nine months ended September 30, 2021. Cost of services increased 5% for the nine months ended September 30, 2022, while revenue decreased 1% during the same period. Gross profit for the Marketplace segment was 32.9% of revenue for the nine months ended September 30, 2022, compared with 36.9% of revenue for the nine months ended September 30, 2021. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 39.1% and 45.6% for the nine months ended September 30, 2022 and 2021, respectively. The entire selling and purchase price

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of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Businesses acquired in the last 12 months accounted for an increase in cost of services of $28.8 million for the nine months ended September 30, 2022.

Gross profit as a percentage of revenue decreased for the nine months ended September 30, 2022 as compared with the nine months ended September 30, 2021, primarily due to an increase in arbitration costs for vehicles sold on dealer-to-dealer platforms, an increase in lower margin transportation revenue, as well as a decrease in on-premise auction revenue in Canada without a corresponding decrease in direct costs. In addition, there were no benefits taken under the Canada Emergency Wage Subsidy in the first nine months of 2022, resulting in a reduction to gross profit as a percentage of revenue.

Selling, General and Administrative

Selling, general and administrative expenses for the Marketplace segment increased $23.4 million, or 8%, to $315.8 million for the nine months ended September 30, 2022, compared with $292.4 million for the nine months ended September 30, 2021, primarily as a result of increases in selling, general and administrative expenses associated with acquisitions of $12.3 million, professional fees of $8.8 million, stock-based compensation of $7.9 million, bad debt expense of $4.1 million, severance of $3.3 million and travel expenses of $1.6 million, partially offset by decreases in medical expenses of $2.6 million, incentive-based compensation of $1.8 million, fluctuations in the Canadian exchange rate of $1.5 million, compensation expense of $1.3 million, telecom expenses of $1.0 million and reductions in other miscellaneous expenses aggregating $8.5 million. In addition, the Employee Retention Credit provided under the Canada Emergency Wage Subsidy was $2.1 million less for the nine months ended September 30, 2022, compared with the nine months ended September 30, 2021.

Finance Results


	Nine Months Ended September 30,
(Dollars in millions except volumes and per loan amounts)	2022		2021
Finance-related revenue
Interest income	$	143.1	$	100.0
Fee income	127.2		108.0
Other revenue	7.7		6.4
Provision for credit losses	(2.8)		(4.4)
Total Finance revenue	275.2		210.0
Cost of services*	47.4		41.0
Gross profit*	227.8		169.0
Selling, general and administrative	36.3		26.1
Depreciation and amortization	6.1		7.1
Operating profit	$	185.4	$	135.8
Loan transactions	1,170,000		1,079,000
Revenue per loan transaction	$	235	$	195

* Exclusive of depreciation and amortization

Revenue

For the nine months ended September 30, 2022, the Finance segment revenue increased $65.2 million, or 31%, to $275.2 million, compared with $210.0 million for the nine months ended September 30, 2021. The increase in revenue was primarily the result of a 21% increase in revenue per loan transaction and an 8% increase in loan transactions.

Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $40, or 21%, primarily as a result of an increase in loan values, an increase in interest yields driven by an increase in prime rates (Federal Reserve raised interest rates 300 basis points in the first nine months of 2022), an increase in floorplan fees and other fee income per unit and a decrease in provision for credit losses for the nine months ended September 30, 2022.

The provision for credit losses decreased to 0.1% of the average managed receivables for the nine months ended September 30, 2022 from 0.3% for the nine months ended September 30, 2021.

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Gross Profit

For the nine months ended September 30, 2022, gross profit for the Finance segment increased $58.8 million, or 35%, to $227.8 million, or 82.8% of revenue, compared with $169.0 million, or 80.5% of revenue, for the nine months ended September 30, 2021. The increase in gross profit as a percent of revenue was primarily the result of a 31% increase in revenue, partially offset by a 16% increase in cost of services. The increase in cost of services was primarily the result of increases in compensation expense of $2.6 million, incentive-based compensation of $2.0 million, lot check expenses of $1.3 million and credit check expenses of $0.5 million.

Selling, General and Administrative

Selling, general and administrative expenses for the Finance segment increased $10.2 million, or 39%, to $36.3 million for the nine months ended September 30, 2022, compared with $26.1 million for the nine months ended September 30, 2021 primarily as a result of increases in stock-based compensation of $2.5 million, compensation expense of $1.8 million, professional fees of $1.7 million, incentive-based compensation of $1.3 million, information technology costs of $0.9 million and other miscellaneous expenses aggregating $2.0 million.

LIQUIDITY AND CAPITAL RESOURCES

We believe that the significant indicators of liquidity for our business are cash on hand, cash flow from operations, working capital and amounts available under our Credit Facility. Our principal sources of liquidity consist of cash generated by operations and borrowings under our Revolving Credit Facility.


	September 30,		December 31,		September 30,
(Dollars in millions)	2022		2021		2021
Cash and cash equivalents	$	148.7	$	177.6	$	606.6
Restricted cash	28.9		25.8		52.4
Working capital	382.5		382.5		771.5
Amounts available under the Revolving Credit Facility*	209.0		325.0		325.0
Cash provided by operating activities for the nine months ended	13.5				213.1

* There were related outstanding letters of credit totaling approximately $19.0 million, $27.6 million and $27.6 million at September 30, 2022, December 31, 2021 and September 30, 2021, respectively, which reduced the amount available for borrowings under the Revolving Credit Facility.

We regularly evaluate alternatives for our capital structure and liquidity given our expected cash flows, growth and operating capital requirements as well as capital market conditions.

Working Capital

A substantial amount of our working capital is generated from the payments received for services provided. The majority of our working capital needs are short-term in nature, usually less than a week in duration. Most of the financial institutions place a temporary hold on the availability of the funds deposited that generally can range up to two business days, resulting in cash in our accounts and on our balance sheet that is unavailable for use until it is made available by the various financial institutions. There are outstanding checks (book overdrafts) to sellers and vendors included in current liabilities. Because a portion of these outstanding checks for operations in the U.S. are drawn upon bank accounts at financial institutions other than the financial institutions that hold the cash, we cannot offset all the cash and the outstanding checks on our balance sheet. Changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from auctions held near period end.

Approximately $121.8 million of available cash was held by our foreign subsidiaries at September 30, 2022. If funds held by our foreign subsidiaries were to be repatriated, we expect any applicable taxes to be minimal.

AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 90 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."

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Credit Facilities

The Revolving Credit Facility, with a maturity date of September 19, 2024, is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline loans.

As set forth in the Credit Agreement, loans under the Revolving Credit Facility will bear interest at a rate calculated based on the type of borrowing (either adjusted LIBOR or Base Rate) and the Company’s Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), with such rate ranging from 2.25% to 1.75% for adjusted LIBOR loans and from 1.25% to 0.75% for Base Rate loans. The Company also pays a commitment fee between 25 to 35 basis points, payable quarterly, on the average daily unused amount of the Revolving Credit Facility based on the Company’s Consolidated Senior Secured Net Leverage Ratio, from time to time.

As of September 30, 2022, $116.0 million was drawn on the Revolving Credit Facility. We had related outstanding letters of credit in the aggregate amount of $19.0 million and $27.6 million at September 30, 2022 and December 31, 2021, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility. Our European operations have lines of credit aggregating $29.4 million (€30 million) of which $17.6 million was drawn at September 30, 2022.

Certain covenants contained within the Credit Agreement are critical to an investor’s understanding of our financial liquidity, as the failure to maintain compliance with these covenants could result in a default and allow the lenders under the Credit Agreement to declare all amounts borrowed immediately due and payable. The Credit Agreement contains a financial covenant requiring compliance with a Consolidated Senior Secured Net Leverage Ratio not to exceed 3.5 as of the last day of each fiscal quarter if revolving loans are outstanding. The Consolidated Senior Secured Net Leverage Ratio is calculated as consolidated total debt (as defined in the Credit Agreement) divided by the last four quarters consolidated Adjusted EBITDA. Consolidated total debt includes term loan borrowings, revolving loans, finance lease liabilities and other obligations for borrowed money less unrestricted cash as defined in the Credit Agreement. Consolidated Adjusted EBITDA is EBITDA (earnings before interest expense, income taxes, depreciation and amortization) adjusted to exclude among other things (a) gains and losses from asset sales; (b) unrealized foreign currency translation gains and losses in respect of indebtedness; (c) certain non-recurring gains and losses; (d) stock-based compensation expense; (e) certain other non-cash amounts included in the determination of net income; (f) charges and revenue reductions resulting from purchase accounting; (g) minority interest; (h) consulting expenses incurred for cost reduction, operating restructuring and business improvement efforts; (i) expenses realized upon the termination of employees and the termination or cancellation of leases, software licenses or other contracts in connection with the operational restructuring and business improvement efforts; (j) expenses incurred in connection with permitted acquisitions; (k) any impairment charges or write-offs of intangibles; and (l) any extraordinary, unusual or non-recurring charges, expenses or losses. Our Consolidated Senior Secured Net Leverage Ratio was negative at September 30, 2022.

In addition, the Credit Agreement and the indenture governing our senior notes (see Note 6, "Long-Term Debt" for additional information) contain certain limitations on our ability to pay dividends and other distributions, make certain acquisitions or investments, grant liens and sell assets, and the Credit Agreement contains certain limitations on our ability to incur indebtedness. The applicable covenants in the Credit Agreement affect our operating flexibility by, among other things, restricting our ability to incur expenses and indebtedness that could be used to grow the business, as well as to fund general corporate purposes. We were in compliance with the covenants in the Credit Agreement and the indenture governing our senior notes at September 30, 2022.

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Senior Notes

On May 31, 2017, we issued $950 million of 5.125% senior notes due June 1, 2025. The Company pays interest on the senior notes semi-annually in arrears on June 1 and December 1 of each year. The senior notes may be redeemed at 101.281% currently and at par as of June 1, 2023. The senior notes are guaranteed by the Subsidiary Guarantors. In August 2022, we conducted a cash tender offer to purchase up to $600 million principal amount of the senior notes. The tender offer was oversubscribed and as such, $600 million of the senior notes were accepted for prepayment and were prepaid in August 2022 with proceeds from the Transaction. We incurred a loss on the extinguishment of the senior notes of $9.3 million in the third quarter of 2022 primarily representative of the early repayment premium and the write-off of unamortized debt issuance costs associated with the portion of the senior notes repaid.

Expected Use of Proceeds from the Transaction

The Company generated gross proceeds from the sale of the U.S. physical auction business of approximately $2.2 billion. The Transaction closed in May 2022. Under terms of the Credit Agreement, net cash proceeds from the Transaction were used to repay Term Loan B-6 within three days of the Transaction. The Company also prepaid $600 million of the senior notes in August 2022. The terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. Therefore, at September 30, 2022, $150.0 million of the remaining senior notes are classified as current debt. The Company is required to redeem or repay the current portion of senior notes by May 9, 2023, subject to the terms of the indenture governing our senior notes.

Liquidity

At September 30, 2022, $150.0 million of the remaining senior notes are classified as current debt, as the terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. As of September 30, 2022, $116.0 million was drawn on the Revolving Credit Facility and is classified as current debt based on the Company’s past practice of using the Revolving Credit Facility for short term borrowings. However, the terms of the Revolving Credit Facility do not require repayment until maturity at September 19, 2024.

At September 30, 2022, cash totaled $148.7 million and there was an additional $190.0 million available for borrowing under the Revolving Credit Facility (net of $19.0 million in outstanding letters of credit). Funds held by our foreign subsidiaries could be repatriated without significant taxes or penalties.

We believe our sources of liquidity from our cash and cash equivalents on hand, working capital, cash provided by operating activities, and availability under our Credit Facility are sufficient to meet our operating needs for the foreseeable future. In addition, we believe the previously mentioned sources of liquidity will be sufficient to fund our capital requirements and debt service payments for the foreseeable future. A lack of recovery in market conditions, or further deterioration in market conditions, could materially affect the Company's liquidity.

Securitization Facilities

AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to AFC Funding Corporation. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires on January 31, 2026. AFC Funding Corporation had committed liquidity of $2.0 billion for U.S. finance receivables at September 30, 2022.

We also have an agreement for the securitization of AFCI's receivables, which expires on January 31, 2026. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$225 million at September 30, 2022. In September 2022, AFCI entered into the Sixth Amended and Restated Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement"). The Canadian Receivables Purchase Agreement extended the facility's maturity date from January 31, 2024 to January 31, 2026. In addition, provisions designed to provide additional lending and operational flexibility were modified or added. We capitalized approximately $1.1 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.

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AFC managed total finance receivables of $2,555.1 million and $2,529.0 million at September 30, 2022 and December 31, 2021, respectively. AFC's allowance for losses was $21.5 million and $23.0 million at September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, $2,529.1 million and $2,482.2 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the $1,707.8 million and $1,692.3 million of obligations collateralized by finance receivables at September 30, 2022 and December 31, 2021, respectively. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. There were unamortized securitization issuance costs of approximately $20.9 million and $15.1 million at September 30, 2022 and December 31, 2021, respectively. After the occurrence of a termination event, as defined in the U.S. securitization agreement, the banks may, and could, cause the stock of AFC Funding Corporation to be transferred to the bank facility, though as a practical matter the bank facility would look to the liquidation of the receivables under the transaction documents as their primary remedy.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA, as presented herein, are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States, or GAAP. They are not measurements of our financial performance under GAAP and should not be considered substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.

EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings, as described above in the discussion of certain restrictive loan covenants under "Credit Facilities."

Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.

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The following tables reconcile EBITDA and Adjusted EBITDA to income (loss) from continuing operations for the periods presented:


	Three Months Ended September 30, 2022
(Dollars in millions)	Marketplace		Finance		Consolidated
Income (loss) from continuing operations	$	(35.8)	$	36.3	$	0.5
Add back:
Income taxes	(5.6)		12.3		6.7
Interest expense, net of interest income	8.6		22.3		30.9
Depreciation and amortization	22.4		1.9		24.3
Intercompany interest	2.4		(2.4)		—
EBITDA	(8.0)		70.4		62.4
Non-cash stock-based compensation	2.8		0.7		3.5
Loss on extinguishment of debt	9.3		—		9.3
Acquisition related costs	0.3		—		0.3
Securitization interest	—		(20.2)		(20.2)
Severance	1.4		0.1		1.5
Foreign currency (gains)/losses	4.1		—		4.1
Net change in unrealized (gains) losses on investment securities	—		0.3		0.3
Professional fees related to business improvement efforts	2.7		0.5		3.2
Other	5.1		—		5.1
Total addbacks/(deductions)	25.7		(18.6)		7.1
Adjusted EBITDA	$	17.7	$	51.8	$	69.5


	Three Months Ended September 30, 2021
(Dollars in millions)	Marketplace		Finance		Consolidated
Income (loss) from continuing operations	$	(49.9)	$	23.0	$	(26.9)
Add back:
Income taxes	3.4		6.9		10.3
Interest expense, net of interest income	21.4		10.3		31.7
Depreciation and amortization	25.2		2.2		27.4
Intercompany interest	—		—		—
EBITDA	0.1		42.4		42.5
Non-cash stock-based compensation	3.0		0.6		3.6
Acquisition related costs	2.1		—		2.1
Securitization interest	—		(7.9)		(7.9)
Severance	0.8		—		0.8
Foreign currency (gains)/losses	0.1		—		0.1
Contingent consideration adjustment	4.4		—		4.4
Net change in unrealized (gains) losses on investment securities	—		20.9		20.9
Other	0.1		—		0.1
Total addbacks/(deductions)	10.5		13.6		24.1
Adjusted EBITDA	$	10.6	$	56.0	$	66.6

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	Nine Months Ended September 30, 2022
(Dollars in millions)	Marketplace		Finance		Consolidated
Income (loss) from continuing operations	$	(111.5)	$	98.2	$	(13.3)
Add back:
Income taxes	(40.9)		33.0		(7.9)
Interest expense, net of interest income	30.8		50.8		81.6
Depreciation and amortization	70.1		6.1		76.2
Intercompany interest	3.1		(3.1)		—
EBITDA	(48.4)		185.0		136.6
Non-cash stock-based compensation	18.9		4.3		23.2
Loss on extinguishment of debt	17.0		—		17.0
Acquisition related costs	0.9		—		0.9
Securitization interest	—		(44.9)		(44.9)
(Gain)/Loss on asset sales	(0.1)		—		(0.1)
Severance	7.7		0.5		8.2
Foreign currency (gains)/losses	8.6		—		8.6
Net change in unrealized (gains) losses on investment securities	—		6.5		6.5
Professional fees related to business improvement efforts	10.7		1.4		12.1
Other	6.4		0.2		6.6
Total addbacks/(deductions)	70.1		(32.0)		38.1
Adjusted EBITDA	$	21.7	$	153.0	$	174.7


	Nine Months Ended September 30, 2021
(Dollars in millions)	Marketplace		Finance		Consolidated
Income (loss) from continuing operations	$	(112.4)	$	96.4	$	(16.0)
Add back:
Income taxes	5.1		32.1		37.2
Interest expense, net of interest income	64.1		29.0		93.1
Depreciation and amortization	74.6		7.1		81.7
Intercompany interest	0.2		(0.2)		—
EBITDA	31.6		164.4		196.0
Non-cash stock-based compensation	11.1		1.9		13.0
Acquisition related costs	5.0		—		5.0
Securitization interest	—		(21.5)		(21.5)
(Gain)/Loss on asset sales	—		(0.8)		(0.8)
Severance	1.6		0.2		1.8
Foreign currency (gains)/losses	2.7		—		2.7
Contingent consideration adjustment	20.1		—		20.1
Net change in unrealized (gains) losses on investment securities	—		(10.7)		(10.7)
Other	0.5		(0.2)		0.3
Total addbacks/(deductions)	41.0		(31.1)		9.9
Adjusted EBITDA	$	72.6	$	133.3	$	205.9

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Certain of our loan covenant calculations utilize financial results for the most recent four consecutive fiscal quarters (total KAR results, including the ADESA U.S. physical auctions shown as discontinued operations). The following table reconciles EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:


	Three Months Ended								Twelve Months Ended
(Dollars in millions)	December 31, 2021		March 31, 2022		June 30, 2022		September 30, 2022		September 30, 2022
Net income (loss)	$	5.1	$	(0.3)	$	210.2	$	(5.8)	$	209.2
Less: Income from discontinued operations	(10.1)		8.1		215.6		(6.3)		207.3
Income (loss) from continuing operations	15.2		(8.4)		(5.4)		0.5		1.9
Add back:
Income taxes	(22.1)		(4.7)		(9.9)		6.7		(30.0)
Interest expense, net of interest income	31.7		25.5		25.2		30.9		113.3
Depreciation and amortization	28.2		26.0		25.9		24.3		104.4
EBITDA	53.0		38.4		35.8		62.4		189.6
Non-cash stock-based compensation	1.3		5.2		14.5		3.5		24.5
Loss on extinguishment of debt	—		—		7.7		9.3		17.0
Acquisition related costs	2.1		0.3		0.3		0.3		3.0
Securitization interest	(8.3)		(10.4)		(14.3)		(20.2)		(53.2)
(Gain)/Loss on asset sales	0.1		(0.1)		—		—		—
Severance	1.5		3.4		3.3		1.5		9.7
Foreign currency (gains)/losses	1.1		1.2		3.3		4.1		9.7
Contingent consideration adjustment	4.2		—		—		—		4.2
Net change in unrealized (gains) losses on investment securities	9.3		3.0		3.2		0.3		15.8
Professional fees related to business improvement efforts	—		8.1		0.8		3.2		12.1
Other	—		—		1.5		5.1		6.6
Total addbacks/(deductions)	11.3		10.7		20.3		7.1		49.4
Adjusted EBITDA from continuing ops	$	64.3	$	49.1	$	56.1	$	69.5	$	239.0
Adjusted EBITDA from discontinued ops	33.6		22.6		2.2		—		58.4
Adjusted EBITDA	$	97.9	$	71.7	$	58.3	$	69.5	$	297.4

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Summary of Cash Flows


	Nine Months Ended September 30,
(Dollars in millions)	2022		2021
Net cash provided by (used by):
Operating activities - continuing operations	$	13.5	$	213.1
Operating activities - discontinued operations	(435.6)		142.4
Investing activities - continuing operations	(87.4)		(396.0)
Investing activities - discontinued operations	2,066.4		(19.0)
Financing activities - continuing operations	(1,566.1)		(103.0)
Financing activities - discontinued operations	10.8		40.2
Effect of exchange rate on cash	(27.4)		(3.0)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(25.8)	$	(125.3)

Cash flow provided by operating activities (continuing operations) was $13.5 million for the nine months ended September 30, 2022, compared with $213.1 million for the nine months ended September 30, 2021. The decrease 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, partially offset by a net increase in non-cash item adjustments.

Net cash used by investing activities (continuing operations) was $87.4 million for the nine months ended September 30, 2022, compared with $396.0 million for the nine months ended September 30, 2021. The decrease in net cash used by investing activities was primarily attributable to:

•a decrease in the additional finance receivables held for investment of approximately $246.5 million;

•a decrease in cash used for acquisitions of $79.4 million; and

•a decrease in investments in securities of approximately $15.4 million;

partially offset by:

•a decrease in the proceeds from sale of investments of approximately $32.4 million.

Net cash used by financing activities (continuing operations) was $1,566.1 million for the nine months ended September 30, 2022, compared with $103.0 million for the nine months ended September 30, 2021. The increase in net cash used by financing activities was primarily attributable to:

•the prepayment of Term Loan B-6 in May 2022, which resulted in an increase in Term Loan B-6 debt payments of $921.5 million;

•the prepayment of a portion of the senior notes and the related costs in August 2022, which resulted in an increase in senior notes payments of $606.1 million; and

•a decrease in the additional obligations collateralized by finance receivables of approximately $83.0 million;

partially offset by:

•a net increase in the borrowings from lines of credit of approximately $132.0 million; and

•a decrease in the repurchase of common stock of approximately $48.7 million.

Capital Expenditures

Capital expenditures for the nine months ended September 30, 2022 and 2021 approximated $45.8 million and $47.6 million, respectively. Capital expenditures were funded from internally generated funds. We continue to invest in our core information technology capabilities and our service locations. Capital expenditures related to continuing operations are expected to be approximately $75 - $80 million for fiscal year 2022. Future capital expenditures could vary substantially based on capital project timing, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies.

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Dividends

The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $0.01 per share, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7% per annum, payable quarterly in arrears. Dividends are payable in kind through the issuance of additional shares of Series A Preferred Stock for the first eight dividend payments (through June 30, 2022), and thereafter, in cash or in kind, or in any combination of both, at the option of the Company. For the three months ended September 30, 2022, the holders of the Series A Preferred Stock received a cash dividend aggregating $11.1 million and for the nine months ended September 30, 2022, the holders of the Series A Preferred Stock received dividends in kind with a value in the aggregate of approximately $21.6 million. The holders of the Series A Preferred Stock are also entitled to participate in dividends declared or paid on our common stock on an as-converted basis.

The Company has temporarily suspended its quarterly common stock dividend. Future dividend decisions will be based on and affected by a variety of factors, including our financial condition and results of operations, contractual restrictions, including restrictive covenants contained in our Credit Agreement and AFC's securitization facilities and the indenture governing our senior notes, capital requirements and other factors that our board of directors deems relevant. No assurance can be given as to whether any future dividends may be declared by our board of directors or the amount thereof.

Recent Development

On October 31, 2022, the Company closed on the sale of excess land in Montreal. This transaction will result in a gain of approximately $32 million.

Contractual Obligations

The Company's contractual cash obligations for long-term debt, interest payments related to long-term debt, finance lease obligations, operating leases and contingent consideration related to acquisitions are summarized in the table of contractual obligations in our Annual Report on Form 10-K for the year ended December 31, 2021. Since December 31, 2021, the contractual obligations of the Company have changed as follows:

•The outstanding balance on Term Loan B-6 was repaid with proceeds from the Transaction. As such, there will be no further principal or interest payments related to Term Loan B-6.

•$600 million principal amount of the senior notes were prepaid with proceeds from the Transaction.

•The operating and finance lease obligations of the ADESA U.S. physical auction business are no longer obligations of the Company.

•Approximately $29.6 million of the contingent consideration related to acquisitions has been paid.

•Operating lease obligations change in the ordinary course of business. We lease most of our facilities, as well as other property and equipment under operating leases. Future operating lease obligations will continue to change if renewal options are exercised and/or if we enter into additional operating lease agreements.

See Note 2, Note 6 and Note 7 to the Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information about the items described above. Our contractual cash obligations as of December 31, 2021, are discussed in the "Contractual Obligations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the "SEC").

Critical Accounting Estimates

Our critical accounting estimates are discussed in the "Critical Accounting Estimates" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC. A summary of significant accounting policies is discussed in Note 2 and elsewhere in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, which includes audited financial statements.

Off-Balance Sheet Arrangements

As of September 30, 2022, we had no off-balance sheet arrangements pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.

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New Accounting Standards

For a description of new accounting standards that could affect the Company, reference the "New Accounting Standards" section of Note 1 to the Unaudited Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

Our foreign currency exposure is limited and arises from transactions denominated in foreign currencies, particularly intercompany loans, as well as from translation of the results of operations from our Canadian and, to a much lesser extent, United Kingdom, Continental Europe and Mexican subsidiaries. However, fluctuations between U.S. and non-U.S. currency values may adversely affect our results of operations and financial position. We have not entered into any foreign exchange contracts to hedge changes in the Canadian dollar, British pound, euro or Mexican peso. Foreign currency losses on intercompany loans were approximately $4.1 million and $8.6 million for the three and nine months ended September 30, 2022, respectively, and approximately $0.1 million and $2.7 million for the three and nine months ended September 30, 2021. Canadian currency translation negatively affected net income by approximately $0.5 million and $1.1 million for the three and nine months ended September 30, 2022 and positively affected net income by approximately $0.8 million and $2.8 million for the three and nine months ended September 30, 2021, respectively. A 1% change in the month-end Canadian exchange rate for September 30, 2022 would have impacted foreign currency losses on intercompany loans by $0.2 million and net income by $0.1 million. A 1% change in the month-end euro exchange rate for September 30, 2022 would have impacted foreign currency losses on intercompany loans by $0.7 million and net income by $0.4 million. A 1% change in the average Canadian exchange rate for the three and nine months ended September 30, 2022 would have impacted net income by approximately $0.2 million and $0.5 million. Currency exposure of our U.K. and Mexican operations is not material to the results of operations.

Interest Rates

We are exposed to interest rate risk on our variable rate borrowings. Accordingly, interest rate fluctuations affect the amount of interest expense we are obligated to pay. We most recently used use interest rate swap agreements to manage our exposure to interest rate changes. We originally designated the interest rate swaps as cash flow hedges for accounting purposes. Accordingly, the earnings impact of the derivatives designated as cash flow hedges are recorded upon the recognition of the interest related to the hedged debt.

In January 2020, we entered into three pay-fixed interest rate swaps with an aggregate notional amount of $500 million to swap variable rate interest payments under our term loan for fixed interest payments bearing a weighted average interest rate of 1.44%. The interest rate swaps had a five-year term, each maturing on January 23, 2025.

In February 2022, we discontinued hedge accounting as we concluded that the forecasted interest rate payments were no longer probable of occurring in consideration of the Transaction and expected repayment of Term Loan B-6. In connection with the repayment of Term Loan B-6 in May 2022, we entered into swap termination agreements. We received $16.7 million to settle and terminate the swaps, which was recognized as a realized gain in "Interest expense" in the consolidated statement of income.

A sensitivity analysis of the impact on our variable rate corporate debt instruments to a hypothetical 100 basis point increase in short-term rates (LIBOR) for the three and nine months ended September 30, 2022 would have resulted in an increase in interest expense of approximately $0.1 million and $1.9 million, respectively.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), during the quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Certain legal proceedings in which the Company is involved are discussed in Note 19 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021 and Part I, Item 3 of the same Annual Report. Unless otherwise indicated therein, all proceedings discussed in the Annual Report remain outstanding.

Item 1A. Risk Factors

Before deciding to invest in our Company, in addition to the other information contained in our Annual Report on Form 10-K and other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021 and the factors discussed in Part II, "Item 1A. Risk Factors" in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, which could materially and adversely affect our business, financial condition, prospects, results of operations and cash flows. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. The risks described in our most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, including our ability to access capital and macroeconomic conditions and geopolitical events, are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially affect our business, financial condition, results of operations and prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

The information required by Item 701 of Regulation S-K was previously disclosed (for the sale of Series A Preferred Stock) in the Company's Current Reports on Form 8-K, filed with the SEC on June 10, 2020 and June 30, 2020.

On November 12, 2020, we issued 857,630 shares of our common stock to three individuals and one trust in connection with the BacklotCars acquisition in the fourth quarter of 2020. We received $15 million as consideration for the sale of such securities. On October 14, 2021, we issued 1,953,124 shares of our common stock to two individuals and one trust in connection with the CARWAVE acquisition in the fourth quarter of 2021. We received $30 million as consideration for the sale of such securities. The issuance of these securities was exempt from registration under the Securities Act, in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering and/or the private offering safe harbor provision of Rule 506 of Regulation D promulgated under the Securities Act.

Issuer Purchases of Equity Securities

The following table provides information about purchases by KAR Auction Services of its shares of common stock during the quarter ended September 30, 2022:


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 (1) (Dollars in millions)
July 1 - July 31	288,108	$	15.73	288,108	$	222.4
August 1 - August 31	2,617,336	15.14		2,617,336	182.8
September 1 - September 30	404,083	14.45		404,083	176.9
Total	3,309,527	$	15.11	3,309,527

(1) In October 2019, the board of directors authorized a repurchase of up to $300 million of the Company’s outstanding common stock, par value $0.01 per share, through October 30, 2021. In October 2021, the board of directors authorized an extension of the Company’s share repurchase program through December 31, 2022. On April 27, 2022, the board of

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directors authorized an increase in the size of the Company’s $300 million share repurchase program by an additional $200 million and an extension of the share repurchase program through December 31, 2023. Repurchases may be made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases is subject to market and other conditions.

Item 6. Exhibits, Financial Statement Schedules

a) Exhibits—the exhibit index below is incorporated herein by reference as the list of exhibits required as part of this report.

In reviewing the agreements included as exhibits to this Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about KAR Auction Services, ADESA, AFC or other parties to the agreements.

The agreements included or incorporated by reference as exhibits to this Quarterly Report on Form 10-Q contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of "materiality" that are different from "materiality" under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.

The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Quarterly Report on Form 10-Q not misleading. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and KAR Auction Services, Inc.'s other public filings, which are available without charge through the SEC's website at http://www.sec.gov.

EXHIBIT INDEX


			Incorporated by Reference
Exhibit No.		Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	+	Separation and Distribution Agreement, dated as of June 27, 2019, by and between KAR Auction Services, Inc. and IAA, Inc.	8-K	001-34568	2.1	6/28/2019

2.2		Agreement and Plan of Merger dated as of September 4, 2020 by and among ADESA, Inc., Showroom Merger Sub, Inc., KAR Auction Services, Inc., BacklotCars, Inc. and Shareholder Representative Services LLC, as the securityholders representative	8-K	001-34568	2.1	9/8/2020

2.3		Securities Purchase Agreement, by and among ADESA, Inc., Carwave Holdings LLC, KKR Chevy Aggregator L.P., John Lauer, William Lauer, Joseph Lauer, Lauer Holdings Inc., KKR Chevy Blocker, LLC, KKR-Milton Strategic Partners L.P., KKR DAF Private Assets Fund Designated Activity Company, KKR NGT II (Chevy) Blocker L.P. and KKR NGT II (Chevy) Blocker Parent L.P.	8-K	001-34568	2.1	8/23/2021

2.4		Securities and Asset Purchase Agreement, dated as of February 24, 2022, by and among KAR Auction Services, Inc., Carvana Group, LLC and Carvana Co. solely for purposes of Section 10.15 thereof as guarantor	8-K	001-34568	2.1	2/24/2022

3.1		Amended and Restated Certificate of Incorporation of KAR Auction Services, Inc.	10-Q	001-34568	3.1	8/3/2016

3.2		Second Amended and Restated By-Laws of KAR Auction Services, Inc.	8-K	001-34568	3.1	11/4/2014

3.3		Certificate of Designations Designating the Series A Convertible Preferred Stock	8-K	001-34568	3.1	6/10/2020

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Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed
Herewith

4.1

Indenture, dated as of May 31, 2017, among KAR Auction Services, Inc., the guarantors party thereto and U.S. Bank National Association, as trustee, including the form of the Notes

8-K

001-34568

4.1

5/31/2017

4.2

Form of common stock certificate

S-1/A

333-161907

4.15

12/10/2009

4.3

Description of the Company's securities

10-K

001-34568

4.3

2/19/2020

10.1a

Amendment and Restatement Agreement, dated March 11, 2014, among KAR Auction Services, Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender and issuing lender (the Amended and Restated Credit Agreement and the Amended and Restated Guarantee and Collateral Agreement are included as Exhibits A and B thereto, respectively)

8-K

001-34568

10.1

3/12/2014

10.1b

Incremental Commitment Agreement and First Amendment, dated as of March 9, 2016, among KAR Auction Services, Inc., JPMorgan Chase Bank, N.A., as administrative agent, certain subsidiaries of the Company party thereto and the several lenders party thereto

8-K

001-34568

10.1

3/9/2016

10.1c

Incremental Commitment Agreement and Second Amendment, dated as of May 31, 2017, among KAR Auction Services, Inc., JPMorgan Chase Bank, N.A., as administrative agent, the guarantors party thereto and the several lenders party thereto

8-K

001-34568

10.1

5/31/2017

10.1d

Third Amendment Agreement, dated as of September 19, 2019, by and among KAR Auction Services, Inc., JPMorgan Chase Bank, N.A., as administrative agent, certain subsidiaries of KAR Auction Services, Inc. party thereto and the several lenders party thereto

8-K

001-34568

10.1

9/20/2019

10.1e

Technical Amendment, dated as of May 28, 2020, by and between KAR Auction Services, Inc., and JPMorgan Chase Bank, N.A., as administrative agent

10-K

001-34568

10.1e

2/18/2021

10.1f

Fourth Amendment Agreement, dated as of May 29, 2020, by and among KAR Auction Services, Inc., JPMorgan Chase Bank, N.A., as administrative agent, certain subsidiaries of the Company party thereto and the certain revolving lenders party thereto

8-K

001-34568

10.1

6/1/2020

10.1g

Fifth Amendment Agreement, dated September 2, 2020, by and among KAR Auction Services, Inc., JPMorgan Chase Bank, N.A., as administrative agent, certain subsidiaries of KAR Auction Services, Inc. party thereto and the certain revolving lenders party thereto

8-K

001-34568

10.1

9/8/2020

10.2

Employment Agreement, dated March 1, 2021, between KAR Auction Services, Inc. and James P. Hallett

8-K

001-34568

10.1

3/2/2021

10.3

Employment Agreement, dated March 9, 2020, between KAR Auction Services, Inc. and Eric M. Loughmiller

8-K

001-34568

10.2

3/13/2020

10.4

Employment Agreement, dated March 9, 2020, between KAR Auction Services, Inc. and John C. Hammer

8-K

001-34568

10.1

3/13/2020

10.5a

Employment Agreement, dated March 9, 2020, between KAR Auction Services, Inc. and Peter J. Kelly

10-Q

001-34568

10.9

5/7/2020

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Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed
Herewith

10.5b

Amendment No. 1 to Employment Agreement, dated March 1, 2021, between KAR Auction Services Inc. and Peter J. Kelly

8-K

001-34568

10.2

3/2/2021

10.6

Employment Agreement, dated October 26, 2021, between KAR Auction Services, Inc. and James Coyle

10-K

001-34568

10.6

2/23/2022

10.7

Employment Agreement dated September 4, 2020, between KAR Auction Services, Inc. and Justin Davis

10-Q

001-34568

10.7

5/4/2022

10.8

KAR Auction Services, Inc. Annual Incentive Program Summary of Terms 2021

10-K

001-34568

10.8

2/18/2021

10.9

KAR Auction Services, Inc. Annual Incentive Program Summary of Terms 2022

10-K

001-34568

10.8

2/23/2022

10.10a

Amended and Restated Purchase and Sale Agreement, dated May 31, 2002, between AFC Funding Corporation and Automotive Finance Corporation

S-4

333-148847

10.32

1/25/2008

10.10b

Amendment No. 1 to Amended and Restated Purchase and Sale Agreement, dated June 15, 2004

S-4

333-148847

10.33

1/25/2008

10.10c

Amendment No. 2 to Amended and Restated Purchase and Sale Agreement, dated January 18, 2007

S-4

333-148847

10.34

1/25/2008

10.10d

Amendment No. 3 to Amended and Restated Purchase and Sale Agreement, dated April 20, 2007

S-4

333-148847

10.35

1/25/2008

10.10e

Amendment No. 4 to Amended and Restated Purchase and Sale Agreement, dated January 30, 2009

10-K

001-34568

10.19e

2/28/2012

10.10f

Amendment No. 5 to Amended and Restated Purchase and Sale Agreement, dated April 25, 2011

10-K

001-34568

10.19f

2/28/2012

10.11

Tenth Amended and Restated Receivables Purchase Agreement, dated September 28, 2022, by and among Automotive Finance Corporation, AFC Funding Corporation, Fairway Finance Company, LLC, Fifth Third Bank, National Association, Chariot Funding LLC, PNC Bank, National Association, Thunder Bay Funding, LLC, Truist Bank, BMO Capital Markets Corp., JPMorgan Chase Bank, N.A., Royal Bank of Canada and Bank of Montreal

10.12

Sixth Amended and Restated Receivables Purchase Agreement, dated September 28, 2022, between Automotive Finance Canada Inc., KAR Auction Services, Inc. and BNY Trust Company of Canada

10.13

Form of Indemnification Agreement

8-K

001-34568

10.1

12/17/2013

10.14a

KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan, as Amended June 10, 2014

DEF 14A

001-34568

Appendix A

4/29/2014

10.14b

First Amendment to the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan

10-K

001-34568

10.24b

2/18/2016

10.14c

KAR Auction Services, Inc. Amended and Restated 2009 Omnibus Stock and Incentive Plan, as Amended and Restated June 4, 2021

DEF 14A

001-34568

Annex 1

4/23/2021

10.15

KAR Auction Services, Inc. Amended and Restated Employee Stock Purchase Plan

10-Q

001-34568

10.27

8/5/2020

10.16a

KAR Auction Services, Inc. Directors Deferred Compensation Plan, effective December 10, 2009

10-Q

001-34568

10.62

8/4/2010

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Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed
Herewith

10.16b

Amendment No. 1 to the KAR Auction Services, Inc. Directors Deferred Compensation Plan, dated as of June 28, 2019

10-Q

001-34568

10.28b

11/6/2019

10.17

Director Restricted Share Agreement

10-Q

001-34568

10.29

8/7/2019

10.18

Form of Nonqualified Stock Option Agreement

S-1/A

333-161907

10.65

12/4/2009

10.19

Form of 2018 Restricted Stock Unit Award Agreement for Section 16 Officers

10-K

001-34568

10.33

2/21/2018

10.20

Form of 2019 Restricted Stock Unit Award Agreement for Section 16 Officers

10-K

001-34568

10.35

2/21/2019

10.21

Form of 2020 Restricted Stock Unit Award Agreement for Section 16 Officers

10-K

001-34568

10.35

2/19/2020

10.22

Form of Non-Qualified Stock Option Award Agreement

10-K

001-34568

10.30

2/18/2021

10.23

Form of 2018 and 2019 Performance-Based Restricted Stock Unit Agreement (Cumulative Operating Adjusted Net Income Per Share)

10-K

001-34568

10.38

2/24/2017

10.24

Form of 2020, 2021 and 2022 Performance-Based Restricted Stock Unit Agreement (Cumulative Operating Adjusted Net Income Per Share)

10-K

001-34568

10.38

2/19/2020

10.25

Form of 2022 Amended and Restated Performance-Based Restricted Stock Unit Agreement (Cumulative Adjusted EBITDA)

10.26

Transition Services Agreement, dated as of June 27, 2019, by and between KAR Auction Services, Inc. and IAA, Inc.

8-K

001-34568

10.1

6/28/2019

10.27

Tax Matters Agreement, dated as of June 27, 2019, by and between KAR Auction Services, Inc. and IAA, Inc.

8-K

001-34568

10.2

6/28/2019

10.28

Employee Matters Agreement, dated as of June 27, 2019, by and between KAR Auction Services, Inc. and IAA, Inc.

8-K

001-34568

10.3

6/28/2019

10.29

Investment Agreement, dated as of May 26, 2020, by and between KAR Auction Services, Inc. and Ignition Parent LP

8-K

001-34568

10.1

5/27/2020

10.30a

Investment Agreement, dated as of May 26, 2020, by and between KAR Auction Services, Inc. and Periphas Capital GP, LLC

8-K

001-34568

10.2

5/27/2020

10.30b

Assignment and Assumption Agreement, dated as of June 9, 2020, by and between Periphas Capital GP, LLC and Periphas Kanga Holdings, L.P.

10-K

001-34568

10.37b

2/18/2021

10.31

Registration Rights Agreement, dated as of June 10, 2020, by and among KAR Auction Services, Inc. and Ignition Parent LP

8-K

001-34568

10.1

6/10/2020

10.32

Registration Rights Agreement, dated as of June 29, 2020, by and between KAR Auction Services, Inc. and Periphas Kanga Holdings, LP

8-K

001-34568

10.1

6/29/2020

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Table of Contents

Incorporated by Reference

Exhibit No.

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed
Herewith

32.1

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following materials from KAR Auction Services, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021; (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021 (iii) the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (iv) the Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2022 and 2021; (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; and (vi) the Condensed Notes to Consolidated Financial Statements.

104

Cover page Interactive Data File, formatted in iXBRL (contained in Exhibit 101).

_______________________________________________________________________________


+			Certain information has been excluded from this exhibit because it is not material and would likely cause competitive harm to the registrant if publicly disclosed.

^			Portions of this exhibit have been redacted pursuant to a request for confidential treatment filed separately with the Secretary of the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act of 1933, as amended.

*			Denotes management contract or compensation plan, contract or arrangement.

Table of Contents

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 thereunto duly authorized.


		KAR Auction Services, Inc.
		(Registrant)

Date:	November 2, 2022	/s/ ERIC M. LOUGHMILLER
		Eric M. Loughmiller Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)