UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 4, 2015
KAR Auction Services, Inc.
(Exact name of Registrant as specified in its charter)
|
| | | | |
Delaware | | 001-34568 | | 20-8744739 |
(State or other jurisdiction
of incorporation) | | (Commission File
Number) | | (I.R.S. Employer
Identification No.) |
13085 Hamilton Crossing Boulevard
Carmel, Indiana 46032
(Address of principal executive offices)
(Zip Code)
(800) 923-3725
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition.
On November 4, 2015, KAR Auction Services, Inc. issued a press release announcing its financial results for the three and nine months ended September 30, 2015. KAR Auction Services, Inc. will host an earnings conference call and webcast, Thursday, November 5, 2015 at 11:00 a.m., Eastern Standard Time. The conference call may be accessed by calling 1-877-741-4248 and entering participant passcode 735791 and the live webcast may be accessed at the investor relations section of www.karauctionservices.com. The call will be hosted by KAR Auction Services, Inc. Chief Executive Officer and Chairman of the Board, Jim Hallett, and Executive Vice President and Chief Financial Officer, Eric Loughmiller. The call will feature a review of operating highlights and financial results for the three and nine months ended September 30, 2015. The press release dated November 4, 2015 is attached to this Current Report on Form 8-K as Exhibit 99.1 and is incorporated herein by reference in its entirety.
On November 4, 2015, KAR Auction Services, Inc. also posted supplemental financial information for the three and nine months ended September 30, 2015, and Earnings Slides for the three months ended September 30, 2015. The supplemental financial information can be located at the investor relations section of www.karauctionservices.com under the quarterly results page and the Earnings Slides can be located at the investor relations section of www.karauctionservices.com under the investor presentations page. The supplemental financial information and Earnings Slides posted on November 4, 2015 are attached to this Current Report on Form 8-K as Exhibits 99.2 and 99.3, respectively, and are incorporated herein by reference in their entirety.
Within the Company's third quarter 2015 press release, related attachments thereto, the supplemental financial information and Earnings Slides, the Company makes reference to certain non-GAAP financial measures. The non-GAAP financial measures include the following: EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Share, Operating Adjusted Net Income and Operating Adjusted Net Income Per Share. The Company has presented reconciling information along with the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”) for each of the above non-GAAP financial measures in the press release, supplemental financial information and Earnings Slides. In addition, the Company’s reasons for presenting these non-GAAP financial measures are discussed below.
The Company believes that these measures represent important internal measures of performance. Accordingly, where these non-GAAP measures are provided, it is done so that investors have the same financial data that management uses with the belief that it will assist the investment community in properly assessing the underlying performance of the Company on a year-over-year and quarter-sequential basis. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. The specific reasons, in addition to the reasons described above, why the Company's management believes that the presentation of the non-GAAP financial measures provides useful information to investors regarding the Company’s results of operations are as follows:
EBITDA and Adjusted EBITDA – The Company’s management believes that EBITDA is a useful supplement and meaningful indicator of earnings performance to be used by its investors, financial analysts and others to analyze the Company’s financial performance and results of operations over time. 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 its creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate the performance of the Company. The most directly comparable financial performance measure calculated and presented in accordance with GAAP is net income (loss). A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014 is contained in the attachments to the press release. In addition, a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014, as well as each of the last four quarters and the twelve months ended September 30, 2015 is contained in the supplemental financial information. A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three months ended September 30, 2015 and 2014 is also contained in the Appendix to the Earnings Slides.
Adjusted Net Income and Adjusted Net Income Per Share – The Company’s management believes that adjusted net income and adjusted net income per share are useful supplements and meaningful indicators of earnings performance to be used by its investors, financial analysts and others to analyze the Company’s financial performance and results of operations over time. The revaluation of certain assets of the company, and resultant increase in depreciation and amortization expense which resulted from the 2007 merger, as well as stock-based compensation expense tied to the 2007 merger, have had a continuing effect on our reported results. Non-GAAP financial measures of adjusted net income and adjusted net income per share, in the opinion of the Company, provide comparability to other companies that may have not incurred these types of non-cash expenses. In addition, net income and net income per share have been adjusted for certain other charges. A reconciliation of net income (loss) and net income (loss) per share to adjusted net income and adjusted net income per share for the three and nine months ended September 30, 2015 and 2014 is contained in the attachments to the press release.
Operating Adjusted Net Income and Operating Adjusted Net Income Per Share – The Company’s management believes that operating adjusted net income and operating adjusted net income per share are useful supplements and meaningful indicators of earnings performance to be used by its investors, financial analysts and others to analyze the Company’s financial performance and results of operations over time. Amortization expense associated with acquired intangible assets, such as customer relationships, software, tradenames and noncompete agreements are not representative of ongoing capital expenditures, but have a continuing effect on our reported results. Non-GAAP financial measures of operating adjusted net income and operating adjusted net income per share, in the opinion of the Company, provide comparability to other companies that may not have incurred these types of non-cash expenses or that report a similar measure. In addition, net income and net income per share have been adjusted for certain other charges. A reconciliation of net income (loss) and net income (loss) per share to operating adjusted net income and operating adjusted net income per share for the three and nine months ended September 30, 2015 and 2014 is contained in the supplemental financial information.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
| |
99.1 | Press release dated November 4, 2015 – “KAR Auction Services, Inc. Reports Growth in Revenues, Adjusted EBITDA and Adjusted Net Income for Third Quarter 2015” |
| |
99.2 | KAR Auction Services, Inc. Q3 2015 Supplemental Financial Information – November 4, 2015 |
| |
99.3 | KAR Auction Services, Inc. Q3 2015 Earnings Slides – November 4, 2015 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: November 4, 2015 KAR Auction Services, Inc.
/s/ Eric M. Loughmiller
Eric M. Loughmiller
Executive Vice President and Chief Financial Officer
For Immediate Release
Analyst Inquiries: Media Inquiries:
Jonathan Peisner Darci Valentine
(317) 249-4390 (317) 249-4414
jonathan.peisner@karauctionservices.com darci.valentine@karauctionservices.com
KAR Auction Services, Inc. Reports Growth in Revenues,
Adjusted EBITDA and Adjusted Net Income for Third Quarter 2015
Board Announces Quarterly Dividend of $0.27 per Common Share
Carmel, IN, November 4, 2015 — KAR Auction Services, Inc. (NYSE: KAR), today reported its third quarter financial results for the three months ended September 30, 2015. For the third quarter of 2015, the company reported revenue of $666.7 million as compared with revenue of $589.1 million for the third quarter of 2014, an increase of 13%. Adjusted EBITDA for the quarter ended September 30, 2015 increased 9% to $163.1 million, as compared with Adjusted EBITDA of $149.1 million for the quarter ended September 30, 2014. Net income for the third quarter of 2015 increased 10% to $52.3 million, or $0.37 per diluted share, as compared with net income of $47.5 million, or $0.33 per diluted share, in the third quarter of 2014. Adjusted net income per diluted share for the quarter ended September 30, 2015 increased 5% to $0.42 versus adjusted net income per diluted share of $0.40 for the quarter ended September 30, 2014. For the quarter ended September 30, 2015, fluctuations in the Canadian exchange rate negatively impacted revenue by $15.2 million, Adjusted EBITDA by $6.0 million and adjusted net income by $3.0 million, or $0.02 per diluted share.
For the nine months ended September 30, 2015, the company reported revenue of $1,957.4 million as compared with revenue of $1,758.5 million for the nine months ended September 30, 2014, an increase of 11%. Adjusted EBITDA for the nine months ended September 30, 2015 increased 10% to $495.3 million, as compared with Adjusted EBITDA of $450.3 million for the nine months ended September 30, 2014. Net income for the first nine months of 2015 increased 40% to $166.3 million, or $1.16 per diluted share, as compared with net income of $119.0 million, or $0.84 per diluted share in the first nine months of 2014. Net income for the nine months ended September 30, 2014 was negatively impacted by $19.2 million ($0.14 per diluted share) resulting from the company’s refinancing activities. Adjusted net income per diluted share for the nine months ended September 30, 2015 increased 7% to $1.30 versus adjusted net income per diluted share of $1.22 for the nine months ended September 30, 2014. For the nine months ended September 30, 2015, fluctuations in the Canadian exchange rate negatively impacted revenue by $34.9 million, Adjusted EBITDA by $13.2 million and adjusted net income by $6.5 million, or $0.05 per diluted share.
The company also announced a cash dividend today of $0.27 per share on the company’s common stock. The dividend is payable on January 7, 2016, to stockholders of record as of the close of business on December 22, 2015.
2015 Outlook
The company is providing the following guidance for fiscal 2015:
|
| | |
($ in millions, except per share amounts) | | |
| | |
Adjusted EBITDA | | $635 - $665 |
Capital expenditures* | | $134 |
Cash taxes | | $130 - $135 |
Cash interest on corporate debt | | $61 |
Free cash flow before dividend payments* | | $310 - $335 |
Effective tax rate | | 38% |
Net income per share | | $1.43 - $1.58 |
Adjusted net income per share | | $1.62 - $1.77 |
Free cash flow per share* | | $2.17 - $2.35 |
| | |
* Includes $19 million of capital expenditures for the recently announced greenfield development of the ADESA Chicago auction facility. |
Earnings Conference Call Information
KAR Auction Services, Inc. will be hosting an earnings conference call and webcast on Thursday, November 5, 2015 at 11:00 a.m. EST (10:00 a.m. CST). The call will be hosted by KAR Auction Services, Inc.’s Chief Executive Officer and Chairman of the Board, Jim Hallett, and Executive Vice President and Chief Financial Officer, Eric Loughmiller. The conference call may be accessed by calling 1-877-741-4248 and entering participant passcode 735791 while the live web cast will be available at the investor relations section of www.karauctionservices.com. Supplemental financial information for KAR Auction Services’ third quarter 2015 results is available at the investor relations section of www.karauctionservices.com under the quarterly results page.
A replay of the call will be available for two weeks via telephone starting approximately 30 minutes after the completion of the call. The replay may be accessed by calling 1-888-203-1112 and entering passcode 735791. The archive of the web cast will also be available following the call and will be available at the investor relations section of www.karauctionservices.com for a limited time.
About KAR Auction Services, Inc.
KAR Auction Services, Inc. (NYSE: KAR), a FORTUNE® 1000 company, operates worldwide vehicle auction services and provides related services. Based in Carmel, Indiana, the KAR group of companies is comprised of ADESA, Inc. (ADESA), Insurance Auto Auctions, Inc. (IAA), Automotive Finance Corporation (AFC), and additional business units, with approximately 13,000 employees and 240 auction facilities. Together, KAR’s complementary businesses provide support, technology and logistics for the used vehicle industry. For more information, visit karauctionservices.com.
Forward Looking Statements
Certain statements contained in this release include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made that are not historical facts may be forward-looking statements. Words such as “should,” “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify forward-looking statements. Such statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include those matters disclosed in the Company’s Securities and Exchange Commission filings. The Company does not undertake any obligation to update any forward-looking statements.
KAR Auction Services, Inc.
Condensed Consolidated Statements of Income
(In millions) (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Operating revenues | | | | | | | |
ADESA Auction Services |
| $351.4 |
| |
| $308.1 |
| |
| $1,024.4 |
| |
| $908.0 |
|
IAA Salvage Services | 246.2 |
| | 217.5 |
| | 732.8 |
| | 666.3 |
|
AFC | 69.1 |
| | 63.5 |
| | 200.2 |
| | 184.2 |
|
Total operating revenues | 666.7 |
| | 589.1 |
| | 1,957.4 |
| | 1,758.5 |
|
| | | | | | | |
Operating expenses | | | | | | | |
Cost of services (exclusive of depreciation and amortization) | 378.1 |
| | 328.0 |
| | 1,096.7 |
| | 974.6 |
|
Selling, general and administrative | 128.5 |
| | 116.5 |
| | 373.5 |
| | 357.6 |
|
Depreciation and amortization | 54.1 |
| | 48.9 |
| | 156.8 |
| | 145.3 |
|
Total operating expenses | 560.7 |
| | 493.4 |
| | 1,627.0 |
| | 1,477.5 |
|
| | | | | | | |
Operating profit | 106.0 |
| | 95.7 |
| | 330.4 |
| | 281.0 |
|
| | | | | | | |
Interest expense | 24.4 |
| | 20.3 |
| | 67.2 |
| | 65.3 |
|
Other income, net | (0.3) |
| | (0.5) |
| | (2.1) |
| | (1.9) |
|
Loss on extinguishment of debt | -- |
| | -- |
| | -- |
| | 30.3 |
|
| | | | | | | |
Income before income taxes | 81.9 |
| | 75.9 |
| | 265.3 |
| | 187.3 |
|
| | | | | | | |
Income taxes | 29.6 |
| | 28.4 |
| | 99.0 |
| | 68.3 |
|
| | | | | | | |
Net income |
| $52.3 |
| |
| $47.5 |
| |
| $166.3 |
| |
| $119.0 |
|
| | | | | | | |
Net income per share | | | | | | | |
Basic |
| $0.37 |
| |
| $0.34 |
| |
| $1.18 |
| |
| $0.85 |
|
Diluted |
| $0.37 |
| |
| $0.33 |
| |
| $1.16 |
| |
| $0.84 |
|
| | | | | | | |
Dividends declared per common share |
| $0.27 |
| |
| $0.25 |
| |
| $0.81 |
| |
| $0.75 |
|
KAR Auction Services, Inc.
Condensed Consolidated Balance Sheets
(In millions) (Unaudited)
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
Cash and cash equivalents |
| $125.3 |
| |
| $152.9 |
|
Restricted cash | 15.0 |
| | 17.0 |
|
Trade receivables, net of allowances | 562.0 |
| | 401.2 |
|
Finance receivables, net of allowances | 1,520.8 |
| | 1,363.1 |
|
Other current assets | 161.2 |
| | 140.7 |
|
Total current assets | 2,384.3 |
| | 2,074.9 |
|
| | | |
Goodwill | 1,793.8 |
| | 1,705.2 |
|
Customer relationships, net of accumulated amortization | 438.0 |
| | 484.4 |
|
Intangible and other assets | 363.3 |
| | 359.1 |
|
Property and equipment, net of accumulated depreciation | 747.1 |
| | 727.9 |
|
Total assets |
| $5,726.5 |
| |
| $5,351.5 |
|
| | | |
Current liabilities, excluding obligations collateralized by finance receivables and current maturities of debt |
| $880.2 |
| |
| $707.7 |
|
Obligations collateralized by finance receivables | 1,122.9 |
| | 865.2 |
|
Current maturities of debt | 144.5 |
| | 17.7 |
|
Total current liabilities | 2,147.6 |
| | 1,590.6 |
|
| | | |
Long-term debt | 1,723.6 |
| | 1,736.6 |
|
Other non-current liabilities | 478.3 |
| | 477.2 |
|
Stockholders’ equity | 1,377.0 |
| | 1,547.1 |
|
Total liabilities and stockholders’ equity |
| $5,726.5 |
| |
| $5,351.5 |
|
KAR Auction Services, Inc.
Condensed Consolidated Statements of Cash Flows
(In millions) (Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
Operating activities | | | |
Net income |
| $166.3 |
| |
| $119.0 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 156.8 |
| | 145.3 |
|
Provision for credit losses | 12.4 |
| | 12.0 |
|
Deferred income taxes | (14.4) |
| | (28.7) |
|
Amortization of debt issuance costs | 5.3 |
| | 5.9 |
|
Stock-based compensation | 9.0 |
| | 26.5 |
|
Excess tax benefit from stock-based compensation | (6.5) |
| | (3.2) |
|
Loss (gain) on disposal of fixed assets | 1.3 |
| | (0.1) |
|
Loss on extinguishment of debt | -- |
| | 30.3 |
|
Other non-cash, net | 2.8 |
| | 2.4 |
|
Changes in operating assets and liabilities, net of acquisitions: | | | |
Trade receivables and other assets | (164.0) |
| | (89.2) |
|
Accounts payable and accrued expenses | 146.4 |
| | 107.5 |
|
Net cash provided by operating activities | 315.4 |
| | 327.7 |
|
Investing activities | | | |
Net increase in finance receivables held for investment | (177.1) |
| | (191.6) |
|
Acquisition of businesses, net of cash acquired | (115.2) |
| | (30.9) |
|
Purchases of property, equipment and computer software | (92.3) |
| | (70.3) |
|
Proceeds from the sale of property and equipment | 0.1 |
| | 0.1 |
|
Decrease in restricted cash | 2.0 |
| | 2.6 |
|
Net cash used by investing activities | (382.5) |
| | (290.1) |
|
Financing activities | | | |
Net increase in book overdrafts | 18.1 |
| | 22.2 |
|
Net increase in borrowings from lines of credit | 130.5 |
| | -- |
|
Net increase in obligations collateralized by finance receivables | 268.2 |
| | 90.3 |
|
Proceeds from long-term debt | -- |
| | 1,767.2 |
|
Payments for debt issuance costs/amendments | (10.9) |
| | (11.7) |
|
Payments on long-term debt | (16.9) |
| | (1,782.2) |
|
Payments on capital leases | (14.9) |
| | (14.3) |
|
Payments of contingent consideration and deferred acquisition costs | (1.2) |
| | (0.2) |
|
Initial net investment for interest rate caps | (2.2) |
| | -- |
|
Issuance of common stock under stock plans | 18.8 |
| | 20.9 |
|
Excess tax benefit from stock-based compensation | 6.5 |
| | 3.2 |
|
Repurchase and retirement of common stock | (227.6) |
| | -- |
|
Dividends paid to stockholders | (114.8) |
| | (104.7) |
|
Net cash provided by (used by) financing activities | 53.6 |
| | (9.3) |
|
Effect of exchange rate changes on cash | (14.1) |
| | (5.0) |
|
Net (decrease) increase in cash and cash equivalents | (27.6) |
| | 23.3 |
|
Cash and cash equivalents at beginning of period | 152.9 |
| | 191.6 |
|
Cash and cash equivalents at end of period |
| $125.3 |
| |
| $214.9 |
|
Cash paid for interest |
| $58.2 |
| |
| $57.3 |
|
Cash paid for taxes, net of refunds |
| $102.0 |
| |
| $79.4 |
|
KAR Auction Services, Inc.
EBITDA and Adjusted EBITDA Measures
EBITDA and Adjusted EBITDA Measures
EBITDA and Adjusted EBITDA as presented herein are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). They are not measurements of our financial performance under GAAP and should not be considered as substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings as described in our senior secured credit agreement covenant calculations. Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions), (Unaudited) | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Net income |
| $52.3 |
| |
| $47.5 |
| |
| $166.3 |
| |
| $119.0 |
|
Add back: | | | | | | | |
Income taxes | 29.6 |
| | 28.4 |
| | 99.0 |
| | 68.3 |
|
Interest expense, net of interest income | 24.3 |
| | 20.2 |
| | 67.0 |
| | 65.1 |
|
Depreciation and amortization | 54.1 |
| | 48.9 |
| | 156.8 |
| | 145.3 |
|
EBITDA | 160.3 |
| | 145.0 |
| | 489.1 |
| | 397.7 |
|
Adjustments per the Credit Agreement | 2.8 |
| | 4.1 |
| | 6.2 |
| | 52.6 |
|
Adjusted EBITDA |
| $163.1 |
| |
| $149.1 |
| |
| $495.3 |
| |
| $450.3 |
|
KAR Auction Services, Inc.
Adjusted Net Income and Adjusted Net Income Per Share
Adjusted Net Income and Adjusted Net Income Per Share
The revaluation of certain assets of the company, and resultant increase in depreciation and amortization expense which resulted from the 2007 merger, as well as stock-based compensation expense tied to the 2007 merger, have had a continuing effect on our reported results. Non-GAAP financial measures of adjusted net income and adjusted net income per share, in the opinion of the company, provide comparability to other companies that may have not incurred these types of non-cash expenses. In addition, net income and net income per share have been adjusted for certain other charges, as seen in the following reconciliation.
The following table reconciles adjusted net income and adjusted net income per share to net income and net income per share for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions, except per share amounts) | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Net income |
| $52.3 |
| |
| $47.5 |
| |
| $166.3 |
| |
| $119.0 |
|
Loss on extinguishment of debt, net of tax (1) | -- |
| | -- |
| | -- |
| | 19.2 |
|
Stepped up depreciation and amortization expense, net of tax (2) | 6.9 |
| | 6.9 |
| | 20.3 |
| | 21.4 |
|
Stock-based compensation, net of tax (3) | -- |
| | 2.4 |
| | -- |
| | 13.4 |
|
Adjusted net income |
| $59.2 |
| |
| $56.8 |
| |
| $186.6 |
| |
| $173.0 |
|
| | | | | | | |
Net income per share – diluted |
| $0.37 |
| |
| $0.33 |
| |
| $1.16 |
| |
| $0.84 |
|
Loss on extinguishment of debt, net of tax | -- |
| | -- |
| | -- |
| | 0.14 |
|
Stepped up depreciation and amortization expense, net of tax | 0.05 |
| | 0.05 |
| | 0.14 |
| | 0.15 |
|
Stock-based compensation, net of tax | -- |
| | 0.02 |
| | -- |
| | 0.09 |
|
Adjusted net income per share – diluted |
| $0.42 |
| |
| $0.40 |
| |
| $1.30 |
| |
| $1.22 |
|
| | | | | | | |
Weighted average diluted shares | 141.8 |
| | 142.3 |
| | 143.2 |
| | 141.4 |
|
| |
(1) | We incurred a loss on the extinguishment of debt totaling $30.3 million ($19.2 million net of tax) for the nine months ended September 30, 2014. |
| |
(2) | Increased depreciation and amortization expense was $10.8 million ($6.9 million net of tax) and $11.1 million ($6.9 million net of tax) for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, increased depreciation and amortization expense was $32.3 million ($20.3 million net of tax) and $33.7 million ($21.4 million net of tax), respectively. |
| |
(3) | Stock-based compensation resulting from the 2007 merger was $3.8 million ($2.4 million net of tax) and $21.2 million ($13.4 million net of tax) for the three and nine months ended September 30, 2014, respectively. |
Non-GAAP Financial Measures
The company provides historical and forward-looking non-GAAP measures called EBITDA, Adjusted EBITDA, free cash flow, adjusted net income, adjusted net income per share, operating adjusted net income and operating adjusted net income per share. Management believes that these measures provide investors additional meaningful methods to evaluate certain aspects of the company’s results period over period and for the other reasons set forth previously.
Earnings guidance also does not contemplate future items such as business development activities, strategic developments (such as restructurings or dispositions of assets or investments), significant expenses related to litigation and changes in applicable laws and regulations (including significant accounting and tax matters). The timing and amounts of these items are highly variable, difficult to predict, and of a potential size that could have a substantial impact on the company’s reported results for any given period. Prospective quantification of these items is generally not practicable. Forward-looking non-GAAP guidance excludes increased depreciation and amortization expense that resulted from the 2007 revaluation of the company’s assets, as well as one-time charges, net of taxes.
KAR Auction Services, Inc.
Q3 2015 Supplemental Financial Information
November 4, 2015
Third Quarter and YTD 2015 Highlights
Summary
| |
• | 13% revenue growth, 9% Adjusted EBITDA growth and 4% growth in Adjusted Net Income |
| |
• | For the first nine months of year, returned $342.4 million to shareholders via dividend and common stock repurchases, retiring approximately 5.3 million shares |
| |
• | 5% growth in Adjusted EPS to $0.42 and 9% growth in Operating Adjusted EPS to $0.47 |
| |
• | Ended quarter with net debt / Adjusted EBITDA of 2.83X |
ADESA
| |
• | 15% volume growth, 14% revenue growth and 16% growth in Adjusted EBITDA |
| |
• | 13% physical volume sold growth |
| |
• | Announced TradeRev expansion into the Carolinas and Florida |
IAA
| |
• | Launched Total Loss Solutions Suite of Products |
| |
• | Inventory increased approximately 20% year over year |
AFC
| |
• | Achieved growth in volumes and revenue of 13% and 9%, respectively |
| |
• | Managed receivables at September 30 were $1,529.6 million – an increase of 19% over September 30, 2014 |
| |
• | Managed portfolio over 99% current as of 9/30/15 |
KAR Auction Services, Inc.
EBITDA and Adjusted EBITDA Measures
EBITDA and Adjusted EBITDA Measures
EBITDA and Adjusted EBITDA as presented herein are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). They are not measurements of our financial performance under GAAP and should not be considered as substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings as described in our senior secured credit agreement covenant calculations. Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2015 |
(Dollars in millions), (Unaudited) | ADESA | | IAA | | AFC | | Corporate | | Consolidated |
| | | | | | | | | |
Net income (loss) |
| $29.6 |
| |
| $19.9 |
| |
| $22.1 |
| | $(19.3) | |
| $52.3 |
|
Add back: | | | | | | | | | |
Income taxes | 16.0 |
| | 11.4 |
| | 13.6 |
| | (11.4) | | 29.6 |
|
Interest expense, net of interest income | 0.1 |
| | -- |
| | 6.6 |
| | 17.6 | | 24.3 |
|
Depreciation and amortization | 22.3 |
| | 20.1 |
| | 7.7 |
| | 4.0 | | 54.1 |
|
Intercompany interest | 12.2 |
| | 9.4 |
| | (7.9) |
| | (13.7) | | -- |
|
EBITDA | 80.2 |
| | 60.8 |
| | 42.1 |
| | (22.8) | | 160.3 |
|
Adjustments per the Credit Agreement | 5.7 |
| | 1.1 |
| | (4.2) |
| | 0.2 | | 2.8 |
|
Adjusted EBITDA |
| $85.9 |
| |
| $61.9 |
| |
| $37.9 |
| | $(22.6) | |
| $163.1 |
|
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2014 |
(Dollars in millions), (Unaudited) | ADESA | | IAA | | AFC | | Corporate | | Consolidated |
| | | | | | | | | |
Net income (loss) |
| $22.3 |
| |
| $19.1 |
| |
| $20.0 |
| | $(13.9) | |
| $47.5 |
|
Add back: | | | | | | | | | |
Income taxes | 13.4 |
| | 11.0 |
| | 12.1 |
| | (8.1) | | 28.4 |
|
Interest expense, net of interest income | 0.1 |
| | -- |
| | 4.7 |
| | 15.4 | | 20.2 |
|
Depreciation and amortization | 19.7 |
| | 19.1 |
| | 7.7 |
| | 2.4 | | 48.9 |
|
Intercompany interest | 12.8 |
| | 9.4 |
| | (5.8) |
| | (16.4) | | -- |
|
EBITDA | 68.3 |
| | 58.6 |
| | 38.7 |
| | (20.6) | | 145.0 |
|
Adjustments per the Credit Agreement | 5.6 |
| | 0.7 |
| | (2.4) |
| | 0.2 | | 4.1 |
|
Adjusted EBITDA |
| $73.9 |
| |
| $59.3 |
| |
| $36.3 |
| | $(20.4) | |
| $149.1 |
|
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2015 |
(Dollars in millions), (Unaudited) | ADESA | | IAA | | AFC | | Corporate | | Consolidated |
| | | | | | | | | |
Net income (loss) |
| $84.1 |
| |
| $69.5 |
| |
| $61.8 |
| | $(49.1) | |
| $166.3 |
|
Add back: | | | | | | | | | |
Income taxes | 48.4 |
| | 41.3 |
| | 37.9 |
| | (28.6) | | 99.0 |
|
Interest expense, net of interest income | 0.4 |
| | -- |
| | 17.2 |
| | 49.4 | | 67.0 |
|
Depreciation and amortization | 63.8 |
| | 59.1 |
| | 23.2 |
| | 10.7 | | 156.8 |
|
Intercompany interest | 37.6 |
| | 28.2 |
| | (17.4) |
| | (48.4) | | -- |
|
EBITDA | 234.3 |
| | 198.1 |
| | 122.7 |
| | (66.0) | | 489.1 |
|
Adjustments per the Credit Agreement | 16.7 |
| | 1.4 |
| | (12.1) |
| | 0.2 | | 6.2 |
|
Adjusted EBITDA |
| $251.0 |
| |
| $199.5 |
| |
| $110.6 |
| | $(65.8) | |
| $495.3 |
|
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2014 |
(Dollars in millions), (Unaudited) | ADESA | | IAA | | AFC | | Corporate | | Consolidated |
| | | | | | | | | |
Net income (loss) |
| $62.5 |
| |
| $61.2 |
| |
| $56.7 |
| | $(61.4) | |
| $119.0 |
|
Add back: | | | | | | | | | |
Income taxes | 35.7 |
| | 36.0 |
| | 34.7 |
| | (38.1) | | 68.3 |
|
Interest expense, net of interest income | 0.5 |
| | 0.2 |
| | 13.8 |
| | 50.6 | | 65.1 |
|
Depreciation and amortization | 59.0 |
| | 56.6 |
| | 22.7 |
| | 7.0 | | 145.3 |
|
Intercompany interest | 37.6 |
| | 28.3 |
| | (17.6) |
| | (48.3) | | -- |
|
EBITDA | 195.3 |
| | 182.3 |
| | 110.3 |
| | (90.2) | | 397.7 |
|
Adjustments per the Credit Agreement | 20.8 |
| | 5.1 |
| | (5.4) |
| | 32.1 | | 52.6 |
|
Adjusted EBITDA |
| $216.1 |
| |
| $187.4 |
| |
| $104.9 |
| | $(58.1) | |
| $450.3 |
|
Certain of our loan covenant calculations utilize financial results for the most recent four consecutive fiscal quarters. The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented:
|
| | | | | | | | | | | | | | | | | | | |
|
Three Months Ended | | Twelve Months Ended |
(Dollars in millions), (Unaudited) | December 31, 2014 | | March 31, 2015 | | June 30, 2015 | | September 30, 2015 | | September 30, 2015 |
| | | | | | | | | |
Net income (loss) |
| $50.3 |
| |
| $54.5 |
| |
| $59.5 |
| |
| $52.3 |
| |
| $216.6 |
|
Add back: | | | | | | | | | |
Income taxes | 27.4 |
| | 34.6 |
| | 34.8 |
| | 29.6 |
| | 126.4 |
|
Interest expense, net of interest income | 20.8 |
| | 20.9 |
| | 21.8 |
| | 24.3 |
| | 87.8 |
|
Depreciation and amortization | 51.3 |
| | 50.9 |
| | 51.8 |
| | 54.1 |
| | 208.1 |
|
EBITDA | 149.8 |
| | 160.9 |
| | 167.9 |
| | 160.3 |
| | 638.9 |
|
Other adjustments per the Credit Agreement | 0.6 |
| | 0.9 |
| | 2.0 |
| | 2.4 |
| | 5.9 |
|
Non-cash charges | 2.0 |
| | 4.3 |
| | 4.3 |
| | 5.5 |
| | 16.1 |
|
AFC interest expense | (3.9) |
| | (3.9) |
| | (4.2) |
| | (5.1) |
| | (17.1) |
|
Adjusted EBITDA |
| $148.5 |
| |
| $162.2 |
| |
| $170.0 |
| |
| $163.1 |
| |
| $643.8 |
|
Segment Results
Impact of Foreign Currency
The strengthening of the U.S. dollar has had a significant impact on the reporting of our Canadian operations in U.S. dollars. For the three months ended September 30, 2015, fluctuations in the Canadian exchange rate decreased revenue by $15.2 million, operating profit by $5.4 million, net income by $3.0 million and net income per diluted share by $0.02. For the nine months ended September 30, 2015, fluctuations in the Canadian exchange rate decreased revenue by $34.9 million, operating profit by $11.8 million, net income by $6.5 million and net income per diluted share by $0.05.
ADESA Results
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
ADESA revenue |
| $351.4 |
| |
| $308.1 |
| |
| $1,024.4 |
| |
| $908.0 |
|
Cost of services* | 199.2 |
| | 174.6 |
| | 578.1 |
| | 512.5 |
|
Gross profit* | 152.2 |
| | 133.5 |
| | 446.3 |
| | 395.5 |
|
Selling, general and administrative | 71.3 |
| | 64.1 |
| | 207.3 |
| | 196.7 |
|
Depreciation and amortization | 22.3 |
| | 19.7 |
| | 63.8 |
| | 59.0 |
|
Operating profit |
| $58.6 |
| |
| $49.7 |
| |
| $175.2 |
| |
| $139.8 |
|
EBITDA |
| $80.2 |
| |
| $68.3 |
| |
| $234.3 |
| |
| $195.3 |
|
Adjustments per the Credit Agreement | 5.7 |
| | 5.6 |
| | 16.7 |
| | 20.8 |
|
Adjusted EBITDA |
| $85.9 |
| |
| $73.9 |
| |
| $251.0 |
| |
| $216.1 |
|
* Exclusive of depreciation and amortization
Overview of ADESA Results for the Three Months Ended September 30, 2015 and 2014
Revenue
Revenue from ADESA increased $43.3 million, or 14%, to $351.4 million for the three months ended September 30, 2015, compared with $308.1 million for the three months ended September 30, 2014. The increase in revenue was primarily a result of a 15% increase in the number of vehicles sold, partially offset by a 1% decrease in revenue per vehicle sold, which included the impact of a decrease in revenues of $11.3 million due to fluctuations in the Canadian exchange rate.
The increase in volume sold was primarily attributable to an increase in institutional volume, including vehicles sold on our online only platform, as well as a 10% increase in dealer consignment units sold for the three months ended September 30, 2015 compared with the three months ended September 30, 2014. Online sales volume for ADESA represented approximately 38% of the total vehicles sold in the third quarter of 2015, compared with approximately 36% in the third quarter of 2014. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location (upstream selling); (ii) online solutions that offer vehicles for sale while in transit to auction locations (midstream selling); (iii) simultaneously broadcasting video and audio of the physical auctions to online bidders (LiveBlock®); and (iv) bulletin-board or real-time online auctions (DealerBlock®). Both the upstream and midstream selling represent online only sales, which accounted for over half of ADESA's online sales volume. ADESA sold approximately 146,000 and 120,000 vehicles through its online only offerings in the third quarter of 2015 and 2014, respectively, of which approximately 90,000 and 80,000 represented vehicle sales to grounding dealers in the third quarter of 2015 and 2014, respectively. For the three months ended September 30, 2015, dealer consignment vehicles represented approximately 52% of used vehicles sold at ADESA physical auction locations, compared with approximately 53% for the three months ended September 30, 2014. Vehicles sold at physical auction locations increased 13% in the third quarter of 2015, compared with the third quarter of 2014. The used vehicle conversion percentage at physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, increased to 56.9% for the
three months ended September 30, 2015, compared with 54.5% for the three months ended September 30, 2014.
Total revenue per vehicle sold decreased to approximately $561 for the three months ended September 30, 2015, compared with approximately $565 for the three months ended September 30, 2014, and included the impact of a decrease in revenue per vehicle sold of $18 due to fluctuations in the Canadian exchange rate. Physical auction revenue per vehicle sold increased to $699 for the three months ended September 30, 2015, from $697 for the three months ended September 30, 2014. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in lower margin ancillary and other related services revenue, including revenue from AutoVIN, MobileTrac and AutoNiq, partially offset by a decrease in physical auction revenue per vehicle sold of $22 due to fluctuations in the Canadian exchange rate. Online only auction revenue per vehicle sold increased $13 to $110 for the three months ended September 30, 2015, compared with $97 for the three months ended September 30, 2014. The increase in online only auction revenue per vehicle sold was attributable to an increase in fees per car sold, primarily due to an increase in the number of cars sold in open sales, partially offset by a decrease in online only auction revenue per vehicle sold of $4 due to fluctuations in the Canadian exchange rate. The revenue per vehicle sold in an open online only auction is greater than the revenue per vehicle sold in closed sales.
Gross Profit
For the three months ended September 30, 2015, gross profit for ADESA increased $18.7 million, or 14%, to $152.2 million, compared with $133.5 million for the three months ended September 30, 2014. Gross profit for ADESA was 43.3% of revenue for the three months ended September 30, 2015 and 2014. The increase in gross profit for the three months ended September 30, 2015, compared with the three months ended September 30, 2014, was primarily the result of the increase in vehicles sold.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $7.2 million, or 11%, to $71.3 million for the three months ended September 30, 2015, compared with $64.1 million for the three months ended September 30, 2014, primarily due to increases in selling, general and administrative expenses associated with acquisitions of $3.0 million, compensation expense of $2.5 million, marketing expenses of $1.3 million, incentive-based compensation expense of $1.2 million, the loss on disposal of certain assets of $1.2 million, as well as increases in travel and telecom expenses, partially offset by fluctuations in the Canadian exchange rate of $2.1 million and a decrease in stock-based compensation expense of $1.4 million.
Overview of ADESA Results for the Nine Months Ended September 30, 2015 and 2014
Revenue
Revenue from ADESA increased $116.4 million, or 13%, to $1,024.4 million for the nine months ended September 30, 2015, compared with $908.0 million for the nine months ended September 30, 2014. The increase in revenue was primarily a result of a 12% increase in the number of vehicles sold, as well as a 1% increase in revenue per vehicle sold, which included the impact of a decrease in revenues of $25.2 million due to fluctuations in the Canadian exchange rate.
The increase in volume sold was primarily attributable to an increase in institutional volume, including vehicles sold on our online only platform, as well as a 6% increase in dealer consignment units sold for the nine months ended September 30, 2015 compared with the nine months ended September 30, 2014. Online sales volume for ADESA represented approximately 40% of the total vehicles sold in the first nine months of 2015, compared with approximately 38% in the first nine months of 2014. Both the upstream and midstream selling represent online only sales, which accounted for over half of ADESA's online sales volume. ADESA sold approximately 440,000 and 381,000 vehicles through its online only offerings in the first nine months of 2015 and 2014, respectively, of which approximately 272,000 and 240,000 represented vehicle sales to grounding dealers in the first nine months of 2015 and 2014, respectively. For the nine months ended September 30, 2015, dealer consignment vehicles represented approximately 50% of used vehicles sold at ADESA physical auction locations, compared with approximately 52% for the nine months ended September 30, 2014. Vehicles sold at physical auction locations increased 11% in the first nine months of 2015, compared with the first nine months of 2014. The used vehicle conversion percentage at physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered
for sale at our ADESA auctions, increased to 59.0% for the nine months ended September 30, 2015, compared with 58.7% for the nine months ended September 30, 2014.
Total revenue per vehicle sold increased to approximately $551 for the nine months ended September 30, 2015, compared with approximately $548 for the nine months ended September 30, 2014, and included the impact of a decrease in revenue per vehicle sold of $14 due to fluctuations in the Canadian exchange rate. Physical auction revenue per vehicle sold increased $9, or 1%, to $689 for the nine months ended September 30, 2015, compared with $680 for the nine months ended September 30, 2014. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in lower margin ancillary and other related services revenue, including revenue from AutoVIN, MobileTrac and AutoNiq, partially offset by a decrease in physical auction revenue per vehicle sold of $17 due to fluctuations in the Canadian exchange rate. Online only auction revenue per vehicle sold increased $2 to $105 for the nine months ended September 30, 2015, compared with $103 for the nine months ended September 30, 2014. The increase in online only auction revenue per vehicle sold was attributable to an increase in fees per car sold, primarily due to an increase in the number of cars sold in closed sales to non-grounding dealers, as well as an increase in the number of cars sold in open sales, partially offset by a decrease in online only auction revenue per vehicle sold of $3 due to fluctuations in the Canadian exchange rate.
Gross Profit
For the nine months ended September 30, 2015, gross profit for ADESA increased $50.8 million, or 13%, to $446.3 million, compared with $395.5 million for the nine months ended September 30, 2014. Gross profit for ADESA was 43.6% of revenue for the nine months ended September 30, 2015 and 2014. The increase in gross profit for the nine months ended September 30, 2015, compared with the nine months ended September 30, 2014, was primarily the result of the increase in vehicles sold.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $10.6 million, or 5%, to $207.3 million for the nine months ended September 30, 2015, compared with $196.7 million for the nine months ended September 30, 2014, primarily due to increases in compensation expense of $6.3 million, selling, general and administrative expenses associated with acquisitions of $4.6 million, marketing expenses of $2.8 million, incentive-based compensation expense of $2.5 million, the loss on disposal of certain assets of $2.1 million, increases in acquisition-related professional fees of $1.9 million, travel expenses of $1.5 million, supply expenses of $1.1 million and other professional fees of $0.9 million, partially offset by a decrease in stock-based compensation expense of $8.9 million and fluctuations in the Canadian exchange rate of $4.5 million.
IAA Results
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions) | 2015 | | 2014 | | 2015 | | 2014 |
IAA revenue |
| $246.2 |
| |
| $217.5 |
| |
| $732.8 |
| |
| $666.3 |
|
Cost of services* | 158.9 |
| | 135.4 |
| | 460.6 |
| | 410.3 |
|
Gross profit* | 87.3 |
| | 82.1 |
| | 272.2 |
| | 256.0 |
|
Selling, general and administrative | 25.6 |
| | 23.5 |
| | 72.6 |
| | 73.6 |
|
Depreciation and amortization | 20.1 |
| | 19.1 |
| | 59.1 |
| | 56.6 |
|
Operating profit |
| $41.6 |
| |
| $39.5 |
| |
| $140.5 |
| |
| $125.8 |
|
EBITDA |
| $60.8 |
| |
| $58.6 |
| |
| $198.1 |
| |
| $182.3 |
|
Adjustments per the Credit Agreement | 1.1 |
| | 0.7 |
| | 1.4 |
| | 5.1 |
|
Adjusted EBITDA |
| $61.9 |
| |
| $59.3 |
| |
| $199.5 |
| |
| $187.4 |
|
* Exclusive of depreciation and amortization
Overview of IAA Results for the Three Months Ended September 30, 2015 and 2014
Revenue
Revenue from IAA increased $28.7 million, or 13%, to $246.2 million for the three months ended September 30, 2015, compared with $217.5 million for the three months ended September 30, 2014. The increase in revenue was a result of an increase in vehicles sold of approximately 16% for the three months ended September 30, 2015, partially offset by a 3% decrease in revenue per vehicle sold, which included the impact of a decrease in revenues of $3.1 million due to fluctuations in the Canadian exchange rate. Revenue per vehicle sold was also negatively impacted by lower average auction prices due to a decrease in scrap prices and the impact of a strong U.S. dollar. IAA's total loss vehicle inventory increased approximately 20% at September 30, 2015, as compared to September 30, 2014. Vehicles sold under purchase agreements were approximately 7% of total salvage vehicles sold for the three months ended September 30, 2015, compared with approximately 6% for the three months ended September 30, 2014. The 1% increase in vehicles sold under purchase agreements is representative of vehicles sold by HBC. Online sales volumes for IAA for the three months ended September 30, 2015 and 2014 represented over half of the total vehicles sold by IAA.
Gross Profit
For the three months ended September 30, 2015, gross profit at IAA increased to $87.3 million, or 35.5% of revenue, compared with $82.1 million, or 37.7% of revenue, for the three months ended September 30, 2014. The increase in gross profit was mainly attributable to a 13% increase in revenue, partially offset by a 17% increase in cost of services related to purchase contracts and volume growth. For the three months ended September 30, 2015, HBC had revenue of approximately $9.8 million and cost of services of approximately $9.1 million, as the majority of HBC's vehicles are sold under purchase contracts. HBC accounted for a 1.2% decrease in IAA's gross profit margin percentage for the three months ended September 30, 2015. In addition, the reduction in gross profit on North American purchase contract vehicles accounted for a 0.4% decrease in IAA's gross profit margin percentage for the three months ended September 30, 2015.
Selling, General and Administrative
Selling, general and administrative expenses at IAA increased $2.1 million, or 9%, to $25.6 million for the three months ended September 30, 2015, compared with $23.5 million for the three months ended September 30, 2014. The increase in selling, general and administrative expenses was primarily attributable to increases in telecom costs of $1.0 million, compensation expense of $0.9 million and the inclusion of expenses associated with HBC of $0.8 million, partially offset by a decrease in stock-based compensation expense of $0.8 million.
Overview of IAA Results for the Nine Months Ended September 30, 2015 and 2014
Revenue
Revenue from IAA increased $66.5 million, or 10%, to $732.8 million for the nine months ended September 30, 2015, compared with $666.3 million for the nine months ended September 30, 2014. The increase in revenue was a result of an increase in vehicles sold of approximately 13% for the nine months ended September 30, 2015, partially offset by a 3% decrease in revenue per vehicle sold, which included the impact of a decrease in revenues of $7.9 million due to fluctuations in the Canadian exchange rate. Revenue per vehicle sold was also negatively impacted by lower average auction prices due to a decrease in scrap prices and the impact of a strong U.S. dollar. Vehicles sold under purchase agreements were approximately 7% of total salvage vehicles sold for the nine months ended September 30, 2015, compared with approximately 6% for the nine months ended September 30, 2014. The 1% increase in vehicles sold under purchase agreements is representative of vehicles sold by HBC. Online sales volumes for IAA for the nine months ended September 30, 2015 and 2014 represented over half of the total vehicles sold by IAA.
Gross Profit
For the nine months ended September 30, 2015, gross profit at IAA increased to $272.2 million, or 37.1% of revenue, compared with $256.0 million, or 38.4% of revenue, for the nine months ended September 30, 2014. The increase in gross profit was mainly attributable to a 10% increase in revenue, partially offset by a 12% increase in cost of services related to purchase contracts and volume growth. For the nine months ended September 30, 2015, HBC had revenue of approximately $14.0 million and cost of services of approximately $13.0 million, as the majority of HBC's vehicles are sold under purchase contracts. HBC accounted for a 0.6% decrease in IAA's gross profit margin percentage for the nine months ended September 30, 2015. In addition, the reduction in gross profit on North American purchase contract vehicles accounted for a 0.5% decrease in IAA's gross profit margin percentage for the nine months ended September 30, 2015.
Selling, General and Administrative
Selling, general and administrative expenses at IAA decreased $1.0 million, or 1%, to $72.6 million for the nine months ended September 30, 2015, compared with $73.6 million for the nine months ended September 30, 2014. The decrease in selling, general and administrative expenses was primarily attributable to decreases in stock-based compensation expense of $5.1 million, non-income based taxes of $0.9 million and bad debt expense of $0.8 million, partially offset by increases in telecom costs of $2.9 million, compensation expense of $1.2 million, the inclusion of expenses associated with HBC of $1.1 million and professional fees of $0.8 million.
AFC Results
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in millions except volumes and per loan amounts) | 2015 | | 2014 | | 2015 | | 2014 |
AFC revenue |
| $69.1 |
| |
| $63.5 |
| |
| $200.2 |
| |
| $184.2 |
|
Cost of services* | 20.0 |
| | 18.0 |
| | 58.0 |
| | 51.8 |
|
Gross profit* | 49.1 |
| | 45.5 |
| | 142.2 |
| | 132.4 |
|
Selling, general and administrative | 7.0 |
| | 6.8 |
| | 21.0 |
| | 22.1 |
|
Depreciation and amortization | 7.7 |
| | 7.7 |
| | 23.2 |
| | 22.7 |
|
Operating profit |
| $34.4 |
| |
| $31.0 |
| |
| $98.0 |
| |
| $87.6 |
|
EBITDA |
| $42.1 |
| |
| $38.7 |
| |
| $122.7 |
| |
| $110.3 |
|
Adjustments per the Credit Agreement | (4.2) |
| | (2.4) |
| | (12.1) |
| | (5.4) |
|
Adjusted EBITDA |
| $37.9 |
| |
| $36.3 |
| |
| $110.6 |
| |
| $104.9 |
|
| | | | | | | |
Loan transactions | 405,116 |
| | 358,800 |
| | 1,198,473 |
| | 1,071,161 |
|
Revenue per loan transaction, excluding “Other service revenue” |
| $153 |
| |
| $158 |
| |
| $150 |
| |
| $155 |
|
* Exclusive of depreciation and amortization
Overview of AFC Results for the Three Months Ended September 30, 2015 and 2014
Revenue
For the three months ended September 30, 2015, AFC revenue increased $5.6 million, or 9%, to $69.1 million, compared with $63.5 million for the three months ended September 30, 2014. The increase in revenue was the result of a 13% increase in loan transactions and an increase of 6% in "Other service revenue" generated by PWI, partially offset by a 3% decrease in revenue per loan transaction for the three months ended September 30, 2015, which included the impact of a decrease in revenues of $0.8 million, or $2 per loan transaction, due to fluctuations in the Canadian exchange rate. In addition, managed receivables increased to $1,529.6 million at September 30, 2015 from $1,285.3 million at September 30, 2014.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased $5, or 3%, primarily as a result of a decrease in fee income, as well as fluctuations in the Canadian exchange rate, partially offset by a decrease in the provision for credit losses and increases in average portfolio duration, other revenue and average loan values. Revenue per loan transaction excludes "Other service revenue."
Gross Profit
For the three months ended September 30, 2015, gross profit for the AFC segment increased $3.6 million, or 8%, to $49.1 million, or 71.1% of revenue, compared with $45.5 million, or 71.7% of revenue, for the three months ended September 30, 2014, primarily as a result of a 9% increase in revenue, partially offset by an 11% increase in cost of services. The floorplan lending business gross profit margin percentage decreased from 78.2% to 77.4% as a result of lower revenue per loan transaction and increased compensation expense. The gross profit margin percentage in the warranty service contract business was approximately 15%.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $0.2 million, or 3%, to $7.0 million for the three months ended September 30, 2015, compared with $6.8 million for the three months ended September 30, 2014. The increase was primarily attributable to increases in expenses associated with PWI's expansion into new markets and compensation expense, partially offset by a decrease in stock-based compensation expense.
Overview of AFC Results for the Nine Months Ended September 30, 2015 and 2014
Revenue
For the nine months ended September 30, 2015, AFC revenue increased $16.0 million, or 9%, to $200.2 million, compared with $184.2 million for the nine months ended September 30, 2014. The increase in revenue was the result of a 12% increase in loan transactions and an increase of 11% in "Other service revenue" generated by PWI, partially offset by a 3% decrease in revenue per loan transaction for the nine months ended September 30, 2015, which included the impact of a decrease in revenues of $1.7 million, or $1 per loan transaction, due to fluctuations in the Canadian exchange rate. In addition, managed receivables increased to $1,529.6 million at September 30, 2015 from $1,285.3 million at September 30, 2014.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased $5, or 3%, primarily as a result of a decrease in fee income and fluctuations in the Canadian exchange rate, partially offset by increases in average loan values, other revenue and average portfolio duration. Revenue per loan transaction excludes "Other service revenue."
Gross Profit
For the nine months ended September 30, 2015, gross profit for the AFC segment increased $9.8 million, or 7%, to $142.2 million, or 71.0% of revenue, compared with $132.4 million, or 71.9% of revenue, for the nine months ended September 30, 2014, primarily as a result of a 9% increase in revenue, partially offset by a 12% increase in cost of services. The floorplan lending business gross profit margin percentage decreased from 78.4% to 77.5% as a result of lower revenue per loan transaction and increased compensation expense. The gross profit margin percentage in the warranty service contract business increased from 13.3% to 15.0% as a result of increased revenue growth and a decreased rate of service contract claims.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $1.1 million, or 5%, to $21.0 million for the nine months ended September 30, 2015, compared with $22.1 million for the nine months ended September 30, 2014. The decrease was primarily attributable to a decrease in stock-based compensation expense of $2.6 million, partially offset by increases in compensation expense and expenses associated with PWI.
LIQUIDITY AND CAPITAL RESOURCES
The company believes that the significant indicators of liquidity for its business are cash on hand, cash flow from operations, working capital and amounts available under its Credit Facility. The company’s principal sources of liquidity consist of cash generated by operations and borrowings under its revolving credit facility.
|
| | | | | | | | | | | | |
(Dollars in millions) | | September 30, 2015 | | December 31, 2014 | | September 30, 2014 |
Cash and cash equivalents | |
| $125.3 |
| |
| $152.9 |
| |
| $214.9 |
|
Restricted cash | | 15.0 |
| | 17.0 |
| | 16.2 |
|
Working capital | | 236.7 |
| | 484.3 |
| | 451.3 |
|
Amounts available under Credit Facility* | | 119.5 |
| | 250.0 |
| | 250.0 |
|
Cash flow from operations for the nine months ended | | 315.4 |
| | | | 327.7 |
|
*KAR Auction Services, Inc. has a $250 million revolving line of credit as part of the company’s Credit Agreement and $130.5 million was drawn as of September 30, 2015. There were related outstanding letters of credit totaling approximately $28.6 million, $25.1 million and $26.4 million at September 30, 2015, December 31, 2014 and September 30, 2014, 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. For the nine months ended September 30, 2015, the Company used cash of $92.3 million to purchase property, plant, equipment and computer software.
Summary of Cash Flows
|
| | | | | | | |
| Nine Months Ended September 30, |
(Dollars in millions) | 2015 | | 2014 |
Net cash provided by (used by): | | | |
Operating activities |
| $315.4 |
| |
| $327.7 |
|
Investing activities | (382.5) |
| | (290.1) |
|
Financing activities | 53.6 |
| | (9.3) |
|
Effect of exchange rate on cash | (14.1) |
| | (5.0) |
|
Net (decrease) increase in cash and cash equivalents | $(27.6) | |
| $23.3 |
|
Cash flow from operating activities was $315.4 million for the nine months ended September 30, 2015, compared with $327.7 million for the nine months ended September 30, 2014. 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, as well as a net decrease in non-cash adjustments to net income, partially offset by increased profitability.
Net cash used by investing activities was $382.5 million for the nine months ended September 30, 2015, compared with $290.1 million for the nine months ended September 30, 2014. The increase in net cash used by investing activities was primarily attributable to:
| |
• | an increase in cash used for acquisitions of approximately $84.3 million; and |
| |
• | an increase in capital expenditures of approximately $22.0 million; |
partially offset by:
| |
• | a decrease in the additional finance receivables held for investment of approximately $14.5 million. |
Net cash provided by financing activities was $53.6 million for the nine months ended September 30, 2015, compared with net cash used by financing activities of $9.3 million for the nine months ended September 30, 2014. The increase in net cash from financing activities was primarily attributable to:
| |
• | a larger increase in obligations collateralized by finance receivables of approximately $177.9 million, in part related to the amendment of the securitization agreement, including the reduction of the overcollateralization requirement; and |
| |
• | increased borrowings on the revolving credit facility of $130.5 million; |
partially offset by:
| |
• | a $227.6 million increase in cash used for the repurchase and retirement of common stock; and |
| |
• | a $10.1 million increase in dividends paid to stockholders for the nine months ended September 30, 2015, compared with the same period in 2014. |
Acquisitions
The aggregate purchase price for the businesses acquired in the first nine months of 2015, net of cash acquired, was approximately $124.8 million, which includes estimated contingent payments with a fair value of $9.6 million. The maximum amount of undiscounted contingent payments related to these acquisitions could approximate $18.0 million. The purchase price for the acquired businesses was allocated to acquired assets and liabilities based upon fair values, including $31.6 million to intangible assets, representing the fair value of acquired customer relationships, tradenames and software, which are being amortized over their expected useful lives. The purchase accounting associated with these acquisitions is preliminary, subject to determination of working capital adjustments and final valuation results. The Company does not expect adjustments to the purchase accounting will be material. The acquisitions resulted in aggregate goodwill of $89.6 million. The goodwill is recorded in the ADESA Auctions and IAA reportable segments. The financial impact of these acquisitions, including pro forma financial results, was immaterial to the Company’s consolidated results.
Revenue and Adjusted EBITDA of the entities acquired in the first nine months of 2015 was approximately $110 million and approximately $15 million, respectively, for the last twelve months prior to acquisition. We expect these acquisitions to contribute approximately $5 million to $10 million of Adjusted EBITDA in 2015 and approximately $20 million to $25 million of Adjusted EBITDA after the businesses are fully integrated.
Operating Adjusted Net Income and Operating Adjusted Net Income Per Share
Depreciation expense for property and equipment and amortization expense of capitalized internally developed software costs relate to ongoing capital expenditures; however, amortization expense associated with acquired intangible assets, such as customer relationships, software, tradenames and noncompete agreements are not representative of ongoing capital expenditures, but have a continuing effect on our reported results. Non-GAAP financial measures of operating adjusted net income and operating adjusted net income per share, in the opinion of the company, provide comparability to other companies that may not have incurred these types of non-cash expenses or that report a similar measure. In addition, net income and net income per share have been adjusted for certain other charges, as seen in the following reconciliation.
The following table reconciles operating adjusted net income and operating adjusted net income per share to net income and net income per share for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions, except per share amounts) | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Net income |
| $52.3 |
| |
| $47.5 |
| |
| $166.3 |
| |
| $119.0 |
|
Acquired amortization expense, net of tax (1) | 14.3 |
| | 13.3 |
| | 40.9 |
| | 40.6 |
|
Loss on extinguishment of debt, net of tax (2) | -- |
| | -- |
| | -- |
| | 19.2 |
|
Operating adjusted net income |
| $66.6 |
| |
| $60.8 |
| |
| $207.2 |
| |
| $178.8 |
|
| | | | | | | |
Net income per share – diluted |
| $0.37 |
| |
| $0.33 |
| |
| $1.16 |
| |
| $0.84 |
|
Acquired amortization expense, net of tax | 0.10 |
| | 0.10 |
| | 0.29 |
| | 0.28 |
|
Loss on extinguishment of debt, net of tax | -- |
| | -- |
| | -- |
| | 0.14 |
|
Operating adjusted net income per share – diluted |
| $0.47 |
| |
| $0.43 |
| |
| $1.45 |
| |
| $1.26 |
|
| | | | | | | |
Weighted average diluted shares | 141.8 |
| | 142.3 |
| | 143.2 |
| | 141.4 |
|
| |
(1) | Acquired amortization expense was $22.4 million ($14.3 million net of tax) and $21.3 million ($13.3 million net of tax) for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014 acquired amortization expense was $65.3 million ($40.9 million net of tax) and $64.0 million ($40.6 million net of tax), respectively. |
| |
(2) | We incurred a loss on the extinguishment of debt totaling $30.3 million ($19.2 million net of tax) for the nine months ended September 30, 2014. |
Non-GAAP Financial Measures
The company provides historical and forward-looking non-GAAP measures called EBITDA, Adjusted EBITDA, free cash flow, adjusted net income, adjusted net income per share, operating adjusted net income and operating adjusted net income per share. Management believes that these measures provide investors additional meaningful methods to evaluate certain aspects of the company’s results period over period and for the other reasons set forth previously.
Earnings guidance also does not contemplate future items such as business development activities, strategic developments (such as restructurings or dispositions of assets or investments), significant expenses related to litigation and changes in applicable laws and regulations (including significant accounting and tax matters). The timing and amounts of these items are highly variable, difficult to predict, and of a potential size that could have a substantial impact on the company’s reported results for any given period. Prospective quantification of these items is generally not practicable. Forward-looking non-GAAP guidance excludes increased depreciation and amortization expense that resulted from the 2007 revaluation of the company’s assets, as well as one-time charges, net of taxes.
KAR Auction Services, Inc. Q3 2015 Earnings Slides November 4, 2015
Forward-Looking Statements This presentation includes forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those projected, expressed or implied by such forward-looking statements. Many of these risk factors are outside of the company’s control, and as such, they involve risks which are not currently known to the company that could cause actual results to differ materially from forecasted results. Factors that could cause or contribute to such differences include those matters disclosed in the company’s Securities and Exchange Commission filings. The forward-looking statements in this document are made as of the date hereof and the company does not undertake to update its forward-looking statements. 2
Third Quarter and YTD 2015 Highlights 3 Summary • 13% revenue growth, 9% Adjusted EBITDA growth and 4% growth in Adjusted Net Income • For the first nine months of year, returned $342.4 million to shareholders via dividend and common stock repurchases, retiring approximately 5.3 million shares • 5% growth in Adjusted EPS to $0.42 and 9% growth in Operating Adjusted EPS to $0.47 • Ended quarter with net debt / Adjusted EBITDA of 2.83X ADESA • 15% volume growth, 14% revenue growth and 16% growth in Adjusted EBITDA • 13% physical volume sold growth • Announced TradeRev expansion into the Carolinas and Florida IAA • 16% growth in volume • 13% growth in revenue • Launched Total Loss Solutions Suite of Products • Inventory increased approximately 20% year over year AFC • Achieved growth in volumes and revenue of 13% and 9%, respectively • Managed receivables at September 30 were $1,529.6 million – an increase of 19% over September 30, 2014 • Managed portfolio over 99% current as of 9/30/15
KAR Q3 2015 Highlights 4 (in millions, except per share amounts) KAR Q3 2015 Q3 2014 Highlights* Total operating revenues 666.7$ 589.1$ -$15.2M CAD currency Gross profit** 288.6$ 261.1$ SG&A $ 128.5 $ 116.5 +$3.8M acquired SG&A, +1.4M professional fees, -$2.4M CAD currency EBITDA 160.3$ 145.0$ -$6M CAD currency Adjusted EBITDA 163.1$ 149.1$ -$6M CAD currency Net income 52.3$ 47.5$ -$3M CAD currency Net income per share - diluted 0.37$ 0.33$ -$0.02 per share CAD currency Weighted average diluted shares 141.8 142.3 Dividends declared per common share 0.27$ 0.25$ Effective tax rate 36.1% 37.4% Capital expenditures 92.3$ 70.3$ Cash flow from operating activities 315.4$ 327.7$ * For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information and Form 10-Q, both for the quarter ended September 30, 2015. ** Exclusive of depreciation and amortization
ADESA Q3 2015 Highlights 5 ($ in millions except RPU) ADESA Q3 2015 Q3 2014 Highlights* Revenue $ 351.4 $ 308.1 +15% volume, -1% RPU (includes -$11.3M CAD currency), +$15.0M acquisitions Gross profit** 152.2$ 133.5$ +$5.2M acquisitions Gross profit % 43.3% 43.3% SG&A $ 71.3 $ 64.1 +$3.0M acquired SG&A , +$2.5M compensation expense, +$1.3M marketing expenses, +$1.2M incentive based compensation expense, +$1.2M loss on disposal of land, -$2.1M CAD currency, -$1.4M stock-based compensation expense EBITDA 80.2$ 68.3$ -$4.5M CAD currency Adjusted EBITDA 85.9$ 73.9$ -$4.6M CAD currency Total volume growth - % 15% 6% Physical 13% 4% Online only 22% 11% Dealer consignment growth 10% 2% Dealer consignment % 52% 53% Conversion rate (physical) 56.9% 54.5% Online volume as a % of total volume 38% 36% Online only volume 146,000 120,000 Online grounding dealer volume 90,000 80,000 Total revenue per vehicle 561$ 565$ -$18 CAD currency Physical RPU 699$ 697$ -$22 CAD currency Online only RPU 110$ 97$ -$4 CAD currency * For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information and Form 10-Q, both for the quarter ended September 30, 2015. ** Exclusive of depreciation and amortization
IAA Q3 2015 Highlights 6 ($ in millions) IAA Q3 2015 Q3 2014 Highlights* Revenue $ 246.2 $ 217.5 +16% volume, -3% RPU (includes -$3.1M CAD currency) +$9.8M HBC Gross profit** 87.3$ 82.1$ +$0.7M HBC Gross profit % 35.5% 37.7% SG&A $ 25.6 $ 23.5 +$1.0M telecom expenses, +$0.9M compensation expense, +$0.8M acquired SG&A, -$0.8M stock-based compensation expense EBITDA 60.8$ 58.6$ -$1M CAD currency Adjusted EBITDA 61.9$ 59.3$ -$1M CAD currency % Volume growth 16% 7% % Purchased contract vehicles 7% 6% +1% HBC volume * For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information and Form 10-Q, both for the quarter ended September 30, 2015. ** Exclusive of depreciation and amortization
AFC Q3 2015 Highlights 7 AFC Q3 2015 Q3 2014 Highlights* Revenue 69.1$ 63.5$ +13% LTUs, +6% in "Other service revenue", -3% revenue per LTU ( includes -$0.8M CAD currency) Other service revenue 7.1$ 6.7$ Provision for credit losses (2.7)$ (3.3)$ Gross profit** 49.1$ 45.5$ Gross profit % 71.1% 71.7% SG&A 7.0$ 6.8$ EBITDA 42.1$ 38.7$ -$0.6M CAD currency Adjusted EBITDA 37.9$ 36.3$ -$0.5M CAD currency Loan transactions 405,116 358,800 % Volume growth 13% 5% Revenue per loan transaction unit (LTU)*** 153$ 158$ -$2 CAD currency Managed receivables 1,529.6$ 1,285.3$ Obligations collateralized by finance receivables 1,122.9$ 858.8$ * For a more complete explanation of these changes, see the MD&A in the company's supplemental financial information and Form 10-Q, both for the quarter ended September 30, 2015. ** Exclusive of depreciation and amortization *** Excludes "Other service revenue" ($ in millions except for revenue per loan transaction)
ADESA Incremental Operating Profit Margin Analysis 8 ($ in millions) Reported Impact of Acquisitions ADESA Excluding Acquisitions Q3 2015 Revenue 351.4$ 15.0$ 336.4$ Operating Profit 58.6$ 0.5$ 58.1$ Operating Profit % 16.7% 3.3% 17.3% Q3 2014 Revenue 308.1$ Operating Profit 49.7$ Operating Profit % 16.1% Q3 2015 Reported Growth Reported Revenue Growth 43.3$ Reported Operating Profit Growth 8.9$ Incremental Operating Margin 20.6% Q3 2015 Excluding Acquisitions Revenue Growth 28.3$ Operating Profit Growth 8.4$ Incremental Operating Margin 29.7%
Appendix 9
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings as described in the company's senior secured credit agreement covenant calculations. Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by the company’s creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate the company’s 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. Non-GAAP Financial Measures 10
Q3 2014 Adjusted EBITDA Reconciliation 11 ($ in millions) Three Months ended September 30, 2014 ADESA IAA AFC Corporate Consolidated Net income (loss) $22.3 $19.1 $20.0 ($13.9) $47.5 Add back: Income taxes 13.4 11.0 12.1 (8.1) 28.4 Interest expense, net of interest income 0.1 – 4.7 15.4 20.2 Depreciation and amortization 19.7 19.1 7.7 2.4 48.9 Intercompany interest 12.8 9.4 (5.8) (16.4) – EBITDA $68.3 $58.6 $38.7 ($20.6) $145.0 Adjustments per the Credit Agreement 5.6 0.7 (2.4) 0.2 4.1 Adjusted EBITDA $73.9 $59.3 $36.3 ($20.4) $149.1 Revenue $308.1 $217.5 $63.5 – $589.1 Adjusted EBITDA % margin 24.0% 27.3% 57.2% 25.3%
12 Q3 2015 Adjusted EBITDA Reconciliation ($ in millions) Three Months ended September 30, 2015 ADESA IAA AFC Corporate Consolidated Net income (loss) $29.6 $19.9 $22.1 ($19.3) $52.3 Add back: Income taxes 16.0 11.4 13.6 (11.4) 29.6 Interest expense, net of interest income 0.1 – 6.6 17.6 24.3 Depreciation and amortization 22.3 20.1 7.7 4.0 54.1 Intercompany interest 12.2 9.4 (7.9) (13.7) – EBITDA $80.2 $60.8 $42.1 ($22.8) $160.3 Adjustments per the Credit Agreement 5.7 1.1 (4.2) 0.2 2.8 Adjusted EBITDA $85.9 $61.9 $37.9 ($22.6) $163.1 Revenue $351.4 $246.2 $69.1 – $666.7 Adjusted EBITDA % margin 24.4% 25.1% 54.8% 24.5%
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