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 endedDecember 31, 2021 , filed onFebruary 23, 2022 , and those described from time to time in our future reports filed with theSecurities 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
InFebruary 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 ADESAU.S. physical auction business from KAR (the "Transaction"). The Transaction was completed inMay 2022 for approximately$2.2 billion in cash and included all auction sales, operations and staff at ADESA'sU.S. vehicle logistic centers and use of the ADESA.com marketplace in theU.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 ADESAU.S. physical auctions will continue to utilize the tradename, which has an indefinite life. The financial results of the ADESAU.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 ADESAU.S. physical auctions based on relative fair value. Discontinued operations included transaction costs of approximately$37.1 million for the nine months endedSeptember 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 endedSeptember 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 ADESAU.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 inNorth America andEurope . 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 acrossCanada 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 byOpenlane , 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 inthe United States , CARWAVE, an online dealer-to-dealer marketplace inthe United States , TradeRev, an online automotive remarketing platform inCanada 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 theUnited Kingdom andADESA Europe , an online wholesale vehicle auction marketplace in Continental Europe.
•As noted above, the Marketplace segment results no longer include the 56 ADESA
•Through AFC, the Finance segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers throughoutthe United States andCanada . 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 throughoutNorth America .
Beginning in the first quarter of 2022, results of the ADESA
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 endedDecember 31, 2021 , compared with approximately 398,000 vehicles for the year endedDecember 31, 2020 . For the three months endedSeptember 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 endedSeptember 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 inOctober 2021 and vehicles sold by BacklotCars prior to its acquisition inNovember 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. 26
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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
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 ADESAU.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 endedSeptember 30, 2022 , we had revenue of$393.0 million compared with revenue of$347.1 million for the three months endedSeptember 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 endedSeptember 30, 2022 , compared with$27.4 million for the three months endedSeptember 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. 28
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Interest Expense
Interest expense increased$0.4 million , or 1%, to$32.3 million for the three months endedSeptember 30, 2022 , compared with$31.9 million for the three months endedSeptember 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 endedSeptember 30, 2022 , as compared with approximately 2.5% for the three months endedSeptember 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 endedSeptember 30, 2022 , we had other expense of$1.2 million compared with$13.9 million for the three months endedSeptember 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 endedSeptember 30, 2022 . The Company had unrealized losses of$0.3 million for the three months endedSeptember 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 endedSeptember 30, 2022 , compared with an effective tax rate of -62.0% resulting in expense on a pre-tax loss for the three months endedSeptember 30, 2021 . The effective tax rate for the three months endedSeptember 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 endedSeptember 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
InMay 2022 , Carvana acquired the ADESAU.S. physical auction business from KAR. As such, the financial results of the ADESAU.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the three months endedSeptember 30, 2022 , the Company's financial statements included a loss from discontinued operations of$6.3 million . For the three months endedSeptember 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 endedSeptember 30, 2022 compared with the three months endedSeptember 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 endedSeptember 30, 2022 compared with the three months endedSeptember 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 . 29
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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 endedSeptember 30, 2022 , compared with$271.5 million for the three months endedSeptember 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 acrossCanada and include ADESA Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and includeOpenlane , BacklotCars, CARWAVE, TradeRev andADESA 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
increased
dealer off-premise auction fees and a smaller mix of lower-fee commercial
off-premise vehicles.
Service revenue for the three months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 . Gross profit for the Marketplace segment was 34.2% of revenue for the three months endedSeptember 30, 2022 , compared with 36.7% of revenue for the three months endedSeptember 30, 2021 . Excluding purchased vehicle sales, gross profit as a percentage of revenue was 40.5% and 45.7% for the three months endedSeptember 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 endedSeptember 30, 2022 . 30
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Gross profit as a percentage of revenue decreased for the three months endedSeptember 30, 2022 as compared with the three months endedSeptember 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 inCanada 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 endedSeptember 30, 2022 , compared with$96.3 million for the three months endedSeptember 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
* Exclusive of depreciation and amortization
Revenue
For the three months endedSeptember 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 endedSeptember 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
three months ended
Gross Profit
For the three months endedSeptember 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 endedSeptember 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 . 31
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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 endedSeptember 30, 2022 , compared with$8.5 million for the three months endedSeptember 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$1.5 million . Overview of Results ofKAR Auction Services, Inc. for the Nine Months EndedSeptember 30, 2022 and 2021: Nine Months Ended September 30, (Dollars in millions except per share amounts) 2022 2021 Revenues from continuing operations Auction fees$ 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 ADESAU.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 endedSeptember 30, 2022 , we had revenue of$1,146.6 million compared with revenue of$1,092.9 million for the nine months endedSeptember 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. 32
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Depreciation and Amortization
Depreciation and amortization decreased$5.5 million , or 7%, to$76.2 million for the nine months endedSeptember 30, 2022 , compared with$81.7 million for the nine months endedSeptember 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 endedSeptember 30, 2022 , compared with$93.7 million for the nine months endedSeptember 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 endedSeptember 30, 2022 , as compared with approximately 2.4% for the nine months endedSeptember 30, 2021 .
Other (Income) Expense, Net
For the nine months endedSeptember 30, 2022 , we had other expense of$6.4 million compared with other income of$20.5 million for the nine months endedSeptember 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 endedSeptember 30, 2022 , compared with unrealized gains on investment securities of approximately$10.7 million for the nine months endedSeptember 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 endedSeptember 30, 2022 . The Company had unrealized losses of$6.5 million for the nine months endedSeptember 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 endedSeptember 30, 2022 , compared with an effective tax rate of 175.5% for the nine months endedSeptember 30, 2021 . The effective tax rate for the nine months endedSeptember 30, 2022 was favorably impacted by the state rate change impact on deferred taxes. The effective tax rate for the nine months endedSeptember 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
InMay 2022 , Carvana acquired the ADESAU.S. physical auction business from KAR. As such, the financial results of the ADESAU.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the nine months endedSeptember 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 endedSeptember 30, 2022 compared with the nine months endedSeptember 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 endedSeptember 30, 2022 compared with the nine months endedSeptember 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 . 33
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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 endedSeptember 30, 2022 , compared with$882.9 million for the nine months endedSeptember 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 acrossCanada and include ADESA Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and includeOpenlane , BacklotCars, CARWAVE, TradeRev andADESA 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
increased
dealer off-premise auction fees and a smaller mix of lower-fee commercial
off-premise vehicles.
Service revenue for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 . Cost of services increased 5% for the nine months endedSeptember 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 endedSeptember 30, 2022 , compared with 36.9% of revenue for the nine months endedSeptember 30, 2021 . Excluding purchased vehicle sales, gross profit as a percentage of revenue was 39.1% and 45.6% for the nine months endedSeptember 30, 2022 and 2021, respectively. The entire selling and purchase price 34
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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
Gross profit as a percentage of revenue decreased for the nine months endedSeptember 30, 2022 as compared with the nine months endedSeptember 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 inCanada without a corresponding decrease in direct costs. In addition, there were no benefits taken under theCanada 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 endedSeptember 30, 2022 , compared with$292.4 million for the nine months endedSeptember 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 theCanada Emergency Wage Subsidy was$2.1 million less for the nine months endedSeptember 30, 2022 , compared with the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 .
The provision for credit losses decreased to 0.1% of the average managed
receivables for the nine months ended
months ended
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Gross Profit
For the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 , compared with$26.1 million for the nine months endedSeptember 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 atSeptember 30, 2022 ,December 31, 2021 andSeptember 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 theU.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
subsidiaries at
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
OnSeptember 19, 2019 , we entered into the seven-year,$950 million Term Loan B-6 and the$325 million , five-year Revolving Credit Facility. InMay 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, with a maturity date ofSeptember 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 ofSeptember 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 atSeptember 30, 2022 andDecember 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 atSeptember 30, 2022 . 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. 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 atSeptember 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 atSeptember 30, 2022 . 37
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Senior Notes
OnMay 31, 2017 , we issued$950 million of 5.125% senior notes dueJune 1, 2025 . The Company pays interest on the senior notes semi-annually in arrears onJune 1 andDecember 1 of each year. The senior notes may be redeemed at 101.281% currently and at par as ofJune 1, 2023 . The senior notes are guaranteed by the Subsidiary Guarantors. InAugust 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 inAugust 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 theU.S. physical auction business of approximately$2.2 billion . The Transaction closed inMay 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 inAugust 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, atSeptember 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 byMay 9, 2023 , subject to the terms of the indenture governing our senior notes.
Liquidity
AtSeptember 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 ofSeptember 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 atSeptember 19, 2024 . AtSeptember 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 itsU.S. dollar denominated finance receivables on a revolving basis and without recourse toAFC Funding Corporation . A securitization agreement allows for the revolving sale byAFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires onJanuary 31, 2026 .AFC Funding Corporation had committed liquidity of$2.0 billion forU.S. finance receivables atSeptember 30, 2022 . InSeptember 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'sU.S. committed liquidity from$1.70 billion to$2.0 billion and extended the facility's maturity date fromJanuary 31, 2024 toJanuary 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 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 AFCI's receivables, which expires onJanuary 31, 2026 . AFCI's committed facility is provided through a third-party conduit (separate from theU.S. facility) and wasC$225 million atSeptember 30, 2022 . InSeptember 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 fromJanuary 31, 2024 toJanuary 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 theU.S. and Canadian securitization agreements are accounted for as secured borrowings. 38
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AFC managed total finance receivables of$2,555.1 million and$2,529.0 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. AFC's allowance for losses was$21.5 million and$23.0 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. As ofSeptember 30, 2022 andDecember 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 atSeptember 30, 2022 andDecember 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 atSeptember 30, 2022 andDecember 31, 2021 , respectively. After the occurrence of a termination event, as defined in theU.S. securitization agreement, the banks may, and could, cause the stock ofAFC 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. 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. AtSeptember 30, 2022 , we were in compliance with the covenants in the securitization agreements.
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 inthe 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. 39
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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)
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 40
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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 41
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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 ADESAU.S. physical auctions shown as discontinued operations). The following table reconciles EBITDA and Adjusted EBITDA to net income (loss) for the periods presented: Twelve Months Three Months Ended Ended December 31, March 31, June 30, September 30, September 30, (Dollars in millions) 2021 2022 2022 2022 2022 Net income (loss)$ 5.1 $
(0.3)
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
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 42
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