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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should," "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" 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; dividend declarations and payments; common stock repurchases; tax rates and assumptions; strategic initiatives, greenfields and acquisitions; our competitive position and retention of customers; and our continued investment in information technology, are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results projected, expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, filed on February 18, 2021, and those described from time to time in our future reports filed with the Securities and Exchange Commission. Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
Impact of COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Although governmental restrictions that were imposed in 2020 to reduce the spread of COVID-19 have since been lifted or scaled back in many jurisdictions, increases in new COVID-19 cases, including more contagious variants, have resulted in the reimposition of restrictions in certain jurisdictions, and may lead to other restrictions being imposed. The COVID-19 pandemic and the related preventative measures taken to help slow the spread have caused, and may continue to cause, significant volatility, uncertainty and economic disruption.
In response to these measures and for the protection of our employees and customers, during 2020 we implemented several measures to help secure our business, including but not limited to furloughs, prohibiting non-essential business travel, suspending non-essential services provided by certain third parties at our locations, delaying or canceling capital projects at our on-premise marketplace locations and suspending the Company's quarterly dividend.
In addition, on March 20, 2020, we temporarily suspended on-premise sale operations across North America, including Simulcast-only sales, and resumed operation of Simulcast-only sales in select markets on April 6, 2020. We subsequently continued to expand the locations offering vehicles for sale via ADESA Simulcast, DealerBlock and Simulcast+, with all ADESA auction locations in the U.S. and Canada offering vehicles for sale by the end of the second quarter of 2020.
We also took advantage of legislation introduced to assist companies during the pandemic. In the first six months of 2021, we recorded a total of approximately $5.8 million claimed under the Canada Emergency Wage Subsidy. These credits partially offset salaries recorded in Canada. We will continue to monitor and assess the impact the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and similar legislation in other countries may have on our business and financial results.
The automotive industry has experienced unprecedented market conditions during the pandemic, including a decline in new vehicle inventory resulting from the shortage of semiconductors. 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. Further, government support and loan accommodations have resulted in fewer repossessed vehicles coming to auction. These factors have contributed to our commercial vehicle volumes declining in 2021.
While we have developed and implemented and continue to develop and implement health and safety and return-to-workplace protocols, business continuity plans and crisis management protocols in an effort to try to mitigate the negative impact of COVID-19 on our employees, customers and our business, the extent of the impact of the pandemic on our business and financial results will continue to depend on future developments that are uncertain and unpredictable.
The broader implications for our business and results of operations remain uncertain and will depend on many factors outside our control, including, without limitation, the duration and severity of the COVID-19 pandemic, the degree to which governmental restrictions are relaxed or reimposed, the length of time it takes for normal economic and operating conditions to resume, the number and effectiveness of vaccines and numerous other uncertainties. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business.
Overview
We provide whole car auction services in North America and Europe. Our business is divided into two reportable business segments, each of which is an integral part of the vehicle remarketing industry: ADESA Auctions and AFC.
•The ADESA Auctions segment serves a domestic and international customer base through digital marketplaces for wholesale vehicles supported by more than 70 vehicle logistics center locations across North America 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. Through ADESA.com, ADESA offers comprehensive private label remarketing solutions 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 ADESA's 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. ADESA also provides value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. ADESA also includes BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized in the United States, TradeRev, an online automotive remarketing platform in Canada where dealers can launch and participate in real-time vehicle auctions at any time, ADESA Remarketing Limited, an online whole car vehicle remarketing business in the United Kingdom and ADESA Europe (formerly known as CarsOnTheWeb), an online wholesale vehicle auction marketplace in Continental Europe.
•The AFC segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers throughout the United States and Canada. Prior to December 2020, the Company also sold vehicle service contracts through Preferred Warranties, Inc. ("PWI").
Prior to 2020, the costs and expenses of the holding company were reported separately from the reportable segments. Due to the spin-off of IAA in 2019 and the Company's transition from physical marketplaces to digital marketplaces, the Company has simplified its business and operations. Corporate expenses, previously reported as holding company expenses, are now included in the segments. Certain known expenses (e.g., information technology costs) were recorded directly to the ADESA and AFC segments. Interest expense previously reported by the holding company has been recorded in the ADESA segment. The residual shared services expenses were recorded at ADESA and allocated to AFC based on revenue and employee headcount. Holding company amounts reported in the segment results in the consolidated financial statements prior to December 31, 2020 have been reclassified to conform to the current presentation.
Industry Trends
Whole Car
Used vehicles sold in North America through whole car auctions, including off-premise volumes and mobile application volumes, were approximately 10.3 million and 12.0 million in 2020 and 2019, respectively. Data for the whole car auction industry is collected by the NAAA through an annual survey. The NAAA industry volumes collected by the annual survey do not include off-premise volumes or mobile application volumes (e.g., Openlane, TradeRev, BacklotCars and their respective competitors), but we have included these volumes in our totals. In addition to the traditional whole car auction market and off-premise venues described above, we believe mobile applications, such as TradeRev and BacklotCars, may provide an opportunity to expand our total addressable market for dealer-to-dealer transactions to as much as 15 million units from approximately 5 million units in 2019. TradeRev and BacklotCars sold approximately 316,000 vehicles in the digital dealer-to-dealer marketplace for the year ended December 31, 2020, compared with approximately 210,000 vehicles for the year ended December 31, 2019. TradeRev and BacklotCars sold approximately 119,000 vehicles in the digital dealer-to-dealer marketplace for the three months ended June 30, 2021, compared with approximately 72,000 vehicles for the three months ended June 30, 2020. This volume data includes vehicles sold by BacklotCars prior to its acquisition in November 2020. For the six months ended June 30, 2021 and 2020, vehicles sold by these companies in the digital dealer-to-dealer marketplace were approximately 219,000 and 127,000, respectively. The COVID-19 pandemic has had a material impact on the whole car auction industry and we are unable to estimate future volumes.
Automotive Finance
AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverages 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 13,600 dealers in 2020, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.5 million in 2020.
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), as well as the ability to operate in locations experiencing pandemic shelter-in-place orders. 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.
Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended June 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(Dollars in millions except per share amounts)
|
2021
|
|
2020
|
Revenues
|
|
|
|
Auction fees
|
$
|
236.7
|
|
|
$
|
177.8
|
|
Service revenue
|
182.2
|
|
|
134.8
|
|
Purchased vehicle sales
|
97.9
|
|
|
49.6
|
|
Finance-related revenue
|
68.6
|
|
|
56.8
|
|
Total revenues
|
585.4
|
|
|
419.0
|
|
Cost of services*
|
333.2
|
|
|
235.1
|
|
Gross profit*
|
252.2
|
|
|
183.9
|
|
Selling, general and administrative
|
140.2
|
|
|
112.3
|
|
Depreciation and amortization
|
45.4
|
|
|
46.5
|
|
Goodwill and other intangibles impairment
|
—
|
|
|
29.8
|
|
Operating profit (loss)
|
66.6
|
|
|
(4.7)
|
|
Interest expense
|
31.2
|
|
|
30.9
|
|
Other (income) expense, net
|
14.8
|
|
|
1.3
|
|
Income (loss) before income taxes
|
20.6
|
|
|
(36.9)
|
|
Income taxes
|
9.1
|
|
|
(4.6)
|
|
Net income (loss)
|
$
|
11.5
|
|
|
$
|
(32.3)
|
|
Net income (loss) per share
|
|
|
|
Basic
|
$
|
0.01
|
|
|
$
|
(0.27)
|
|
Diluted
|
$
|
0.01
|
|
|
$
|
(0.27)
|
|
* Exclusive of depreciation and amortization
Overview
For the three months ended June 30, 2021, we had revenue of $585.4 million compared with revenue of $419.0 million for the three months ended June 30, 2020, an increase of 40%. Businesses acquired in the last twelve months accounted for an increase in revenue of $39.7 million or 7% 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 $1.1 million, or 2%, to $45.4 million for the three months ended June 30, 2021, compared with $46.5 million for the three months ended June 30, 2020. The decrease in depreciation and amortization was primarily the result of fixed assets that have become fully depreciated and a reduction in assets placed in service.
Goodwill and Other Intangibles Impairment
In the second quarter of 2020 a $25.5 million non-cash goodwill impairment charge and a $4.3 million non-cash customer relationship impairment charge were recorded in our ADESA Remarketing Limited reporting unit (doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook for the business to be significantly reduced.
Interest Expense
Interest expense increased $0.3 million, or 1%, to $31.2 million for the three months ended June 30, 2021, compared with $30.9 million for the three months ended June 30, 2020. The increase was primarily attributable to an increase in interest expense at AFC of $0.2 million, which resulted from an increase in the average finance receivables balance for the three months ended June 30, 2021, as compared with the three months ended June 30, 2020.
Other (Income) Expense, Net
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. Realized gains on these investments were $0.2 million for the three months ended June 30, 2021. The Company had a reduction in unrealized gains of $11.9 million at June 30, 2021, as a result of the change in fair value for one of these investment securities which had a recent public offering. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.
For the three months ended June 30, 2021, we had other expense of $14.8 million compared with $1.3 million for the three months ended June 30, 2020. The increase in other expense was primarily attributable to a reduction in unrealized gains on investment securities of approximately $11.9 million and an increase in contingent consideration valuation of $4.5 million, partially offset by a decrease in foreign currency losses of $2.3 million and other miscellaneous items aggregating $0.6 million.
Income Taxes
We had an effective tax rate of 44.2% for the three months ended June 30, 2021, compared with an effective tax rate of 12.5% for the three months ended June 30, 2020. The effective tax rate for the three months ended June 30, 2021 was unfavorably impacted by the expense for the increase in the estimated value of contingent consideration for which no tax benefits have been recorded. The rate for the three months ended June 30, 2020 was unfavorably impacted by the goodwill and other intangibles impairment charge for which no tax benefit was recorded, partially offset by the tax benefit from recording net operating losses and deductions related to stock-based compensation expenses.
Impact of Foreign Currency
For the three months ended June 30, 2021, fluctuations in the Canadian exchange rate increased revenue by $9.3 million, operating profit by $3.4 million and net income by $2.0 million. For the three months ended June 30, 2021, fluctuations in the European exchange rate increased revenue by $5.7 million, operating profit by $0.2 million and decreased net income by $0.2 million.
Impact of COVID-19 on Our Operations
The Company has been subject to numerous orders and directives that have impacted our ability to operate our business throughout North America and in Europe. As a result of these COVID-19 related restrictions on our operations, we have adjusted our business processes so that we can continue to meet the needs of our customers while complying with the various laws, regulations, mandates and directives in each of the markets in which we operate. In many cases, we have had to limit the number of employees and customers at our physical locations at any given time and modify the delivery of services to our customers. However, these adjustments have also resulted in improvements in our operations.
During this challenging time, the Company has worked to meet the needs of the wholesale used car marketplace with its technology-based auction platforms throughout North America and in Europe. The Company believes that certain changes to its business processes that were necessitated by the COVID-19 outbreak are sustainable going forward. For example, the Company has reduced the labor required to process wholesale auction transactions and reduced its selling, general and administrative expenses.
ADESA Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(Dollars in millions, except per vehicle amounts)
|
2021
|
|
2020
|
Auction fees
|
$
|
236.7
|
|
|
$
|
177.8
|
|
Service revenue
|
182.2
|
|
|
134.8
|
|
Purchased vehicle sales
|
97.9
|
|
|
49.6
|
|
Total ADESA revenue
|
516.8
|
|
|
362.2
|
|
Cost of services*
|
319.5
|
|
|
217.2
|
|
Gross profit*
|
197.3
|
|
|
145.0
|
|
Selling, general and administrative
|
131.4
|
|
|
103.7
|
|
Depreciation and amortization
|
42.9
|
|
|
43.3
|
|
Goodwill and other intangibles impairment
|
—
|
|
|
29.8
|
|
Operating profit (loss)
|
$
|
23.0
|
|
|
$
|
(31.8)
|
|
On-premise vehicles sold
|
332,000
|
|
|
312,000
|
|
Off-premise vehicles sold
|
379,000
|
|
|
336,000
|
|
Total vehicles sold
|
711,000
|
|
|
648,000
|
|
Auction fees per vehicle sold
|
$
|
333
|
|
|
$
|
274
|
|
Gross profit per vehicle sold*
|
$
|
277
|
|
|
$
|
224
|
|
Gross profit percentage, excluding purchased vehicles*
|
47.1%
|
|
46.4%
|
Dealer consignment mix
|
41%
|
|
21%
|
Commercial mix
|
59%
|
|
79%
|
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased $154.6 million, or 43%, to $516.8 million for the three months ended June 30, 2021, compared with $362.2 million for the three months ended June 30, 2020. The increase in revenue was the result of an increase in the number of vehicles sold and an increase in average revenue per vehicle sold. Businesses acquired in the last twelve months accounted for an increase in revenue of $39.7 million. The change in revenue included the impact of an increase in revenue of $8.7 million due to fluctuations in the Canadian exchange rate and an increase of $5.7 million due to fluctuations in the European exchange rate.
On-premise marketplace sales are initiated online for vehicles at any of our locations across North America and include Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and include Openlane, TradeRev, BacklotCars and ADESA Europe sales. The 10% increase in the number of vehicles sold was comprised of a 6% increase in on-premise vehicles sold and a 13% increase in off-premise vehicles sold. However, the Company has experienced a decline in both on-premise and off-premise commercial volumes aggregating 18% for the three months ended June 30, 2021 compared with the three months ended June 30, 2020. For the quarters ended June 30, 2021 and 2020, we conducted all sales through digital marketplaces. All vehicles were offered online, cars were not driven through the auction lanes and we limited access to our physical locations to promote social distancing measures and help prevent the spread of COVID-19.
Auction fees per vehicle sold for the three months ended June 30, 2021 increased $59, or 22%, reflecting higher vehicle values and a changing mix of vehicles sold.
Service revenue for the three months ended June 30, 2021 increased $47.4 million, or 35%, primarily as a result of all the Company's services being available in 2021. A substantial amount of the Company's on-premise and off-premise services were not available for a portion of the second quarter of 2020.
Gross Profit
For the three months ended June 30, 2021, gross profit for ADESA increased $52.3 million, or 36%, to $197.3 million, compared with $145.0 million for the three months ended June 30, 2020. Gross profit for ADESA was 38.2% of revenue for the
three months ended June 30, 2021, compared with 40.0% of revenue for the three months ended June 30, 2020. Gross profit as a percentage of revenue decreased for the three months ended June 30, 2021 as compared with the three months ended June 30, 2020, primarily due to the impact of purchased vehicles. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 47.1% and 46.4% for the three months ended June 30, 2021 and 2020, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. We have also taken measures to reduce expenses to help protect our business while our operations have been impacted by COVID-19. In the second quarter of 2021 we recorded a benefit of $1.5 million taken under the Canada Emergency Wage Subsidy as compared with an aggregate of $10.1 million taken under the CARES Act and the Canada Emergency Wage Subsidy in the second quarter of 2020. Businesses acquired in the last 12 months accounted for an increase in cost of services of $23.3 million for the three months ended June 30, 2021.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $27.7 million, or 27%, to $131.4 million for the three months ended June 30, 2021, compared with $103.7 million for the three months ended June 30, 2020, primarily due to increases in selling, general and administrative expenses associated with acquisitions of $24.3 million, incentive-based compensation of $5.5 million, fluctuations in the Canadian exchange rate of $2.1 million, stock-based compensation of $1.8 million and professional fees of $1.3 million, partially offset by decreases in bad debt expense of $4.5 million, severance of $2.3 million, medical expenses of $2.2 million and other miscellaneous expenses aggregating $4.3 million. In addition, the Employee Retention Credit provided under the CARES Act and the Canada Emergency Wage Subsidy was $6.0 million less for the three months ended June 30, 2021, compared with the three months ended June 30, 2020.
Goodwill and Other Intangibles Impairment
In the second quarter of 2020 a $25.5 million non-cash goodwill impairment charge and a $4.3 million non-cash customer relationship impairment charge were recorded in our ADESA Remarketing Limited reporting unit (doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook for the business to be significantly reduced.
AFC Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
(Dollars in millions except volumes and per loan amounts)
|
2021
|
|
2020
|
Finance-related revenue
|
|
|
|
Interest and fee income
|
$
|
68.2
|
|
|
$
|
65.1
|
|
Other revenue
|
2.2
|
|
|
2.0
|
|
Provision for credit losses
|
(1.8)
|
|
|
(19.0)
|
|
Warranty contract revenue
|
—
|
|
|
8.7
|
|
Total AFC revenue
|
68.6
|
|
|
56.8
|
|
Cost of services*
|
13.7
|
|
|
17.9
|
|
Gross profit*
|
54.9
|
|
|
38.9
|
|
Selling, general and administrative
|
8.8
|
|
|
8.6
|
|
Depreciation and amortization
|
2.5
|
|
|
3.2
|
|
Operating profit
|
$
|
43.6
|
|
|
$
|
27.1
|
|
Loan transactions
|
356,000
|
|
|
420,000
|
|
Revenue per loan transaction, excluding Warranty contract revenue
|
$
|
193
|
|
|
$
|
115
|
|
* Exclusive of depreciation and amortization
Revenue
For the three months ended June 30, 2021, AFC revenue increased $11.8 million, or 21%, to $68.6 million, compared with $56.8 million for the three months ended June 30, 2020. The increase in revenue was primarily the result of a 68% increase in
revenue per loan transaction, largely as a result of a decrease in the provision for credit losses, partially offset by a 15% decrease in loan transactions and the elimination of Warranty contract revenue as a result of the sale of PWI in December 2020.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $78, or 68%, primarily as a result of a decrease in provision for credit losses for the three months ended June 30, 2021, an increase in interest yields and an increase in loan values, partially offset by a decrease in average portfolio duration. Revenue per loan transaction excludes Warranty contract revenue in 2020.
The provision for credit losses decreased to 0.4% of the average managed receivables for the three months ended June 30, 2021 from 4.3% for the three months ended June 30, 2020.
Gross Profit
For the three months ended June 30, 2021, gross profit for the AFC segment increased $16.0 million, or 41%, to $54.9 million, or 80.0% of revenue, compared with $38.9 million, or 68.5% of revenue, for the three months ended June 30, 2020. Excluding PWI for the three months ended June 30, 2020, AFC's gross profit as a percent of revenue was 74.3%. The increase in gross profit as a percent of revenue was primarily the result of a 21% increase in revenue and an 23% decrease in cost of services. The decrease in cost of services was primarily the result of a decrease in PWI expenses of $5.5 million, partially offset by increases in incentive-based compensation of $0.6 million, collection expenses of $0.5 million and other miscellaneous expenses aggregating $0.2 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $0.2 million, or 2%, to $8.8 million for the three months ended June 30, 2021, compared with $8.6 million for the three months ended June 30, 2020 primarily as a result of increases in incentive-based compensation of $0.6 million and other miscellaneous expenses aggregating $0.7 million, partially offset by decreases in PWI expenses of $0.6 million and compensation expense of $0.5 million.
Overview of Results of KAR Auction Services, Inc. for the Six Months Ended June 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
(Dollars in millions except per share amounts)
|
2021
|
|
2020
|
Revenues
|
|
|
|
Auction fees
|
$
|
472.2
|
|
|
$
|
433.1
|
|
Service revenue
|
369.8
|
|
|
371.0
|
|
Purchased vehicle sales
|
190.6
|
|
|
125.1
|
|
Finance-related revenue
|
134.4
|
|
|
135.3
|
|
Total revenues
|
1,167.0
|
|
|
1,064.5
|
|
Cost of services*
|
663.6
|
|
|
629.7
|
|
Gross profit*
|
503.4
|
|
|
434.8
|
|
Selling, general and administrative
|
289.2
|
|
|
274.7
|
|
Depreciation and amortization
|
92.4
|
|
|
94.2
|
|
Goodwill and other intangibles impairment
|
—
|
|
|
29.8
|
|
Operating profit
|
121.8
|
|
|
36.1
|
|
Interest expense
|
62.1
|
|
|
68.9
|
|
Other (income) expense, net
|
(35.4)
|
|
|
(0.7)
|
|
Income (loss) before income taxes
|
95.1
|
|
|
(32.1)
|
|
Income taxes
|
32.7
|
|
|
(2.6)
|
|
Net income (loss)
|
$
|
62.4
|
|
|
$
|
(29.5)
|
|
Net income (loss) per share
|
|
|
|
Basic
|
$
|
0.27
|
|
|
$
|
(0.24)
|
|
Diluted
|
$
|
0.26
|
|
|
$
|
(0.24)
|
|
* Exclusive of depreciation and amortization
Overview
For the six months ended June 30, 2021, we had revenue of $1,167.0 million compared with revenue of $1,064.5 million for the six months ended June 30, 2020, an increase of 10%. Businesses acquired in the last twelve months accounted for an increase in revenue of $64.9 million or 6% 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 $1.8 million, or 2%, to $92.4 million for the six months ended June 30, 2021, compared with $94.2 million for the six months ended June 30, 2020. The decrease in depreciation and amortization was primarily the result of fixed assets that have become fully depreciated and a reduction in assets placed in service.
Goodwill and Other Intangibles Impairment
In the second quarter of 2020 a $25.5 million non-cash goodwill impairment charge and a $4.3 million non-cash customer relationship impairment charge were recorded in our ADESA Remarketing Limited reporting unit (doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook for the business to be significantly reduced.
Interest Expense
Interest expense decreased $6.8 million, or 10%, to $62.1 million for the six months ended June 30, 2021, compared with $68.9 million for the six months ended June 30, 2020. The decrease was primarily attributable to a decrease in interest expense at AFC of $4.1 million, which resulted from a decrease in incremental interest rates for the six months ended June 30, 2021, as compared with the six months ended June 30, 2020. In addition, there was a slight decrease in the weighted average interest rate on corporate debt and a decrease of $8.8 million in the average outstanding balance of corporate debt for the six months ended June 30, 2021, compared with the six months ended June 30, 2020.
Other (Income) Expense, Net
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. Realized gains on these investments were $17.2 million for the six months ended June 30, 2021. The Company had unrealized gains of $31.6 million at June 30, 2021, as a result of a recent public offering for one of these investment securities. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.
For the six months ended June 30, 2021, we had other income of $35.4 million compared with $0.7 million for the six months ended June 30, 2020. The increase in other income was primarily attributable to an increase in realized and unrealized gains on investment securities of approximately $48.8 million, a decrease in foreign currency losses of $0.5 million and an increase in other miscellaneous items aggregating $1.1 million, partially offset by an increase in contingent consideration valuation of $15.7 million.
Income Taxes
We had an effective tax rate of 34.4% for the six months ended June 30, 2021, compared with an effective tax rate of 8.1% for the six months ended June 30, 2020. The effective tax rate for the six months ended June 30, 2021 was unfavorably impacted by the expense for the increase in the estimated value of contingent consideration for which no tax benefits have been recorded. The rate for the six months ended June 30, 2020 was unfavorably impacted by the goodwill and other intangibles impairment charge for which no tax benefit was recorded. This was partially offset by the tax benefit from recording net operating losses and deductions related to stock-based compensation expenses.
Impact of Foreign Currency
For the six months ended June 30, 2021, fluctuations in the Canadian exchange rate increased revenue by $12.6 million, operating profit by $4.3 million and net income by $1.9 million. For the six months ended June 30, 2021, fluctuations in the European exchange rate increased revenue by $11.3 million, operating profit by $0.5 million and decreased net income by $0.5 million.
ADESA Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
(Dollars in millions, except per vehicle amounts)
|
2021
|
|
2020
|
Auction fees
|
$
|
472.2
|
|
|
$
|
433.1
|
|
Service revenue
|
369.8
|
|
|
371.0
|
|
Purchased vehicle sales
|
190.6
|
|
|
125.1
|
|
Total ADESA revenue
|
1,032.6
|
|
|
929.2
|
|
Cost of services*
|
636.4
|
|
|
587.9
|
|
Gross profit*
|
396.2
|
|
|
341.3
|
|
Selling, general and administrative
|
271.6
|
|
|
256.1
|
|
Depreciation and amortization
|
87.5
|
|
|
87.7
|
|
Goodwill and other intangibles impairment
|
—
|
|
|
29.8
|
|
Operating profit (loss)
|
$
|
37.1
|
|
|
$
|
(32.3)
|
|
On-premise vehicles sold
|
681,000
|
|
|
780,000
|
|
Off-premise vehicles sold
|
783,000
|
|
|
730,000
|
|
Total vehicles sold
|
1,464,000
|
|
|
1,510,000
|
|
Auction fees per vehicle sold
|
$
|
323
|
|
|
$
|
287
|
|
Gross profit per vehicle sold*
|
$
|
271
|
|
|
$
|
226
|
|
Gross profit percentage, excluding purchased vehicles*
|
47.1%
|
|
42.4%
|
Dealer consignment mix
|
37%
|
|
24%
|
Commercial mix
|
63%
|
|
76%
|
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased $103.4 million, or 11%, to $1,032.6 million for the six months ended June 30, 2021, compared with $929.2 million for the six months ended June 30, 2020. 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 twelve months accounted for an increase in revenue of $64.9 million. The change in revenue included the impact of an increase in revenue of $11.7 million due to fluctuations in the Canadian exchange rate and an increase of $11.3 million due to fluctuations in the European exchange rate.
On-premise marketplace sales are initiated online for vehicles at any of our locations across North America and include Simulcast, Simulcast+ and DealerBlock sales. Off-premise marketplace sales are initiated online and include Openlane, TradeRev, BacklotCars and ADESA Europe sales. The 3% decrease in the number of vehicles sold was comprised of a 13% decrease in on-premise vehicles sold and a 7% increase in off-premise vehicles sold. In addition, the Company has experienced a decline in both on-premise and off-premise commercial volumes aggregating 19% for the six months ended June 30, 2021 compared with the six months ended June 30, 2020. For the six months ended June 30, 2021, we conducted all sales through digital marketplaces. All vehicles were offered online, cars were not driven through the auction lanes and we limited access to our physical locations to promote social distancing measures and help prevent the spread of COVID-19.
Auction fees per vehicle sold for the six months ended June 30, 2021 increased $36, or 13%, reflecting higher vehicle values and a changing mix of vehicles sold.
Service revenue for the six months ended June 30, 2021 decreased $1.2 million, or less than 1%, primarily as a result of the decrease in vehicles sold. Typically consigned vehicles located at our facilities utilize our service offerings at a higher rate than off-premise vehicles.
Gross Profit
For the six months ended June 30, 2021, gross profit for ADESA increased $54.9 million, or 16%, to $396.2 million, compared with $341.3 million for the six months ended June 30, 2020. Gross profit for ADESA was 38.4% of revenue for the six months
ended June 30, 2021, compared with 36.7% of revenue for the six months ended June 30, 2020. Gross profit as a percentage of revenue increased for the six months ended June 30, 2021 as compared with the six months ended June 30, 2020, as we have taken measures to reduce expenses to help protect our business while our operations have been impacted by COVID-19 and vehicles sold online require less labor. In the first six months of 2021 we also recorded a benefit of $3.7 million taken under the Canada Emergency Wage Subsidy as compared with an aggregate of $10.1 million taken under the CARES Act and the Canada Emergency Wage Subsidy in the first six months of 2020. On March 20, 2020 our on-premise auctions were shut down in response to the COVID-19 pandemic. While revenue decreased during the closure, cost of services remained consistent, as all non-essential auction employees were paid during the closure. In addition, our gross profit as a percentage of revenue is impacted by purchased vehicles. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 47.1% and 42.4% for the six months ended June 30, 2021 and 2020, 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 $37.2 million for the six months ended June 30, 2021.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $15.5 million, or 6%, to $271.6 million for the six months ended June 30, 2021, compared with $256.1 million for the six months ended June 30, 2020, primarily due to increases in selling, general and administrative expenses associated with acquisitions of $45.6 million, incentive-based compensation of $14.5 million, fluctuations in the Canadian exchange rate of $3.0 million and stock-based compensation of $2.0 million, partially offset by decreases in compensation expense of $21.0 million, bad debt expense of $6.3 million, severance of $4.0 million, medical expenses of $3.9 million, marketing costs of $3.7 million, telecom expenses of $2.7 million, travel expenses of $2.5 million, professional fees of $2.4 million and other miscellaneous expenses aggregating $7.9 million. In addition, the Employee Retention Credit provided under the CARES Act and the Canada Emergency Wage Subsidy was $4.8 million less for the six months ended June 30, 2021, compared with the six months ended June 30, 2020.
Goodwill and Other Intangibles Impairment
In the second quarter of 2020 a $25.5 million non-cash goodwill impairment charge and a $4.3 million non-cash customer relationship impairment charge were recorded in our ADESA Remarketing Limited reporting unit (doing business as ADESA U.K.). The impairments resulted from the changes in economic circumstances which caused the outlook for the business to be significantly reduced.
AFC Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
(Dollars in millions except volumes and per loan amounts)
|
2021
|
|
2020
|
Finance-related revenue
|
|
|
|
Interest and fee income
|
$
|
136.8
|
|
|
$
|
148.9
|
|
Other revenue
|
4.2
|
|
|
4.7
|
|
Provision for credit losses
|
(6.6)
|
|
|
(35.9)
|
|
Warranty contract revenue
|
—
|
|
|
17.6
|
|
Total AFC revenue
|
134.4
|
|
|
135.3
|
|
Cost of services*
|
27.2
|
|
|
41.8
|
|
Gross profit*
|
107.2
|
|
|
93.5
|
|
Selling, general and administrative
|
17.6
|
|
|
18.6
|
|
Depreciation and amortization
|
4.9
|
|
|
6.5
|
|
Operating profit
|
$
|
84.7
|
|
|
$
|
68.4
|
|
Loan transactions
|
728,000
|
|
|
868,000
|
|
Revenue per loan transaction, excluding Warranty contract revenue
|
$
|
185
|
|
|
$
|
136
|
|
* Exclusive of depreciation and amortization
Revenue
For the six months ended June 30, 2021, AFC revenue decreased $0.9 million, or 1%, to $134.4 million, compared with $135.3 million for the six months ended June 30, 2020. The decrease in revenue was primarily the result of a 16% decrease in loan
transactions and the elimination of Warranty contract revenue as a result of the sale of PWI in December 2020, partially offset by a 36% increase in revenue per loan transaction, largely as a result of a decrease in the provision for credit losses.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $49, or 36%, primarily as a result of a decrease in provision for credit losses for the six months ended June 30, 2021 and an increase in loan values, partially offset by a decrease in average portfolio duration. Revenue per loan transaction excludes Warranty contract revenue in 2020.
The provision for credit losses decreased to 0.7% of the average managed receivables for the six months ended June 30, 2021 from 3.8% for the six months ended June 30, 2020.
Gross Profit
For the six months ended June 30, 2021, gross profit for the AFC segment increased $13.7 million, or 15%, to $107.2 million, or 79.8% of revenue, compared with $93.5 million, or 69.1% of revenue, for the six months ended June 30, 2020. Excluding PWI for the six months ended June 30, 2020, AFC's gross profit as a percent of revenue was 75.0%. The increase in gross profit as a percent of revenue was primarily the result of a 35% decrease in cost of services. The decrease in cost of services was primarily the result of decreases in PWI expenses of $12.4 million, compensation expense of $2.5 million and lot check expenses of $1.0 million, partially offset by increases in incentive-based compensation of $1.0 million and other miscellaneous expenses aggregating $0.3 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $1.0 million, or 5%, to $17.6 million for the six months ended June 30, 2021, compared with $18.6 million for the six months ended June 30, 2020 primarily as a result of decreases in PWI expenses of $1.4 million, compensation expense of $0.8 million and other miscellaneous expenses aggregating $0.3 million, partially offset by an increase in incentive-based compensation of $1.5 million.
LIQUIDITY AND CAPITAL RESOURCES
We believe that the significant indicators of liquidity for our business are cash on hand, cash flow from operations, working capital and amounts available under our Credit Facility. Our principal sources of liquidity consist of cash generated by operations and borrowings under our Revolving Credit Facility.
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June 30,
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December 31,
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June 30,
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(Dollars in millions)
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2021
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2020
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2020
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Cash and cash equivalents
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$
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621.6
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$
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752.1
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$
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968.5
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Restricted cash
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53.8
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60.2
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50.0
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Working capital
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731.3
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924.6
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1,241.8
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Amounts available under the Revolving Credit Facility*
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325.0
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325.0
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325.0
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Cash flow from operations for the six months ended
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295.7
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268.9
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* There were related outstanding letters of credit totaling approximately $29.7 million, $28.5 million and $25.0 million at June 30, 2021, December 31, 2020 and June 30, 2020 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. The COVID-19 pandemic has had, and is continuing to have, an adverse impact on our business. As a result, during 2020 we implemented several measures that we believe will enhance liquidity for the foreseeable future. Some of these measures included furloughs, prohibiting non-essential business travel, suspending non-essential services provided by certain third parties at our locations, delaying or canceling capital projects at our on-premise marketplace locations and suspending the Company's quarterly dividend.
We also took advantage of legislation introduced to assist companies during the pandemic. In the first six months of 2021, we recorded a total of approximately $5.8 million claimed under the Canada Emergency Wage Subsidy. These credits partially offset salaries recorded in Canada. We will continue to monitor and assess the impact the CARES Act and similar legislation in other countries may have on our business and financial results. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued disruption could materially affect our liquidity.
Working Capital
A substantial amount of our working capital is generated from the payments received for services provided. The majority of our working capital needs are short-term in nature, usually less than a week in duration. Most of the financial institutions place a temporary hold on the availability of the funds deposited that generally can range up to two business days, resulting in cash in our accounts and on our balance sheet that is unavailable for use until it is made available by the various financial institutions. There are outstanding checks (book overdrafts) to sellers and vendors included in current liabilities. Because a portion of these outstanding checks for operations in the U.S. are drawn upon bank accounts at financial institutions other than the financial institutions that hold the cash, we cannot offset all the cash and the outstanding checks on our balance sheet. Changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from auctions held near period end.
Approximately $233.1 million of available cash was held by our foreign subsidiaries at June 30, 2021. If funds held by our foreign subsidiaries were to be repatriated, we expect any applicable taxes to be minimal.
AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 90 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
On September 19, 2019, we entered into the seven-year, $950 million Term Loan B-6 and the $325 million, five-year Revolving Credit Facility.
The Credit Facility is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline loans.
Term Loan B-6 was issued at a discount of $2.4 million and the discount is being amortized using the effective interest method to interest expense over the term of the loan. Term Loan B-6 is payable in quarterly installments equal to 0.25% of the original aggregate principal amount, with the balance payable at the maturity date.
As set forth in the Credit Agreement, Term Loan B-6 bears interest at an adjusted LIBOR rate plus 2.25% or at the Company’s election, Base Rate (as defined in the Credit Agreement) plus 1.25%. 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. The interest rate applicable to Term Loan B-6 was 2.38% at June 30, 2021.
On June 30, 2021, $933.4 million was outstanding on Term Loan B-6 and there were no borrowings outstanding on the Revolving Credit Facility. We had related outstanding letters of credit in the aggregate amount of $29.7 million and $28.5 million at June 30, 2021 and December 31, 2020, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility. Our European operations have lines of credit aggregating $35.6 million (€30 million) of which $13.2 million was drawn at June 30, 2021.
The obligations of the Company under the Credit Facility 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 perfected 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) perfected 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 0.8 at June 30, 2021.
In addition, the Credit Agreement and the indenture governing our senior notes (see Note 6, "Long-Term Debt" for additional information) contain certain limitations on our ability to pay dividends and other distributions, make certain acquisitions or investments, grant liens and sell assets, and the Credit Agreement contains certain limitations on our ability to incur indebtedness. The applicable covenants in the Credit Agreement affect our operating flexibility by, among other things, restricting our ability to incur expenses and indebtedness that could be used to grow the business, as well as to fund general corporate purposes. We were in compliance with the covenants in the Credit Agreement and the indenture governing our senior notes at June 30, 2021.
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.
Senior Notes
On May 31, 2017, we issued $950 million of 5.125% senior notes due June 1, 2025. The Company pays interest on the senior notes semi-annually in arrears on June 1 and December 1 of each year, which commenced on December 1, 2017. We may redeem the senior notes, in whole or in part, at a premium that declines ratably to par in 2023. The senior notes are guaranteed by the Subsidiary Guarantors.
Securitization Facilities
AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to AFC Funding Corporation. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires on January 31, 2024. AFC Funding Corporation had committed liquidity of $1.60 billion for U.S. finance receivables at June 30, 2021.
We also have an agreement for the securitization of AFCI's receivables, which expires on January 31, 2024. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$175 million at June 30, 2021. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
AFC managed total finance receivables of $2,108.9 million and $1,911.0 million at June 30, 2021 and December 31, 2020, respectively. AFC's allowance for losses was $24.0 million and $22.0 million at June 30, 2021 and December 31, 2020, respectively.
As of June 30, 2021 and December 31, 2020, $2,058.3 million and $1,865.3 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 $1,324.2 million and $1,261.2 million of obligations collateralized by finance receivables at June 30, 2021 and December 31, 2020, 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 $18.1 million and $21.6 million at June 30, 2021 and December 31, 2020, respectively. After the occurrence of a termination event, as defined in the U.S. securitization agreement, the banks may, and could, cause the stock of AFC Funding Corporation to be transferred to the bank facility, though as a practical matter the bank facility would look to the liquidation of the receivables under the transaction documents as their primary remedy.
Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At June 30, 2021, 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 in the United States, or GAAP. They are not measurements of our financial performance under GAAP and should not be considered substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings, as described above in the discussion of certain restrictive loan covenants under "Credit Facilities."
Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) for the periods presented: