EX-99.2 3 exhibit992-q32018ersupplem.htm EXHIBIT 99.2 - Q3 2018 SUPPLEMENTAL FINANCIAL INFORMATION Exhibit

EXHIBIT 99.2






KAR Auction Services, Inc.    
Q3 2018 Supplemental Financial Information
November 6, 2018



KAR Auction Services, Inc.
EBITDA and Adjusted EBITDA Measures
EBITDA and Adjusted EBITDA as presented herein are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). They are not measurements of our financial performance under GAAP and should not be considered as substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings as described in our senior secured credit agreement covenant calculations. Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.

The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
 
Three Months Ended September 30, 2018
(Dollars in millions), (Unaudited)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
51.0

 
$
41.8

 
$
29.1

 
$
(44.4
)
 
$
77.5

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
19.0

 
14.3

 
9.0

 
(17.2
)
 
25.1

Interest expense, net of interest income
0.1

 
—

 
14.9

 
32.8

 
47.8

Depreciation and amortization
31.9

 
24.3

 
2.3

 
7.1

 
65.6

Intercompany interest
3.6

 
9.4

 
(0.9
)
 
(12.1
)
 
—

EBITDA
105.6

 
89.8

 
54.4

 
(33.8
)
 
216.0

Intercompany charges
3.3

 
—

 
—

 
(3.3
)
 
—

Non-cash stock-based compensation
2.5

 
1.0

 
0.6

 
2.7

 
6.8

Acquisition related costs
1.3

 
—

 
—

 
0.2

 
1.5

Securitization interest
—

 
—

 
(12.9
)
 
—

 
(12.9
)
Severance
0.9

 
—

 
0.5

 
0.1

 
1.5

IAA separation costs
—

 
—

 
—

 
2.1

 
2.1

Other
0.5

 
0.2

 
—

 
—

 
0.7

  Total addbacks
8.5

 
1.2

 
(11.8
)
 
1.8

 
(0.3
)
Adjusted EBITDA
$
114.1

 
$
91.0

 
$
42.6

 
$
(32.0
)
 
$
215.7



2


 
Three Months Ended September 30, 2017
(Dollars in millions), (Unaudited)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
47.0

 
$
28.0

 
$
20.4

 
$
(32.6
)
 
$
62.8

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
29.6

 
15.9

 
11.6

 
(19.4
)
 
37.7

Interest expense, net of interest income
(0.4
)
 
—

 
11.0

 
30.1

 
40.7

Depreciation and amortization
28.5

 
23.1

 
7.9

 
6.7

 
66.2

Intercompany interest
8.9

 
9.5

 
(1.6
)
 
(16.8
)
 
—

EBITDA
113.6

 
76.5

 
49.3

 
(32.0
)
 
207.4

Intercompany charges
2.5

 
—

 
—

 
(2.5
)
 
—

Non-cash stock-based compensation
1.9

 
1.0

 
0.7

 
2.5

 
6.1

Acquisition related costs
1.3

 
—

 
—

 
0.2

 
1.5

Securitization interest
—

 
—

 
(8.7
)
 
—

 
(8.7
)
Minority interest
1.6

 
—

 
—

 
—

 
1.6

Severance
0.5

 
—

 
—

 
—

 
0.5

Other
0.6

 
0.3

 
—

 
—

 
0.9

  Total addbacks
8.4

 
1.3

 
(8.0
)
 
0.2

 
1.9

Adjusted EBITDA
$
122.0

 
$
77.8

 
$
41.3

 
$
(31.8
)
 
$
209.3

 
Nine Months Ended September 30, 2018
(Dollars in millions), (Unaudited)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
165.2

 
$
144.5

 
$
82.5

 
$
(131.5
)
 
$
260.7

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
58.0

 
48.2

 
26.7

 
(46.2
)
 
86.7

Interest expense, net of interest income
0.9

 
—

 
43.0

 
92.7

 
136.6

Depreciation and amortization
94.4

 
73.1

 
13.6

 
21.7

 
202.8

Intercompany interest
15.6

 
28.3

 
(2.1
)
 
(41.8
)
 
—

EBITDA
334.1

 
294.1

 
163.7

 
(105.1
)
 
686.8

Intercompany charges
11.0

 
—

 
—

 
(11.0
)
 
—

Non-cash stock-based compensation
6.9

 
2.9

 
1.7

 
7.3

 
18.8

Acquisition related costs
3.7

 
—

 
—

 
1.5

 
5.2

Securitization interest
—

 
—

 
(37.0
)
 
—

 
(37.0
)
Severance
3.3

 
0.1

 
0.5

 
0.1

 
4.0

IAA separation costs
—

 
—

 
—

 
6.8

 
6.8

Other
2.0

 
0.7

 
—

 
—

 
2.7

  Total addbacks
26.9

 
3.7

 
(34.8
)
 
4.7

 
0.5

Adjusted EBITDA
$
361.0

 
$
297.8

 
$
128.9

 
$
(100.4
)
 
$
687.3



3


 
Nine Months Ended September 30, 2017
(Dollars in millions), (Unaudited)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
152.0

 
$
97.5

 
$
61.6

 
$
(121.9
)
 
$
189.2

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
92.4

 
54.5

 
35.9

 
(77.1
)
 
105.7

Interest expense, net of interest income
(0.4
)
 
—

 
31.8

 
89.4

 
120.8

Depreciation and amortization
82.5

 
69.2

 
23.5

 
20.0

 
195.2

Intercompany interest
27.1

 
28.3

 
(20.1
)
 
(35.3
)
 
—

EBITDA
353.6

 
249.5

 
132.7

 
(124.9
)
 
610.9

Intercompany charges
7.6

 
—

 
—

 
(7.6
)
 
—

Non-cash stock-based compensation
5.1

 
2.8

 
1.8

 
7.8

 
17.5

Loss on extinguishment of debt
—

 
—

 
—

 
27.5

 
27.5

Acquisition related costs
3.8

 
—

 
—

 
1.3

 
5.1

Securitization interest
—

 
—

 
(25.0
)
 
—

 
(25.0
)
Minority interest
4.3

 
—

 
—

 
—

 
4.3

Severance
1.7

 
0.2

 
0.1

 
—

 
2.0

Other
1.5

 
(0.4
)
 
—

 
—

 
1.1

  Total addbacks
24.0

 
2.6

 
(23.1
)
 
29.0

 
32.5

Adjusted EBITDA
$
377.6

 
$
252.1

 
$
109.6

 
$
(95.9
)
 
$
643.4




Certain of our loan covenant calculations utilize financial results for the most recent four consecutive fiscal quarters. The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented:
 


Three Months Ended
 
Twelve Months Ended
(Dollars in millions),
(Unaudited)
December 31, 2017
 
March 31,
2018
 
June 30,
2018
 
September 30,
2018
 
September 30,
2018
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
172.8

 
$
90.0

 
$
93.2

 
$
77.5

 
$
433.5

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
(69.7
)
 
26.4

 
35.2

 
25.1

 
17.0

Interest expense, net of
     interest income
41.8

 
41.3

 
47.5

 
47.8

 
178.4

Depreciation and amortization
69.4

 
70.3

 
66.9

 
65.6

 
272.2

EBITDA
214.3

 
228.0

 
242.8

 
216.0

 
901.1

Non-cash stock-based
     compensation
7.7

 
6.7

 
5.3

 
6.8

 
26.5

Acquisition related costs
1.7

 
2.2

 
1.5

 
1.5

 
6.9

Securitization interest
(9.9
)
 
(11.4
)
 
(12.7
)
 
(12.9
)
 
(46.9
)
Minority interest
0.1

 
—

 
—

 
—

 
0.1

(Gain)/Loss on asset sales
0.2

 
0.4

 
0.3

 
0.2

 
1.1

Gain on previously held equity interest value
(21.6
)
 
—

 
—

 
—

 
(21.6
)
Severance
0.9

 
1.5

 
1.0

 
1.5

 
4.9

IAA separation costs
—

 
1.1

 
3.6

 
2.1

 
6.8

Other
1.2

 
0.9

 
0.4

 
0.5

 
3.0

  Total addbacks
(19.7
)
 
1.4

 
(0.6
)
 
(0.3
)
 
(19.2
)
Adjusted EBITDA
$
194.6

 
$
229.4

 
$
242.2

 
$
215.7

 
$
881.9


4


Segment Results

Impact of Foreign Currency
For the three months ended September 30, 2018, the strengthening of the U.S. dollar has impacted the reporting of our Canadian operations in U.S. dollars. For the three months ended September 30, 2018, fluctuations in the Canadian exchange rate decreased revenue by $4.6 million, operating profit by $1.7 million, net income by $1.0 million and net income per diluted share by less than $0.01. For the nine months ended September 30, 2018, fluctuations in the Canadian exchange rate increased revenue by $4.3 million, operating profit by $1.6 million, net income by $0.9 million and net income per diluted share by less than $0.01.
ADESA Results
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Dollars in millions, except per vehicle amounts)
2018
 
2017
 
2018
 
2017
ADESA revenue
$
527.0

 
$
477.1

 
$
1,593.4

 
$
1,464.3

Cost of services*
307.8

 
272.6

 
921.0

 
842.2

Gross profit*
219.2

 
204.5

 
672.4

 
622.1

Selling, general and administrative
111.8

 
87.6

 
328.9

 
260.1

Depreciation and amortization
31.9

 
28.5

 
94.4

 
82.5

Operating profit
$
75.5

 
$
88.4

 
$
249.1

 
$
279.5

 
 
 
 
 
 
 
 
Vehicles sold
876,000

 
788,000

 
2,661,000

 
2,436,000

   Physical auction vehicles sold
533,000

 
547,000

 
1,663,000

 
1,735,000

   Online only vehicles sold
343,000

 
241,000

 
998,000

 
701,000

   Dealer consignment mix at physical auctions
44
%
 
47
%
 
43
%
 
46
%
   Conversion rate at North American physical auctions
62.9
%
 
61.3
%
 
62.6
%
 
61.4
%
Physical auction revenue per vehicle sold, excluding purchased vehicles
$
850

 
$
781

 
$
836

 
$
761

Online only revenue per vehicle sold, excluding ADESA Assurance Program vehicles
$
126

 
$
112

 
$
120

 
$
109


* Exclusive of depreciation and amortization
Overview of ADESA Results for the Three Months Ended September 30, 2018 and 2017
Revenue
Revenue from ADESA increased $49.9 million, or 10%, to $527.0 million for the three months ended September 30, 2018, compared with $477.1 million for the three months ended September 30, 2017. The increase in revenue was primarily a result of a 11% increase in the number of vehicles sold (7% increase excluding acquisitions), partially offset by a 1% decrease in average revenue per vehicle sold. Businesses acquired in the last 12 months accounted for an increase in revenue of $10.6 million. Revenue decreased $3.1 million due to fluctuations in the Canadian exchange rate.
The increase in vehicles sold was primarily attributable to a 14% increase in institutional volume, including vehicles sold on our online only platform for the three months ended September 30, 2018 compared with the three months ended September 30, 2017. Dealer consignment units sold increased 5% (9% decrease excluding acquisitions) for the three months ended September 30, 2018 compared with the three months ended September 30, 2017. Online sales volume for ADESA represented approximately 54% of the total vehicles sold in the third quarter of 2018, compared with approximately 46% in the third quarter of 2017. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location (upstream selling); (ii) online solutions that offer vehicles for sale while in transit to auction locations (midstream selling); (iii) vehicles sold on the TradeRev platform (TradeRev was acquired in the fourth quarter of 2017); (iv) simultaneously broadcasting video and audio of the physical auctions to online bidders (LiveBlock®); and (v) bulletin-board or real-time online auctions (DealerBlock®). Upstream selling, midstream selling and TradeRev sales, which represent online only sales, accounted for approximately 74% of ADESA's online sales volume. ADESA sold approximately 343,000 (including approximately

5


35,000 from TradeRev compared with pre-acquisition TradeRev volumes of approximately 16,000 in the third quarter of 2017) and 241,000 vehicles through its online only offerings in the third quarter of 2018 and 2017, respectively, of which approximately 156,000 and 120,000 represented vehicle sales to grounding dealers in the third quarter of 2018 and 2017, respectively. For the three months ended September 30, 2018, dealer consignment vehicles represented approximately 44% of used vehicles sold at ADESA physical auction locations, compared with approximately 47% for the three months ended September 30, 2017. Vehicles sold at physical auction locations decreased 3% in the third quarter of 2018, compared with the third quarter of 2017. The used vehicle conversion percentage at North American physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, increased to 62.9% for the three months ended September 30, 2018, compared with 61.3% for the three months ended September 30, 2017.
Physical auction revenue per vehicle sold increased $69, or 9%, to $850 for the three months ended September 30, 2018, compared with $781 for the three months ended September 30, 2017. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services and excludes the sale of purchased vehicles. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in lower margin ancillary and other related services revenue and auction fees related to higher average transaction prices, partially offset by a decrease in physical auction revenue per vehicle sold of $6 due to fluctuations in the Canadian exchange rate.
Online only auction revenue per vehicle sold increased $24 to $152 for the three months ended September 30, 2018, compared with $128 for the three months ended September 30, 2017. The increase in online only auction revenue per vehicle sold was attributable to an increase in purchased vehicles associated with the ADESA Assurance Program and the inclusion of TradeRev sales. Excluding vehicles purchased as part of the ADESA Assurance Program, online only revenue per vehicle would have been $126 and $112 for the three months ended September 30, 2018 and 2017, respectively. This $14 increase in online only revenue per vehicle was attributable to increased revenue per vehicle for units sold on the TradeRev platform.
Gross Profit
For the three months ended September 30, 2018, gross profit for ADESA increased $14.7 million, or 7%, to $219.2 million, compared with $204.5 million for the three months ended September 30, 2017. Gross profit for ADESA was 41.6% of revenue for the three months ended September 30, 2018, compared with 42.9% of revenue for the three months ended September 30, 2017. Gross profit as a percentage of revenue decreased for the three months ended September 30, 2018 as compared with the three months ended September 30, 2017 as a result of an increase in lower margin related services, an increase in purchase vehicles primarily related to ADESA Assurance and incentives to promote TradeRev.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $24.2 million, or 28%, to $111.8 million for the three months ended September 30, 2018, compared with $87.6 million for the three months ended September 30, 2017, primarily due to increases in selling, general and administrative expenses associated with acquisitions of $17.9 million, compensation expense of $2.1 million, incentive-based compensation expense of $2.1 million, marketing expense of $1.6 million, information technology costs of $0.6 million and other miscellaneous expenses aggregating $1.6 million, partially offset by a decrease in professional fees of $1.1 million and fluctuations in the Canadian exchange rate of $0.6 million.
Overview of ADESA Results for the Nine Months Ended September 30, 2018 and 2017
Revenue
Revenue from ADESA increased $129.1 million, or 9%, to $1,593.4 million for the nine months ended September 30, 2018, compared with $1,464.3 million for the nine months ended September 30, 2017. The increase in revenue was primarily a result of a 9% increase in the number of vehicles sold (6% increase excluding acquisitions) and average revenue per vehicle sold was consistent. Businesses acquired in the last 12 months accounted for an increase in revenue of $26.3 million. Revenue increased $3.0 million due to fluctuations in the Canadian exchange rate.
The increase in vehicles sold was primarily attributable to a 14% increase in institutional volume, including vehicles sold on our online only platform and dealer consignment units sold were consistent (11% decrease excluding acquisitions) for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017. Online sales volume for ADESA represented approximately 54% of the total vehicles sold in the first nine

6


months of 2018, compared with approximately 45% in the first nine months of 2017. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location (upstream selling); (ii) online solutions that offer vehicles for sale while in transit to auction locations (midstream selling); (iii) vehicles sold on the TradeRev platform (TradeRev was acquired in the fourth quarter of 2017); (iv) simultaneously broadcasting video and audio of the physical auctions to online bidders (LiveBlock®); and (v) bulletin-board or real-time online auctions (DealerBlock®). Upstream selling, midstream selling and TradeRev sales, which represent online only sales, accounted for approximately 72% of ADESA's online sales volume. ADESA sold approximately 998,000 (including approximately 86,000 from 2017 acquisitions) and 701,000 vehicles through its online only offerings in the first nine months of 2018 and 2017, respectively, of which approximately 459,000 and 355,000 represented vehicle sales to grounding dealers in the first nine months of 2018 and 2017, respectively. For the nine months ended September 30, 2018, dealer consignment vehicles represented approximately 43% of used vehicles sold at ADESA physical auction locations, compared with approximately 46% for the nine months ended September 30, 2017. Vehicles sold at physical auction locations decreased 4% in the first nine months of 2018, compared with the first nine months of 2017. The used vehicle conversion percentage at North American physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, increased to 62.6% for the nine months ended September 30, 2018, compared with 61.4% for the nine months ended September 30, 2017.
Physical auction revenue per vehicle sold increased $75, or 10%, to $836 for the nine months ended September 30, 2018, compared with $761 for the nine months ended September 30, 2017. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services and excludes the sale of purchased vehicles. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in lower margin ancillary and other related services revenue and auction fees related to higher average transaction prices and an increase in physical auction revenue per vehicle sold of $2 due to fluctuations in the Canadian exchange rate.
Online only auction revenue per vehicle sold increased $16 to $140 for the nine months ended September 30, 2018, compared with $124 for the nine months ended September 30, 2017. The increase in online only auction revenue per vehicle sold was attributable to an increase in purchased vehicles associated with the ADESA Assurance Program and the inclusion of TradeRev sales. Excluding vehicles purchased as part of the ADESA Assurance Program, online only revenue per vehicle would have been $120 and $109 for the nine months ended September 30, 2018 and 2017, respectively. This $11 increase in online only revenue per vehicle was attributable to increased revenue per vehicle for units sold on the TradeRev platform.
Gross Profit
For the nine months ended September 30, 2018, gross profit for ADESA increased $50.3 million, or 8%, to $672.4 million, compared with $622.1 million for the nine months ended September 30, 2017. Gross profit for ADESA was 42.2% of revenue for the nine months ended September 30, 2018, compared with 42.5% of revenue for the nine months ended September 30, 2017.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $68.8 million, or 26%, to $328.9 million for the nine months ended September 30, 2018, compared with $260.1 million for the nine months ended September 30, 2017, primarily due to increases in selling, general and administrative expenses associated with acquisitions of $50.7 million, compensation expense of $6.5 million, incentive-based compensation expense of $2.9 million, marketing expense of $2.1 million, information technology costs of $2.0 million, benefit and other employee related expenses of $1.5 million, supplies expense of $1.0 million, stock-based compensation expense of $0.9 million, bad debt expense of $0.7 million, fluctuations in the Canadian exchange rate of $0.5 million and other miscellaneous expenses aggregating $2.4 million, partially offset by decreases in professional fees of $1.3 million and non-income based taxes of $1.1 million.


7


IAA Results
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Dollars in millions)
2018
 
2017
 
2018
 
2017
IAA revenue
$
321.1

 
$
287.7

 
$
991.6

 
$
883.8

Cost of services*
202.5

 
184.8

 
610.3

 
555.4

Gross profit*
118.6

 
102.9

 
381.3

 
328.4

Selling, general and administrative
28.8

 
26.5

 
88.0

 
79.9

Depreciation and amortization
24.3

 
23.1

 
73.1

 
69.2

Operating profit
$
65.5

 
$
53.3

 
$
220.2

 
$
179.3

 
 
 
 
 
 
 
 
Vehicles sold
597,000

 
562,000

 
1,863,000

 
1,733,000

* Exclusive of depreciation and amortization
Overview of IAA Results for the Three Months Ended September 30, 2018 and 2017
Revenue
Revenue from IAA increased $33.4 million, or 12%, to $321.1 million for the three months ended September 30, 2018, compared with $287.7 million for the three months ended September 30, 2017. The increase in revenue was a result of an increase in vehicles sold of approximately 6% for the three months ended September 30, 2018. Revenue per vehicle sold increased 5% for the three months ended September 30, 2018 compared with the three months ended September 30, 2017, and included a decrease in revenue of $1.2 million due to fluctuations in the Canadian exchange rate. IAA's North American same-store total loss vehicle inventory decreased approximately 9% (4% increase excluding vehicles from catastrophic weather events in 2018 and 2017) at September 30, 2018, as compared to September 30, 2017. Vehicles sold under purchase agreements were approximately 4% and 5% of total salvage vehicles sold for the three months ended September 30, 2018 and 2017, respectively. North American online sales volumes for IAA for the three months ended September 30, 2018 and 2017 each represented over 60% of the total vehicles sold by IAA.
Gross Profit
For the three months ended September 30, 2018, gross profit at IAA increased to $118.6 million, or 36.9% of revenue, compared with $102.9 million, or 35.8% of revenue, for the three months ended September 30, 2017. The increase in gross profit was mainly attributable to a 12% increase in revenue, partially offset by a 10% increase in cost of services, which included costs associated with purchase contract vehicles and organic volume growth. 
Excluding HBC, IAA's gross profit margin was 37.4% and 36.3% for the three months ended September 30, 2018 and 2017, respectively. For the three months ended September 30, 2018 and 2017, HBC had revenue of approximately $7.1 million and $7.3 million, respectively, and cost of services of approximately $6.0 million and $6.3 million, respectively, as fewer of HBC's vehicles were sold under purchase contracts. The entire selling price of the vehicle is recorded as revenue and cost of services for purchase contracts.
IAA recorded a $1.2 million and $4.3 million gross loss for the three months ended September 30, 2018 and 2017, respectively, related to catastrophic events. Excluding these events, (and HBC as noted above), IAA's gross profit margin was 37.8% and 37.9% for the three months ended September 30, 2018 and 2017, respectively.
Selling, General and Administrative
Selling, general and administrative expenses at IAA increased $2.3 million, or 9%, to $28.8 million for the three months ended September 30, 2018, compared with $26.5 million for the three months ended September 30, 2017. The increase in selling, general and administrative expenses was primarily attributable to increases in non-income based taxes of $0.9 million, compensation expense of $0.8 million, bad debt expense of $0.7 million and incentive-based compensation expense of $0.6 million, partially offset by a decrease in professional fees of $0.7 million.


8


Overview of IAA Results for the Nine Months Ended September 30, 2018 and 2017
Revenue
Revenue from IAA increased $107.8 million, or 12%, to $991.6 million for the nine months ended September 30, 2018, compared with $883.8 million for the nine months ended September 30, 2017. The increase in revenue was a result of an increase in vehicles sold of approximately 8% for the nine months ended September 30, 2018. Revenue per vehicle sold increased 4% for the nine months ended September 30, 2018 compared with the nine months ended September 30, 2017, and included an increase in revenue of $1.0 million due to fluctuations in the Canadian exchange rate, partially offset by a decrease of $5.2 million from HBC, which includes an increase in revenue of $1.6 million due to fluctuations in the U.K. exchange rate. Vehicles sold under purchase agreements were approximately 4% and 5% of total salvage vehicles sold for the nine months ended September 30, 2018 and 2017, respectively. North American online sales volumes for IAA for the nine months ended September 30, 2018 and 2017 each represented over 60% of the total vehicles sold by IAA.
Gross Profit
For the nine months ended September 30, 2018, gross profit at IAA increased to $381.3 million, or 38.5% of revenue, compared with $328.4 million, or 37.2% of revenue, for the nine months ended September 30, 2017. The increase in gross profit was mainly attributable to a 12% increase in revenue, partially offset by a 10% increase in cost of services, which included costs associated with purchase contract vehicles and organic volume growth. 
Excluding HBC, IAA's gross profit margin was 39.0% and 38.0% for the nine months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, HBC had revenue of approximately $25.1 million and $30.3 million, respectively, and cost of services of approximately $20.4 million and $26.1 million, respectively, as fewer of HBC's vehicles were sold under purchase contracts. The entire selling price of the vehicle is recorded as revenue and cost of services for purchase contracts.
IAA recorded a $4.0 million and $4.3 million gross loss for the nine months ended September 30, 2018 and 2017, respectively, related to catastrophic events. Excluding these events, (and HBC as noted above), IAA's gross profit margin was 39.7% and 38.5% for the three months ended September 30, 2018 and 2017, respectively.
Selling, General and Administrative
Selling, general and administrative expenses at IAA increased $8.1 million, or 10%, to $88.0 million for the nine months ended September 30, 2018, compared with $79.9 million for the nine months ended September 30, 2017. The increase in selling, general and administrative expenses was primarily attributable to increases in compensation expense of $2.7 million, incentive-based compensation expense of $1.8 million, bad debt expense of $1.4 million, supply expenses of $0.9 million, benefit related expenses of $0.5 million, information technology costs of $0.5 million and other miscellaneous expenses aggregating $2.1 million, partially offset by decreases in telecom costs of $1.1 million and professional fees of $0.7 million.



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AFC Results
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Dollars in millions except volumes and per loan amounts)
2018
 
2017
 
2018
 
2017
AFC revenue
$
85.4

 
$
78.2

 
$
255.6

 
$
219.5

Cost of services*
22.9

 
21.8

 
68.2

 
64.5

Gross profit*
62.5

 
56.4

 
187.4

 
155.0

Selling, general and administrative
8.1

 
7.2

 
23.6

 
22.4

Depreciation and amortization
2.3

 
7.9

 
13.6

 
23.5

Operating profit
$
52.1

 
$
41.3

 
$
150.2

 
$
109.1

 
 
 
 
 
 
 
 
Loan transactions
433,000

 
402,000

 
1,332,000

 
1,274,000

Revenue per loan transaction, excluding “Other service revenue”
$
177

 
$
174

 
$
173

 
$
153

* Exclusive of depreciation and amortization
Overview of AFC Results for the Three Months Ended September 30, 2018 and 2017
Revenue
For the three months ended September 30, 2018, AFC revenue increased $7.2 million, or 9%, to $85.4 million, compared with $78.2 million for the three months ended September 30, 2017. The increase in revenue was the result of a 2% increase in revenue per loan transaction, an 8% increase in loan transactions and a 2% increase in "Other service revenue" generated by PWI. The increase in revenue and revenue per loan transaction included the impact of a decrease in revenue of $0.3 million due to fluctuations in the Canadian exchange rate.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $3, or 2%. The increase in provision for credit losses, which is a reduction of revenue, resulted in a decrease in revenue per loan transaction of $4 for the three months ended September 30, 2018. The remaining $7 increase in revenue per loan transaction was primarily the result of an increase in interest yield as a result of prime rate increases, as well as an increase in average loan values and average portfolio duration. Revenue per loan transaction excludes "Other service revenue."
The provision for credit losses increased to 1.5% of the average managed receivables for the three months ended September 30, 2018 from 1.1% for the three months ended September 30, 2017. The provision for credit losses is expected to be under 2%, annually, of the average managed receivables balance. However, the actual losses in any particular quarter could deviate from this range.
Gross Profit
For the three months ended September 30, 2018, gross profit for the AFC segment increased $6.1 million, or 11%, to $62.5 million, or 73.2% of revenue, compared with $56.4 million, or 72.1% of revenue, for the three months ended September 30, 2017, primarily as a result of a 9% increase in revenue, which includes the increased provision for credit losses, partially offset by a 5% increase in cost of services. The increase in cost of services was the result of increases in compensation expense of $0.8 million and other expenses aggregating $0.3 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $0.9 million, or 13%, to $8.1 million for the three months ended September 30, 2018, compared with $7.2 million for the three months ended September 30, 2017. The increase in selling, general and administrative expenses was primarily attributable to increases in incentive-based compensation expense of $0.4 million, compensation expense of $0.4 million and other miscellaneous expenses aggregating $0.1 million.



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Overview of AFC Results for the Nine Months Ended September 30, 2018 and 2017
Revenue
For the nine months ended September 30, 2018, AFC revenue increased $36.1 million, or 16%, to $255.6 million, compared with $219.5 million for the nine months ended September 30, 2017. The increase in revenue was the result of a 13% increase in revenue per loan transaction and a 5% increase in loan transactions. The increase in revenue and revenue per loan transaction included the impact of an increase in revenue of $0.2 million due to fluctuations in the Canadian exchange rate.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $20, or 13%. The decrease in provision for credit losses, which is a reduction of revenue, resulted in an increase in revenue per loan transaction of $5 for the nine months ended September 30, 2018. The remaining $15 increase in revenue per loan transaction was primarily the result of increases in fee revenue and interest yield as a result of prime rate increases, as well as an increase in average loan values. Revenue per loan transaction excludes "Other service revenue."
The provision for credit losses decreased to 1.5% of the average managed receivables for the nine months ended September 30, 2018 from 2.1% for the nine months ended September 30, 2017. The provision for credit losses is expected to be under 2%, annually, of the average managed receivables balance. However, the actual losses in any particular quarter could deviate from this range.
Gross Profit
For the nine months ended September 30, 2018, gross profit for the AFC segment increased $32.4 million, or 21%, to $187.4 million, or 73.3% of revenue, compared with $155.0 million, or 70.6% of revenue, for the nine months ended September 30, 2017, primarily as a result of a 16% increase in revenue, which includes the decreased provision for credit losses, partially offset by a 6% increase in cost of services. The increase in cost of services was the result of increases in compensation expense of $2.9 million, incentive based compensation expense of $0.6 million, collection costs of $0.4 million and other expenses aggregating $0.2 million, partially offset by a decrease in PWI expenses of $0.4 million.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $1.2 million, or 5%, to $23.6 million for the nine months ended September 30, 2018, compared with $22.4 million for the nine months ended September 30, 2017. The increase in selling, general and administrative expenses was primarily attributable to increases in incentive-based compensation expense of $1.5 million and other miscellaneous expenses aggregating $0.1 million, partially offset by a decrease in selling, general and administrative costs at PWI of $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
The company believes that the significant indicators of liquidity for its business are cash on hand, cash flow from operations, working capital and amounts available under its Credit Facility. The company's principal sources of liquidity consist of cash generated by operations and borrowings under its revolving credit facility.
(Dollars in millions)
September 30,
2018
 
December 31,
2017
 
September 30,
2017
Cash and cash equivalents
$
455.1

 
$
317.2

 
$
432.1

Restricted cash
22.6

 
19.4

 
18.6

Working capital
846.7

 
748.2

 
826.5

Amounts available under Credit Facility*
350.0

 
350.0

 
350.0

Cash flow from operations for the nine months ended
585.8

 
 
 
487.9

* KAR Auction Services, Inc. has a $350 million revolving line of credit as part of the company's Credit Agreement. There were related outstanding letters of credit totaling approximately $32.4 million, $42.8 million and $35.9 million at September 30, 2018, December 31, 2017 and September 30, 2017, 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.

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Summary of Cash Flows
 
Nine Months Ended
September 30,
(Dollars in millions)
2018
 
2017
Net cash provided by (used by):
 
 
 
Operating activities
$
585.8

 
$
487.9

Investing activities
(234.1
)
 
(200.3
)
Financing activities
(205.7
)
 
(73.1
)
Effect of exchange rate on cash
(4.9
)
 
16.5

Net increase in cash, cash equivalents and restricted cash
$
141.1

 
$
231.0

Cash flow from operating activities was $585.8 million for the nine months ended September 30, 2018, compared with $487.9 million for the nine months ended September 30, 2017. The increase in operating cash flow was primarily attributable to changes in operating assets and liabilities as a result of the timing of collections and the disbursement of funds to consignors for auctions held near period-ends, as well as increased profitability adjusted for non-cash items.
Net cash used by investing activities was $234.1 million for the nine months ended September 30, 2018, compared with $200.3 million for the nine months ended September 30, 2017. The increase in net cash used by investing activities was primarily attributable to:
•
an increase in the additional finance receivables held for investment of approximately $51.7 million; and
•
an increase in cash used for capital expenditures of approximately $11.0 million;
partially offset by:
•
a decrease in cash used for acquisitions of approximately $23.7 million.
Net cash used by financing activities was $205.7 million for the nine months ended September 30, 2018, compared with $73.1 million for the nine months ended September 30, 2017. The increase in net cash used by financing activities was primarily attributable to:
•
the approximately $186.0 million of net cash received from the refinancing and repayment activities in 2017;
•
a smaller increase in book overdrafts in the first nine months of 2018 compared with the first nine months of 2017 of approximately $17.4 million; and
•
an increase in dividend payments of approximately $9.7 million;
partially offset by:
•
a decrease in common stock repurchases in 2018 of approximately $50.0 million; and
•
an increase in the additional obligations collateralized by finance receivables of approximately $39.0 million.
Potential Share Repurchases

The company did not repurchase any of its shares in the quarter ended September 30, 2018. The company expects to repurchase some of its shares in the fourth quarter of 2018, under its current share repurchase program. Repurchases may be made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations. The timing and amount of any repurchases is subject to market and other conditions.


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Non-GAAP Financial Measures

The company provides the following non-GAAP measures on a forward-looking basis: Adjusted EBITDA and operating adjusted net income per share. Management believes that these measures provide investors additional meaningful methods to evaluate certain aspects of the company’s results period over period and for the other reasons set forth previously.

Earnings guidance also does not contemplate future items such as business development activities, strategic developments (such as restructurings, spin-offs or dispositions of assets or investments), gains/losses associated with step acquisitions, significant expenses related to litigation and changes in applicable laws and regulations (including significant accounting and tax matters). The timing and amounts of these items are highly variable, difficult to predict, and of a potential size that could have a substantial impact on the company’s reported results for any given period. Prospective quantification of these items is generally not practicable. Forward-looking non-GAAP guidance excludes amortization expenses associated with acquired intangible assets, as well as one-time charges, net of taxes.

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