10-Q 1 kar-20220331.htm FORM 10-Q - MARCH 31, 2022 kar-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-34568
kar-20220331_g1.jpg
KAR Auction Services, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
20-8744739
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
11299 N. Illinois Street, Carmel, Indiana 46032
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (800923-3725

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common Stock, par value $0.01 per shareKARNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐    No 
As of April 30, 2022, 121,532,693 shares of the registrant's common stock, par value $0.01 per share, were outstanding.


KAR Auction Services, Inc.
Table of Contents

2

PART I
FINANCIAL INFORMATION
Item 1.    Financial Statements
KAR Auction Services, Inc.
Consolidated Statements of Income
(In millions, except per share data)
(Unaudited)

Three Months Ended March 31,
 20222021
Operating revenues  
Auction fees$101.4 $102.5 
Service revenue137.5 146.3 
Purchased vehicle sales46.3 55.2 
Finance-related revenue84.2 65.8 
Total operating revenues$369.4 $369.8 
Operating expenses  
Cost of services (exclusive of depreciation and amortization)210.8 203.8 
Selling, general and administrative118.9 107.3 
Depreciation and amortization26.0 26.9 
Total operating expenses355.7 338.0 
Operating profit13.7 31.8 
Interest expense25.6 30.8 
Other (income) expense, net1.2 (49.7)
Income (loss) from continuing operations before income taxes(13.1)50.7 
Income taxes(4.7)24.5 
Income (loss) from continuing operations(8.4)26.2 
Income from discontinued operations, net of income taxes8.1 24.7 
Net income (loss)$(0.3)$50.9 
Net income (loss) per share - basic  
Income (loss) from continuing operations$(0.16)$0.10 
Income from discontinued operations0.070.15 
Net income (loss) per share - basic$(0.09)$0.25 
Net income (loss) per share - diluted
Income (loss) from continuing operations$(0.16)$0.10 
Income from discontinued operations0.07 0.15 
Net income (loss) per share - diluted$(0.09)$0.25 
   





See accompanying condensed notes to consolidated financial statements
3

KAR Auction Services, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
 Three Months Ended March 31,
 20222021
Net income (loss)$(0.3)$50.9 
Other comprehensive income, net of tax  
Foreign currency translation gain1.1 1.6 
Unrealized gain on interest rate derivatives, net of tax9.1 6.7 
Total other comprehensive income, net of tax10.2 8.3 
Comprehensive income$9.9 $59.2 
   

























See accompanying condensed notes to consolidated financial statements
4

KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions)
(Unaudited)
 March 31,
2022
December 31, 2021
Assets  
Current assets  
Cash and cash equivalents$134.2 $177.6 
Restricted cash26.3 25.8 
Trade receivables, net of allowances of $10.1 and $9.5
433.3 381.3 
Finance receivables, net of allowances of $23.0 and $23.0
2,734.8 2,506.0 
Other current assets117.8 87.9 
Current assets held-for-sale2,058.6 213.2 
Total current assets5,505.0 3,391.8 
Other assets  
Goodwill1,595.4 1,598.0 
Customer relationships, net of accumulated amortization of $407.8 and $401.5
153.4 159.1 
Other intangible assets, net of accumulated amortization of $365.9 and $350.0
236.6 243.3 
Operating lease right-of-use assets93.2 94.7 
Property and equipment, net of accumulated depreciation of $206.1 and $201.6
142.2 143.5 
Other assets66.6 53.7 
Non-current assets held-for-sale 1,766.6 
Total other assets2,287.4 4,058.9 
Total assets$7,792.4 $7,450.7 
   
















See accompanying condensed notes to consolidated financial statements
5

KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
(Unaudited)
 March 31,
2022
December 31, 2021
Liabilities, Temporary Equity and Stockholders' Equity  
Current liabilities  
Accounts payable$833.5 $785.3 
Accrued employee benefits and compensation expenses25.2 32.3 
Accrued interest18.6 6.1 
Other accrued expenses79.0 107.4 
Income taxes payable3.4 7.9 
Obligations collateralized by finance receivables1,866.6 1,692.3 
Current maturities of long-term debt1,034.0 16.3 
Current liabilities held-for-sale705.3 361.7 
Total current liabilities4,565.6 3,009.3 
Non-current liabilities  
Long-term debt939.8 1,849.7 
Deferred income tax liabilities60.5 55.9 
Operating lease liabilities86.9 88.1 
Other liabilities22.1 30.0 
Non-current liabilities held-for-sale 313.8 
Total non-current liabilities1,109.3 2,337.5 
Commitments and contingencies (Note 9)
Temporary equity
Series A convertible preferred stock601.6 590.9 
Stockholders' equity  
Common stock, $0.01 par value:
  
Authorized shares: 400,000,000
  
Issued and outstanding shares:  
March 31, 2022: 121,532,564
  
December 31, 2021: 121,163,050
1.2 1.2 
Additional paid-in capital914.6 910.8 
Retained earnings614.6 625.7 
Accumulated other comprehensive loss(14.5)(24.7)
Total stockholders' equity1,515.9 1,513.0 
Total liabilities, temporary equity and stockholders' equity$7,792.4 $7,450.7 








See accompanying condensed notes to consolidated financial statements
6

KAR Auction Services, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-In
Capital
Retained EarningsAccumulated
Other
Comprehensive
Loss
Total
Balance at December 31, 2021121.2 $1.2 $910.8 $625.7 $(24.7)$1,513.0 
Net loss(0.3)(0.3)
Other comprehensive income10.2 10.2 
Issuance of common stock under stock plans0.5 0.6 0.6 
Surrender of RSUs for taxes(0.2)(2.5)(2.5)
Stock-based compensation expense5.6 5.6 
Dividends earned under stock plans0.1 (0.1) 
Dividends on preferred stock(10.7)(10.7)
Balance at March 31, 2022121.5 $1.2 $914.6 $614.6 $(14.5)$1,515.9 
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-In
Capital
Retained EarningsAccumulated
Other
Comprehensive
Loss
Total
Balance at December 31, 2020129.7 $1.3 $1,046.5 $600.7 $(32.7)$1,615.8 
Net income50.9 50.9 
Other comprehensive income8.3 8.3 
Issuance of common stock under stock plans0.4 0.3 0.3 
Surrender of RSUs for taxes(0.1)(2.2)(2.2)
Stock-based compensation expense5.4 5.4 
Repurchase and retirement of common stock(5.2)(80.8)(80.8)
Dividends earned under stock plans0.2 (0.4)(0.2)
Dividends on preferred stock(10.0)(10.0)
Balance at March 31, 2021124.8 $1.3 $969.4 $641.2 $(24.4)$1,587.5 
   











See accompanying condensed notes to consolidated financial statements
7

KAR Auction Services, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 Three Months Ended March 31,
 20222021
Operating activities  
Net income (loss)$(0.3)$50.9 
Net income from discontinued operations(8.1)(24.7)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation and amortization26.0 26.9 
Provision for credit losses3.0 5.1 
Deferred income taxes2.6 4.4 
Amortization of debt issuance costs3.1 3.0 
Stock-based compensation5.0 4.7 
Contingent consideration adjustment 11.2 
Net change in unrealized (gain) loss on investment securities3.0 (43.5)
Other non-cash, net(8.7)0.6 
Changes in operating assets and liabilities:  
Trade receivables and other assets(80.1)(222.4)
Accounts payable and accrued expenses45.0 334.0 
Net cash (used by) provided by operating activities - continuing operations(9.5)150.2 
Net cash used by operating activities - discontinued operations(50.5)(1.6)
Investing activities  
Net increase in finance receivables held for investment(229.4)(73.3)
Purchases of property, equipment and computer software(13.5)(11.9)
Investments in securities(4.1)(15.3)
Proceeds from sale of investments0.3 21.1 
Proceeds from the sale of PWI 0.9 
Net cash used by investing activities - continuing operations(246.7)(78.5)
Net cash used by investing activities - discontinued operations(11.8)(0.7)
Financing activities  
Net increase in book overdrafts6.5 5.1 
Net increase in borrowings from lines of credit108.8 6.1 
Net increase (decrease) in obligations collateralized by finance receivables170.5 (25.1)
Payments on long-term debt(2.4)(2.4)
Payments on finance leases(1.3)(1.5)
Payments of contingent consideration and deferred acquisition costs(29.6)(21.3)
Issuance of common stock under stock plans0.6 0.3 
Tax withholding payments for vested RSUs(2.5)(2.2)
Repurchase and retirement of common stock (80.8)
Net cash provided by (used by) financing activities - continuing operations250.6 (121.8)
Net cash provided by financing activities - discontinued operations22.0 33.1 
Effect of exchange rate changes on cash3.0 2.6 
Net decrease in cash, cash equivalents and restricted cash(42.9)(16.7)
Cash, cash equivalents and restricted cash at beginning of period203.4 784.3 
Cash, cash equivalents and restricted cash at end of period$160.5 $767.6 
Cash paid for interest, net of proceeds from interest rate derivatives$18.5 $15.3 
Cash paid for taxes, net of refunds$12.6 $11.7 







See accompanying condensed notes to consolidated financial statements
8

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements
March 31, 2022 (Unaudited)

Note 1—Basis of Presentation and Nature of Operations
Defined Terms
Unless otherwise indicated or unless the context otherwise requires, the following terms used herein shall have the following meanings:
"we," "us," "our," "KAR" and "the Company" refer, collectively, to KAR Auction Services, Inc. and all of its subsidiaries;
"ADESA" or "ADESA Auctions" refer, collectively, to ADESA, Inc., a wholly-owned subsidiary of KAR Auction Services, and ADESA, Inc.'s subsidiaries, including Openlane, Inc. (together with Openlane, Inc.'s subsidiaries, "Openlane"), BacklotCars, Inc. ("BacklotCars"), CARWAVE Holdings LLC ("CARWAVE"), Nth Gen Software Inc. ("TradeRev"), ADESA Remarketing Limited (formerly known as GRS Remarketing Limited ("GRS" or "ADESA Remarketing Limited")) and ADESA Europe (formerly known as CarsOnTheWeb ("COTW"));
"AFC" refers, collectively, to Automotive Finance Corporation, a wholly-owned subsidiary of ADESA, and Automotive Finance Corporation's subsidiaries and other related entities, including PWI Holdings, Inc. (which was sold on December 1, 2020);
"Credit Agreement" refers to the Amended and Restated Credit Agreement, dated March 11, 2014 (as amended, amended and restated, modified or supplemented from time to time), among KAR Auction Services, Inc., as the borrower, the several banks and other financial institutions or entities from time to time parties thereto and JPMorgan Chase Bank N.A., as administrative agent;
"Credit Facility" refers to the $950 million, senior secured term loan B-6 facility due September 19, 2026 ("Term Loan B-6") and the $325 million, senior secured revolving credit facility due September 19, 2024 (the "Revolving Credit Facility"), the terms of which are set forth in the Credit Agreement;
"IAA" refers, collectively, to Insurance Auto Auctions, Inc., formerly a wholly-owned subsidiary of KAR Auction Services, and Insurance Auto Auctions, Inc.'s subsidiaries and other related entities, including HBC Vehicle Services Limited ("HBC");
"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries;
"Senior notes" refers to the 5.125% senior notes due 2025 ($950 million aggregate principal was outstanding at March 31, 2022); and
"Series A Preferred Stock" refers to the Series A Convertible Preferred Stock, par value $0.01 per share (623,397 and 612,676 shares of Series A Preferred Stock were outstanding at March 31, 2022 and December 31, 2021, respectively).
Business and Nature of Operations
ADESA is a leading provider of wholesale vehicle auctions and related vehicle remarketing services for the automotive industry. In February 2022, the Company announced that it had entered into a definitive agreement with Carvana Group, LLC (“Carvana”) and Carvana Co., pursuant to which Carvana will acquire the ADESA U.S. physical auction business from KAR (the “Transaction”). The Transaction includes all auction sales, operations and staff at ADESA’s U.S. vehicle logistic centers and use of the ADESA.com marketplace in the U.S. (see Note 2). As of March 31, 2022, the ADESA Auctions segment serves a domestic and international customer base through digital marketplaces and 14 vehicle logistics center locations across Canada. ADESA includes BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized in the United States, CARWAVE, an online dealer-to-dealer marketplace in the United States, TradeRev, an online automotive remarketing platform in Canada where dealers can launch and participate in real-time vehicle auctions at any time, ADESA Remarketing Limited, an online whole car vehicle remarketing business in the United Kingdom and ADESA Europe, an online wholesale vehicle auction marketplace in Continental Europe. Our auctions facilitate the sale of used vehicles through on-premise and off-premise marketplaces. ADESA's online service offerings include customized private label solutions powered with software developed by its wholly-owned subsidiary, Openlane, that allow our commercial consignors (automobile manufacturers, captive finance companies and other institutions) to offer vehicles via the Internet prior to arrival at on-premise marketplaces.
9

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

Remarketing services include a variety of activities designed to facilitate the transfer of used vehicles between sellers and buyers throughout the vehicle life cycle. ADESA facilitates the exchange of these vehicles through an auction marketplace, which aligns sellers and buyers. As an agent for customers, the Company generally does not take title to or ownership of vehicles sold at the auctions. Generally, fees are earned from the seller and buyer on each successful auction transaction in addition to fees earned for ancillary services.
ADESA also provides services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. ADESA is able to serve the diverse and multi-faceted needs of its customers through the wide range of services offered.
AFC is a leading provider of floorplan financing to independent used vehicle dealers and this financing is provided through approximately 100 locations throughout the United States and Canada as of March 31, 2022. Floorplan financing supports independent used vehicle dealers in North America who purchase vehicles at ADESA, BacklotCars, CARWAVE, TradeRev, other used vehicle and salvage auctions. In addition, AFC provides financing for dealer inventory purchased directly from wholesalers and other dealers as well as providing liquidity for customer trade-ins which encompasses settling lien holder payoffs. AFC also provides title services for their customers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("U.S. GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by U.S. GAAP for annual financial statements. Operating results for interim periods are not necessarily
indicative of results that may be expected for the year as a whole. In the opinion of management, the consolidated financial
statements reflect all adjustments, generally consisting of normal recurring accruals, necessary for a fair statement of our results
of operations, cash flows and financial position for the periods presented. These consolidated financial statements and
condensed notes to consolidated financial statements are unaudited and should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2021, as filed with the Securities and Exchange Commission on February 23, 2022. The 2021 year-end
consolidated balance sheet data included in this Form 10-Q was derived from the audited financial statements referenced above
and does not include all disclosures required by U.S. GAAP for annual financial statements.
Reclassifications
During the first quarter of 2022, the Company classified the ADESA U.S. physical auctions (vehicle logistics centers) as held-for-sale based on management’s intention to sell the business. Certain amounts reported in the consolidated financial statements and related notes prior to March 2022 have been reclassified to discontinued operations to reflect the pending sale of the Company’s ADESA U.S. physical auction business. The assets and liabilities of the ADESA U.S. physical auctions have been reclassified to "Current assets held-for-sale," "Non-current assets held-for-sale," "Current liabilities held-for-sale" and "Non-current liabilities held-for-sale" in the consolidated balance sheets for all periods presented. Likewise, certain amounts reported for segment results in the consolidated financial statements prior to March 2022 have been reclassified to conform to the discontinued operations presentation. See Note 2 for a further discussion.
In addition, KAR provided transportation services of $17.7 million and $24.4 million to the ADESA U.S. physical auctions for the three months ended March 31, 2022 and 2021, respectively. The revenue and cost of services for these transportation services provided to the ADESA U.S. physical auctions was previously eliminated in consolidation, but this revenue and the related costs are now included in the Company's consolidated statements of income.

AFC also has accounts payable to customers of the ADESA U.S. physical auctions related to auction proceeds financed. Previously, these accounts payables were eliminated in consolidation, but are now included in "Accounts payable" and "Current assets held-for-sale" on the consolidated balance sheets and were $40.4 million and $33.5 million at March 31, 2022 and December 31, 2021, respectively.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates based in part on assumptions about current, and for some estimates, future economic and market conditions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
10

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

statements, and the reported amounts of revenues and expenses during the period. Although the current estimates contemplate current conditions and expected future changes, as appropriate, it is reasonably possible that future conditions could differ from these estimates, which could materially affect our results of operations and financial position. Among other effects, such changes could result in future impairments of goodwill, intangible assets and long-lived assets, incremental losses on finance receivables, additional allowances on accounts receivable and deferred tax assets and changes in litigation and other loss contingencies.
New Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. The update also requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. The new guidance is effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. This update can be adopted on either a fully retrospective or a modified retrospective basis. The adoption of ASU 2020-06 did not have a material impact on the consolidated financial statements.
Note 2—Pending Sale of ADESA U.S. Physical Auction Business and Discontinued Operations
In February 2022, the Company announced that it had entered into a definitive agreement with Carvana, pursuant to which Carvana will acquire the ADESA U.S. physical auction business from KAR. The Transaction is valued at $2.2 billion and includes all auction sales, operations and staff at ADESA’s U.S. vehicle logistic centers and use of the ADESA.com marketplace in the U.S. The Transaction is subject to customary closing conditions and is expected to close in May 2022. In connection with the Transaction, the Company and Carvana expect to enter into various agreements to provide a framework for their relationship after the Transaction, including a transition services agreement and a commercial agreement. In addition, KAR will continue to own the ADESA tradename and the ADESA U.S. physical auctions will continue to utilize the tradename, which has an indefinite life.
The Company has classified the ADESA U.S. physical auctions as held-for-sale in its consolidated balance sheets, based on management’s intention to sell the business. The "Goodwill" shown in the balance sheets below was allocated to the ADESA U.S. physical auctions based on relative fair value. The financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. The business was formerly included in the Company’s ADESA Auctions reportable segment.
The following table presents the results of operations for the ADESA U.S. physical auction business that have been reclassified to discontinued operations for all periods presented (in millions):
Three Months Ended March 31,
20222021
Operating revenues$220.0 $236.2 
Operating expenses
   Cost of services (exclusive of depreciation and amortization)158.6 149.7 
   Selling, general and administrative43.9 44.4 
   Depreciation and amortization11.2 20.1 
Total operating expenses213.7 214.2 
Operating profit6.3 22.0 
Interest expense0.1 0.1 
Other (income) expense, net(6.1)(1.9)
Income from discontinued operations before income taxes12.3 23.8 
Income taxes4.2 (0.9)
Income from discontinued operations$8.1 $24.7 
11

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

The following tables summarize the major classes of assets and liabilities of the ADESA U.S. physical auction business that have been classified as held-for-sale for each period presented (in millions):
March 31,
2022
Assets
Cash and cash equivalents$36.7 
Trade receivables, net of allowances237.8 
Inventory16.5 
Other current assets6.0 
Goodwill980.5 
Customer relationships, net of accumulated amortization81.4 
Other intangible assets, net of accumulated amortization33.5 
Operating lease right-of-use assets226.6 
Property and equipment, net of accumulated depreciation437.1 
Other assets2.5 
Current assets held-for-sale$2,058.6 
Liabilities
Accounts payable$323.1 
Accrued employee benefits and compensation expenses19.7 
Other accrued expenses27.0 
Current portion of operating lease liabilities27.7 
Deferred income tax liabilities83.8 
Operating lease liabilities222.0 
Other liabilities2.0 
Current liabilities held-for-sale$705.3 

12

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

December 31, 2021
Assets
Cash and cash equivalents$12.4 
Trade receivables, net of allowances179.3 
Inventory15.7 
Other current assets5.8 
Current assets held-for-sale213.2 
Goodwill980.5 
Customer relationships, net of accumulated amortization84.2 
Other intangible assets, net of accumulated amortization32.6 
Operating lease right-of-use assets231.0 
Property and equipment, net of accumulated depreciation435.7 
Other assets2.6 
Non-current assets held-for-sale1,766.6 
Total assets held-for-sale$1,979.8 
Liabilities
Accounts payable$271.7 
Accrued employee benefits and compensation expenses27.2 
Other accrued expenses35.3 
Current portion of operating lease liabilities27.5 
Current liabilities held-for-sale361.7 
Deferred income tax liabilities82.5 
Operating lease liabilities229.0 
Other liabilities2.3 
Non-current liabilities held-for-sale313.8 
Total liabilities held-for-sale$675.5 
Note 3—Stock and Stock-Based Compensation Plans
The KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan ("Omnibus Plan") is intended to provide equity and/or cash-based awards to our executive officers and key employees. Our stock-based compensation expense includes expense associated with KAR Auction Services, Inc. service-based options ("service options"), market-based options ("market options"), performance-based restricted stock units ("PRSUs") and service-based restricted stock units ("RSUs"). We have determined that the KAR Auction Services, Inc. service options, market options, PRSUs and RSUs should be classified as equity awards.
The following table summarizes our stock-based compensation expense by type of award (in millions):
 Three Months Ended March 31,
 20222021
PRSUs$1.9 $2.0 
RSUs1.4 1.4 
Service options0.2 0.3 
Market options1.5 1.0 
Total stock-based compensation expense$5.0 $4.7 
13

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

PRSUs and RSUs
In the first quarter of 2022, we granted a target amount of approximately 0.5 million PRSUs to certain executive officers of the Company. The PRSUs granted in 2022 vest if and to the extent that the Company's three-year cumulative operating adjusted net income per share attains certain specified goals. In addition, approximately 0.3 million RSUs were granted to certain management members of the Company. The RSUs are contingent upon continued employment and generally vest in three equal annual installments. The weighted average grant date fair value of the PRSUs and the RSUs was $18.46 per share and $18.45 per share, respectively, which was determined using the closing price of the Company's common stock on the dates of grant.
Share Repurchase Program
In October 2019, the board of directors authorized a repurchase of up to $300 million of the Company's outstanding common stock, par value $0.01 per share, through October 30, 2021. In October 2021, the board of directors authorized an extension of the October 2019 share repurchase program through December 31, 2022. At March 31, 2022, approximately $109.0 million of the Company's outstanding common stock remained available for repurchase under the 2019 share repurchase program. Repurchases may be made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases is subject to market and other conditions. This program does not oblige the Company to repurchase any dollar amount or any number of shares under the authorization, and the program may be suspended, discontinued or modified at any time, for any reason and without notice. No shares of common stock were repurchased during the three months ended March 31, 2022. For the three months ended March 31, 2021, we repurchased and retired 5,219,800 shares of common stock in the open market at a weighted average price of $15.47 per share, under the October 2019 authorization.
Note 4—Net Income (Loss) from Continuing Operations Per Share
The following table sets forth the computation of net income from continuing operations per share (in millions except per share amounts):
 Three Months Ended March 31,
 20222021
Net income (loss) from continuing operations$(8.4)$26.2 
Series A Preferred Stock dividends(10.7)(10.0)
Net income attributable to participating securities (3.3)
Net income (loss) attributable to common stockholders$(19.1)$12.9 
Weighted average common shares outstanding121.4 129.0 
Effect of dilutive stock options and restricted stock awards 0.7 
Weighted average common shares outstanding and potential common shares121.4 129.7 
Net income (loss) from continuing operations per share 
Basic$(0.16)$0.10 
Diluted$(0.16)$0.10 
The Company includes participating securities (Series A Preferred Stock) in the computation of net income from continuing operations per share pursuant to the two-class method. The two-class method of calculating net income from continuing operations per share is an allocation method that calculates earnings per share for common stock and participating securities. Under the two-class method, total dividends provided to the holders of the Series A Preferred Stock and undistributed earnings allocated to participating securities are subtracted from net income from continuing operations in determining net income attributable to common stockholders. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
The effect of stock options and restricted stock on net income from continuing operations per share-diluted is determined through the application of the treasury stock method, whereby net proceeds received by the Company based on assumed exercises are hypothetically used to repurchase our common stock at the average market price during the period. As a result of the spin-off, there are IAA employees who hold KAR equity awards included in the calculation. Stock options that would have
14

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

an anti-dilutive effect on net income from continuing operations per diluted share, unexercisable market options and PRSUs subject to performance conditions which have not yet been satisfied are excluded from the calculations. No service options were excluded from the calculation of diluted net income from continuing operations per share for the three months ended March 31, 2021. All of the market options were excluded from the calculation of diluted net income from continuing operations per share for the three months ended March 31, 2021. Approximately 0.8 million PRSUs were excluded from the calculation of diluted net income from continuing operations per share for the three months ended March 31, 2021. Total options outstanding at March 31, 2022 and 2021 were 5.7 million and 2.7 million, respectively. In accordance with U.S. GAAP, no potential common shares were included in the computation of diluted net income from continuing operations per share for the three months ended March 31, 2022 because to do so would have been anti-dilutive based on the period net loss from continuing operations.
Note 5—Finance Receivables and Obligations Collateralized by Finance Receivables
AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to a wholly-owned, bankruptcy remote, consolidated, special purpose subsidiary ("AFC Funding Corporation"), established for the purpose of purchasing AFC's finance receivables. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires on January 31, 2024. AFC Funding Corporation had committed liquidity of $1.70 billion for U.S. finance receivables at March 31, 2022.
We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") 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$225 million at March 31, 2022. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
The following tables present quantitative information about delinquencies, credit loss charge-offs less recoveries ("net credit losses") and components of securitized financial assets and other related assets managed. For purposes of this illustration, delinquent receivables are defined as receivables 31 days or more past due.
 March 31, 2022Net Credit Losses
Three Months Ended
March 31, 2022
 Total Amount of:
(in millions)ReceivablesReceivables
Delinquent
Floorplan receivables$2,750.9 $8.4 $1.4 
Other loans6.9   
Total receivables managed$2,757.8 $8.4 $1.4 

 December 31, 2021Net Credit Losses
Three Months Ended
March 31, 2021
 Total Amount of:
(in millions)ReceivablesReceivables
Delinquent
Floorplan receivables$2,519.7 $7.3 $1.3 
Other loans9.3   
Total receivables managed$2,529.0 $7.3 $1.3 
15

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

The following is a summary of the changes in the allowance for credit losses related to finance receivables (in millions):
 March 31,
2022
March 31,
2021
Allowance for Credit Losses  
Balance at December 31$23.0 $22.0 
Provision for credit losses1.4 4.8 
Recoveries1.9 2.5 
Less charge-offs(3.3)(3.8)
Balance at end of period$23.0 $25.5 
As of March 31, 2022 and December 31, 2021, $2,710.9 million and $2,482.2 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the obligations collateralized by finance receivables. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. Obligations collateralized by finance receivables consisted of the following (in millions):
March 31,
2022
December 31,
2021
Obligations collateralized by finance receivables, gross$1,879.9 $1,707.4 
Unamortized securitization issuance costs(13.3)(15.1)
Obligations collateralized by finance receivables$1,866.6 $1,692.3 
Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At March 31, 2022, we were in compliance with the covenants in the securitization agreements.
Note 6—Long-Term Debt
Long-term debt consisted of the following (in millions):
 Interest Rate*MaturityMarch 31,
2022
December 31,
2021
Term Loan B-6Adjusted LIBOR+ 2.25%September 19, 2026$926.2 $928.6 
Revolving Credit FacilityAdjusted LIBOR+ 1.75%September 19, 2024101.0  
Senior notes5.125%June 1, 2025950.0 950.0 
European lines of creditEuribor+ 1.25%Repayable upon demand14.6 6.8 
Total debt  1,991.8 1,885.4 
Unamortized debt issuance costs/discounts (18.0)(19.4)
Current portion of long-term debt  (1,034.0)(16.3)
Long-term debt  $939.8 $1,849.7 
*The interest rates presented in the table above represent the rates in place at March 31, 2022.
Credit Facilities
On September 19, 2019, we entered into the seven-year, $950 million Term Loan B-6 and the $325 million, five-year Revolving Credit Facility. The outstanding balance on Term Loan B-6 is classified as current debt at March 31, 2022, net of unamortized debt issuance costs/discounts of approximately $7.8 million, as the Company expects to repay the debt with the net
16

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

proceeds from the closing of the Transaction. Under the Credit Agreement, net cash proceeds from the Transaction must be used to repay Term Loan B-6 shortly after closing.
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. 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 2.75% at March 31, 2022.
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 security interests in 100% of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and 65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions. The Credit Agreement contains affirmative and negative covenants that we believe are usual and customary for a senior secured credit agreement. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments and transactions with our affiliates. The Credit Agreement also requires us to maintain a Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), not to exceed 3.5 as of the last day of each fiscal quarter, if there are revolving loans outstanding. We were in compliance with the applicable covenants in the Credit Agreement at March 31, 2022.
As of March 31, 2022, $101.0 million was drawn on the Revolving Credit Facility and there were no borrowings outstanding on the Revolving Credit Facility at December 31, 2021. We had related outstanding letters of credit in the aggregate amount of $27.3 million and $27.6 million at March 31, 2022 and December 31, 2021, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility.
Senior Notes
The Company expects to use any remaining proceeds from the Transaction after the repayment of Term Loan B-6 to redeem the senior notes within 365 days of the close of the Transaction. The terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. At March 31, 2022, the senior notes are classified as non-current debt as the Company is not obligated to repay within the next year.
European Lines of Credit
ADESA Europe has lines of credit aggregating $33.2 million (€30 million). The lines of credit had an aggregate $14.6 million and $6.8 million of borrowings outstanding at March 31, 2022 and December 31, 2021, respectively. The lines of credit are secured by certain inventory and receivables at ADESA Europe subsidiaries.
Fair Value of Debt
As of March 31, 2022, the estimated fair value of our long-term debt amounted to $1,994.8 million. The estimates of fair value were based on broker-dealer quotes (Level 2 inputs) for our debt as of March 31, 2022. The estimates presented on long-term financial instruments are not necessarily indicative of the amounts that would be realized in a current market exchange.
Note 7—Derivatives
We are exposed to interest rate risk on our variable rate borrowings. Accordingly, interest rate fluctuations affect the amount of interest expense we are obligated to pay. We have used interest rate derivatives with the objective of managing exposure to interest rate movements, thereby reducing the effect of interest rate changes and the effect they could have on future cash flows. Currently, interest rate swap agreements are used to accomplish this objective.
In January 2020, we entered into three pay-fixed interest rate swaps with an aggregate notional amount of $500 million to swap variable rate interest payments under our term loan for fixed interest payments bearing a weighted average interest rate of 1.44%, for a total interest rate of 3.69%. The interest rate swaps have a five-year term, each maturing on January 23, 2025.
17

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

We originally designated the interest rate swaps as cash flow hedges. The changes in the fair value of the interest rate swaps that are included in the assessment of hedge effectiveness are recorded as a component of "Accumulated other comprehensive income." For the three months ended March 31, 2022, the Company recorded an unrealized gain on the interest rate swaps of $9.1 million, net of tax of $3.0 million, in "Accumulated other comprehensive income." For the three months ended March 31, 2021, the Company recorded an unrealized gain on the interest rate swaps of $6.7 million, net of tax of $2.2 million, in "Accumulated other comprehensive income." The earnings impact of the interest rate derivatives designated as cash flow hedges is recorded upon the recognition of the interest related to the hedged debt. In February 2022, we discontinued hedge accounting as we concluded that the forecasted interest rate payments were no longer probable of occurring in consideration of the Transaction and expected repayment of Term Loan B-6. As a result, the increase in the fair value of the swaps from the time of hedge accounting discontinuance to March 31, 2022 was recognized as an $8.7 million unrealized gain in "Interest expense" in the consolidated statement of income.
When derivatives are used, we are exposed to credit loss in the event of non-performance by the counterparties; however, non-performance is not anticipated and was considered immaterial to the fair value estimates. ASC 815, Derivatives and Hedging, requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. The fair values of the interest rate derivatives are based on quoted market prices for similar instruments from commercial banks (based on significant observable inputs - Level 2 inputs). The following table presents the fair value of our interest rate derivatives included in the consolidated balance sheets for the periods presented (in millions):
Asset/Liability Derivatives
March 31, 2022December 31, 2021
Derivatives Designated as Hedging InstrumentsBalance Sheet LocationFair ValueBalance Sheet LocationFair Value
2020 Interest rate swapsOther assetsN/AOther liabilities$7.5 
Derivatives Not Designated as Hedging Instruments
2020 Interest rate swapsOther assets$13.3 Other liabilitiesN/A
Note 8—Other (Income) Expense, Net
Other (income) expense, net consisted of the following (in millions):
Three Months Ended March 31,
20222021
Change in realized and unrealized (gains) losses on investment securities, net$3.0 $(60.5)
Contingent consideration valuation 11.2 
Foreign currency (gains) losses1.2 2.2 
Other(3.0)(2.6)
Other (income) expense, net$1.2 $(49.7)
Fair Value Measurement of Investments
The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. Realized gains on these investments were $0.0 million and $17.0 million for the three months ended March 31, 2022 and 2021, respectively. The Company had unrealized losses of $3.0 million for the three months ended March 31, 2022 and unrealized gains of $43.5 million for the three months ended March 31, 2021.
18

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

ASC 820, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A small portion of finance receivables for one entity were converted to investment securities during the first quarter of 2021. This entity became publicly traded during the first quarter of 2021 and now has a readily determinable fair value. As of March 31, 2022, the fair value of investment securities are based on quoted market prices for identical assets (Level 1 of the fair value hierarchy) and approximated $4.5 million. The net unrealized loss on these investment securities was $3.0 million at March 31, 2022. The remaining investments held of $26.2 million do not have readily determinable fair values and the Company has elected to apply the measurement alternative to these investments and present them at cost. Investments are reported in "Other assets" in the accompanying consolidated balance sheets. Realized and unrealized gains and losses are reported in "Other (income) expense, net" in the consolidated statements of income.
Note 9—Commitments and Contingencies
We are involved in litigation and disputes arising in the ordinary course of business, such as actions related to injuries; property damage; handling, storage or disposal of vehicles; environmental laws and regulations; and other litigation incidental to the business such as employment matters and dealer disputes. Management considers the likelihood of loss or the incurrence of a liability, as well as the ability to reasonably estimate the amount of loss, in determining loss contingencies. We accrue an estimated loss contingency when it is probable that a liability has been incurred and the amount of loss (or range of possible losses) can be reasonably estimated. Management regularly evaluates current information available to determine whether accrual amounts should be adjusted. Accruals for contingencies including litigation and environmental matters are included in "Other accrued expenses" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information becomes available. If the amount of an actual loss is greater than the amount accrued, this could have an adverse impact on our operating results in that period. Such matters are generally not, in the opinion of management, likely to have a material adverse effect on our financial condition, results of operations or cash flows. Legal fees are expensed as incurred. There has been no significant change in the legal and regulatory proceedings which were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Note 10—Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (in millions):
 March 31,
2022
December 31,
2021
Foreign currency translation loss$(17.9)$(19.0)
Unrealized gain (loss) on interest rate derivatives, net of tax3.4 (5.7)
Accumulated other comprehensive loss$(14.5)$(24.7)

Note 11—Segment Information
ASC 280, Segment Reporting, requires reporting of segment information that is consistent with the manner in which the chief operating decision maker operates and views the Company. Our operations are grouped into two operating segments: ADESA Auctions and AFC, which also serve as our reportable business segments. These reportable business segments offer different services and have fundamental differences in their operations. Beginning in the first quarter of 2022, results of the ADESA U.S physical auctions are now reported as discontinued operations (see Note 2). Segment results for prior periods have been reclassified to conform with the new presentation.
19

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

Financial information regarding our reportable segments is set forth below as of and for the three months ended March 31, 2022 (in millions):
ADESA
Auctions
AFCConsolidated
Operating revenues$285.2 $84.2 $369.4 
Operating expenses
Cost of services (exclusive of depreciation and amortization)195.8 15.0 210.8 
Selling, general and administrative108.4 10.5 118.9 
Depreciation and amortization23.9 2.1 26.0 
Total operating expenses328.1 27.6 355.7 
Operating profit (loss)(42.9)56.6 13.7 
Interest expense13.3 12.3 25.6 
Other (income) expense, net(1.8)3.0 1.2 
Intercompany expense (income)0.1 (0.1) 
Income (loss) from continuing operations before income taxes(54.5)41.4 (13.1)
Income taxes(15.1)10.4 (4.7)
Net income (loss) from continuing operations$(39.4)$31.0 $(8.4)
Total assets$2,630.3 $3,103.5 $5,733.8 

Financial information regarding our reportable segments is set forth below as of and for the three months ended March 31, 2021 (in millions):
ADESA
Auctions
AFCConsolidated
Operating revenues$304.0 $65.8 $369.8 
Operating expenses   
Cost of services (exclusive of depreciation and amortization)190.3 13.5 203.8 
Selling, general and administrative98.5 8.8 107.3 
Depreciation and amortization          24.5 2.4 26.9 
Total operating expenses313.3 24.7 338.0 
Operating profit (loss)(9.3)41.1 31.8 
Interest expense21.5 9.3 30.8 
Other (income) expense, net(5.4)(44.3)(49.7)
Intercompany expense (income)0.1 (0.1) 
Income (loss) from continuing operations before income taxes(25.5)76.2 50.7 
Income taxes5.0 19.5 24.5 
Net income (loss) from continuing operations$(30.5)$56.7 $26.2 
Total assets$2,710.6 $2,376.8 $5,087.4 
20

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
March 31, 2022 (Unaudited)

Geographic Information
Our foreign operations include Canada, Mexico, Continental Europe and the U.K. Approximately 64% and 52% of our foreign operating revenues were from Canada for the three months ended March 31, 2022 and 2021, respectively. Most of the remaining foreign operating revenues were generated from Continental Europe. Information regarding the geographic areas of our operations is set forth below (in millions):
 Three Months Ended March 31,
 20222021
Operating revenues  
U.S.$231.1 $227.8 
Foreign138.3 142.0 
$369.4 $369.8 
Note 12—Subsequent Event
On April 27, 2022, the board of directors authorized an increase in the size of the Company’s $300 million share repurchase program by an additional $200 million and an extension of the share repurchase program through December 31, 2023. The share repurchase program was originally approved by the board of directors in October 2019. With the increase, and giving effect to the Company’s previous repurchases, approximately $309.0 million of the Company’s outstanding common stock, par value $0.01 per share, remains available for repurchases under the share repurchase program. Repurchases may be made in the open market or through privately negotiated transactions, in accordance with applicable securities laws and regulations, including pursuant to repurchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing and amount of any repurchases is subject to market and other conditions. This program does not oblige the Company to repurchase any dollar amount or any number of shares under the authorization, and the program may be suspended, discontinued or modified at any time, for any reason and without notice.
21

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should," "may," "will," "can," "of the opinion," "confident," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "continues," "outlook," initiatives," "goals," "opportunities" and similar expressions identify forward-looking statements. Such statements, including statements regarding the potential impacts of the COVID-19 pandemic; our future growth; anticipated cost savings, revenue increases, credit losses and capital expenditures; contractual obligations; dividend declarations and payments; common stock repurchases; tax rates and assumptions; strategic initiatives, 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, 2021, filed on February 23, 2022, and those described from time to time in our future reports filed with the Securities and Exchange Commission. Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
Pending Sale of ADESA U.S. Physical Auction Business and Discontinued Operations
In February 2022, the Company announced that it had entered into a definitive agreement with Carvana Group, LLC (“Carvana”) and Carvana Co., pursuant to which Carvana will acquire the ADESA U.S. physical auction business from KAR (the “Transaction”). The Transaction is valued at $2.2 billion and includes all auction sales, operations and staff at ADESA’s U.S. vehicle logistic centers and use of the ADESA.com marketplace in the U.S. The Transaction is subject to customary closing conditions and is expected to close in May 2022. In connection with the Transaction, the Company and Carvana expect to enter into various agreements to provide a framework for their relationship after the Transaction, including a transition services agreement and a commercial agreement. In addition, KAR will continue to own the ADESA tradename and the ADESA U.S. physical auctions will continue to utilize the tradename, which has an indefinite life.
The Company has classified the ADESA U.S. physical auctions as held-for-sale in its consolidated balance sheets, based on management’s intention to sell the business. Goodwill was allocated to the ADESA U.S. physical auctions based on relative fair value. The financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. The business was formerly included in the Company’s ADESA Auctions reportable segment. The results presented in the "Results of Operations" discussion below only include continuing operations and do not include the results of the ADESA U.S. physical auction business.
Impact of COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Although governmental restrictions that were imposed at the outset of the pandemic to reduce the spread of COVID-19 have since been lifted or scaled back in many jurisdictions, increases in new COVID-19 cases, including new 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.
The automotive industry has experienced unprecedented market conditions during the pandemic, including a decline in new vehicle production 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 and 2022 and are expected to continue for the foreseeable future.
22

While we 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 impact 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 and 14 vehicle logistics center locations across Canada that are developed and strategically located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Powered with software developed by Openlane, comprehensive private label remarketing solutions are offered to automobile manufacturers, captive finance companies and other institutions to offer vehicles via the Internet prior to arrival at on-premise marketplaces. Vehicles sold on 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, CARWAVE, an online dealer-to-dealer marketplace in the United States, TradeRev, an online automotive remarketing platform in Canada where dealers can launch and participate in real-time vehicle auctions at any time, ADESA Remarketing Limited, an online whole car vehicle remarketing business in the United Kingdom and ADESA Europe, an online wholesale vehicle auction marketplace in Continental Europe.
As noted above, the ADESA segment results no longer include the 56 ADESA U.S. physical auction locations. These locations sold approximately 212,000 and 295,000 vehicles in the three months ended March 31, 2022 and 2021, respectively.
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.
Beginning in the first quarter of 2022, results of the ADESA U.S physical auctions are now reported as discontinued operations (see Note 2). Segment results for prior periods have been reclassified to conform with the new presentation.
Industry Trends
Whole Car
We believe the North American wholesale used vehicle marketplace has a total addressable market of approximately 22 million vehicles. This wholesale used vehicle marketplace consists of the dealer-to-dealer market (franchise and independent dealers that both buy and sell vehicles) and the commercial market (commercial sellers). We believe digital applications, such as BacklotCars, CARWAVE and TradeRev, may provide an opportunity to expand our total addressable market for dealer-to-dealer transactions to 15 million units from approximately 5 million units in 2019. Commercial seller vehicles are estimated at approximately 8 million vehicles per year.
BacklotCars, CARWAVE and TradeRev sold approximately 550,000 vehicles in the North American digital dealer-to-dealer marketplace for the year ended December 31, 2021, compared with approximately 398,000 vehicles for the year ended December 31, 2020. For the three months ended March 31, 2022 and 2021, vehicles sold by these companies in the North American digital dealer-to-dealer marketplace were approximately 133,000 and 125,000, respectively. This volume data includes vehicles sold by CARWAVE prior to its acquisition in October 2021 and vehicles sold by BacklotCars prior to its acquisition in November 2020. The supply chain issues and current market conditions facing the automotive industry, including the disruption of new vehicle production, have had a material impact on the whole car auction industry and we are unable to estimate future volumes.
23

Automotive Finance
AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverage its local presence of branches and in-market representatives, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 14,500 dealers in 2021, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.4 million in 2021.
Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, access to consumer financing and increased used car retail activity of franchise and public dealerships (most of which do not utilize AFC or its competitors for floorplan financing). These same challenges, to the extent they occur, could result in a material negative impact on AFC's results of operations. A significant decline in used vehicle sales would result in a decrease in consumer auto loan originations and an increased number of dealers defaulting on their loans. In addition, volatility in wholesale vehicle pricing impacts the value of recovered collateral on defaulted loans and the resulting severity of credit losses at AFC. A decrease in wholesale used car pricing could lead to increased losses if dealers are unable to satisfy their obligations.
Seasonality
The volume of vehicles sold through our auctions generally fluctuates from quarter-to-quarter. This seasonality is caused by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affects the demand side of the auction industry. Used vehicle auction volumes tend to decline during prolonged periods of winter weather conditions. As a result, revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The fourth calendar quarter typically experiences lower used vehicle auction volume as well as additional costs associated with the holidays and winter weather.
Sources of Revenues and Expenses
Our revenue is derived from auction fees and various on-premise and off-premise services, and from dealer financing fees, interest income and other revenue at AFC. Although auction revenues primarily include the auction services and related fees, our related receivables and payables include the gross value of the vehicles sold.
Our operating expenses consist of cost of services, selling, general and administrative and depreciation and amortization. Cost of services is composed of payroll and related costs, subcontract services, the cost of vehicles purchased, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites and loan offices. Cost of services excludes depreciation and amortization. Selling, general and administrative expenses are composed of payroll and related costs, sales and marketing, information technology services and professional fees.
24

Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended March 31, 2022 and 2021:
 Three Months Ended March 31,
(Dollars in millions except per share amounts)20222021
Revenues from continuing operations  
Auction fees$101.4 $102.5 
Service revenue137.5 146.3 
Purchased vehicle sales46.3 55.2 
Finance-related revenue84.2 65.8 
Total revenues from continuing operations369.4 369.8 
Cost of services*210.8 203.8 
Gross profit*158.6 166.0 
Selling, general and administrative118.9 107.3 
Depreciation and amortization26.0 26.9 
Operating profit13.7 31.8 
Interest expense25.6 30.8 
Other (income) expense, net1.2 (49.7)
Income (loss) from continuing operations before income taxes(13.1)50.7 
Income taxes(4.7)24.5 
Net income (loss) from continuing operations(8.4)26.2 
Net income from discontinued operations8.1 24.7 
Net income (loss)$(0.3)$50.9 
Net income (loss) from continuing operations per share  
Basic$(0.16)$0.10 
Diluted$(0.16)$0.10 

* Exclusive of depreciation and amortization
Discontinued Operations
The financial performance of the ADESA U.S. physical auction business is presented as discontinued operations. As a result, revenue, cost of services and all costs of discontinued operations are presented as one line item in the above table as "Net income from discontinued operations."
Overview
For the three months ended March 31, 2022, we had revenue of $369.4 million compared with revenue of $369.8 million for the three months ended March 31, 2021, a decrease of less than 1%. Businesses acquired in the last 12 months accounted for an increase in revenue of $18.0 million or 5% 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 $0.9 million, or 3%, to $26.0 million for the three months ended March 31, 2022, compared with $26.9 million for the three months ended March 31, 2021. 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.
25

Interest Expense
Interest expense decreased $5.2 million, or 17%, to $25.6 million for the three months ended March 31, 2022, compared with $30.8 million for the three months ended March 31, 2021. The decrease was primarily attributable to an unrealized gain of $8.7 million related to the discontinuance of hedge accounting for the interest rate swaps, partially offset by an increase in interest expense at AFC of $3.0 million, which resulted from an increase in the a