10-Q 1 kar-20220930.htm FORM 10-Q - SEPTEMBER 30, 2022 kar-20220930
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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 September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-34568
kar-20220930_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 October 31, 2022, 108,907,844 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 September 30,Nine Months Ended September 30,
 2022202120222021
Operating revenues  
Auction fees$88.9 $89.6 $289.5 $298.4 
Service revenue159.2 128.2 444.0 415.5 
Purchased vehicle sales45.8 53.7 137.9 169.0 
Finance-related revenue99.1 75.6 275.2 210.0 
Total operating revenues393.0 347.1 1,146.6 1,092.9 
Operating expenses  
Cost of services (exclusive of depreciation and amortization)209.6 185.7 632.3 598.3 
Selling, general and administrative109.1 104.8 352.1 318.5 
Depreciation and amortization24.3 27.4 76.2 81.7 
Total operating expenses343.0 317.9 1,060.6 998.5 
Operating profit50.0 29.2 86.0 94.4 
Interest expense32.3 31.9 83.8 93.7 
Other (income) expense, net1.2 13.9 6.4 (20.5)
Loss on extinguishment of debt9.3  17.0  
Income (loss) from continuing operations before income taxes7.2 (16.6)(21.2)21.2 
Income taxes6.7 10.3 (7.9)37.2 
Income (loss) from continuing operations0.5 (26.9)(13.3)(16.0)
Income (loss) from discontinued operations, net of income taxes(6.3)25.9 217.4 77.4 
Net income (loss)$(5.8)$(1.0)$204.1 $61.4 
Net income (loss) per share - basic  
Income (loss) from continuing operations$(0.09)$(0.31)$(0.30)$(0.30)
Income (loss) from discontinued operations(0.06)0.21 1.41 0.50 
Net income (loss) per share - basic$(0.15)$(0.10)$1.11 $0.20 
Net income (loss) per share - diluted
Income (loss) from continuing operations$(0.09)$(0.31)$(0.30)$(0.30)
Income (loss) from discontinued operations(0.06)0.21 1.41 0.50 
Net income (loss) per share - diluted$(0.15)$(0.10)$1.11 $0.20 
   




See accompanying condensed notes to consolidated financial statements
3

KAR Auction Services, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Net income (loss)$(5.8)$(1.0)$204.1 $61.4 
Other comprehensive income (loss), net of tax  
Foreign currency translation loss(31.0)(13.4)(45.3)(4.7)
Unrealized gain on interest rate derivatives, net of tax 2.0 5.7 9.0 
Total other comprehensive income (loss), net of tax(31.0)(11.4)(39.6)4.3 
Comprehensive income (loss)$(36.8)$(12.4)$164.5 $65.7 
   

























See accompanying condensed notes to consolidated financial statements
4

KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions)
(Unaudited)
 September 30,
2022
December 31, 2021
Assets  
Current assets  
Cash and cash equivalents$148.7 $177.6 
Restricted cash28.9 25.8 
Trade receivables, net of allowances of $14.2 and $9.5
419.9 381.3 
Finance receivables, net of allowances of $21.5 and $23.0
2,533.6 2,506.0 
Other current assets71.8 87.9 
Current assets of discontinued operations 213.2 
Total current assets3,202.9 3,391.8 
Other assets  
Goodwill1,452.3 1,598.0 
Customer relationships, net of accumulated amortization of $409.2 and $401.5
141.1 159.1 
Other intangible assets, net of accumulated amortization of $390.5 and $350.0
231.3 243.3 
Operating lease right-of-use assets85.9 94.7 
Property and equipment, net of accumulated depreciation of $205.2 and $201.6
131.3 143.5 
Other assets56.5 53.7 
Non-current assets of discontinued operations 1,766.6 
Total other assets2,098.4 4,058.9 
Total assets$5,301.3 $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)
 September 30,
2022
December 31, 2021
Liabilities, Temporary Equity and Stockholders' Equity  
Current liabilities  
Accounts payable$645.6 $785.3 
Accrued employee benefits and compensation expenses27.4 32.3 
Accrued interest10.1 6.1 
Other accrued expenses86.9 107.4 
Income taxes payable59.0 7.9 
Obligations collateralized by finance receivables1,707.8 1,692.3 
Current maturities of long-term debt283.6 16.3 
Current liabilities of discontinued operations 361.7 
Total current liabilities2,820.4 3,009.3 
Non-current liabilities  
Long-term debt194.7 1,849.7 
Deferred income tax liabilities50.6 55.9 
Operating lease liabilities80.7 88.1 
Other liabilities8.0 30.0 
Non-current liabilities of discontinued operations 313.8 
Total non-current liabilities334.0 2,337.5 
Commitments and contingencies (Note 9)
Temporary equity
Series A convertible preferred stock612.5 590.9 
Stockholders' equity  
Common stock, $0.01 par value:
  
Authorized shares: 400,000,000
  
Issued and outstanding shares:  
September 30, 2022: 112,816,976
  
December 31, 2021: 121,163,050
1.1 1.2 
Additional paid-in capital800.7 910.8 
Retained earnings796.9 625.7 
Accumulated other comprehensive loss(64.3)(24.7)
Total stockholders' equity1,534.4 1,513.0 
Total liabilities, temporary equity and stockholders' equity$5,301.3 $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 June 30, 2022116.1 $1.2 $847.2 $813.8 $(33.3)$1,628.9 
Net loss(5.8)(5.8)
Other comprehensive loss(31.0)(31.0)
Issuance of common stock under stock plans0.2 0.2 
Stock-based compensation expense3.3 3.3 
Repurchase and retirement of common stock(3.3)(0.1)(50.0)(50.1)
Dividends on preferred stock(11.1)(11.1)
Balance at September 30, 2022112.8 $1.1 $800.7 $796.9 $(64.3)$1,534.4 
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 income204.1 204.1 
Other comprehensive loss(39.6)(39.6)
Issuance of common stock under stock plans0.5 1.1 1.1 
Surrender of RSUs for taxes(0.2)(2.5)(2.5)
Stock-based compensation expense23.3 23.3 
Repurchase and retirement of common stock(8.7)(0.1)(132.1)(132.2)
Dividends earned under stock plans0.1 (0.2)(0.1)
Dividends on preferred stock(32.7)(32.7)
Balance at September 30, 2022112.8 $1.1 $800.7 $796.9 $(64.3)$1,534.4 
   











See accompanying condensed notes to consolidated financial statements
7

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 June 30, 2021119.2 $1.2 $874.6 $642.5 $(17.0)$1,501.3 
Net loss(1.0)(1.0)
Other comprehensive loss(11.4)(11.4)
Issuance of common stock under stock plans0.2 0.2 
Stock-based compensation expense4.0 4.0 
Dividends on preferred stock(10.4)(10.4)
Balance at September 30, 2021119.2 $1.2 $878.8 $631.1 $(28.4)$1,482.7 
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 income61.4 61.4 
Other comprehensive income4.3 4.3 
Issuance of common stock under stock plans0.4 1.2 1.2 
Surrender of RSUs for taxes(0.1)(2.2)(2.2)
Stock-based compensation expense13.9 13.9 
Repurchase and retirement of common stock(10.8)(0.1)(180.8)(180.9)
Dividends earned under stock plans0.2 (0.4)(0.2)
Dividends on preferred stock(30.6)(30.6)
Balance at September 30, 2021119.2 $1.2 $878.8 $631.1 $(28.4)$1,482.7 






















See accompanying condensed notes to consolidated financial statements
8

KAR Auction Services, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 Nine Months Ended September 30,
 20222021
Operating activities  
Net income$204.1 $61.4 
Net income from discontinued operations(217.4)(77.4)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation and amortization76.2 81.7 
Provision for credit losses9.7 6.5 
Deferred income taxes(4.3)5.3 
Amortization of debt issuance costs8.5 9.1 
Stock-based compensation22.6 12.1 
Contingent consideration adjustment 20.1 
Net change in unrealized (gain) loss on investment securities6.5 (10.7)
Loss on extinguishment of debt17.0  
Other non-cash, net0.3 1.7 
Changes in operating assets and liabilities, net of acquisitions:  
Trade receivables and other assets(23.2)(180.5)
Accounts payable and accrued expenses(86.5)283.8 
Net cash provided by operating activities - continuing operations13.5 213.1 
Net cash (used by) provided by operating activities - discontinued operations(435.6)142.4 
Investing activities  
Net increase in finance receivables held for investment(34.9)(281.4)
Acquisition of businesses (net of cash acquired)(0.4)(79.8)
Purchases of property, equipment and computer software(45.8)(47.6)
Investments in securities(6.6)(22.0)
Proceeds from sale of investments0.3 32.7 
Proceeds from the sale of business 2.1 
Net cash used by investing activities - continuing operations(87.4)(396.0)
Net cash provided by (used by) investing activities - discontinued operations2,066.4 (19.0)
Financing activities  
Net decrease in book overdrafts(5.8)(2.7)
Net increase (decrease) in borrowings from lines of credit126.8 (5.2)
Net increase in obligations collateralized by finance receivables36.6 119.6 
Payments for debt issuance costs/amendments(11.6) 
Payments on long-term debt(928.6)(7.1)
Payment for early extinguishment of debt(606.1) 
Payments on finance leases(3.1)(4.4)
Payments of contingent consideration and deferred acquisition costs(29.6)(21.3)
Issuance of common stock under stock plans1.1 1.2 
Tax withholding payments for vested RSUs(2.5)(2.2)
Repurchase and retirement of common stock(132.2)(180.9)
Dividends paid on Series A Preferred Stock(11.1) 
Net cash used by financing activities - continuing operations(1,566.1)(103.0)
Net cash provided by financing activities - discontinued operations10.8 40.2 
Effect of exchange rate changes on cash(27.4)(3.0)
Net decrease in cash, cash equivalents and restricted cash(25.8)(125.3)
Cash, cash equivalents and restricted cash at beginning of period203.4 784.3 
Cash, cash equivalents and restricted cash at end of period$177.6 $659.0 
Cash paid for interest, net of proceeds from interest rate derivatives$71.0 $71.6 
Cash paid for taxes, net of refunds$325.2 $22.1 


See accompanying condensed notes to consolidated financial statements
9

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 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 LLC ("CARWAVE"), Nth Gen Software Inc. ("TradeRev"), ADESA Remarketing Limited and ADESA Europe;
"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;
"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 ($350 million aggregate principal was outstanding at September 30, 2022); and
"Series A Preferred Stock" refers to the Series A Convertible Preferred Stock, par value $0.01 per share (634,305 and 612,676 shares of Series A Preferred Stock were outstanding at September 30, 2022 and December 31, 2021, respectively).
Business and Nature of Operations
KAR is a leading provider of wholesale vehicle auctions and related vehicle remarketing services for the automotive industry. As of September 30, 2022, the Marketplace segment (formerly referenced as ADESA Auctions) serves a domestic and international customer base through digital marketplaces and 14 vehicle logistics center locations across Canada. Our digital marketplaces include 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. Our online service offerings include customized private label solutions powered with software developed by 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. Remarketing services include a variety of activities designed to facilitate the transfer of used vehicles between sellers and buyers throughout the vehicle life cycle. We facilitate 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.
10

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

We also provide services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. We are able to serve the diverse and multi-faceted needs of our 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 September 30, 2022. Floorplan financing supports independent used vehicle dealers in North America who purchase vehicles at ADESA, BacklotCars, CARWAVE, TradeRev, and other used vehicle and salvage auctions. In addition, AFC provides financing for dealer inventory purchased directly from wholesalers, other dealers and directly from consumers, 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
Beginning in 2022, the Company has classified the ADESA U.S. physical auctions (vehicle logistics centers) as discontinued operations. Certain amounts reported in the consolidated financial statements and related notes prior to March 2022 have been reclassified to discontinued operations to reflect the 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 of discontinued operations," "Non-current assets of discontinued operations," "Current liabilities of discontinued operations" and "Non-current liabilities of discontinued operations" 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 $20.6 million and $56.7 million to the ADESA U.S. physical auctions for the three and nine months ended September 30, 2022, respectively, and $18.0 million and $63.7 million for the three and nine months ended September 30, 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 had accounts payable to customers of the ADESA U.S. physical auctions related to auction proceeds financed. Previously, these accounts were eliminated in consolidation, but are now included in "Current assets of discontinued operations" on the consolidated balance sheet and were $33.5 million at December 31, 2021.
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 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.
11

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

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—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 would acquire the ADESA U.S. physical auction business from KAR (the "Transaction"). The Transaction was completed in May 2022 for approximately $2.2 billion in cash and included 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 net proceeds received in connection with the Transaction are included in "Net cash provided by investing activities - discontinued operations" in the consolidated statement of cash flow. In connection with the Transaction, the Company and Carvana entered into various agreements to provide a framework for their relationship after the Transaction, including a transition services agreement for a transitional period and a commercial agreement for a term of 7 years that provides for platform and other fees for services rendered. In addition, KAR will continue to own the ADESA tradename and the ADESA U.S. physical auctions will continue to utilize the tradename, which has an indefinite life. From the completion of the Transaction through September 30, 2022, KAR has received a net cash inflow from the commercial agreement and transition services agreement of approximately $33.5 million.
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 Marketplace reportable segment (formerly referenced as ADESA Auctions). The "Goodwill" shown in the balance sheet below was allocated to the ADESA U.S. physical auctions based on relative fair value. Discontinued operations included transaction costs of approximately $37.1 million for the nine months ended September 30, 2022, in connection with the Transaction. These costs consisted of consulting and professional fees associated with the Transaction. As shown below, the Transaction resulted in a pretax gain on disposal of approximately $521.8 million. The change in the pretax gain on disposal for the three months ended September 30, 2022 occurred as a result of a net working capital adjustment and additional transaction costs.
12

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

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 September 30,Nine Months Ended September 30,
2022202120222021
Operating revenues$ $206.2 $305.9 $673.1 
Operating expenses
   Cost of services (exclusive of depreciation and amortization) 144.2 224.9 438.3 
   Selling, general and administrative 32.1 68.8 113.2 
   Depreciation and amortization 17.3 11.2 55.3 
Total operating expenses 193.6 304.9 606.8 
Operating profit (loss) 12.6 1.0 66.3 
Interest expense 0.3 0.1 0.6 
Other (income) expense, net (2.1)(8.4)(6.0)
Income (loss) from discontinued operations before gain on disposal and income taxes 14.4 9.3 71.7 
Pretax gain on disposal of discontinued operations(11.9) 521.8  
Income taxes(5.6)(11.5)313.7 (5.7)
Income from discontinued operations$(6.3)$25.9 $217.4 $77.4 
13

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

The following table summarizes the major classes of assets and liabilities of the ADESA U.S. physical auction business that have been classified as discontinued operations for the period presented (in millions):
December 31, 2021
Assets
Cash and cash equivalents$12.4 
Trade receivables, net of allowances179.3 
Inventory15.7 
Other current assets5.8 
Current assets of discontinued operations
213.2 
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 of discontinued operations
1,766.6 
Total assets of discontinued operations
$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 of discontinued operations
361.7 
Deferred income tax liabilities82.5 
Operating lease liabilities229.0 
Other liabilities2.3 
Non-current liabilities of discontinued operations
313.8 
Total liabilities of discontinued operations
$675.5 
14

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

Note 3—Stock and Stock-Based Compensation Plans
The KAR Auction Services, Inc. Amended and Restated 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 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 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 September 30,Nine Months Ended September 30,
 2022202120222021
PRSUs$1.3 $0.6 $15.1 $3.4 
RSUs0.9 1.2 3.4 3.8 
Service options0.2 0.2 0.6 0.8 
Market options0.9 1.4 3.5 4.1 
Total stock-based compensation expense$3.3 $3.4 $22.6 $12.1 
PRSUs and RSUs
In the first nine months 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 were set to vest if and to the extent that the Company's three-year cumulative operating adjusted net income per share attains certain specified goals. Following the Transaction, in September 2022 the performance targets and the related award agreements for the 2022 PRSUs were amended to modify the performance metric from operating adjusted net income per share to Adjusted EBITDA. The modification of the 2022 PRSUs affected 13 participants and there was no incremental compensation cost resulting from the modification. In addition, in the first nine months of 2022, 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 $18.39 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 Company’s share repurchase program through December 31, 2022. 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. At September 30, 2022, approximately $176.9 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. For the three and nine months ended September 30, 2022, we repurchased and retired 3,309,527 shares and 8,740,316 shares of common stock, respectively, in the open market at a weighted average price of $15.11 per share and $15.11 per share, respectively. For the nine months ended September 30, 2021, we repurchased and retired 10,847,800 shares of common stock in the open market at a weighted average price of $16.66 per share. No shares of common stock were repurchased during the three months ended September 30, 2021.
15

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

Note 4—Income (Loss) from Continuing Operations Per Share
The following table sets forth the computation of income (loss) from continuing operations per share (in millions except per share amounts):
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Income (loss) from continuing operations$0.5 $(26.9)$(13.3)$(16.0)
Series A Preferred Stock dividends(11.1)(10.4)(32.7)(30.6)
Loss from continuing operations attributable to participating securities  10.6 9.9 
Income (loss) from continuing operations attributable to common stockholders$(10.6)$(37.3)$(35.4)$(36.7)
Weighted average common shares outstanding114.6 119.3 118.5 123.7 
Effect of dilutive stock options and restricted stock awards    
Weighted average common shares outstanding and potential common shares114.6 119.3 118.5 123.7 
Income (loss) from continuing operations per share 
Basic$(0.09)$(0.31)$(0.30)$(0.30)
Diluted$(0.09)$(0.31)$(0.30)$(0.30)
The Company includes participating securities (Series A Preferred Stock) in the computation of income from continuing operations per share pursuant to the two-class method. The two-class method of calculating 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 income from continuing operations in determining income attributable to common stockholders.
The effect of stock options and restricted stock on 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 an anti-dilutive effect on 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. In accordance with U.S. GAAP, no potential common shares were included in the computation of diluted income from continuing operations per share for the three or nine months ended September 30, 2022 and 2021 because to do so would have been anti-dilutive based on the period undistributed loss from continuing operations. Total options outstanding at September 30, 2022 and 2021 were 5.0 million and 5.4 million, respectively.
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. AFC Funding Corporation had committed liquidity of $2.0 billion for U.S. finance receivables at September 30, 2022.
In September 2022, AFC and AFC Funding Corporation entered into the Tenth Amended and Restated Receivables Purchase Agreement (the "Receivables Purchase Agreement"). The Receivables Purchase Agreement increased AFC Funding's U.S. committed liquidity from $1.70 billion to $2.0 billion and extended the facility's maturity date from January 31, 2024 to January 31, 2026. In addition, the discount rate is now based on the SOFR reference rate, provisions designed to provide additional lending and operational flexibility were modified or added and provisions providing for a mechanism for determining an
16

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

alternative rate of interest were modified. We capitalized approximately $10.5 million of costs in connection with the Receivables Purchase Agreement.
We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") receivables. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$225 million at September 30, 2022. In September 2022, AFCI entered into the Sixth Amended and Restated Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement"). The Canadian Receivables Purchase Agreement extended the facility's maturity date from January 31, 2024 to January 31, 2026. In addition, provisions designed to provide additional lending and operational flexibility were modified or added. We capitalized approximately $1.1 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both 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.
 September 30, 2022Net Credit Losses
Three Months Ended
September 30, 2022
Net Credit Losses
Nine Months Ended
September 30, 2022
 Total Amount of:
(in millions)ReceivablesReceivables
Delinquent
Floorplan receivables$2,548.4 $11.1 $1.2 $4.0 
Other loans6.7    
Total receivables managed$2,555.1 $11.1 $1.2 $4.0 

 December 31, 2021Net Credit Losses (Recoveries)
Three Months Ended
September 30, 2021
Net Credit Losses
Nine Months Ended
September 30, 2021
 Total Amount of:
(in millions)ReceivablesReceivables
Delinquent
Floorplan receivables$2,519.7 $7.3 $(2.2)$2.4 
Other loans9.3    
Total receivables managed$2,529.0 $7.3 $(2.2)$2.4 
The following is a summary of the changes in the allowance for credit losses related to finance receivables (in millions):
 September 30,
2022
September 30,
2021
Allowance for Credit Losses  
Balance at December 31$23.0 $22.0 
Provision for credit losses2.8 4.4 
Recoveries7.2 10.3 
Less charge-offs(11.2)(12.7)
Other(0.3) 
Balance at end of period$21.5 $24.0 
17

KAR Auction Services, Inc.
Condensed Notes to Consolidated Financial Statements (Continued)
September 30, 2022 (Unaudited)

As of September 30, 2022 and December 31, 2021, $2,529.1 million and $2,482.2 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the 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):
September 30,
2022
December 31,
2021
Obligations collateralized by finance receivables, gross$1,728.7 $1,707.4 
Unamortized securitization issuance costs(20.9)(15.1)
Obligations collateralized by finance receivables$1,707.8 $1,692.3 
Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At September 30, 2022, we were in compliance with the covenants in the securitization agreements.
Note 6—Long-Term Debt
Long-term debt consisted of the following (in millions):
 Interest Rate*MaturitySeptember 30,
2022
December 31,
2021
Term Loan B-6Adjusted LIBOR+ 2.25%September 19, 2026$ $928.6 
Revolving Credit FacilityAdjusted LIBOR+ 1.75%September 19, 2024116.0  
Senior notes5.125%June 1, 2025350.0 950.0 
European lines of creditEuribor+ 1.25%Repayable upon demand17.6 6.8 
Total debt  483.6 1,885.4 
Unamortized debt issuance costs/discounts (5.3)(19.4)
Current portion of long-term debt  (283.6)(16.3)
Long-term debt  $194.7 $1,849.7 
*The interest rates presented in the table above represent the rates in place at September 30, 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. In May 2022, the Company prepaid the $926.2 million outstanding balance on Term Loan B-6 with proceeds from the Transaction. As a result of the prepayment, we incurred a non-cash loss on the extinguishment of debt of $7.7 million in the second quarter of 2022. The loss was primarily a result of the write-off of unamortized debt issuance costs/discounts associated with Term Loan B-6.
The Revolving Credit Facility 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 obligations of the Company under the Credit Facilities are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges