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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2015
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number: 001-34568
________________________________________________________
KAR Auction Services, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or
organization)
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20-8744739
(I.R.S. Employer
Identification No.)
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13085 Hamilton Crossing Boulevard
Carmel, Indiana 46032
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(800) 923-3725
________________________________________________________
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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a
smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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As of April 30, 2015,
141,762,051
shares of the registrant's common stock, par value $0.01 per share, were outstanding.
KAR Auction Services, Inc.
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
KAR Auction Services, Inc.
Consolidated Statements of Income
(In millions, except per share data)
(Unaudited)
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Three Months Ended
March 31,
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2015
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2014
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Operating revenues
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ADESA Auction Services
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$
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328.0
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$
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298.1
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IAA Salvage Services
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238.0
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225.0
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AFC
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66.4
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60.7
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Total operating revenues
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632.4
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583.8
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Operating expenses
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Cost of services (exclusive of depreciation and amortization)
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352.1
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324.5
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Selling, general and administrative
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121.5
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126.8
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Depreciation and amortization
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50.9
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48.1
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Total operating expenses
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524.5
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499.4
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Operating profit
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107.9
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84.4
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Interest expense
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21.0
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24.1
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Other income, net
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(2.2
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(0.5
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Loss on extinguishment of debt
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—
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30.3
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Income before income taxes
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89.1
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30.5
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Income taxes
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34.6
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9.8
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Net income
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$
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54.5
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$
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20.7
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Net income per share
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Basic
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$
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0.39
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$
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0.15
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Diluted
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$
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0.38
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$
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0.15
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Dividends declared per common share
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$
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0.27
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$
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0.25
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See accompanying notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
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Three Months Ended
March 31,
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2015
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2014
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Net income
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$
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54.5
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$
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20.7
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Other comprehensive loss, net of tax
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Foreign currency translation loss
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(18.3
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(8.5
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Total other comprehensive loss, net of tax
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(18.3
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(8.5
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Comprehensive income
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$
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36.2
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$
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12.2
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See accompanying notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions)
(Unaudited)
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March 31,
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December 31,
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2015
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2014
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Assets
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Current assets
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Cash and cash equivalents
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$
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178.4
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$
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152.9
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Restricted cash
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14.2
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17.0
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Trade receivables, net of allowances of $6.7 and $6.3
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525.3
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401.2
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Finance receivables, net of allowances $8.3 and $8.0
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1,347.5
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1,363.1
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Deferred income tax assets
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41.0
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41.0
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Other current assets
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110.8
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99.7
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Total current assets
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2,217.2
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2,074.9
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Other assets
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Goodwill
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1,715.4
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1,705.2
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Customer relationships, net of accumulated amortization of $565.0 and $551.1
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465.2
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484.4
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Other intangible assets, net of accumulated amortization of $233.1 and $221.2
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299.6
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306.2
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Unamortized debt issuance costs
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15.0
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16.7
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Other assets
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35.6
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36.2
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Total other assets
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2,530.8
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2,548.7
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Property and equipment, net of accumulated depreciation of $519.4 and $507.2
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728.4
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727.9
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Total assets
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$
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5,476.4
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$
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5,351.5
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See accompanying notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
(Unaudited)
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March 31,
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December 31,
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2015
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2014
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Liabilities and Stockholders' Equity
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Current liabilities
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Accounts payable
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$
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638.0
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$
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471.7
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Accrued employee benefits and compensation expenses
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58.4
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77.6
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Accrued interest
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0.3
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0.3
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Other accrued expenses
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111.4
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114.4
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Income taxes payable
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6.0
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5.5
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Dividends payable
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38.3
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38.2
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Obligations collateralized by finance receivables
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850.0
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865.2
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Current maturities of long-term debt
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17.7
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17.7
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Total current liabilities
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1,720.1
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1,590.6
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Non-current liabilities
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Long-term debt
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1,732.2
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1,736.6
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Deferred income tax liabilities
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332.1
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333.4
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Other liabilities
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141.9
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143.8
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Total non-current liabilities
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2,206.2
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2,213.8
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Commitments and contingencies (Note 8)
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Stockholders' equity
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Preferred stock, $0.01 par value:
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Authorized shares: 100,000,000
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Issued shares: none
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—
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—
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Common stock, $0.01 par value:
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Authorized shares: 400,000,000
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Issued and outstanding shares:
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March 31, 2015: 141,795,665
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December 31, 2014: 141,316,444
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1.4
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1.4
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Additional paid-in capital
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1,598.8
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1,593.7
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Accumulated deficit
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(30.2
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(46.4
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Accumulated other comprehensive loss
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(19.9
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(1.6
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Total stockholders' equity
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1,550.1
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1,547.1
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Total liabilities and stockholders' equity
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$
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5,476.4
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$
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5,351.5
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See accompanying notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
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Common
Stock
Shares
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Common
Stock
Amount
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Additional
Paid-In
Capital
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Accumulated
Deficit
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Accumulated
Other
Comprehensive
Loss
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Total
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Balance at December 31, 2014
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141.3
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$
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1.4
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$
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1,593.7
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$
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(46.4
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$
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(1.6
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$
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1,547.1
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Net income
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54.5
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54.5
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Other comprehensive loss, net of tax
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(18.3
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(18.3
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Issuance of common stock under stock plans
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0.8
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9.2
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9.2
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Stock-based compensation expense
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2.6
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2.6
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Excess tax benefit from stock-based compensation
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3.5
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3.5
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Repurchase and retirement of common stock
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(0.3
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(10.2
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(10.2
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Cash dividends declared to stockholders ($0.27 per share)
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(38.3
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(38.3
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Balance at March 31, 2015
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141.8
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$
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1.4
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$
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1,598.8
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$
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(30.2
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$
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(19.9
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$
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1,550.1
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See accompanying notes to consolidated financial statements
KAR Auction Services, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
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Three Months Ended
March 31,
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2015
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2014
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Operating activities
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Net income
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$
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54.5
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$
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20.7
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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50.9
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48.1
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Provision for credit losses
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4.6
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4.8
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Deferred income taxes
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(3.2
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(20.2
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Amortization of debt issuance costs
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1.7
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2.8
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Stock-based compensation
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2.6
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15.1
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Excess tax benefit from stock-based compensation
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(3.5
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(1.8
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Loss on disposal of fixed assets
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0.1
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—
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Loss on extinguishment of debt
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—
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30.3
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Other non-cash, net
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0.8
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1.1
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Changes in operating assets and liabilities, net of acquisitions:
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Trade receivables and other assets
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(128.1
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(103.2
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Accounts payable and accrued expenses
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105.7
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94.6
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Net cash provided by operating activities
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86.1
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92.3
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Investing activities
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Net decrease (increase) in finance receivables held for investment
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6.0
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(7.2
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Acquisition of businesses, net of cash acquired
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(21.9
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(0.5
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Purchases of property, equipment and computer software
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(25.1
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(22.4
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Decrease in restricted cash
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2.8
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3.9
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Net cash used by investing activities
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(38.2
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(26.2
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Financing activities
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Net increase in book overdrafts
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40.7
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55.2
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Net decrease in obligations collateralized by finance receivables
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(9.1
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(12.1
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Proceeds from long-term debt
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—
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1,767.2
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Payments for debt issuance costs/amendments
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—
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(11.7
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)
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Payments on long-term debt
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(4.4
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(1,771.8
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Payments on capital leases
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(4.8
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(4.8
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Payments of contingent consideration and deferred acquisition costs
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(1.2
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(0.2
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Issuance of common stock under stock plans
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9.2
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7.9
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Excess tax benefit from stock-based compensation
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3.5
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1.8
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Repurchase and retirement of common stock
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(10.2
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—
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Dividends paid to stockholders
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(38.2
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)
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(34.7
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)
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Net cash used by financing activities
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(14.5
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)
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(3.2
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Effect of exchange rate changes on cash
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(7.9
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)
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(3.3
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)
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Net increase in cash and cash equivalents
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25.5
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59.6
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Cash and cash equivalents at beginning of period
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152.9
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191.6
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Cash and cash equivalents at end of period
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$
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178.4
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$
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251.2
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Cash paid for interest
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$
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18.8
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$
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20.1
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Cash paid for taxes, net of refunds
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$
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34.2
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$
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19.6
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See accompanying notes to consolidated financial statements
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements
March 31, 2015
(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:
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•
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"we," "us," "our" and "the Company" refer, collectively, to KAR Auction Services, Inc. and all of its subsidiaries;
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•
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"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");
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•
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"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.;
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•
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"Credit Agreement" refers to the Amended and Restated Credit Agreement, dated March 11, 2014, among KAR Auction Services, as the borrower, the several banks and other financial institutions or entities from time to time parties thereto and the administrative agent;
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•
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"Original Credit Agreement" refers to the Credit Agreement, dated May 19, 2011, among KAR Auction Services, as the borrower, the several banks and other financial institutions or entities from time to time parties thereto and the administrative agent, as amended on November 29, 2012 and March 12, 2013;
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•
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"Credit Facility" refers to the
three
year senior secured term loan B-1 facility ("Term Loan B-1"), the
seven
year senior secured term loan B-2 facility ("Term Loan B-2") and the
$250 million
,
five
year senior secured revolving credit facility (the "new revolving credit facility"), the terms of which are set forth in the Credit Agreement;
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•
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"Original Credit Facility" refers to the
six
year senior secured term loan facility ("Term Loan B") and the
$250 million
,
five
year senior secured revolving credit facility (the "old revolving credit facility"), the terms of which are set forth in the Original Credit Agreement;
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•
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"IAA" refers, collectively, to Insurance Auto Auctions, Inc., a wholly-owned subsidiary of KAR Auction Services, and Insurance Auto Auctions, Inc.'s subsidiaries; and
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•
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"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries.
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Business and Nature of Operations
As of
March 31, 2015
, we have a network of
66
ADESA whole car auction sites and
169
IAA salvage vehicle auction sites; in addition, we offer online auctions for both whole car and salvage vehicles. Our auctions facilitate the sale of used and salvage vehicles through physical, online or hybrid auctions, which permit Internet buyers to participate in physical auctions. ADESA Auctions and IAA are leading, national providers of wholesale and salvage vehicle auctions and related vehicle remarketing services for the automotive industry in North America. ADESA's online service offerings include customized private label solutions powered with software developed by its wholly-owned subsidiary, OPENLANE, that allow our institutional consignors (automobile manufacturers, captive finance companies and other institutions) to offer vehicles via the Internet prior to arrival at the physical auction. Remarketing services include a variety of activities designed to transfer used and salvage vehicles between sellers and buyers throughout the vehicle life cycle. ADESA Auctions and IAA 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.
ADESA has the second largest used vehicle auction network in North America, based upon the number of used vehicles sold through auctions annually, and 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.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
IAA is one of the leading providers of salvage vehicle auctions and related services in North America. The salvage auctions facilitate the remarketing of damaged vehicles that are designated as total losses by insurance companies, recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made, purchased vehicles and older model vehicles donated to charity or sold by dealers in salvage auctions. The salvage auction business specializes in providing services such as inbound transportation logistics, inspections, evaluations, salvage recovery services, titling and settlement administrative services.
AFC is a leading provider of floorplan financing to independent used vehicle dealers and this financing is provided through
112
locations throughout the United States and Canada as of
March 31, 2015
. Floorplan financing supports independent used vehicle dealers in North America who purchase vehicles at ADESA, IAA, other used vehicle and salvage auctions and non-auction purchases. In addition to floorplan financing, AFC also provides independent used vehicle dealers with other related services and products, such as vehicle service contracts.
Basis of Presentation
The accompanying unaudited 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, 2014
, as filed with the Securities and Exchange Commission on February 18, 2015. The
2014
year-end consolidated balance sheet data included in this Form 10-Q was derived from the audited financial statements referenced above, but does not include all disclosures required by U.S. GAAP for annual financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates.
New Accounting Standards
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The new guidance represents a change in accounting principle, is effective for fiscal years beginning after December 15, 2015 and will require retrospective application. At March 31, 2015, the Company had
$15.0 million
of unamortized debt issuance costs classified within other assets, which will be reclassified as a deduction from the carrying amount of the related debt liability upon adoption of ASU 2015-03.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605,
Revenue Recognition
. The new guidance provides clarification on the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosures to help financial statement users better understand the nature, amount, timing and uncertainty of revenue that is recognized. The new guidance is effective for the first annual reporting period and interim periods beginning after December 15, 2016, and will require either retrospective application to each prior reporting period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. The Company is currently evaluating the impact the adoption of ASU 2014-09 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
Note 2—Acquisition
On March 17, 2015, ADESA completed the acquisition of Pittsburgh Auto Auction. Financial results for this acquisition have been included in our consolidated financial statements from the date of acquisition. The purchase price of the auction, net of cash acquired, was approximately
$21.9 million
. The purchase accounting associated with this acquisition is preliminary, subject to determination of a working capital adjustment and final valuation results. The financial impact of this acquisition, including pro forma financial results, was immaterial to the Company’s consolidated results.
Note 3—Stock and Stock-Based Compensation Plans
We adopted the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan ("Omnibus Plan") in December 2009. The Omnibus Plan is intended to provide equity or cash-based awards to our employees. Our stock-based compensation expense has included expense associated with KAR Auction Services, Inc. service and exit option awards, performance-based restricted stock units ("PRSUs") and service-based restricted stock units ("RSUs"). We have classified the KAR Auction Services, Inc. service and exit options, PRSUs and RSUs as equity awards.
In the first quarter of 2015, we granted a target amount of approximately
0.2 million
PRSUs to certain executive officers and management of the Company. The PRSUs vest if and to the extent that the Company's
three
year adjusted earnings per share attains certain specified goals. In addition, approximately
0.2 million
RSUs were granted to certain executive officers and management of the Company. The RSUs vest in
three
equal annual installments. The grant date fair value of both the PRSUs and the RSUs was
$37.02
, which was the closing price of the Company's common stock on the date of grant.
The total income tax benefit recognized in the consolidated statement of income for options, PRSUs and RSUs was approximately
$1.0 million
and
$5.4 million
for the three months ended
March 31, 2015
and
2014
, respectively. The following table summarizes our stock-based compensation expense by type of award
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2015
|
|
2014
|
|
Service options
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
Exit options
|
—
|
|
|
13.5
|
|
|
PRSUs
|
1.3
|
|
|
0.7
|
|
|
RSUs
|
0.4
|
|
|
—
|
|
|
Total stock-based compensation expense
|
$
|
2.6
|
|
|
$
|
15.1
|
|
In March 2015, the vesting criteria for the final
25%
of the exit options granted under the KAR Auction Services, Inc. Stock Incentive Plan and the Omnibus Plan was met and as such, the final
25%
of the outstanding exit options became exercisable. As of December 31, 2014, all of the compensation expense related to the exit options was recognized.
Share Repurchase Program
In October 2014, 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 28, 2016
. 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.
As of
March 31, 2015
, we had repurchased and retired a total of
299,900
shares of common stock at a weighted average price of
$35.77
per share.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
Note 4—Net Income Per Share
The following table sets forth the computation of net income per share
(in millions except per share amounts)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2015
|
|
2014
|
|
Net income
|
$
|
54.5
|
|
|
$
|
20.7
|
|
|
Weighted average common shares outstanding
|
141.4
|
|
|
139.3
|
|
|
Effect of dilutive stock options and restricted stock awards
|
2.5
|
|
|
1.6
|
|
|
Weighted average common shares outstanding and potential common shares
|
143.9
|
|
|
140.9
|
|
|
Net income per share
|
|
|
|
|
Basic
|
$
|
0.39
|
|
|
$
|
0.15
|
|
|
Diluted
|
$
|
0.38
|
|
|
$
|
0.15
|
|
Basic net income per share was calculated by dividing net income by the weighted-average number of outstanding common shares for the period. Diluted net income per share was calculated consistent with basic net income per share including the effect of dilutive unissued common shares related to our stock-based employee compensation program. The effect of stock options and restricted stock on net income per share-diluted is determined through the application of the treasury stock method, whereby 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. Stock options that would have an anti-dilutive effect on net income per diluted share are excluded from the calculations.
No
options and approximately
0.4 million
options were excluded from the calculation of diluted net income per share for the three months ended
March 31, 2015
and
2014
, respectively. In addition, approximately
0.3 million
and approximately
0.1 million
PRSUs were excluded from the calculation of diluted net income per share for the three months ended
March 31, 2015
and
2014
, respectively, because they were subject to performance conditions which had not yet been satisfied. Total options outstanding at
March 31, 2015
and
2014
were
5.1 million
and
7.5 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. The agreement expires on June 30, 2016. AFC Funding Corporation had committed liquidity of
$950 million
for U.S. finance receivables at
March 31, 2015
.
We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") receivables. This securitization facility also expires on June 30, 2016. AFCI's committed facility is provided through a third party conduit (separate from the U.S. facility) and was
C$100 million
at
March 31, 2015
. 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 losses 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.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
Net Credit Losses
Three Months Ended
March 31, 2015
|
|
Net Credit Losses
Three Months Ended
March 31, 2014
|
|
December 31, 2014
|
|
|
Principal Amount of:
|
|
|
Principal Amount of:
|
|
(in millions)
|
Receivables
|
|
Receivables
Delinquent
|
|
|
Receivables
|
|
Receivables
Delinquent
|
|
Floorplan receivables
|
$
|
1,349.7
|
|
|
$
|
5.8
|
|
|
$
|
3.2
|
|
|
$
|
3.6
|
|
|
$
|
1,365.1
|
|
|
$
|
4.2
|
|
|
Other loans
|
6.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.0
|
|
|
—
|
|
|
Total receivables managed
|
$
|
1,355.8
|
|
|
$
|
5.8
|
|
|
$
|
3.2
|
|
|
$
|
3.6
|
|
|
$
|
1,371.1
|
|
|
$
|
4.2
|
|
AFC's allowance for losses was
$8.3 million
and
$8.0 million
at
March 31, 2015
and
December 31, 2014
, respectively.
As of
March 31, 2015
and
December 31, 2014
,
$1,343.3 million
and
$1,364.9 million
, respectively, of finance receivables and a cash reserve of
1
percent of the obligations collateralized by finance receivables served as security for the
$850.0 million
and
$865.2 million
of obligations collateralized by finance receivables at
March 31, 2015
and
December 31, 2014
, respectively.
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, 2015
, 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
|
|
|
|
Maturity
|
|
March 31, 2015
|
|
December 31, 2014
|
|
Term Loan B-1
|
LIBOR
|
|
+ 2.50%
|
|
March 11, 2017
|
|
$
|
643.5
|
|
|
$
|
645.1
|
|
|
Term Loan B-2
|
Adjusted LIBOR
|
|
+ 2.75%
|
|
March 11, 2021
|
|
1,108.8
|
|
|
1,111.6
|
|
|
Revolving credit facility
|
LIBOR
|
|
+ 2.25%
|
|
March 11, 2019
|
|
—
|
|
|
—
|
|
|
Canadian line of credit
|
CAD Prime
|
|
+ 1.50%
|
|
Repayable upon demand
|
|
—
|
|
|
—
|
|
|
Total debt
|
|
|
|
|
|
|
1,752.3
|
|
|
1,756.7
|
|
|
Unamortized debt discount
|
|
|
|
|
|
|
(2.4
|
)
|
|
(2.4
|
)
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
(17.7
|
)
|
|
(17.7
|
)
|
|
Long-term debt
|
|
|
|
|
|
|
$
|
1,732.2
|
|
|
$
|
1,736.6
|
|
Credit Facility
On March 11, 2014, we repaid all principal outstanding and interest due under the Original Credit Agreement and established a
three
year senior secured term loan facility ("Term Loan B-1"), a
seven
year senior secured term loan facility ("Term Loan B-2") and a
$250 million
,
five
year senior secured revolving credit facility (the "revolving credit facility"), the terms of which are set forth in the Amended and Restated Credit Agreement, dated as of March 11, 2014. The terms in the Credit Agreement supersede the terms of the Original Credit Agreement. No early termination penalties were incurred by the Company in connection with the refinancing; however, we incurred a non-cash loss on the extinguishment of debt under the Original Credit Agreement of
$30.3 million
in the first quarter of 2014.
The Credit Facility is available for letters of credit, working capital and general corporate purposes. The Company also pays a commitment fee of 40 basis points, payable quarterly, on the average daily unused amount of the revolving credit facility. The rates on Term Loan B-1 and Term Loan B-2 were
2.81%
and
3.50%
at
March 31, 2015
, respectively.
The Credit Facility is subject to mandatory prepayments and reduction in an amount equal to the net proceeds of certain debt offerings, certain asset sales and certain insurance recovery events. In addition, in accordance with the terms of the Credit Agreement,
50%
of the net cash proceeds from the sale-leaseback of certain technology and capital equipment were used to
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
prepay
$0.9 million
and
$1.5 million
of Term Loan B-1 and Term Loan B-2, respectively, in April
2015
. Each such prepayment is credited to prepay, on a pro rata basis, in order of maturity the unpaid amounts due on the next
eight
scheduled quarterly installments of Term Loan B-1 and Term Loan B-2 and thereafter to the remaining scheduled quarterly installments of each term loan on a pro rata basis.
The obligations of the Company under the Credit Facility are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority perfected security interests in
100%
of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and
65%
of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) perfected first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions. 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 maximum leverage ratio, provided there are revolving loans outstanding. We were in compliance with the covenants in the Credit Agreement at
March 31, 2015
.
There were
no
borrowings on the revolving credit facility at
March 31, 2015
or
December 31, 2014
, respectively. However, we had related outstanding letters of credit in the aggregate amount of
$28.6 million
and
$25.1 million
at
March 31, 2015
and
December 31, 2014
, respectively, which reduce the amount available for borrowings under the credit facility.
Fair Value of Debt
As of
March 31, 2015
, the estimated fair value of our long-term debt amounted to
$1,746.0 million
. The estimates of fair value are based on broker-dealer quotes for our debt as of
March 31, 2015
. 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 use 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 cap agreements are used to accomplish this objective.
|
|
|
|
•
|
In August 2013, we purchased
four
interest rate caps for an aggregate amount of approximately
$2.2 million
with an aggregate notional amount of
$1.2 billion
to manage our exposure to interest rate movements on our variable rate Credit Facility when
three-month LIBOR
exceeds
1.0%
. The interest rate cap agreements each had an effective date of August 16, 2013 and each mature on August 16, 2015. The unamortized portion of the
$2.2 million
investment is recorded in “Other assets” on the consolidated balance sheet and is being amortized over the remaining life of the interest rate caps to interest expense.
|
|
|
|
|
•
|
In April 2015, we purchased
two
interest rate caps for an aggregate amount of approximately
$0.7 million
with an aggregate notional amount of
$400 million
to manage our exposure to interest rate movements on our variable rate Credit Facility when
three-month LIBOR
exceeds
1.5%
. The interest rate cap agreements each had an effective date of April 16, 2015 and each mature on March 31, 2017.
|
We are exposed to credit loss in the event of non-performance by the counterparties; however, non-performance is not anticipated. 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. We have not designated any of the interest rate caps as hedges for accounting purposes. Accordingly, changes in the fair value of the interest rate caps are recognized as "Interest expense" in the consolidated statement of income. The balances and activity of our interest rate derivatives were immaterial for the three months ended
March 31, 2015
and
2014
.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
Note 8—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, 2014
.
IAA—Lower Duwamish Waterway
Since June 2004, IAA has operated a branch on property it leases in Tukwila, Washington just south of Seattle. The property is located adjacent to a Superfund site known as the Lower Duwamish Waterway Superfund Site ("LDW Site"). The LDW Site had been designated a Superfund site in 2001,
three
years prior to IAA’s tenancy. On March 25, 2008, the United States Environmental Protection Agency, or the "EPA," issued IAA a General Notice of Potential Liability, or "General Notice," pursuant to Section 107(a), and a Request for Information pursuant to Section 104(e) of the Comprehensive Environmental Response, Compensation, and Liability Act, or "CERCLA," related to the LDW Site. On November 7, 2012, the EPA issued IAA a Second General Notice of Potential Liability, or "Second General Notice," for the LDW Site. The EPA's website indicates that the EPA has issued general notice letters to approximately
116
entities, and has issued Section 104(e) Requests to more than
300
entities related to the LDW Site. In the General Notice and Second General Notice, the EPA informed IAA that the EPA believes IAA may be a Potentially Responsible Party, or ”PRP,” but the EPA did not specify the factual basis for this assertion. At this time, the EPA still has not specified the factual basis for this assertion and has not demanded that IAA pay any funds or take any action apart from responding to the Section 104(e) Information Request.
Four
PRPs, The Boeing Company, the City of Seattle, the Port of Seattle and King County, have funded a remedial investigation and feasibility study related to the cleanup of the LDW Site. In December 2014, the EPA issued a Record of Decision (ROD), detailing the final cleanup plan for the LDW Site. The ROD estimates the cost of cleanup to be
$342 million
, with the plan involving dredging of
105
acres, capping
24
acres, and enhanced natural recovery of
48
acres. The estimated length of the cleanup is
17
years, including
7
years of active remediation, and
10
years of monitored natural recovery. IAA is aware that certain authorities may bring natural resource damage claims against PRPs. At this time, however, the Company does not have adequate information to determine IAA's responsibility, if any, for contamination at this site, or to estimate IAA's loss as a result of this potential liability.
In addition, the Washington State Department of Ecology (“Ecology”) is working with the EPA in relation to the LDW Site, primarily to investigate and address sources of potential contamination contributing to the LDW Site. In 2007, IAA installed a stormwater capture and filtration system designed to treat sources of potential contamination before discharge to the LDW site. The immediate-past property owner, the former property owner and IAA have had discussions with Ecology concerning possible source control measures including, an investigation of the water and soils entering the stormwater system, an analysis of the source of contamination identified within the system, if any, and possible repairs and upgrades to the stormwater system if required. In October 2014, Ecology, in furtherance of its source control obligations, conducted stormwater sampling at the property, collecting water samples from within the stormwater system. Although no solids were detected in the stormwater system during the sampling, Ecology tested the water that was collected for various constituents. Ecology is expected to issue a final report regarding this sampling later this year. At this time, IAA is not aware of any additional Ecology source control activities planned for the site. Additional source control measures, if any, are not expected to have a material adverse effect on future recurring operating costs.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
Note 9—Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
December 31, 2014
|
|
Foreign currency translation loss
|
$
|
(20.1
|
)
|
|
$
|
(1.8
|
)
|
|
Unrealized gain on postretirement benefit obligation, net of tax
|
0.2
|
|
|
0.2
|
|
|
Accumulated other comprehensive loss
|
$
|
(19.9
|
)
|
|
$
|
(1.6
|
)
|
Note 10—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
three
operating segments: ADESA Auctions, IAA and AFC, which also serve as our reportable business segments. These reportable business segments offer different services and have fundamental differences in their operations.
The holding company is maintained separately from the
three
reportable segments and includes expenses associated with the corporate office, such as salaries, benefits and travel costs for the corporate management team, certain human resources, information technology and accounting costs, and certain insurance, treasury, legal and risk management costs. Holding company interest expense includes the interest expense incurred on capital leases and the corporate debt structure. Intercompany charges relate primarily to interest on intercompany debt or receivables and certain administrative costs allocated by the holding company.
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 2015 (Unaudited)
Financial information regarding our reportable segments is set forth below for the three months ended
March 31, 2015
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
IAA
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
|
Operating revenues
|
$
|
328.0
|
|
|
$
|
238.0
|
|
|
$
|
66.4
|
|
|
$
|
—
|
|
|
$
|
632.4
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
187.1
|
|
|
146.6
|
|
|
18.4
|
|
|
—
|
|
|
352.1
|
|
|
Selling, general and administrative
|
68.5
|
|
|
22.1
|
|
|
7.1
|
|
|
23.8
|
|
|
121.5
|
|
|
Depreciation and amortization
|
20.2
|
|
|
19.6
|
|
|
7.8
|
|
|
3.3
|
|
|
50.9
|
|
|
Total operating expenses
|
275.8
|
|
|
188.3
|
|
|
33.3
|
|
|
27.1
|
|
|
524.5
|
|
|
Operating profit (loss)
|
52.2
|
|
|
49.7
|
|
|
33.1
|
|
|
(27.1
|
)
|
|
107.9
|
|
|
Interest expense
|
0.2
|
|
|
—
|
|
|
5.1
|
|
|
15.7
|
|
|
21.0
|
|
|
Other (income) expense, net
|
(0.6
|
)
|
|
(0.2
|
)
|
|
(1.5
|
)
|
|
0.1
|
|
|
(2.2
|
)
|
|
Intercompany expense (income)
|
15.2
|
|
|
9.6
|
|
|
(4.3
|
)
|
|
(20.5
|
)
|
|
—
|
|
|
Income (loss) before income taxes
|
37.4
|
|
|
40.3
|
|
|
33.8
|
|
|
(22.4
|
)
|
|
89.1
|
|
|
Income taxes
|
14.9
|
|
|
15.3
|
|
|
12.8
|
|
|
(8.4
|
)
|
|
34.6
|
|
|
Net income (loss)
|
$
|
22.5
|
|
|
$
|
25.0
|
|
|
$
|
21.0
|
|
|
$
|
(14.0
|
)
|
|
$
|
54.5
|
|
|
Total assets
|
$
|
2,408.6
|
|
|
$
|
1,238.9
|
|
|
$
|
1,760.8
|
|
|
$
|
68.1
|
|
|
$
|
5,476.4
|
|
Financial information regarding our reportable segments is set forth below for the three months ended
March 31, 2014
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADESA
Auctions
|
|
IAA
|
|
AFC
|
|
Holding
Company
|
|
Consolidated
|
|
Operating revenues
|
$
|
298.1
|
|
|
$
|
225.0
|
|
|
$
|
60.7
|
|
|
$
|
—
|
|
|
$
|
583.8
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
Cost of services (exclusive of depreciation and amortization)
|
170.2
|
|
|
137.9
|
|
|
16.4
|
|
|
—
|
|
|
324.5
|
|
|
Selling, general and administrative
|
69.9
|
|
|
26.2
|
|
|
8.8
|
|
|
21.9
|
|
|
126.8
|
|
|
Depreciation and amortization
|
19.5
|
|
|
18.8
|
|
|
7.5
|
|
|
2.3
|
|
|
48.1
|
|
|
Total operating expenses
|
259.6
|
|
|
182.9
|
|
|
32.7
|
|
|
24.2
|
|
|
499.4
|
|
|
Operating profit (loss)
|
38.5
|
|
|
42.1
|
|
|
28.0
|
|
|
(24.2
|
)
|
|
84.4
|
|
|
Interest expense
|
0.3
|
|
|
0.1
|
|
|
4.5
|
|
|
19.2
|
|
|
24.1
|
|
|
Other income, net
|
(0.4
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
30.3
|
|
|
30.3
|
|
|
Intercompany expense (income)
|
13.9
|
|
|
9.6
|
|
|
(5.3
|
)
|
|
(18.2
|
)
|
|
—
|
|
|
Income (loss) before income taxes
|
24.7
|
|
|
32.5
|
|
|
28.8
|
|
|
(55.5
|
)
|
|
30.5
|
|
|
Income taxes
|
8.9
|
|
|
11.9
|
|
|
10.9
|
|
|
(21.9
|
)
|
|
9.8
|
|
|
Net income (loss)
|
$
|
15.8
|
|
|
$
|
20.6
|
|
|
$
|
17.9
|
|
|
$
|
(33.6
|
)
|
|
$
|
20.7
|
|
|
Total assets
|
$
|
2,416.0
|
|
|
$
|
1,200.1
|
|
|
$
|
1,553.4
|
|
|
$
|
65.5
|
|
|
$
|
5,235.0
|
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and which are subject to certain risks, trends and uncertainties. In particular, statements made in this report on Form 10-Q that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should," "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions identify forward-looking statements. Such statements, including statements regarding our future growth; anticipated cost savings, revenue increases and capital expenditures; dividend declarations and payments; common stock repurchases; 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 Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2014
filed on February 18, 2015. Some of these factors include:
|
|
|
|
•
|
fluctuations in consumer demand for and in the supply of used, leased and salvage vehicles and the resulting impact on auction sales volumes, conversion rates and loan transaction volumes;
|
|
|
|
|
•
|
trends in new and used vehicle sales and incentives, including wholesale used vehicle pricing;
|
|
|
|
|
•
|
the ability of consumers to lease or finance the purchase of new and/or used vehicles;
|
|
|
|
|
•
|
the ability to recover or collect from delinquent or bankrupt customers;
|
|
|
|
|
•
|
economic conditions including fuel prices, commodity prices, foreign exchange rates and interest rate fluctuations;
|
|
|
|
|
•
|
trends in the vehicle remarketing industry;
|
|
|
|
|
•
|
trends in the number of commercial vehicles being brought to auction, in particular off-lease volumes;
|
|
|
|
|
•
|
changes in the volume of vehicle production, including capacity reductions at the major original equipment manufacturers;
|
|
|
|
|
•
|
increases in the number of used vehicles purchased on virtual auction platforms;
|
|
|
|
|
•
|
significant current competition and the introduction of new competitors;
|
|
|
|
|
•
|
laws, regulations and industry standards, including changes in regulations governing the sale of used vehicles, the processing of salvage vehicles and commercial lending activities;
|
|
|
|
|
•
|
changes in the market value of vehicles auctioned, including changes in the actual cash value of salvage vehicles;
|
|
|
|
|
•
|
competitive pricing pressures;
|
|
|
|
|
•
|
costs associated with the acquisition of businesses or technologies;
|
|
|
|
|
•
|
litigation developments;
|
|
|
|
|
•
|
our ability to successfully implement our business strategies or realize expected cost savings and revenue enhancements;
|
|
|
|
|
•
|
our ability to maintain our brand and protect our intellectual property;
|
|
|
|
|
•
|
our ability to develop and implement information systems responsive to customer needs;
|
|
|
|
|
•
|
business development activities, including greenfields, acquisitions and integration of acquired businesses;
|
|
|
|
|
•
|
the costs of environmental compliance and/or the imposition of liabilities under environmental laws and regulations;
|
|
|
|
|
•
|
weather, including increased expenses as a result of catastrophic events;
|
|
|
|
|
•
|
general business conditions;
|
|
|
|
|
•
|
our substantial amount of debt;
|
|
|
|
|
•
|
restrictive covenants in our debt agreements;
|
|
|
|
|
•
|
our assumption of the settlement risk for vehicles sold;
|
|
|
|
|
•
|
any impairment to our goodwill or other intangible assets;
|
|
|
|
|
•
|
our self-insurance for certain risks;
|
|
|
|
|
•
|
any losses of key personnel;
|
|
|
|
|
•
|
interruptions to service from our workforce;
|
|
|
|
|
•
|
changes in effective tax rates;
|
|
|
|
|
•
|
changes to accounting standards; and
|
|
|
|
|
•
|
other risks described from time to time in our filings with the SEC.
|
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.
Our future growth depends on a variety of factors, including our ability to increase vehicle sold volumes and loan transaction volumes, expand our product and service offerings, including information systems development, acquire and integrate additional business entities, manage expansion, control costs in our operations, introduce fee increases, and retain our executive officers and key employees. We cannot predict whether our growth strategy will be successful. In addition, we cannot predict what portion of overall sales will be conducted through online auctions or other remarketing methods in the future and what impact this may have on our auction business.
Overview
We provide whole car and salvage auction services in North America. Our business is divided into three reportable business segments, each of which is an integral part of the vehicle remarketing industry: ADESA Auctions, IAA and AFC.
|
|
|
|
•
|
The ADESA Auctions segment serves a domestic and international customer base through live and online auctions and through
66
whole car auction facilities in North America that are developed and strategically located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Through ADESA.com, powered by OPENLANE technology, ADESA offers comprehensive private label remarketing solutions to automobile manufacturers, captive finance companies and other institutions to offer vehicles via the Internet prior to arrival at the physical auction. Vehicles at ADESA's auctions 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.
|
|
|
|
|
•
|
The IAA segment serves a domestic and international customer base through live and online auctions and through
169
salvage vehicle auction sites in the United States and Canada at
March 31, 2015
. The salvage auctions facilitate the remarketing of damaged vehicles designated as total losses by insurance companies, charity donation vehicles, recovered stolen (or theft) vehicles and low value used vehicles. The salvage auction business specializes in providing services such as inbound transportation, titling, salvage recovery and claims settlement administrative services.
|
|
|
|
|
•
|
The AFC segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers. At
March 31, 2015
, AFC conducted business at
112
locations in the United States and Canada. The Company also sells vehicle service contracts through Preferred Warranties, Inc. ("PWI").
|
The holding company is maintained separately from the three reportable segments and includes expenses associated with the corporate office, such as salaries, benefits and travel costs for our management team, certain human resources, information technology and accounting costs, and certain insurance, treasury, legal and risk management costs. Holding company interest expense includes the interest expense incurred on capital leases and the corporate debt structure. Intercompany charges relate primarily to interest on intercompany debt or receivables and certain administrative costs allocated by the holding company.
Industry Trends
Whole Car
Used vehicles sold in North America through whole car auctions, including online only sales, were approximately 8.2 million, 8.7 million and an estimated 9.1 million in 2012, 2013 and 2014, respectively. Industry volumes continue to recover and are moving toward those experienced from 2000-2009, when industry volumes were approximately 9 to 10 million units. Declines in new vehicle sales and lease originations from 2007 to 2009 and declines in repossessions from 2009 to 2012 led to supply shortages in the North American whole car auction industry and resulted in auction volumes below 9 million units for a few years. The supply shortages and resulting decline in industry auction volumes reflected a reduction in units sold by institutional consignors, which was partially offset by an increase in dealer consignment units sold.
We estimate that used vehicle auction volumes in North America, including online only volumes, will be approximately 9.5 million units in 2015, approximately 9.8 million units in 2016 and approximately 10.0 million units in 2017. The anticipated improvement is the result of more off-lease, repossessed, rental and dealer consignment vehicles entering the market.
Salvage
Vehicles deemed a total loss by automobile insurance companies represent the largest category of vehicles sold in the salvage vehicle auction industry. The percentage of claims resulting in total losses was approximately 14% in 2014, 2013 and 2012. There is no central reporting system that tracks the number of total loss vehicles in any given year, which makes estimating industry volumes difficult.
Fluctuations in used vehicle and commodity pricing (aluminum, steel, etc.) have an impact on proceeds received in the salvage vehicle auction industry. In times of rising prices, as the industry experienced over the last few years, revenue and gross profit are positively impacted. If used vehicle and commodity prices decrease, as the industry is experiencing now, proceeds, revenue and gross profit at salvage auctions may be negatively impacted, which could adversely affect the level of profitability.
Automotive Finance
AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverages its local branches, industry experience and scale, as well as KAR affiliations. Over the last few years, the U.S. independent used vehicle dealer base has consolidated from approximately 36,000 dealers in 2009 to about 35,000 dealers in 2014. During this time, AFC's North American dealer base grew from over 9,700 dealers in 2009 to over 13,700 dealers in 2014 and loan transactions, which includes both loans paid off and loans curtailed, grew from approximately 800,000 in 2009 to approximately 1,445,000 in 2014.
Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory and lack of access to consumer 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.
AFC implemented a number of strategic initiatives in recent years to enhance credit standards, improve portfolio risk management and enhance the customer experience. Additionally, in June 2013, the Company acquired PWI, a vehicle service contract business, as part of its strategy to provide additional services to independent used vehicle dealers. These initiatives, along with the current industry environment, have enabled AFC to increase its penetration of the independent dealer base while maintaining a high level of portfolio quality, evidenced by low levels of net credit losses and a managed portfolio which was over 99 percent current at
March 31, 2015
.
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, the availability and quality of salvage vehicles, 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. In addition, mild weather conditions and decreases in traffic volume can each lead to a decline in the available supply of salvage vehicles because fewer traffic accidents occur, resulting in fewer damaged vehicles overall. 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 related services associated with our whole car and salvage auctions, and from dealer financing fees, interest income and other service 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, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites and loan offices. Cost of services excludes depreciation and amortization. Selling, general and administrative expenses are composed of payroll and related costs, sales and marketing, information technology services and professional fees.
Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended
March 31, 2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in millions except per share amounts)
|
2015
|
|
2014
|
|
Revenues
|
|
|
|
|
ADESA
|
$
|
328.0
|
|
|
$
|
298.1
|
|
|
IAA
|
238.0
|
|
|
225.0
|
|
|
AFC
|
66.4
|
|
|
60.7
|
|
|
Total revenues
|
632.4
|
|
|
583.8
|
|
|
Cost of services*
|
352.1
|
|
|
324.5
|
|
|
Gross profit*
|
280.3
|
|
|
259.3
|
|
|
Selling, general and administrative
|
121.5
|
|
|
126.8
|
|
|
Depreciation and amortization
|
50.9
|
|
|
48.1
|
|
|
Operating profit
|
107.9
|
|
|
84.4
|
|
|
Interest expense
|
21.0
|
|
|
24.1
|
|
|
Other income, net
|
(2.2
|
)
|
|
(0.5
|
)
|
|
Loss on extinguishment of debt
|
—
|
|
|
30.3
|
|
|
Income before income taxes
|
89.1
|
|
|
30.5
|
|
|
Income taxes
|
34.6
|
|
|
9.8
|
|
|
Net income
|
$
|
54.5
|
|
|
$
|
20.7
|
|
|
Net income per share
|
|
|
|
|
Basic
|
$
|
0.39
|
|
|
$
|
0.15
|
|
|
Diluted
|
$
|
0.38
|
|
|
$
|
0.15
|
|
* Exclusive of depreciation and amortization
For the three months ended
March 31, 2015
, we had revenue of
$632.4 million
compared with revenue of
$583.8 million
for the three months ended
March 31, 2014
, an increase of 8%. 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 increased $2.8 million, or 6%, to
$50.9 million
for the three months ended
March 31, 2015
, compared with
$48.1 million
for the three months ended
March 31, 2014
. The increase in depreciation and amortization was primarily the result of certain assets placed in service over the last twelve months.
Interest Expense
Interest expense decreased $3.1 million, or 13%, to
$21.0 million
for the three months ended
March 31, 2015
, compared with
$24.1 million
for the three months ended
March 31, 2014
. The decrease in interest expense was primarily due to a decrease in the interest rates on term loan debt associated with the March 11, 2014 debt refinancing. The weighted average interest rate on term loan debt was approximately 3.2% for the three months ended
March 31, 2015
, compared with a weighted average interest rate on term loan debt of approximately 3.6% for the three months ended
March 31, 2014
. As a result of the debt refinancing on March 11, 2014, the interest rates on term loan debt decreased and at
March 31, 2015
, Term Loan B-1 and Term Loan B-2 had rates of
2.81%
and
3.50%
respectively. The decrease in interest expense on the term loan debt was partially offset by an increase in interest expense at AFC, which resulted from an increase in the average U.S. portfolio financed for the three months ended
March 31, 2015
as compared with the three months ended
March 31, 2014
.
Loss on Extinguishment of Debt
In March 2014, we amended and restated our Credit Agreement and recorded a $30.3 million pretax charge resulting from the write-off of unamortized debt discount associated with the term loan and unamortized debt issue costs associated with the term loan and the revolving credit facility.
Income Taxes
We had an effective tax rate of 38.8% for the three months ended
March 31, 2015
, compared with an effective tax rate of 32.1% for the three months ended
March 31, 2014
. During the three months ended March 31, 2015, our effective tax rate was unfavorably impacted primarily by adjustments to certain deferred tax assets related to Canadian income tax reserves. During the three months ended March 31, 2014, our effective tax rate benefited from a favorable state law change as well as changes to our income tax reserves for uncertain tax positions which resulted in a net benefit of $1.9 million. Excluding the effect of the discrete items, our effective tax rate for the three months ended
March 31, 2015
and
2014
would have been 37.6% and 38.4%, respectively.
ADESA Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in millions)
|
2015
|
|
2014
|
|
ADESA revenue
|
$
|
328.0
|
|
|
$
|
298.1
|
|
|
Cost of services*
|
187.1
|
|
|
170.2
|
|
|
Gross profit*
|
140.9
|
|
|
127.9
|
|
|
Selling, general and administrative
|
68.5
|
|
|
69.9
|
|
|
Depreciation and amortization
|
20.2
|
|
|
19.5
|
|
|
Operating profit
|
$
|
52.2
|
|
|
$
|
38.5
|
|
* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased $29.9 million, or 10%, to
$328.0 million
for the three months ended
March 31, 2015
, compared with
$298.1 million
for the three months ended
March 31, 2014
. The increase in revenue was primarily a result of an 8% increase in the number of vehicles sold, as well as a 2% increase in revenue per vehicle sold, which includes the impact of a decrease in revenues of $6.1 million due to fluctuations in the Canadian exchange rate.
The increase in volume sold was primarily attributable to an increase in institutional volume, including vehicles sold on our online only platform, as well as a 1% increase in dealer consignment units sold for the three months ended
March 31, 2015
compared with the three months ended
March 31, 2014
. Online sales volumes for ADESA represented approximately 40% of the total vehicles sold in the
first
quarter of
2015
, compared with approximately 39% in the
first
quarter of
2014
. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location (upstream selling); (ii) online solutions that offer vehicles for sale while in transit to auction locations (midstream selling); (iii) simultaneously broadcasting video and audio of the physical auctions to online bidders (LiveBlock
®
); and (iv) bulletin-board or real-time online auctions (DealerBlock
®
). Both the upstream and midstream selling represent online only sales, which represent over half of ADESA's online sales volume. ADESA sold approximately 141,000 and 128,000 vehicles through its online only offerings in the
first
quarter of
2015
and
2014
, respectively. For the three months ended
March 31, 2015
, dealer consignment vehicles represented approximately 47% of used vehicles sold at ADESA physical auction locations, compared with approximately 50% for the three months ended
March 31, 2014
. Vehicles sold at physical auction locations increased 7% in the
first
quarter of
2015
, compared with the
first
quarter of
2014
. The used vehicle conversion percentage at physical auction locations, calculated as the number of vehicles sold as a percentage of the number of vehicles entered for sale at our ADESA auctions, decreased to 62.8% for the three months ended
March 31, 2015
, compared with 63.6% for the three months ended
March 31, 2014
.
Total revenue per vehicle sold increased 2% to approximately $546 for the three months ended
March 31, 2015
, compared with approximately $536 for the three months ended
March 31, 2014
. Physical auction revenue per vehicle sold increased $18 or 3%, to $681 for the three months ended
March 31, 2015
, compared with $663 for the three months ended
March 31, 2014
. Physical auction revenue per vehicle sold includes revenue from seller and buyer auction fees and ancillary and other related services, which includes non-auction services. The increase in physical auction revenue per vehicle sold was primarily attributable to an increase in ancillary and other related services revenue. Online only auction revenue per vehicle sold decreased $7 to $107 for the three months ended
March 31, 2015
, compared with $114 for the three months ended
March 31, 2014
. The decrease in online only auction revenue per vehicle sold was attributable to a decline in fees per car sold, primarily due to an increase in the number of cars sold in closed private label sales, which includes sales to grounding dealers. The revenue per vehicle sold in a closed private label sale is lower than the revenue per vehicle sold in an open online only auction.
Gross Profit
For the three months ended
March 31, 2015
, gross profit for ADESA increased $13.0 million, or 10%, to
$140.9 million
, compared with
$127.9 million
for the three months ended
March 31, 2014
. Gross profit for ADESA was 43.0% of revenue for the three months ended
March 31, 2015
, compared with 42.9% of revenue for the three months ended
March 31, 2014
. The increase in gross profit for the three months ended
March 31, 2015
, compared with the three months ended
March 31, 2014
, was primarily the result of the increase in vehicles sold.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment decreased $1.4 million, or 2%, to
$68.5 million
for the three months ended
March 31, 2015
, compared with
$69.9 million
for the three months ended
March 31, 2014
, primarily due to a decrease in stock-based compensation expense of $6.0 million and fluctuations in the Canadian exchange rate of $1.2 million, partially offset by increases in compensation expense of $1.6 million, acquisition-related professional fees of $1.0 million, incentive-based compensation expense of $0.9 million, marketing expenses of $0.7 million, travel expenses of $0.6 million, as well as the write-off of certain assets of $0.8 million.
IAA Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in millions)
|
2015
|
|
2014
|
|
IAA revenue
|
$
|
238.0
|
|
|
$
|
225.0
|
|
|
Cost of services*
|
146.6
|
|
|
137.9
|
|
|
Gross profit*
|
91.4
|
|
|
87.1
|
|
|
Selling, general and administrative
|
22.1
|
|
|
26.2
|
|
|
Depreciation and amortization
|
19.6
|
|
|
18.8
|
|
|
Operating profit
|
$
|
49.7
|
|
|
$
|
42.1
|
|
* Exclusive of depreciation and amortization
Revenue
Revenue from IAA increased $13.0 million, or 6%, to
$238.0 million
for the three months ended
March 31, 2015
, compared with
$225.0 million
for the three months ended
March 31, 2014
. The increase in revenue was a result of an increase in vehicles sold of approximately 8% for the three months ended
March 31, 2015
, partially offset by a 2% decrease in revenue per vehicle sold, related to lower average auction prices. IAA's total loss vehicle inventory has increased approximately 20% at
March 31, 2015
, as compared to
March 31, 2014
. Vehicles sold under purchase agreements were approximately 7% of total salvage vehicles sold for the three months ended
March 31, 2015
, compared with approximately 6% for the three months ended
March 31, 2014
. Online sales volumes for IAA for the three months ended
March 31, 2015
and
2014
represented over half of the total vehicles sold by IAA.
Gross Profit
For the three months ended
March 31, 2015
, gross profit at IAA increased to
$91.4 million
, or 38.4% of revenue, compared with
$87.1 million
, or 38.7% of revenue, for the three months ended
March 31, 2014
. The increase in gross profit was mainly attributable to a 6% increase in revenue, partially offset by a 6% increase in cost of services. The increase in cost of services was primarily attributable to variable cost increases related to the increase in volume specifically pertaining to towing and processing costs, as well as labor and occupancy related costs.
Selling, General and Administrative
Selling, general and administrative expenses at IAA decreased $4.1 million, or 16%, to
$22.1 million
for the three months ended
March 31, 2015
, compared with
$26.2 million
for the three months ended
March 31, 2014
. The decrease in selling, general and administrative expenses was primarily attributable to a decrease in stock-based compensation expense of $3.5 million, as well as decreases in marketing expenses, non-income based taxes and incentive-based compensation expense, partially offset by an increase in telecom and information technology costs.
AFC Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in millions except volumes and per loan amounts)
|
2015
|
|
2014
|
|
AFC revenue
|
|
|
|
|
Interest and fee income
|
$
|
59.7
|
|
|
$
|
56.4
|
|
|
Other revenue
|
3.5
|
|
|
2.3
|
|
|
Provision for credit losses
|
(3.5
|
)
|
|
(3.6
|
)
|
|
Other service revenue
|
6.7
|
|
|
5.6
|
|
|
Total AFC revenue
|
66.4
|
|
|
60.7
|
|
|
Cost of services*
|
18.4
|
|
|
16.4
|
|
|
Gross profit*
|
48.0
|
|
|
44.3
|
|
|
Selling, general and administrative
|
7.1
|
|
|
8.8
|
|
|
Depreciation and amortization
|
7.8
|
|
|
7.5
|
|
|
Operating profit
|
$
|
33.1
|
|
|
$
|
28.0
|
|
|
Loan transactions
|
411,682
|
|
|
375,215
|
|
|
Revenue per loan transaction, excluding "Other service revenue"
|
$
|
145
|
|
|
$
|
147
|
|
* Exclusive of depreciation and amortization
Revenue
For the three months ended
March 31, 2015
, AFC revenue increased $5.7 million, or 9%, to
$66.4 million
, compared with
$60.7 million
for the three months ended
March 31, 2014
. The increase in revenue was the result of a 10% increase in loan transactions and an increase of 20% in "Other service revenue" generated by PWI, for the three months ended
March 31, 2015
, compared with the same period in
2014
, partially offset by a 1% decrease in revenue per loan transaction for the three months ended
March 31, 2015
. In addition, managed receivables increased to
$1,355.8 million
at
March 31, 2015
from $1,107.9 million at
March 31, 2014
.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased $2, or 1%, primarily as a result of a decrease in fee income, as well as fluctuations in the Canadian exchange rate, partially offset by increases in other revenue, average loan values and average portfolio duration, as well as a decrease in the provision for credit losses. Revenue per loan transaction excludes "Other service revenue."
Gross Profit
For the three months ended
March 31, 2015
, gross profit for the AFC segment increased $3.7 million, or 8%, to
$48.0 million
, or 72.3% of revenue, compared with
$44.3 million
, or 73.0% of revenue, for the three months ended
March 31, 2014
, primarily as a result of a 9% increase in revenue, partially offset by a 12% increase in cost of services. The increase in cost of services and the decrease in gross margin percentage was primarily the result of increases in compensation expense and expenses associated with PWI.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $1.7 million, or 19%, to
$7.1 million
for the three months ended
March 31, 2015
, compared with
$8.8 million
for the three months ended
March 31, 2014
. The decrease was primarily attributable to a decrease in stock-based compensation expense of $1.8 million.
Holding Company Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in millions)
|
2015
|
|
2014
|
|
Selling, general and administrative
|
$
|
23.8
|
|
|
$
|
21.9
|
|
|
Depreciation and amortization
|
3.3
|
|
|
2.3
|
|
|
Operating loss
|
$
|
(27.1
|
)
|
|
$
|
(24.2
|
)
|
Selling, General and Administrative
For the three months ended
March 31, 2015
, selling, general and administrative expenses at the holding company increased $1.9 million, or 9%, to
$23.8 million
, compared with
$21.9 million
for the three months ended
March 31, 2014
, primarily as a result of increases in compensation expense of $1.8 million and acquisition-related professional fees of $0.7 million, partially offset by a decrease in stock-based compensation expense of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
We believe that the significant indicators of liquidity for our business are cash on hand, cash flow from operations, working capital and amounts available under our credit facility. Our principal sources of liquidity consist of cash generated by operations and borrowings under our revolving credit facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2015
|
|
December 31, 2014
|
|
March 31, 2014
|
|
Cash and cash equivalents
|
$
|
178.4
|
|
|
$
|
152.9
|
|
|
$
|
251.2
|
|
|
Restricted cash
|
14.2
|
|
|
17.0
|
|
|
14.9
|
|
|
Working capital
|
497.1
|
|
|
484.3
|
|
|
403.2
|
|
|
Amounts available under credit facility*
|
250.0
|
|
|
250.0
|
|
|
250.0
|
|
|
Cash flow from operations for the three months ended
|
86.1
|
|
|
|
|
92.3
|
|
|
|
|
|
*
|
There were related outstanding letters of credit totaling approximately
$28.6 million
,
$25.1 million
and $26.4 million at
March 31, 2015
,
December 31, 2014
and
March 31, 2014
, respectively, which reduced the amount available for borrowings under the credit facility.
|
We regularly evaluate alternatives for our capital structure and liquidity given our expected cash flows, growth and operating capital requirements as well as capital market conditions.
Working Capital
A substantial amount of our working capital is generated from the payments received for services provided. The majority of our working capital needs are short-term in nature, usually less than a week in duration. Due to the decentralized nature of the business, payments for most vehicles purchased are received at each auction and branch. Most of the financial institutions place a temporary hold on the availability of the funds deposited that generally can range up to two business days, resulting in cash in our accounts and on our balance sheet that is unavailable for use until it is made available by the various financial institutions. There are outstanding checks (book overdrafts) to sellers and vendors included in current liabilities. Because a portion of these outstanding checks for operations in the U.S. are drawn upon bank accounts at financial institutions other than the financial institutions that hold the cash, we cannot offset all the cash and the outstanding checks on our balance sheet.
Our available cash, which excludes cash in transit, was $84.3 million at
March 31, 2015
. Of this amount, approximately $14.1 million was held by our foreign subsidiaries. If the portion of funds held by our foreign subsidiaries that are considered to be permanently reinvested were to be repatriated, tax expense would need to be accrued at the U.S. statutory rate, net of any applicable foreign tax credits. Such foreign tax credits would substantially offset any U.S. taxes that would be due in the event cash held by our foreign subsidiaries was repatriated.
AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 60 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
On March 11, 2014, we established a three year senior secured term loan facility ("Term Loan B-1"), a seven year senior secured term loan facility ("Term Loan B-2") and a $250 million, five year senior secured revolving credit facility (the "revolving credit facility"), the terms of which are set forth in the Credit Agreement.
The Credit Facility is available for letters of credit, working capital and general corporate purposes. The Credit Agreement provides that with respect to the revolving credit facility, up to $75 million is available for letters of credit and up to $75 million is available for swing line loans. Subject to certain conditions, the Credit Agreement also permits additional revolving or term loan commitments of (i) up to $300 million or (ii) an unlimited amount if the Consolidated Senior Secured Leverage Ratio (as defined in the Credit Agreement) is less than or equal to 3.5 to 1.0, in each case from one or more of the existing lenders or other lenders (with the consent of the administrative agent).
Term Loan B-2 was issued at a discount of $2.8 million. The discount is being amortized using the effective interest method to interest expense over the seven year term of the loan. Both Term Loan B-1 and Term Loan B-2 are payable in quarterly installments equal to 0.25% of the original aggregate principal amounts of the term loans, respectively, as of the effective date, such payments commenced on June 30, 2014 and the balances are payable at each respective maturity date. The Credit Facility is subject to mandatory prepayments and reduction in an amount equal to the net proceeds of certain debt offerings, certain asset sales and certain insurance recovery events. In addition, in accordance with the terms of the Credit Agreement,
50%
of the net cash proceeds from the sale-leaseback of certain technology and capital equipment were used to prepay
$0.9 million
and
$1.5 million
of Term Loan B-1 and Term Loan B-2, respectively, in April
2015
. Each such prepayment is credited to prepay, on a pro rata basis, in order of maturity the unpaid amounts due on the next
eight
scheduled quarterly installments of Term Loan B-1 and Term Loan B-2 and thereafter to the remaining scheduled quarterly installments of each term loan on a pro rata basis.
Term Loan B-1 bears interest at LIBOR plus 2.5%, Term Loan B-2 at Adjusted LIBOR plus 2.75% (with an Adjusted LIBOR floor of 0.75% per annum for Term Loan B-2) and revolving loan borrowings at LIBOR plus 2.25%. However, for specified types of borrowings, the Company may elect to make Term Loan B-1 borrowings at a Base Rate (as defined in the Credit Agreement) plus 1.50%, Term Loan B-2 at a Base Rate plus 1.75% and revolving loan borrowings at a Base Rate plus 1.25%. The rates on Term Loan B-1 and Term Loan B-2 were
2.81%
and
3.50%
at
March 31, 2015
, respectively. In addition, if the Company reduces its Consolidated Senior Secured Leverage Ratio, which is based on a net debt calculation, to levels specified in the Credit Agreement, the applicable interest rate on Term Loan B-2 and the revolving credit facility will step down by 25 basis points. The Company also pays a commitment fee of 40 basis points, payable quarterly, on the average daily unused amount of the revolving credit facility. The fee may step down to 35 basis points based on the Company's Consolidated Senior Secured Leverage Ratio as described above.
On
March 31, 2015
,
$643.5 million
was outstanding on Term Loan B-1,
$1,108.8 million
was outstanding on Term Loan B-2 and there were no borrowings on the revolving credit facility. In addition, there were related outstanding letters of credit in the aggregate amount of
$28.6 million
at
March 31, 2015
, which reduce the amount available for borrowings under the Credit Facility. Our Canadian operations also have a C$8 million line of credit which was undrawn as of
March 31, 2015
. However, there were related letters of credit outstanding totaling approximately C$1.1 million at
March 31, 2015
, which reduce credit available under the Canadian line of credit.
The obligations of the Company under the Credit Facility are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority perfected security interests in 100% of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and 65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) perfected first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions.
The Credit Agreement contains certain restrictive loan covenants, including, among others, a financial covenant requiring that a maximum consolidated senior secured leverage ratio be satisfied as of the last day of each fiscal quarter if revolving loans are outstanding, and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, consummate change of control transactions, dispose of assets, pay dividends, make investments and engage in certain transactions with affiliates. The senior secured leverage ratio is calculated as total senior secured debt divided by the last four quarters consolidated Adjusted EBITDA. Senior secured debt includes term loan borrowings, revolving loans and capital lease liabilities less available cash as defined in the Credit Agreement. Consolidated Adjusted EBITDA is EBITDA (earnings before interest expense, income taxes, depreciation and amortization) adjusted to exclude among other things (a) gains and losses from asset sales; (b) unrealized foreign currency translation gains and losses in respect of indebtedness; (c) certain non-recurring gains and losses; (d) stock option expense; (e) certain other non-cash amounts included in the determination of net income; (f) charges and revenue
reductions resulting from purchase accounting; (g) minority interest; (h) expenses associated with the consolidation of salvage operations; (i) consulting expenses incurred for cost reduction, operating restructuring and business improvement efforts; (j) expenses realized upon the termination of employees and the termination or cancellation of leases, software licenses or other contracts in connection with the operational restructuring and business improvement efforts; (k) expenses incurred in connection with permitted acquisitions; (l) any impairment charges or write-offs of intangibles; and (m) any extraordinary, unusual or non-recurring charges, expenses or losses.
Certain covenants contained within the Credit Agreement are critical to an investor's understanding of our financial liquidity, as the failure to maintain compliance with these covenants could result in a default and allow our lenders to declare all amounts borrowed immediately due and payable. The maximum consolidated senior secured leverage ratio is required to be met when there are revolving loans outstanding under our Credit Agreement. For the quarter ended
March 31, 2015
the ratio could not exceed 3.75 to 1.0 and it continues to decline throughout the remaining life of the Credit Facility until it reaches 3.0 to 1.0 at December 31, 2017. Our actual consolidated senior secured leverage ratio, including capital lease obligations of $36.7 million, was 2.77 to 1.0 at
March 31, 2015
.
In addition, the Credit Agreement contains certain financial and operational restrictions that limit our ability to pay dividends and other distributions, make certain acquisitions or investments, incur indebtedness, grant liens and sell assets. The covenants in the Credit Agreement affect our operating flexibility by, among other things, restricting our ability to incur expenses and indebtedness that could be used to grow the business, as well as to fund general corporate purposes. We were in compliance with the covenants in the Credit Agreement at
March 31, 2015
.
We believe our sources of liquidity from our cash and cash equivalents on hand, working capital, cash provided by operating activities, and availability under our credit facility are sufficient to meet our short and long-term operating needs for the foreseeable future. In addition, we believe the previously mentioned sources of liquidity will be sufficient to fund our capital requirements and debt service payments for the next twelve months.
Securitization Facilities
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 June 30, 2016. AFC Funding Corporation had committed liquidity of
$950 million
for U.S. finance receivables at
March 31, 2015
.
We also have an agreement for the securitization of AFCI's receivables. This securitization facility also expires on June 30, 2016. AFCI's committed facility is provided through a third party conduit (separate from the U.S. facility) and was
C$100 million
at
March 31, 2015
. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.
AFC managed total finance receivables of
$1,355.8 million
and $1,371.1 million at
March 31, 2015
and
December 31, 2014
, respectively. AFC's allowance for losses was
$8.3 million
and
$8.0 million
at
March 31, 2015
and
December 31, 2014
, respectively.
As of
March 31, 2015
and
December 31, 2014
,
$1,343.3 million
and
$1,364.9 million
, respectively, of finance receivables and a cash reserve of 1 percent of the obligations collateralized by finance receivables served as security for the
$850.0 million
and
$865.2 million
of obligations collateralized by finance receivables at
March 31, 2015
and
December 31, 2014
, respectively. After the occurrence of a termination event, as defined in the U.S. securitization agreement, the banks may, and could, cause the stock of AFC Funding Corporation to be transferred to the bank facility, though as a practical matter the bank facility would look to the liquidation of the receivables under the transaction documents as their primary remedy.
Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At
March 31, 2015
, we were in compliance with the covenants in the securitization agreements.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA, as presented herein, are supplemental measures of our performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States, or GAAP. They are not measurements of our financial performance under GAAP and should not be considered substitutes for net income (loss) or any other performance measures derived in accordance with GAAP.
EBITDA is defined as net income (loss), plus interest expense net of interest income, income tax provision (benefit), depreciation and amortization. Adjusted EBITDA (as defined in the Credit Agreement) is EBITDA adjusted for the items of income and expense and expected incremental revenue and cost savings, as described above in the discussion of certain restrictive loan covenants under "Credit Facilities."
Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors about one of the principal measures of performance used by our creditors. In addition, management uses EBITDA and Adjusted EBITDA to evaluate our performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
(Dollars in millions)
|
ADESA
|
|
IAA
|
|
AFC
|
|
Corporate
|
|
Consolidated
|
|
Net income (loss)
|
$
|
22.5
|
|
|
$
|
25.0
|
|
|
$
|
21.0
|
|
|
$
|
(14.0
|
)
|
|
$
|
54.5
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
14.9
|
|
|
15.3
|
|
|
12.8
|
|
|
(8.4
|
)
|
|
34.6
|
|
|
Interest expense, net of interest income
|
0.1
|
|
|
—
|
|
|
5.1
|
|
|
15.7
|
|
|
20.9
|
|
|
Depreciation and amortization
|
20.2
|
|
|
19.6
|
|
|
7.8
|
|
|
3.3
|
|
|
50.9
|
|
|
Intercompany interest
|
12.8
|
|
|
9.4
|
|
|
(4.3
|
)
|
|
(17.9
|
)
|
|
—
|
|
|
EBITDA
|
70.5
|
|
|
69.3
|
|
|
42.4
|
|
|
(21.3
|
)
|
|
160.9
|
|
|
Adjustments per the Credit Agreement
|
6.5
|
|
|
(0.3
|
)
|
|
(4.6
|
)
|
|
(0.3
|
)
|
|
1.3
|
|
|
Adjusted EBITDA
|
$
|
77.0
|
|
|
$
|
69.0
|
|
|
$
|
37.8
|
|
|
$
|
(21.6
|
)
|
|
$
|
162.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2014
|
|
(Dollars in millions)
|
ADESA
|
|
IAA
|
|
AFC
|
|
Corporate
|
|
Consolidated
|
|
Net income (loss)
|
$
|
15.8
|
|
|
$
|
20.6
|
|
|
$
|
17.9
|
|
|
$
|
(33.6
|
)
|
|
$
|
20.7
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
8.9
|
|
|
11.9
|
|
|
10.9
|
|
|
(21.9
|
)
|
|
9.8
|
|
|
Interest expense, net of interest income
|
0.3
|
|
|
0.1
|
|
|
4.5
|
|
|
19.2
|
|
|
24.1
|
|
|
Depreciation and amortization
|
19.5
|
|
|
18.8
|
|
|
7.5
|
|
|
2.3
|
|
|
48.1
|
|
|
Intercompany interest
|
12.3
|
|
|
9.4
|
|
|
(5.3
|
)
|
|
(16.4
|
)
|
|
—
|
|
|
EBITDA
|
56.8
|
|
|
60.8
|
|
|
35.5
|
|
|
(50.4
|
)
|
|
102.7
|
|
|
Adjustments per the Credit Agreement
|
9.9
|
|
|
3.5
|
|
|
(0.7
|
)
|
|
31.7
|
|
|
44.4
|
|
|
Adjusted EBITDA
|
$
|
66.7
|
|
|
$
|
64.3
|
|
|
$
|
34.8
|
|
|
$
|
(18.7
|
)
|
|
$
|
147.1
|
|
Certain of our loan covenant calculations utilize financial results for the most recent four consecutive fiscal quarters. The following table reconciles EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve
Months
Ended
|
|
(Dollars in millions)
|
June 30,
2014
|
|
September 30,
2014
|
|
December 31,
2014
|
|
March 31,
2015
|
|
March 31, 2015
|
|
Net income (loss)
|
$
|
50.8
|
|
|
$
|
47.5
|
|
|
$
|
50.3
|
|
|
$
|
54.5
|
|
|
$
|
203.1
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
30.1
|
|
|
28.4
|
|
|
27.4
|
|
|
34.6
|
|
|
120.5
|
|
|
Interest expense, net of interest income
|
20.8
|
|
|
20.2
|
|
|
20.8
|
|
|
20.9
|
|
|
82.7
|
|
|
Depreciation and amortization
|
48.3
|
|
|
48.9
|
|
|
51.3
|
|
|
50.9
|
|
|
199.4
|
|
|
EBITDA
|
150.0
|
|
|
145.0
|
|
|
149.8
|
|
|
160.9
|
|
|
605.7
|
|
|
Other adjustments per the Credit Agreement
|
0.9
|
|
|
1.0
|
|
|
0.6
|
|
|
0.9
|
|
|
3.4
|
|
|
Non-cash charges
|
6.7
|
|
|
6.8
|
|
|
2.0
|
|
|
4.3
|
|
|
19.8
|
|
|
AFC interest expense
|
(3.5
|
)
|
|
(3.7
|
)
|
|
(3.9
|
)
|
|
(3.9
|
)
|
|
(15.0
|
)
|
|
Adjusted EBITDA
|
$
|
154.1
|
|
|
$
|
149.1
|
|
|
$
|
148.5
|
|
|
$
|
162.2
|
|
|
$
|
613.9
|
|
Summary of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in millions)
|
2015
|
|
2014
|
|
Net cash provided by (used by):
|
|
|
|
|
Operating activities
|
$
|
86.1
|
|
|
$
|
92.3
|
|
|
Investing activities
|
(38.2
|
)
|
|
(26.2
|
)
|
|
Financing activities
|
(14.5
|
)
|
|
(3.2
|
)
|
|
Effect of exchange rate on cash
|
(7.9
|
)
|
|
(3.3
|
)
|
|
Net increase in cash and cash equivalents
|
$
|
25.5
|
|
|
$
|
59.6
|
|
Cash flow from operating activities was
$86.1 million
for the three months ended
March 31, 2015
, compared with
$92.3 million
for the three months ended
March 31, 2014
. The decrease in operating cash flow was primarily attributable to changes in operating assets and liabilities as a result of the timing of collections and the disbursement of funds to consignors for auctions held near period-ends, as well as a net decrease in non-cash adjustments to net income, partially offset by increased profitability.
Net cash used by investing activities was
$38.2 million
for the three months ended
March 31, 2015
, compared with
$26.2 million
for the three months ended
March 31, 2014
. The increase in net cash used by investing activities was primarily attributable to:
|
|
|
|
•
|
an increase in cash used for acquisitions of approximately $21.4 million; and
|
|
|
|
|
•
|
an increase in capital expenditures of approximately $2.7 million. For a discussion of the Company's capital expenditures, see “Capital Expenditures” below;
|
partially offset by:
|
|
|
|
•
|
the changes in finance receivables held for investment.
|
Net cash used by financing activities was
$14.5 million
for the three months ended
March 31, 2015
, compared with
$3.2 million
for the three months ended
March 31, 2014
. The increase in net cash used by financing activities was primarily attributable to:
|
|
|
|
•
|
a smaller increase in book overdrafts; and
|
|
|
|
|
•
|
payments of $10.2 million in the first quarter of 2015 to repurchase common stock, compared with no payments in the same period of 2014;
|
partially offset by:
|
|
|
|
•
|
no payments for debt issuance costs in the first quarter of
2015
, compared with payments of
$11.7 million
in the first quarter of
2014
.
|
Capital Expenditures
Capital expenditures for the three months ended
March 31, 2015
and
2014
approximated
$25.1 million
and
$22.4 million
, respectively. Capital expenditures were funded primarily from internally generated funds. We continue to invest in our core information technology capabilities and capacity expansion. Capital expenditures are expected to be approximately $115 million for fiscal year 2015. Anticipated capital expenditures are primarily attributable to ongoing information system projects, upkeep and improvements at existing vehicle auction facilities, improvements in information technology systems and infrastructure and expansion of existing auction sites that are at capacity. Future capital expenditures could vary substantially based on capital project timing, the opening of new auction facilities and the initiation of new information systems projects to support our business strategies.
In April 2015, the Company announced the development of a whole car auction facility named ADESA Chicago. The Company expects the cost of this greenfield development to be approximately $30 million to $35 million over the next two years. The expected capital expenditures for ADESA Chicago are not included in the estimated $115 million of capital expenditures for fiscal year 2015.
Dividends
Subject to board of director approval, we expect to pay a quarterly dividend of $0.27 per share in 2015 using cash flow from operations, representing an annualized dividend of $1.08 per share. The following dividend information has been released for 2015:
|
|
|
|
•
|
On November 4, 2014, the Company announced a cash dividend of $0.27 per share that was paid on January 7, 2015, to stockholders of record at the close of business on December 29, 2014.
|
|
|
|
|
•
|
On February 17, 2015, the Company announced a cash dividend of $0.27 per share that was paid on April 2, 2015, to stockholders of record at the close of business on March 25, 2015.
|
|
|
|
|
•
|
On May 5, 2015, the Company announced a cash dividend of $0.27 per share that is payable on July 2, 2015, to stockholders of record at the close of business on June 24, 2015.
|
Future dividend decisions will be based on and affected by a variety of factors, including our financial condition and results of operations, contractual restrictions, including restrictive covenants contained in our Credit Agreement and AFC's securitization facilities, capital requirements and other factors that our board of directors deems relevant. No assurance can be given as to whether any future dividends may be declared by our board of directors or the amount thereof.
Acquisition
On March 17, 2015, ADESA completed the acquisition of Pittsburgh Auto Auction. This acquisition bolsters ADESA’s presence in the eastern region and complements its current buyer base. The auction is comprised of 200 acres and includes 7 fully automated auction lanes and full-service reconditioning facilities providing detail, mechanical and body shop services. The purchased assets of the auction included land, buildings, accounts receivable, operating equipment, customer relationships and tradenames related to the auction. Financial results for this acquisition have been included in our consolidated financial statements from the date of acquisition.
The purchase price of the auction, net of cash acquired, was approximately
$21.9 million
. The purchase accounting associated with this acquisition is preliminary, subject to determination of a working capital adjustment and final valuation results. The financial impact of this acquisition, including pro forma financial results, was immaterial to the Company’s consolidated results.
Contractual Obligations
The Company's contractual cash obligations for long-term debt, interest payments related to long-term debt, capital lease obligations and operating leases were summarized in the table of contractual obligations in our Annual Report on Form 10-K for the year ended
December 31, 2014
. Since
December 31, 2014
, there have been no material changes to the contractual obligations of the Company; however, we noted the following:
|
|
|
|
•
|
In April 2015, 50% of the net cash proceeds from the sale-leaseback of certain technology and capital equipment were used to prepay
$0.9 million
and
$1.5 million
of Term Loan B-1 and Term Loan B-2, respectively.
|
|
|
|
|
•
|
Operating lease obligations change in the ordinary course of business. We lease most of our auction facilities, as well as other property and equipment under operating leases. Future operating lease obligations will continue to change if renewal options are exercised and/or if we enter into additional operating lease agreements.
|
See Note 6 to the Consolidated Financial Statements, included elsewhere in this Quarterly Report on Form 10-Q, for additional information about the items described above. Our contractual cash obligations as of
December 31, 2014
, are discussed in the "Contractual Obligations" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2014
, as filed with the Securities and Exchange Commission.
Critical Accounting Estimates
Our critical accounting estimates are discussed in the "Critical Accounting Estimates" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2014
, as filed with the Securities and Exchange Commission. A summary of significant accounting policies is discussed in Note 2 and elsewhere in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2014
, which includes audited financial statements.
Off-Balance Sheet Arrangements
As of
March 31, 2015
, we had no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
New Accounting Standards
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The new guidance represents a change in accounting principle, is effective for fiscal years beginning after December 15, 2015 and will require retrospective application. At March 31, 2015, the Company had $15.0 million of unamortized debt issuance costs classified within other assets, which will be reclassified as a deduction from the carrying amount of the related debt liability upon adoption of ASU 2015-03.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in Accounting Standards Codification 605,
Revenue Recognition
. The new guidance provides clarification on the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosures to help financial statement users better understand the nature, amount, timing and uncertainty of revenue that is recognized. The new guidance is effective for the first annual reporting period and interim periods beginning after December 15, 2016, and will require either retrospective application to each prior reporting period presented or retrospective application with the cumulative effect of initially applying the standard recognized at the date of adoption. The Company is currently evaluating the impact the adoption of ASU 2014-09 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency
Our foreign currency exposure is limited and arises from transactions denominated in foreign currencies, particularly intercompany loans, as well as from translation of the results of operations from our Canadian and, to a much lesser extent, Mexican subsidiaries. However, fluctuations between U.S. and non-U.S. currency values may adversely affect our results of operations and financial position. We have not entered into any foreign exchange contracts to hedge changes in the Canadian or Mexican exchange rates. Canadian currency translation negatively affected net income by approximately $1.3 million for the three months ended
March 31, 2015
. A 1% change in the average Canadian exchange rate for the three months ended
March 31, 2015
would have impacted net income by approximately $0.1 million. Currency exposure of our Mexican operations is not material to the results of operations.
Interest Rates
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 currently use interest rate cap agreements to manage our exposure to interest rate changes. We have not designated any of the interest rate caps as hedges for accounting purposes. Accordingly, changes in the fair value of the interest rate caps are recognized as "Interest expense" in the consolidated statement of income.
In August 2013, we purchased four interest rate caps for approximately $2.2 million with an aggregate notional amount of $1.2 billion to manage our exposure to interest rate movements on our variable rate Credit Facility when three-month LIBOR exceeds 1.0%. The interest rate cap agreements cap three-month LIBOR at 1.0%, have an effective date of August 16, 2013 and mature on August 16, 2015.
In April 2015, we purchased two interest rate caps for approximately $0.7 million with an aggregate notional amount of $400 million to manage our exposure to interest rate movements on our variable rate Credit Facility when three-month LIBOR exceeds 1.5%. The interest rate cap agreements cap three-month LIBOR at 1.5%, have an effective date of April 16, 2015 and mature on March 31, 2017.
Taking our interest rate caps into account, a sensitivity analysis of the impact on our variable rate corporate debt instruments to a hypothetical 100 basis point increase in short-term rates (LIBOR) for the three months ended
March 31, 2015
would have resulted in an increase in interest expense of approximately $2.8 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended
March 31, 2015
, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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. Such litigation is 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 and regulatory proceedings which could be material are discussed below.
Certain legal proceedings in which the Company is involved are discussed in Note 16 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended
December 31, 2014
and Part I, Item 3 of the same Annual Report. Unless otherwise indicated, all proceedings discussed in the Annual Report remain outstanding.
IAA—Lower Duwamish Waterway
Since June 2004, IAA has operated a branch on property it leases in Tukwila, Washington just south of Seattle. The property is located adjacent to a Superfund site known as the Lower Duwamish Waterway Superfund Site ("LDW Site"). The LDW Site had been designated a Superfund site in 2001, three years prior to IAA’s tenancy. On March 25, 2008, the United States Environmental Protection Agency, or the "EPA," issued IAA a General Notice of Potential Liability, or "General Notice," pursuant to Section 107(a), and a Request for Information pursuant to Section 104(e) of the Comprehensive Environmental Response, Compensation, and Liability Act, or "CERCLA," related to the LDW Site. On November 7, 2012, the EPA issued IAA a Second General Notice of Potential Liability, or "Second General Notice," for the LDW Site. The EPA's website indicates that the EPA has issued general notice letters to approximately 116 entities, and has issued Section 104(e) Requests to more than 300 entities related to the LDW Site. In the General Notice and Second General Notice, the EPA informed IAA that the EPA believes IAA may be a Potentially Responsible Party, or ”PRP,” but the EPA did not specify the factual basis for this assertion. At this time, the EPA still has not specified the factual basis for this assertion and has not demanded that IAA pay any funds or take any action apart from responding to the Section 104(e) Information Request. Four PRPs, The Boeing Company, the City of Seattle, the Port of Seattle and King County, have funded a remedial investigation and feasibility study related to the cleanup of the LDW Site. In December 2014, the EPA issued a Record of Decision (ROD), detailing the final cleanup plan for the LDW Site. The ROD estimates the cost of cleanup to be $342 million, with the plan involving dredging of 105 acres, capping 24 acres, and enhanced natural recovery of 48 acres. The estimated length of the cleanup is 17 years, including 7 years of active remediation, and 10 years of monitored natural recovery. IAA is aware that certain authorities may bring natural resource damage claims against PRPs. At this time, however, the Company does not have adequate information to determine IAA's responsibility, if any, for contamination at this site, or to estimate IAA's loss as a result of this potential liability.
In addition, the Washington State Department of Ecology (“Ecology”) is working with the EPA in relation to the LDW Site, primarily to investigate and address sources of potential contamination contributing to the LDW Site. In 2007, IAA installed a stormwater capture and filtration system designed to treat sources of potential contamination before discharge to the LDW site. The immediate-past property owner, the former property owner and IAA have had discussions with Ecology concerning possible source control measures including, an investigation of the water and soils entering the stormwater system, an analysis of the source of contamination identified within the system, if any, and possible repairs and upgrades to the stormwater system if required. In October 2014, Ecology, in furtherance of its source control obligations, conducted stormwater sampling at the property, collecting water samples from within the stormwater system. Although no solids were detected in the stormwater system during the sampling, Ecology tested the water that was collected for various constituents. Ecology is expected to issue a final report regarding this sampling later this year. At this time, IAA is not aware of any additional Ecology source control activities planned for the site. Additional source control measures, if any, are not expected to have a material adverse effect on future recurring operating costs.
Item 1A. Risk Factors
In addition to the other information set forth in this report, readers should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2014
, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about purchases by KAR Auction Services of its shares of common stock during the quarter ended
March 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of Shares Purchased
|
|
Average Price Paid per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
(Dollars in millions)
|
|
January 1 - January 31
|
|
94,900
|
|
|
$
|
34.36
|
|
|
94,900
|
|
|
$
|
296.7
|
|
|
February 1 - February 28
|
|
95,000
|
|
|
35.72
|
|
|
95,000
|
|
|
293.3
|
|
|
March 1 - March 31
|
|
110,000
|
|
|
37.02
|
|
|
110,000
|
|
|
289.3
|
|
|
Total
|
|
299,900
|
|
|
35.77
|
|
|
299,900
|
|
|
|
|
|
|
|
(1)
|
In October 2014, 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 28, 2016. 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.
|
Item 6. Exhibits
|
|
|
|
a)
|
Exhibits—the exhibit list in the Exhibit Index is incorporated herein by reference as the list of exhibits required as part of this report.
|
In reviewing the agreements included as exhibits to this Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about KAR Auction Services, ADESA, IAA or other parties to the agreements.
The agreements included or incorporated by reference as exhibits to this Quarterly Report on Form 10-Q contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of "materiality" that are different from "materiality" under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Quarterly Report on Form 10-Q not misleading. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and KAR Auction Services, Inc.'s other public filings, which are available without charge through the SEC's website at http://www.sec.gov.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
KAR Auction Services, Inc.
|
|
|
(Registrant)
|
|
|
|
|
Date: May 6, 2015
|
/s/ ERIC M. LOUGHMILLER
|
|
|
Eric M. Loughmiller
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and
Accounting Officer)
|
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Incorporated by Reference
|
|
|
|
Exhibit No.
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
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|
3.1
|
|
|
Amended and Restated Certificate of Incorporation of KAR Auction Services, Inc.
|
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S-1/A
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333-161907
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3.1
|
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12/10/2009
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3.2
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Second Amended and Restated By-Laws of KAR Auction Services, Inc.
|
|
8-K
|
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001-34568
|
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3.1
|
|
11/4/2014
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4.1
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Form of common stock certificate
|
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S-1/A
|
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333-161907
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4.2
|
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12/10/2009
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10.1
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Amendment and Restatement Agreement, dated March 11, 2014, among KAR Auction Services, Inc. and certain of its subsidiaries and JPMorgan Chase Bank, N.A., as administrative agent, swingline lender and issuing lender (the Amended and Restated Credit Agreement and the Amended and Restated Guarantee and Collateral Agreement are included as Exhibits A and B thereto, respectively)
|
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8-K
|
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001-34568
|
|
10.1
|
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3/12/2014
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10.2
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*
|
Conversion Option Plan of KAR Auction Services, Inc. (formerly KAR Holdings, Inc.)
|
|
S-1/A
|
|
333-158666
|
|
10.9
|
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6/17/2009
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10.3
|
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*
|
Form of Conversion Agreement, dated April 20, 2007, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and certain executive officers and employees of IAA
|
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S-1/A
|
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333-158666
|
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10.13
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6/17/2009
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10.4
|
|
*
|
KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) Stock Incentive Plan
|
|
S-8
|
|
333-164032
|
|
10.1
|
|
12/24/2009
|
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10.5
|
|
*
|
Form of Nonqualified Stock Option Agreement of KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) pursuant to the Stock Incentive Plan
|
|
S-4
|
|
333-148847
|
|
10.15
|
|
1/25/2008
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|
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|
10.6
|
|
*
|
Employment Agreement, dated February 27, 2012, between KAR Auction Services, Inc. and James P. Hallett
|
|
10-K
|
|
001-34568
|
|
10.15
|
|
2/28/2012
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|
10.7
|
|
*
|
Employment Agreement, dated April 13, 2015, between KAR Auction Services, Inc. and Stephane St-Hilaire
|
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|
X
|
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|
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|
10.8
|
|
*
|
Amended and Restated Employment Agreement, dated March 24, 2014, between KAR Auction Services, Inc. and Don Gottwald
|
|
8-K
|
|
001-34568
|
|
10.1
|
|
3/20/2014
|
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|
10.9
|
|
*
|
Employment Agreement, dated December 17, 2013, between KAR Auction Services, Inc. and Eric Loughmiller
|
|
8-K
|
|
001-34568
|
|
10.5
|
|
12/17/2013
|
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|
|
|
|
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|
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|
10.10
|
|
*
|
Employment Agreement, dated December 17, 2013, between KAR Auction Services, Inc. and Rebecca Polak
|
|
10-K
|
|
001-34568
|
|
10.13
|
|
2/19/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
*
|
KAR Auction Services, Inc. Annual Incentive Plan Summary of Terms for Plan Year 2015
|
|
|
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|
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|
|
X
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
|
Exhibit No.
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12a
|
^
|
Amended and Restated Purchase and Sale Agreement, dated May 31, 2002, between AFC Funding Corporation and Automotive Finance Corporation
|
|
S-4
|
|
333-148847
|
|
10.32
|
|
1/25/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12b
|
|
Amendment No. 1 to Amended and Restated Purchase and Sale Agreement, dated June 15, 2004
|
|
S-4
|
|
333-148847
|
|
10.33
|
|
1/25/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12c
|
|
Amendment No. 2 to Amended and Restated Purchase and Sale Agreement, dated January 18, 2007
|
|
S-4
|
|
333-148847
|
|
10.34
|
|
1/25/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12d
|
^
|
Amendment No. 3 to Amended and Restated Purchase and Sale Agreement, dated April 20, 2007
|
|
S-4
|
|
333-148847
|
|
10.35
|
|
1/25/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12e
|
|
Amendment No. 4 to Amended and Restated Purchase and Sale Agreement, dated January 30, 2009
|
|
10-K
|
|
001-34568
|
|
10.19e
|
|
2/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12f
|
|
Amendment No. 5 to Amended and Restated Purchase and Sale Agreement, dated April 25, 2011
|
|
10-K
|
|
001-34568
|
|
10.19f
|
|
2/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13a
|
^
|
Fifth Amended and Restated Receivables Purchase Agreement, dated June 21, 2013, among Automotive Finance Corporation, AFC Funding Corporation, Fairway Finance Company, LLC, Saratoga Funding Corp., LLC, Deutsche Bank AG, New York Branch, BMO Harris Bank N.A., Fifth Third Bank and BMO Capital Markets Corp.
|
|
10-Q
|
|
001-34568
|
|
10.18
|
|
8/6/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13b
|
^
|
Amendment No. 1 to Fifth Amended and Restated Receivables Purchase Agreement, dated November 21, 2013
|
|
10-K
|
|
001-34568
|
|
10.18b
|
|
2/19/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13c
|
|
Amendment No. 2 to Fifth Amended and Restated Receivables Purchase Agreement, dated May 6, 2014
|
|
10-Q
|
|
001-34568
|
|
10.13c
|
|
8/6/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13d
|
^
|
Amendment No. 3 to Fifth Amended and Restated Receivables Purchase Agreement, dated December 18, 2014
|
|
10-K
|
|
001-34568
|
|
10.13d
|
|
2/18/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14a
|
^
|
Second Amended and Restated Receivables Purchase Agreement, dated June 28, 2013, among KAR Auction Services, Inc., Automotive Finance Canada Inc. and BNY Trust Company of Canada
|
|
10-Q
|
|
001-34568
|
|
10.19
|
|
8/6/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14b
|
^
|
Amending Agreement to Second Amended and Restated Receivables Purchase Agreement, dated November 22, 2013
|
|
10-K
|
|
001-34568
|
|
10.19b
|
|
2/19/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14c
|
|
Amending Agreement to Second Amended and Restated Receivables Purchase Agreement, dated May 8, 2014
|
|
10-Q
|
|
001-34568
|
|
10.14c
|
|
8/6/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15a
|
|
Ground Lease, dated September 4, 2008, between ADESA San Diego, LLC and First Industrial L.P. (East 39 Acres at Otay Mesa, California)
|
|
8-K
|
|
333-148847
|
|
10.3
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15b
|
|
Guaranty of Lease, dated September 4, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial L.P. (East 39 Acres at Otay Mesa, California)
|
|
8-K
|
|
333-148847
|
|
10.11
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16a
|
|
Ground Lease, dated September 4, 2008, between ADESA San Diego, LLC and First Industrial L.P. (West 39 Acres at Otay Mesa, California)
|
|
8-K
|
|
333-148847
|
|
10.40
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
|
Exhibit No.
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16b
|
|
|
Guaranty of Lease, dated September 4, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial L.P. (West 39 Acres at Otay Mesa, California)
|
|
8-K
|
|
333-148847
|
|
10.12
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17a
|
|
|
Ground Lease, dated September 4, 2008, between ADESA California, LLC and ADESA San Diego, LLC and First Industrial Pennsylvania, L.P. (Sacramento, California)
|
|
8-K
|
|
333-148847
|
|
10.5
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17b
|
|
|
Guaranty of Lease, dated September 4, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial Pennsylvania, L.P. (Sacramento, California)
|
|
8-K
|
|
333-148847
|
|
10.13
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18a
|
|
|
Ground Lease, dated September 4, 2008, between ADESA California, LLC and First Industrial Pennsylvania, L.P. (Tracy, California)
|
|
8-K
|
|
333-148847
|
|
10.6
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18b
|
|
|
Guaranty of Lease, dated September 4, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial Pennsylvania, L.P. (Tracy, California)
|
|
8-K
|
|
333-148847
|
|
10.14
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19a
|
|
|
Ground Lease, dated September 4, 2008, between ADESA Washington, LLC and First Industrial, L.P. (Auburn, Washington)
|
|
8-K
|
|
333-148847
|
|
10.7
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19b
|
|
|
Guaranty of Lease, dated September 4, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial, L.P. (Auburn, Washington)
|
|
8-K
|
|
333-148847
|
|
10.15
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20a
|
|
|
Ground Lease, dated September 4, 2008, between ADESA Texas, Inc. and First Industrial, L.P. (Houston, Texas)
|
|
8-K
|
|
333-148847
|
|
10.8
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20b
|
|
|
Guaranty of Lease, dated September 4, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial, L.P. (Houston, Texas)
|
|
8-K
|
|
333-148847
|
|
10.16
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21a
|
|
|
Ground Lease, dated September 4, 2008, between ADESA Florida, LLC and First Industrial Financing Partnership, L.P. (Bradenton, Florida)
|
|
8-K
|
|
333-148847
|
|
10.10
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21b
|
|
|
Guaranty of Lease, dated September 4, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial Financing Partnership, L.P. (Bradenton, Florida)
|
|
8-K
|
|
333-148847
|
|
10.18
|
|
9/9/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22a
|
|
|
Ground Sublease, dated October 3, 2008, between ADESA Atlanta, LLC and First Industrial, L.P. (Fairburn, Georgia)
|
|
10-Q
|
|
333-148847
|
|
10.21
|
|
11/13/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22b
|
|
|
Guaranty of Lease, dated October 3, 2008, between KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) and First Industrial, L.P. (Fairburn, Georgia)
|
|
10-Q
|
|
333-148847
|
|
10.22
|
|
11/13/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
|
Form of Indemnification Agreement
|
|
8-K
|
|
001-34568
|
|
10.1
|
|
12/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
*
|
KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan, as Amended June 10, 2014
|
|
DEF 14A
|
|
001-34568
|
|
Appendix A
|
|
4/29/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
|
Exhibit No.
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25a
|
|
*
|
Form of KAR Auction Services, Inc. Employee Stock Purchase Plan
|
|
S-8
|
|
333-164032
|
|
10.3
|
|
12/24/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25b
|
|
*
|
Amendment No. 1 to KAR Auction Services, Inc. Employee Stock Purchase Plan dated March 31, 2010
|
|
10-Q
|
|
001-34568
|
|
10.60
|
|
8/4/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25c
|
|
*
|
Amendment No. 2 to KAR Auction Services, Inc. Employee Stock Purchase Plan dated April 1, 2010
|
|
10-Q
|
|
001-34568
|
|
10.61
|
|
8/4/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
*
|
KAR Auction Services, Inc. Directors Deferred Compensation Plan, effective December 10, 2009
|
|
10-Q
|
|
001-34568
|
|
10.62
|
|
8/4/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.27
|
|
*
|
Form of Director Restricted Share Agreement
|
|
10-Q
|
|
001-34568
|
|
10.63
|
|
8/4/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.28
|
|
*
|
Form of Nonqualified Stock Option Agreement
|
|
S-1/A
|
|
333-161907
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10.65
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12/4/2009
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10.29a
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*
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Form of 2015 Restricted Stock Unit Award Agreement for Section 16 Officers
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X
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10.29b
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*
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Form of 2015 Restricted Stock Unit Award Agreement for non-Section 16 Officers
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X
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10.30
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*
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Form of Performance-Based Restricted Stock Unit Agreement (Total Shareholder Return Percentile Rank vs. S&P 500)
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8-K
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001-34568
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10.2
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12/17/2013
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10.31
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*
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Form of Performance-Based Restricted Stock Unit Agreement (Cumulative Adjusted Net Income Per Share)
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8-K
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001-34568
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10.1
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2/27/2014
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10.32
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Form of 2015 Performance-Based Restricted Stock Unit Agreement (Cumulative Adjusted Net Income Per Share)
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X
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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X
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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X
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32.1
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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X
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32.2
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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X
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101.INS
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XBRL Instance Document
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X
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101.SCH
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XBRL Taxonomy Extension Schema
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X
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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X
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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X
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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X
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_______________________________________________________________________________
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^
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Portions of this exhibit have been redacted pursuant to a request for confidential treatment filed separately with the Secretary of the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act of 1933, as amended.
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*
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Denotes management contract or compensation plan, contract or arrangement.
|
EMPLOYMENT AGREEMENT
This Employment Agreement (this “
Agreement
”), dated and effective April 13, 2015 (“
Effective Date
”), is entered into by and between KAR Auction Services, Inc. (“
Employer
”) and Stephane St-Hilaire (“
Employee
”).
RECITALS
A. Employer desires to employ Employee as Chief Executive Officer and President of ADESA, Inc. pursuant to the terms and conditions set forth in this Agreement.
B. Employee desires to accept such employment.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.
Employment Period
. The period of employment of Employee by Employer hereunder shall commence on the Effective Date and continue thereafter until terminated pursuant to
Section 4
of this Agreement (the “
Employment Period
”).
2.
Title and Duties
. During the Employment Period, Employee shall serve as the Chief Executive Officer and President of ADESA, Inc., a position reporting to the Chief Operating Officer of Employer. Employee shall perform the duties and responsibilities inherent in such position and any other duties consistent with such position as may be reasonably assigned to Employee from time to time by Employer’s Chief Executive Officer, Chief Operating Officer or Board of Directors of Employer (“
Board
”). Employee shall perform the duties of this position in a diligent and competent manner and on a full-time basis during the Employment Period.
3.
Compensation and Benefits
.
(a)
Base Salary
. During the Employment Period, Employee shall be paid an annual base salary of $450,000 USD (“
Base Salary
”), less withholdings and deductions required by law or requested by Employee. Employee’s Base Salary may be adjusted but may not be adjusted downward except in connection with across-the-board base salary reductions, by the Board from time to time.
(b)
Business Expenses
. Employer shall reimburse Employee for all reasonable business expenses incurred in performing services pursuant to this Agreement upon Employee’s presentation to Employer, on a timely basis, of satisfactory documentation of such expenditures. Such expenses shall be reimbursed as soon as administratively feasible, but in no event later than the end of the calendar year following the calendar year in which the applicable expense was incurred. Notwithstanding the
foregoing, all such expenses shall be reimbursed upon any termination of Employee’s employment under this Agreement, including without limitation a termination for Cause.
(c)
Annual Bonuses
. In addition to Base Salary, Employee shall be eligible to participate in the KAR Auction Services, Inc. Annual Incentive Plan (the “
Bonus Plan
”) (as in effect from time to time). Except as provided in
Section 4
and
Section 5
below, payment to Employee of any amounts under the Bonus Plan shall be subject to Employee’s continued employment with Employer through December 31 of the calendar year to which such bonus relates. Payment of any bonus pursuant to the Bonus Plan shall be made as soon as practicable but in no event later than March 15 of the year following the calendar year to which such bonus relates.
(d)
Equity
. Employee shall be eligible to participate in all Employer incentive programs extended to executive-level employees of Employer generally at levels commensurate with Employee’s position, including without limitation the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan.
(e)
Employee Benefits
. Employee shall be eligible to participate in Employer’s health and welfare benefit programs, 401(k) benefit program, life and disability insurance programs, and any other employee benefits, benefit plans, policies or programs Employer provides to its executive-level employees, in each case, as they may exist from time to time and subject to the terms and conditions thereof. Nothing in this Agreement shall require Employer to maintain any benefit plan, or shall preclude Employer from terminating or amending any benefit plan from time to time.
(f)
Vacation and Holidays
. During the Employment Period, Employee shall be entitled to annual paid vacation in accordance with Employer’s policy applicable to executive-level employees, but in no event less than four (4) weeks of paid vacation during each full calendar year of employment. Employee shall receive a pro-rated portion of such vacation during Employee’s initial and final partial calendar years of employment under this Agreement. Unused, earned vacation shall not carry over from one calendar year to the next, unless Employer’s written policies otherwise provide for such carry over. Upon termination of Employee’s employment for any reason, Employer shall pay Employee for any unused, earned vacation days based upon Employee’s then current Base Salary. Employee shall also be entitled to all of the paid holidays recognized by Employer generally.
(g)
Automobile
. During the Employment Period, Employer shall be entitled to use a Company-owned automobile for use by Employee.
4.
Termination
.
(a)
Termination by Employer for Cause
. Employer may terminate Employee’s employment under this Agreement at any time for Cause after the Board, by the majority vote of its members (excluding, for this purpose, any employee member of the Board, if applicable) determines that the actions or inactions of Employee constitute Cause, and
Employee’s employment should accordingly be terminated for Cause. In the event of a termination of Employee by Employer for Cause, Employee or Employee’s estate, if applicable, shall be entitled to receive: (i) Employee’s accrued Base Salary through the termination date, paid within 30 days of the termination date; (ii) an amount for reimbursement, paid within 30 days following submission by Employee to Employer of appropriate supporting documentation for any unreimbursed business expenses properly incurred prior to the termination date by Employee pursuant to
Section 3(b)
and in accordance with Employer’s policy; (iii) any accrued and unpaid vacation pay, paid within 30 days of the termination date; and (iv) such employee benefits, if any, to which Employee or Employee’s dependents may be entitled under the employee benefit plans or programs of Employer, paid in accordance with the terms of the applicable plans or programs (the amounts described in clauses (i) through (iv) hereof being referred to as “
Employee’s Accrued Obligations
”).
For purposes of this Agreement, “
Cause
” means (A) Employee’s willful, continued and uncured failure to perform substantially Employee’s duties under this Agreement (other than any such failure resulting from incapacity due to medically documented illness or injury) for a period of fourteen (14) days following written notice by Employer to Employee of such failure, (B) Employee engaging in illegal conduct or gross misconduct that is demonstrably likely to lead to material injury to Employer, monetarily or otherwise, (C) Employee’s indictment or conviction of, or plea of
nolo contendere
to, a crime constituting a felony or any other crime involving moral turpitude, or (D) Employee’s violation of
Section 7
of this Agreement or any other covenants owed to Employer by Employee.
(b)
Termination by Employer without Cause
. Employer may terminate Employee’s employment under this Agreement without Cause at any time upon thirty (30) days’ prior written notice to Employee. In addition to the severance benefits provided in
Section 5
, in the event of Employee’s termination by Employer without Cause, Employer shall pay to Employee all of Employee’s Accrued Obligations.
(c)
Termination by Employee for Good Reason
. Employee may terminate Employee’s employment under this Agreement for Good Reason. For purposes of this Agreement, “
Good Reason
” means the occurrence of any of the following:
(i) Any material reduction of Employee’s authority, duties and responsibilities;
(ii) Any material failure by Employer to comply with any of the terms and conditions of this Agreement;
(iii) Any failure to timely pay or provide Employee’s Base Salary, or any reduction in Employee’s Base Salary, excluding any Base Salary reduction made in connection with across the board salary reductions;
(iv) The requirement by Employer that Employee relocate Employee’s principal business location to a location more than fifty (50) miles from Employee’s principal base of operation as of the Effective Date; or
(v) A Change of Control occurs and, if applicable, Employer fails to cause its successor (whether by purchase, merger, consolidation or otherwise) to assume or reaffirm Employer’s obligations under this Agreement without change. For purposes of this Agreement, “
Change of Control
” shall have the meaning assigned to such term under the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan.
Within ninety (90) days of the occurrence of a Good Reason event, Employee may provide Employer with written notice of Employee’s termination of employment to be effective thirty (30) days after delivery of such notice, during which Employer shall have the opportunity to cure such Good Reason event. In the event of a termination for Good Reason, in addition to the severance benefits provided in
Section 5
, Employer shall pay to Employee all of Employee’s Accrued Obligations.
(d)
Termination by Employee without Good Reason
. Employee may terminate Employee’s employment under this Agreement at any time without Good Reason, upon thirty (30) days’ prior written notice to Employer. In the event of a termination described in this
Section 4(d)
, Employer shall pay to Employee all of Employee’s Accrued Obligations.
(e)
Termination due to Employee’s death or Disability
. Employee’s employment under this Agreement shall terminate upon Employee’s (i) death, or (ii) “
Disability
,” which for purposes of this Agreement means a “Total Disability” (or equivalent) as defined under Employer’s Long Term Disability Plan in effect at the time of the Disability. In the event of a termination described in this
Section 4(e)
, Employer shall pay to Employee all of Employee’s Accrued Obligations. In addition, (i) if Employee is participating in the health plans of Employer at the time of termination, Employer shall pay to Employee the premiums attributable to maintaining Employee’s (and Employee’s qualified beneficiaries’) insurance coverage under the Consolidated Omnibus Budget Reconciliation Act until the earlier of (A) the date that is twelve (12) months following the date of termination and (B) the date Employee is or becomes eligible for comparable coverage under health plans of another employer (the “
Continued Benefits
”), (ii) Employer shall pay to Employee (or Employee’s estate and/or beneficiaries), in a lump sum following effectiveness of the release described in
Section 6
and at the same time Employer pays annual bonuses for such calendar year to its other executives, an amount equal to (x) the actual bonus Employee would have received under the Bonus Plan had Employee remained employed by Employer through the remainder of the calendar year in which termination occurred,
multiplied by
(y) a fraction, the numerator of which is the number of days Employee was employed in the calendar year in which termination occurred and the denominator of which is 365 and (iii) Employer shall pay to Employee (or Employee’s estate and/or beneficiaries) an amount equal to any
annual bonus for a prior completed calendar year that is yet to be calculated and/or paid to Employee, paid as soon as practicable following effectiveness of the release described in
Section 6
but in no event later than March 15 of the year following the calendar year to which such bonus relates (the “
Earned But Unpaid Bonus
”).
5.
Severance Benefits
. In the event of a termination of Employee’s employment under
Section 4(b)
or
4(c)
of this Agreement, Employer shall provide Employee with the following severance benefits:
(a) Employer shall pay to Employee an amount equal to the sum of (i) Employee’s annual Base Salary and (ii) Employee’s bonus at target for the year in which termination occurs, which shall be paid by Employer to Employee in a lump sum as soon as practicable following (and subject to) effectiveness of the release described in
Section 6
but in no event later than sixty (60) days following the date of termination, provided that if such sixty (60) day period covers two taxable years, payment shall be made in the second taxable year.
(b) The Continued Benefits; and
(c) The Earned But Unpaid Bonus.
6.
Release of Claims
. As a condition to the receipt of any payments or benefits described in
Section 5
of this Agreement, subsequent to the termination of the employment of Employee (other than any Accrued Benefits or any payment or benefits payable on account of Employee’s death), Employee shall be required to execute, and not subsequently revoke, within fifty (50) days following the termination of Employee’s employment a release, in a form reasonably satisfactory to Employer, of all claims arising out of or related to Employee’s employment or the termination thereof.
7.
Restricted Activities
.
(a)
Acknowledgements
. Employee understands and acknowledges that Employer has invested, and continues to invest, substantial time, money and specialized knowledge into developing its resources, creating a customer base, generating customer and potential customer lists, training its employees, and improving its offerings in the field of wholesale, retail or consumer vehicle remarketing, including but not limited to vehicle auctions (whole car and salvage), online services, or dealer floor-plan financing. Employee understands and acknowledges that as a result of these efforts, Employer has created, and continues to use and create, Confidential Information (as defined below) and that such Confidential Information is integral to providing Employer with a competitive advantage over others in the marketplace. Employee further understands and acknowledges that the nature of Employee’s position gives him access to and knowledge of Confidential Information and places him in a position of trust and confidence with Employer.
(b)
Confidential Information
. Employee acknowledges and agrees that Confidential Information is the property of Employer, and that Employee shall not acquire any ownership rights in Confidential Information. Employee (i) shall use Confidential Information solely in connection with Employee’s employment with Employer; (ii) shall not directly or indirectly disclose, use or exploit any Confidential Information for Employee’s own benefit or for the benefit of any person or entity, other than Employer, both during and after Employee’s employment with Employer; and (iii) shall hold Confidential Information in trust and confidence, and use all reasonable means to assure that it is not directly or indirectly disclosed to or copied by unauthorized persons or used in an unauthorized manner, both during and after Employee’s employment with Employer. To the extent that Employee creates or develops any Confidential Information during the course of Employee’s employment with Employer, it shall be the sole and exclusive property of Employer. For purposes of this Agreement, “
Confidential Information
” shall mean any proprietary, confidential and competitively-sensitive information and materials which are the property of Employer, excluding information and materials generally known or available to the public, other than as a result of Employee’s breach of this
Section 7
, and including without limitation (A) trade secrets, (B) business and technical information that gives Employer a competitive advantage, and (C) information concerning Employer’s customers, suppliers, vendors, licensors, affiliates, financing sources, profits, revenues, financial condition, pricing, training programs, service techniques, service processes, marketing plans, and business strategies.
(c)
Intellectual Property
. Employee agrees to promptly disclose to Employer and hereby assigns and agrees to assign, without further compensation, to Employer, Employee’s entire right, title and interest in each and every invention (whether or not patentable), technological innovation, and copyrightable work, in which Employee participates during Employee’s employment with Employer whether or not during working hours, that pertains to Employer’s business or is aided by the use of time, material, or facilities of Employer. Employee further agrees to perform all reasonable acts, including executing necessary documents, requested by Employer to assist it, without further compensation, in obtaining and enforcing its property rights in the above.
(d)
Non-Competition
. During Employee’s employment with Employer and for a period of one (1) year immediately following the termination of Employee’s employment for any reason, Employee shall not within the United States or Canada perform for or on behalf of any Competitor (as defined below), the same or similar services as those that the Employee performed for Employer during Employee’s employment with Employer. In addition, Employee shall not, during Employee’s employment with Employer and for a period of one (1) year immediately following the termination of Employee’s employment for any reason, within the United States or Canada, engage in, own, operate, or control any Competitor. For purposes of this Agreement, “
Competitor
” means any person or entity engaged in the business of wholesale, retail or consumer vehicle remarketing activities, including but not limited to vehicle auctions (whole car or salvage), online services, or dealer floor plan financing
within the United States or Canada, provided that Employer (either directly or indirectly through its controlled subsidiaries) is engaged in such businesses.
(e)
Non-Solicitation/Non-Interference
. During Employee’s employment with Employer and for a period of one (1) year immediately following the termination of Employee’s employment for any reason, Employee shall not (i) induce or attempt to induce any employee of Employer to leave the employ of Employer, or in any way interfere with the relationship between Employer and any of its employees, or (ii) induce or attempt to induce any customer, client, member, supplier, licensee, licensor or other business relation of Employer to cease doing business with Employer, or otherwise interfere with the business relationship between Employer and any such customer, client, member, supplier, licensee, licensor or business relation of Employer.
8.
Section 409A
. The payments and benefits under this Agreement and the terms of any release agreement are intended to be exempt from Section 409A of the Internal Revenue Code of 1986, as amended (“
Code
”), and the regulations promulgated thereunder (“
Section 409A
”) and, accordingly, to the maximum extent permitted, this Agreement and any release agreement shall be interpreted and administered consistent with such intent. If under this Agreement, an amount is to be paid in two or more installments, for purposes of Section 409A, each installment shall be treated as a separate payments. Without limiting the foregoing, solely to the extent required to avoid the imposition of any additional tax or interest to the Employee under Section 409A, any payments, benefits and other obligations under this Agreement that arise in connection with Employee’s “termination of employment,” “termination” or similar reference in this Agreement shall be triggered only if such termination of employment qualifies as a “separation from service” within the meaning under Section 409A. Notwithstanding any other provision of this Agreement, if at the time of the termination of Employee’s employment, Employee is a “specified employee,” for purposes of Section 409A, and any payments or benefits upon such termination including but not limited to payments or benefits under this Agreement would otherwise result in additional tax or interest to the employee under Section 409A, Employee will not be entitled to receive such payments or benefits until the date that is six (6) months after the termination of the Employee’s employment for any reason, subject to earlier immediate payment if the employee dies during such six (6) month period. To the extent required to avoid the imposition of any additional tax or interest under Section 409A, amounts reimbursable to under this Agreement shall be paid to Employee on or before the last day of the year following the year in which the expense was incurred and the amount of expenses eligible for reimbursement (and in-kind benefits provided to Employee) during any one year may not affect amounts reimbursable or provided in any subsequent year. If any provision of this Agreement would subject Employee to any additional tax or interest under Section 409A, then Employer shall use its best efforts to amend such provision; provided that Employer shall not incur any additional expense as a result of such amendment. Notwithstanding any other provision hereof, in no event shall Employer be liable for, or be required to indemnify Employee for, any liability of Employee for taxes or penalties under Section 409A.
9.
Arbitration
. Any dispute, controversy or claim arising out of or relating to this Agreement, the breach, termination, enforcement, interpretation, or validity thereof (including
the determination of the scope or applicability of this arbitration agreement), or its subject matter shall be subject and resolved by binding arbitration administered by a single arbitrator from the American Arbitration Association. The parties acknowledge and agree that Employer is involved in transactions involving interstate commerce and that the Federal Arbitration Act shall govern any arbitration pursuant to this Agreement. Such arbitration shall be conducted in accordance with the commercial rules and regulations promulgated by the American Arbitration Association applying the laws of the State of Indiana. The arbitration shall be conducted in Indianapolis, Indiana. Discovery shall be completed within ninety (90) days of the filing of the complaint and the arbitration shall be held no later than one hundred twenty (120) days after the filing of the complaint. A record of the proceedings shall be kept by a qualified court reporter. The decision of the arbitrator shall contain findings of fact and conclusions of law, and shall be made within thirty (30) days of the arbitration and shall be final and binding on the parties, and shall be unappealable. The decision may be enforced in any court having jurisdiction over the parties and the subject matter. Costs of the arbitrator shall be split equally between Employer and Employee.
10.
Miscellaneous Provisions
.
|
|
|
|
(a)
|
Notices
. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below:
|
To Employer: KAR Auction Services, Inc.
13085 Hamilton Crossing Blvd.
Carmel, IN 46032
Attention: Rebecca C. Polak, Esq.
Email: becca.polak@karauctionservices.com
To Employee: At Employee’s address on file with Employer
(b)
Entire Agreement
. This Agreement sets forth the entire agreement between Employer and Employee with respect to the subject matter of this Agreement and fully supersedes all prior negotiations, representations and agreements, whether written or oral, between Employer and Employee with respect to the subject matter of this Agreement.
(c)
Severability
. The provisions of this Agreement are severable and shall be separately construed. If any of them is determined to be unenforceable by any court, that determination shall not invalidate any other provision of this Agreement.
(d)
Amendment and Waiver
. This Agreement may not be modified, amended or waived in any manner except by a written document executed by Employer and Employee. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other
provision of this Agreement (whether or not similar), or a continuing waiver or a waiver of any subsequent breach by such party of a provision of this Agreement.
(e)
No Mitigation
. In no event shall Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Employee under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Employee obtains other employment.
(f)
Successors and Assigns
. This Agreement and the covenants herein shall extend to and inure to the benefit of the successors and assigns of Employer. Employer shall require any successor (whether by purchase, merger, consolidation or otherwise) to assume or reaffirm, as applicable, Employer’s obligations under this Agreement without change. Failure of Employer to obtain such an assumption shall entitle Employee to terminate Employee’s employment under this Agreement for Good Reason.
(g)
Headings
. Numbers and titles to Sections hereof are for information purposes only and, where inconsistent with the text, are to be disregarded.
(h)
Counterparts
. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which when taken together, shall be and constitute one and the same instrument.
(i)
Governing Law and Forum
. This Agreement shall be governed by and construed according to the internal laws of the State of Indiana, without regard to conflict of law principles.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above.
“Employer” “Employee”
KAR AUCTION SERVICES, INC.
By:
/s/ Don Gottwald
By:
/s/ Stéphane St-Hilaire
Printed:
Don Gottwald
Printed:
Stéphane St-Hilaire
Title:
Chief Operating Officer
Title:
CEO & President of ADESA
Exhibit 10.11
KAR Auction Services, Inc.
Annual Incentive Plan
Summary of Terms
Plan Year 2015
KAR Auction Services, Inc. Annual Incentive Plan
Summary of Terms
The following is a summary of the 2015 KAR Auction Services, Inc. Annual Incentive Plan (the “Plan”) which is part of the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan, as Amended June 10, 2014 (the “Omnibus Plan”). For executive officers of the Company, the Plan constitutes a Cash-Based Award under the Omnibus Plan that is intended to be “qualified performance based compensation” under Section 162(m) of the Code and shall be subject to the terms of the Omnibus Plan related thereto and administered accordingly. Any awards under the Plan are subject to the approval of the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of KAR Auction Services, Inc. (the “Company”). The Committee has all final authority with respect to administration and interpretation of the Plan. All capitalized terms herein that are not otherwise defined shall have the meanings given to such terms in the Omnibus Plan.
Purpose of the Plan
The purpose of the Plan is to reward eligible employees of the Company with incentive compensation based on their contributions toward meeting and exceeding overall Company goals.
Eligibility
Key employees of the Company may participate in the Plan as determined by the Committee.
Effective Date
This Plan is effective January 1, 2015. The Company reserves the right to revise or terminate the Plan at any time, with or without advance notice, in accordance with applicable law.
Performance Period
Each performance period under the Plan will be one year in duration and will coincide with the Company's fiscal year (January 1 – December 31).
Awards
The award is tied to personal performance as well as the financial performance of the Company or particular business unit, division, region or individual site during the performance period. The award opportunity is expressed as a percentage of base salary, which typically will be determined at the end of the performance period. Awards to executive officers of the Company are subject to the individual annual limit for Other Cash-Based Awards specified in the Omnibus Plan.
The award is tied to specific “threshold,” “target” and “superior” performance goals. The “threshold” is the minimum performance goal that must be met before any award is earned. The “target” opportunity represents the award amount received if the Company meets its targeted financial and, if applicable, non-financial goals. The “superior” opportunity represents the maximum performance goal that must be met for a maximum payout. The actual award opportunities at threshold, target and superior levels of performance are set forth in an individual’s personalized incentive compensation statement. The award is conditioned on satisfactory performance of job responsibilities.
Performance Goals and Targets
Through the annual planning process, performance goals and targets are established. The performance goals and targets chosen for the Company, each business unit, division, region and site reflect the Company’s strategy, competitive situation and market potential. The award may be weighted on a combination of the overall performance of the Company, business unit, division, region or site. Actual performance goals and goal definitions are included with the personalized incentive compensation statement materials.
Calculation of Awards
In calculating your award, actual base salary during the plan year will be utilized. Please note that if your salary or bonus opportunity changes during the plan year your award will be prorated as explained in the examples below.
Example One:
Employee is bonus eligible with a base salary of $40,000 with a target opportunity of 20% and receives a merit increase of 2% on 7/1/2015. Bonus calculation would be as follows:
$40,000 x 20% = $8,000 (target award) x performance factor x goal weighting x proration 6/12
ths
plus
$40,800 x 20% = $8,160 (target award) x performance factor x goal weighting x proration 6/12
ths
Example Two:
Employee is bonus eligible with a base salary of $40,000 with a target opportunity of 20% and receives a promotion on 7/1/2015 with a base salary of $45,000 and a target opportunity of 25%. Bonus calculation would be as follows:
$40,000 x 20% = $8,000 (target award) x performance factor x goal weighting x proration 6/12
ths
plus
$45,000 x 25% = $11,250 (target award) x performance factor x goal weighting x proration 6/12
ths
The performance factor is directly related to financial performance relative to the established threshold, target and superior performance goals. If actual financial results fall between the threshold, target or superior performance levels, straight-line interpolation will be used to determine the performance factor. Multiple goal weightings must add to 100%.
Payment of Awards
Generally, all awards are paid out annually; however, certain non-executive officer positions, if approved by the Committee and business unit President, may be paid out quarterly or semiannually.
Generally, all awards will be paid out in cash, net of applicable withholding taxes. While awards are generally paid as soon as practicable after the audited financial results are available for the performance period, in the Board’s sole discretion, payments to participants other than executive officers of the Company may be based on an estimation of the audited financial results. Additionally, awards may be paid in one or more installments, in the Board’s sole discretion.
In no event will any portion of any awards payable under the Plan (including any pro rata awards paid upon certain terminations of employment described below and any installments) be paid later than March 15, 2016.
Discretionary Adjustment of Awards
The Committee retains discretion to adjust payouts up or down on a case-by-case basis; provided, however, that for participants who are executive officers of the Company, the Committee may only reduce payments. Individual award payouts may be adjusted downward due to personal performance of job responsibilities. Individual award payouts may be eliminated entirely for noncompliance with corporate policy or controls
.
In addition, consistent with the terms of the Omnibus Plan and Section 162(m) of the Code, each as applicable, the Committee may adjust any or all financial goals during performance period to reflect unforeseen, unusual or extraordinary events or circumstances including but not limited to (i) changes in accounting principles or practices, (ii) extraordinary gains or losses on the sale of assets, (iii) new or amended laws or regulations and (iv) acquisitions or divestitures.
The Committee also has the authority to impose such other limitations on awards as it may deem necessary or appropriate.
Prorated Awards
In the event that an individual transfers between business units or is promoted during the course of a performance period, a prorated award may be earned based on the time spent in each position.
All eligible employees hired or promoted on or before the 15
th
of the month will be prorated based on the number of months of plan eligibility, including the month of hire.
All eligible employees hired or promoted on or after the 16
th
of the month will be eligible to participant in the Plan at the beginning of the following month.
All eligible employees hired on or after November 1
st
of the current year will not be eligible to participate in the Plan until the beginning of the next Plan year.
Termination of Employment
Generally
Generally, upon termination of employment for any reason, the individual will forfeit any award that has not been paid.
Retirement, Disability or Death
In the event that employment is terminated as a result of retirement (defined below), disability (defined below) or death, the award will be prorated based on the number of months employed during the performance period prior to the termination of employment and based on and subject to actual performance during the performance period, in accordance with the Plan. Payment will be paid as soon as practicable in the following year after the audited financial results are available for the performance period, but in no event later than March 15, 2016. In the event of death, the award will be paid to the individual’s beneficiary or, if no beneficiary is named, to their estate.
For purposes of the Plan: (i) retirement shall mean a termination of a participant’s employment, other than for Cause, on or after the attainment of age 65 and (ii) disability shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or
mental impairment for the period of time as set forth under the long term disability plan maintained by the Company for the benefit of the participant.
Voluntary Termination or Termination by the Company
In the event that a participant voluntarily terminates from employment or is involuntarily terminated by the Company, the participant will forfeit any award that has not been paid, in accordance with the Plan. In other words, a participant must be employed by the Company on the date the award is actually paid by the Company.
Termination or Modification of the Plan
The Committee may modify or terminate the Plan at any time, effective at such date as the Committee may determine. The Committee or Board will, prior to the end of the Plan year, adopt a resolution fixing a minimum aggregate amount, which amount is in the Committee or Board’s discretion (a “Pool”), to be paid to participants under the Plan for 2015. After such a Pool is established, (i) the Plan may not be modified or terminated and the amount of the Pool may not be reduced after December 31, 2015, and (ii) any amounts forfeited by individual participants hereunder because they are not employed as of the payment date will not reduce the Pool but will be reallocated among other participants in the Plan who are not subject to Section 162(m) of the Code, and shall not revert to the Company.
Exhibit 10.29a
[Section 16 Officers]
KAR Auction Services, Inc.
2009 OMNIBUS STOCK AND INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT
2015 AWARD
THIS AGREEMENT (the “Agreement”) is made between KAR Auction Services, Inc., a Delaware corporation (the “Company”), and [NAME] (the “Recipient”) pursuant to the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan, as amended (the “Plan”). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Plan. The parties hereto agree as follows:
1.
Grant of Restricted Stock Units
. The Company hereby grants to the Recipient [_______] Restricted Stock Units (the “Award”) as of [___________], 2015 (the “Grant Date”), subject to the terms and conditions of the Plan and this Agreement. The Restricted Stock Units shall vest based on the Company’s performance described in Section 4 and pursuant to the terms of this Agreement. A “Restricted Stock Unit” is an “Other Share-Based Award” under the Plan and each Restricted Stock Unit entitles the Recipient to a share of Common Stock upon vesting subject to the terms of this Agreement.
2.
Restrictions
. The Restricted Stock Units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, whether voluntarily or involuntarily or by operation of law. The Recipient shall have no rights in the Common Stock underlying the Restricted Stock Units until the Award vests as described in Section 4 below or as otherwise provided in the Plan or this Agreement. The Recipient shall not have any voting rights with respect to the Restricted Stock Units.
3.
Restricted Stock Unit Account
. The Company shall maintain an account (the “Restricted Stock Unit Account” or “Account”) on its books in the name of the Recipient, which shall reflect the number of Restricted Stock Units awarded to the Recipient.
4.
Period of Restriction
. Subject to the Company achieving Adjusted Net Income of more than $100,000,000 in its 2015 fiscal year, the Recipient’s continuous employment with the Company through the following dates and the other provisions of the Plan and this Agreement, unless vested or forfeited earlier as described in Section 5 or 6 of this Agreement, as applicable, (i) one-third (1/3) of the Award shall become vested on the first anniversary of the Grant Date, (ii) an additional one-third (1/3) of the Award shall become vested on the second anniversary of the Grant Date and (iii) the final one-third (1/3) of the Award shall become vested on the third anniversary of the Grant Date. If the Company fails to achieve Adjusted Net Income of more than $100,000,000 in its 2015 fiscal year, no amounts will vest and the Award shall immediately terminate and be forfeited by the Recipient.
Upon vesting, all vested Restricted Stock Units shall cease to be considered Restricted Stock Units, subject to the terms and conditions of the Plan and this Agreement, and the Recipient shall be entitled to receive one share of Common Stock for each vested Restricted Stock Unit in the Recipient’s Restricted Stock Unit Account. Such shares of Common Stock shall be paid to the Recipient as soon as practicable after the vesting date and, if applicable, certification by the Committee that the performance criteria have been met, but in no event later than March 15 of the year following the year in which the shares became vested.
“Adjusted Net Income” shall mean the Company’s adjusted net income
as reported in the Company's earnings release or annually to the Board of Directors in the event adjusted earnings per share is not included in a publicly released document.
.
5.
Forfeiture upon Termination of Employment
. If, from the Grant Date until the third anniversary of the Grant Date, the Recipient experiences a termination of employment with the Company for any reason prior to a Change in Control, then the Recipient shall forfeit any unvested Restricted Stock Units outstanding as of the date of such termination of employment.
6.
Vesting upon Change in Control
. Upon a Change in Control occurring from the Grant Date until the third anniversary of the Grant Date and prior to the Recipient’s termination of employment with the Company, all unvested Restricted Stock Units shall become immediately vested on the date of such Change in Control and shall be paid to the Recipient as soon as administratively feasible thereafter (but in no event later than March 15 of the year following the year in which such Change in Control occurs).
7.
Adjustment in Capitalization
. In the event of any change in the Common Stock through stock dividends or stock splits, a corporate split-off or split-up, or recapitalization, merger, consolidation, exchange of shares, or a similar event, the number of Restricted Stock Units subject to this Agreement shall be equitably adjusted by the Committee.
8.
Delivery of Stock Certificates
. Subject to the requirements of Sections 9 and 10 below, the Company may, if applicable, cause to be issued and delivered to a brokerage account for the benefit of the Recipient certificates or electronic book entry credit for the shares of Common Stock that correspond to the vested Restricted Stock Units.
9.
Tax Withholding
. Whenever Common Stock is to be issued or any payment is to be made under this Agreement, the Company or any Subsidiary shall withhold, or require the Recipient to remit to the Company or such Subsidiary, an amount sufficient to satisfy the statutory minimum federal, state, and local withholding tax requirements relating to such transaction, and the Company or such Subsidiary may defer any payment or issuance of Common Stock until such requirements are satisfied.
10.
Securities Laws
. This Award is a private offer that may be accepted only by a Recipient who satisfies the eligibility requirements outlined in the Plan and the Committee’s administrative procedures. The future value of Common Stock acquired under the Plan is unknown and could increase or decrease.
Neither the Plan nor any offering materials related to the Plan may be distributed to the public. The Common Stock should be resold only on the New York Stock Exchange and should not be resold to the public except in full compliance with local securities laws.
11.
No Guarantee of Employment
. Nothing in this Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Recipient’s employment at any time, or confer upon the Recipient any right to continue in the employ of the Company or any Subsidiary.
12.
Compliance with Code Section 409A
. Notwithstanding any provision of the Plan or this Agreement to the contrary, the Award is intended to be exempt from or, in the alternative, comply with Code Section 409A and the interpretive guidance thereunder, including the exceptions for stock rights and short-term deferrals. The Plan and the Agreement will be construed and interpreted in accordance with such intent. References in the Plan and this Agreement to “termination of employment” and similar terms shall mean a “separation from service” within the meaning of that term under Code Section 409A. Any payment or distribution that is to be made to a Recipient who is a “specified employee” of the Company within the meaning of that term under Code Section 409A and as determined by the Committee, on account of a “separation from service” under Code Section 409A, may not be made before the date which is six months after the date of such “separation from service,” unless the payment or distribution is exempt from the application of Code Section 409A by reason of the short-term deferral exemption or otherwise.
13.
Dividend Equivalents
. If the Company declares a cash dividend on its shares, then, on the payment date of the dividend, the Recipient will be credited with dividend equivalents equal to the amount of cash dividend per share multiplied by the number of Restricted Stock Units credited to the Recipient through the record date. The dollar amount credited to the Recipient under the preceding sentence will be credited to an account (“Dividend Account”) established for the Recipient for bookkeeping purposes only on the books of the Company. The amounts credited to the Dividend Account will be credited as of the last day of each month with interest, compounded monthly, until the amount credited to the Dividend Account is paid to the Recipient. The rate of interest credited under the previous sentence will be the prime rate of interest as reported by the Midwest edition of the Wall Street Journal for the second business day of each quarter on an annual basis. The balance in the Dividend Account will be subject to the same terms regarding vesting and forfeiture as the Recipient’s Restricted Stock Units awarded under the accompanying letter and this document, and will be paid in cash in a single sum at the time that the shares of Common Stock associated with the Recipient’s Restricted Stock Units are delivered (or forfeited at the time that the Recipient’s Restricted Stock Units are forfeited).
14.
No Fractional Shares
. No fractional shares of Common Stock shall be issued or delivered under this Agreement. The Committee shall determine whether cash or other property shall be issued or paid in lieu of such fractional shares of Common Stock or whether such fractional shares of Common Stock or any rights thereto shall be forfeited or otherwise eliminated.
15.
Amendment
. The Committee may at any time amend, modify or terminate this Agreement; provided, however, that no such action of the Committee
shall adversely affect the Recipient’s rights under this Agreement
without the consent of the Recipient. The Committee, to
the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify this Agreement so that the Award qualifies for exemption from or complies with Code Section 409A; provided, however, that the Committee and the Company make no representations that the Award shall be exempt from or comply with Code Section 409A and make no undertaking to preclude Code Section 409A from applying to the Award.
16.
Plan Terms and Committee Authority
. This Agreement and the rights of the Recipient hereunder are subject to all of the terms and conditions of the Plan, as it may be amended from time to time, as well as to such policies, rules and regulations as the Committee may adopt for administration of the Plan, including but not limited to any stock ownership and stock holding guidelines. It is expressly understood that the Committee is authorized to administer, construe and make all determinations necessary or appropriate for the administration of the Plan and this Agreement, all of which shall be binding upon the Recipient. Any inconsistency between this Agreement and the Plan shall be resolved in favor of the Plan. The Recipient hereby acknowledges receipt of a copy of the Plan and this Agreement.
17.
Severability
. If any provision of this Agreement is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or the Agreement under any law deemed applicable by the Board, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Board’s determination, materially altering the intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or person, and the remainder of the Agreement shall remain in full force and effect.
18.
Governing Law and Jurisdiction
. The Plan and this Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, United States of America. The jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), the Plan will be exclusively in the courts in the State of Indiana, County of Hamilton, United States of America, including the Federal Courts located therein (should Federal jurisdiction exist).
19.
Successors
. All obligations of the Company under this Agreement will be binding on any successor to the Company, whether the existence of the successor results from a direct or indirect purchase of all or substantially all of the business or assets of the Company or both, or a merger, consolidation or otherwise.
20.
Erroneously Awarded Compensation
. This Award shall be subject to any compensation recovery policy adopted by the Company to comply with applicable law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or to comport with good corporate governances practices, as such policy may be amended from time to time.
[signature page follows]
IN WITNESS WHEREOF, the Recipient and the Company have executed this Agreement as of this ___ day of [________], 2015.
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_______________________________
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KAR AUCTION SERVICES, INC.
By: _______________________________
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[NAME]
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Its: _______________________________
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Exhibit 10.29b
[non-Section 16 Officer Employees]
KAR Auction Services, Inc.
2009 OMNIBUS STOCK AND INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT
2015 AWARD
THIS AGREEMENT (the “Agreement”) is made between KAR Auction Services, Inc., a Delaware corporation (the “Company”), and [NAME] (the “Recipient”) pursuant to the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan, as amended (the “Plan”). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Plan. The parties hereto agree as follows:
1.
Grant of Restricted Stock Units
. The Company hereby grants to the Recipient [_______] Restricted Stock Units (the “Award”) as of [___________], 2015 (the “Grant Date”), subject to the terms and conditions of the Plan and this Agreement. The Restricted Stock Units shall vest pursuant to the terms of this Agreement. A “Restricted Stock Unit” is an “Other Share-Based Award” under the Plan and each Restricted Stock Unit entitles the Recipient to a share of Common Stock upon vesting subject to the terms of this Agreement.
2.
Restrictions
. The Restricted Stock Units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, whether voluntarily or involuntarily or by operation of law. The Recipient shall have no rights in the Common Stock underlying the Restricted Stock Units until the Award vests as described in Section 4 below or as otherwise provided in the Plan or this Agreement. The Recipient shall not have any voting rights with respect to the Restricted Stock Units.
3.
Restricted Stock Unit Account
. The Company shall maintain an account (the “Restricted Stock Unit Account” or “Account”) on its books in the name of the Recipient, which shall reflect the number of Restricted Stock Units awarded to the Recipient.
4.
Period of Restriction
. Subject to the Recipient’s continuous employment with the Company through the following dates and the other provisions of the Plan and this Agreement, unless vested or forfeited earlier as described in Section 5 or 6 of this Agreement, as applicable, (i) one-third (1/3) of the Award shall become vested on the first anniversary of the Grant Date, (ii) an additional one-third (1/3) of the Award shall become vested on the second anniversary of the Grant Date and (iii) the final one-third (1/3) of the Award shall become vested on the third anniversary of the Grant Date.
Upon vesting, all vested Restricted Stock Units shall cease to be considered Restricted Stock Units, subject to the terms and conditions of the Plan and this Agreement, and the Recipient shall be entitled to receive one share of Common Stock for each vested Restricted Stock Unit in the
Recipient’s Restricted Stock Unit Account. Such shares of Common Stock shall be paid to the Recipient no later than March 15 of the year following the year in which the shares became vested.
5.
Forfeiture upon Termination of Employment
. If, from the Grant Date until the third anniversary of the Grant Date, the Recipient experiences a termination of employment with the Company for any reason prior to a Change in Control, then the Recipient shall forfeit any unvested Restricted Stock Units outstanding as of the date of such termination of employment.
6.
Vesting upon Change in Control
. Upon a Change in Control occurring from the Grant Date until the third anniversary of the Grant Date and prior to the Recipient’s termination of employment with the Company, all unvested Restricted Stock Units shall become immediately vested on the date of such Change in Control and shall be paid to the Recipient as soon as administratively feasible thereafter (but in no event later than March 15 of the year following the year in which such Change in Control occurs).
7.
Adjustment in Capitalization
. In the event of any change in the Common Stock through stock dividends or stock splits, a corporate split-off or split-up, or recapitalization, merger, consolidation, exchange of shares, or a similar event, the number of Restricted Stock Units subject to this Agreement shall be equitably adjusted by the Committee.
8.
Delivery of Stock Certificates
. Subject to the requirements of Sections 9 and 10 below, the Company may, if applicable, cause to be issued and delivered to a brokerage account for the benefit of the Recipient certificates or electronic book entry credit for the shares of Common Stock that correspond to the vested Restricted Stock Units.
9.
Tax Withholding
. Whenever Common Stock is to be issued or any payment is to be made under this Agreement, the Company or any Subsidiary shall withhold, or require the Recipient to remit to the Company or such Subsidiary, an amount sufficient to satisfy the statutory minimum federal, state, and local withholding tax requirements relating to such transaction, and the Company or such Subsidiary may defer any payment or issuance of Common Stock until such requirements are satisfied.
10.
Securities Laws
. This Award is a private offer that may be accepted only by a Recipient who satisfies the eligibility requirements outlined in the Plan and the Committee’s administrative procedures. The future value of Common Stock acquired under the Plan is unknown and could increase or decrease.
Neither the Plan nor any offering materials related to the Plan may be distributed to the public. The Common Stock should be resold only on the New York Stock Exchange and should not be resold to the public except in full compliance with local securities laws.
11.
No Guarantee of Employment
. Nothing in this Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Recipient’s employment at any time, or confer upon the Recipient any right to continue in the employ of the Company or any Subsidiary.
12.
Compliance with Code Section 409A
. Notwithstanding any provision of the Plan or this Agreement to the contrary, the Award is intended to be exempt from or, in the alternative, comply with Code Section 409A and the interpretive guidance thereunder, including the exceptions for stock rights and short-term deferrals. The Plan and the Agreement will be construed and interpreted in accordance with such intent. References in the Plan and this Agreement to “termination of employment” and similar terms shall mean a “separation from service” within the meaning of that term under Code Section 409A. Any payment or distribution that is to be made to a Recipient who is a “specified employee” of the Company within the meaning of that term under Code Section 409A and as determined by the Committee, on account of a “separation from service” under Code Section 409A, may not be made before the date which is six months after the date of such “separation from service,” unless the payment or distribution is exempt from the application of Code Section 409A by reason of the short-term deferral exemption or otherwise.
13.
Dividend Equivalents
. The Recipient will accrue dividend equivalents with respect to the Award. Dividend equivalents represent the right to receive additional shares of Common Stock in the future, subject to the terms and conditions of this Agreement. Dividend equivalents will be determined based on the dividends that the Recipient would have received, had the Recipient held shares of Common Stock equal to the vested number of Restricted Stock Units from January 1, 2015 until the earlier to occur of the applicable vesting date or the date of a Change in Control, and assuming that the dividends were reinvested in Common Stock (and any dividends on such shares were reinvested in Common Stock). The dividend equivalents will be subject to the same transfer restrictions and forfeiture and vesting conditions as specified in this Agreement.
14.
No Fractional Shares
. No fractional shares of Common Stock shall be issued or delivered under this Agreement. The Committee shall determine whether cash or other property shall be issued or paid in lieu of such fractional shares of Common Stock or whether such fractional shares of Common Stock or any rights thereto shall be forfeited or otherwise eliminated.
15.
Amendment
. The Committee may at any time amend, modify or terminate this Agreement; provided, however, that no such action of the Committee
shall adversely affect the Recipient’s rights under this Agreement
without the consent of the Recipient. The Committee, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify this Agreement so that the Award qualifies for exemption from or complies with Code Section 409A; provided, however, that the Committee and the Company make no representations that the Award shall be exempt from or comply with Code Section 409A and make no undertaking to preclude Code Section 409A from applying to the Award.
16.
Plan Terms and Committee Authority
. This Agreement and the rights of the Recipient hereunder are subject to all of the terms and conditions of the Plan, as it may be amended from time to time, as well as to such policies, rules and regulations as the Committee may adopt for administration of the Plan, including but not limited to any stock ownership and stock holding guidelines. It is expressly understood that the Committee is authorized to administer, construe and make all determinations necessary or appropriate for the administration of the Plan and this Agreement, all of which shall be binding upon the Recipient. Any inconsistency between this Agreement and the Plan shall be resolved in favor of the Plan. The Recipient hereby acknowledges receipt of a copy of the Plan and this Agreement.
17.
Severability
. If any provision of this Agreement is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or the Agreement under any law deemed applicable by the Board, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Board’s determination, materially altering the intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or person, and the remainder of the Agreement shall remain in full force and effect.
18.
Governing Law and Jurisdiction
. The Plan and this Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, United States of America. The jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), the Plan will be exclusively in the courts in the State of Indiana, County of Hamilton, United States of America, including the Federal Courts located therein (should Federal jurisdiction exist).
19.
Successors
. All obligations of the Company under this Agreement will be binding on any successor to the Company, whether the existence of the successor results from a direct or indirect purchase of all or substantially all of the business or assets of the Company or both, or a merger, consolidation or otherwise.
20.
Erroneously Awarded Compensation
. This Award shall be subject to any compensation recovery policy adopted by the Company to comply with applicable law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or to comport with good corporate governances practices, as such policy may be amended from time to time.
[signature page follows]
IN WITNESS WHEREOF, the Recipient and the Company have executed this Agreement as of this ___ day of [________], 2015.
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_______________________________
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KAR AUCTION SERVICES, INC.
By: _______________________________
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[NAME]
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Its: _______________________________
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KAR Auction Services, Inc.
2009 OMNIBUS STOCK AND INCENTIVE PLAN
PERFORMANCE-BASED RESTRICTED STOCK UNIT AGREEMENT
2015 AWARD
THIS AGREEMENT (the “Agreement”) is made between KAR Auction Services, Inc., a Delaware corporation (the “Company”), and [NAME] (the “Recipient”) pursuant to the KAR Auction Services, Inc. 2009 Omnibus Stock and Incentive Plan, as amended (the “Plan”). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Plan. The parties hereto agree as follows:
1.
Grant of Restricted Stock Units
. The Company hereby grants to the Recipient a target number of [_______] Restricted Stock Units (the “Award”) as of [___________], 2015, subject to the terms and conditions of the Plan and this Agreement. The Restricted Stock Units shall vest based on the Company’s performance during the “Period of Restriction,” as specified in Section 4 and pursuant to the terms of this Agreement. A “Restricted Stock Unit” is an “Other Share-Based Award” under the Plan and each Restricted Stock Unit entitles the Recipient to a share of Common Stock upon vesting subject to the terms of this Agreement.
2.
Restrictions
. The Restricted Stock Units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, whether voluntarily or involuntarily or by operation of law. The Recipient shall have no rights in the Common Stock underlying the Restricted Stock Units until the termination of the Period of Restriction specified in Section 4 below or as otherwise provided in the Plan or this Agreement. The Recipient shall not have any voting rights with respect to the Restricted Stock Units.
3.
Restricted Stock Unit Account
. The Company shall maintain an account (the “Restricted Stock Unit Account” or “Account”) on its books in the name of the Recipient, which shall reflect the number of Restricted Stock Units awarded to the Recipient.
4.
Period of Restriction
. Subject to the provisions of the Plan and this Agreement, unless vested or forfeited earlier as described in Section 5, 6, or 7 of this Agreement, as applicable, the number of Restricted Stock Units that shall become vested shall be calculated in accordance with the chart below, based on the Company’s “Cumulative Adjusted Net Income Per Share” for the “Measurement Period,” calculated as of the “Measurement Date” (each as defined below). If the Company’s Cumulative Adjusted Net Income Per Share falls between Threshold and Target or between Target and Maximum levels of performance, the number of Restricted Stock Units that vest shall be calculated using straight-line interpolation. Such vesting shall occur upon certification by the Committee that the applicable performance criteria have been met.
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Cumulative Adjusted Net Income Per Share During the Measurement Period
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Number of Restricted Stock Units Vesting
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Below Threshold:
Below $[____]
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0
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Threshold:
$[____]
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[0.5x]
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Target:
$[____]
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[x]
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Maximum:
Greater than or equal to $[____]
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[2x]
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x = [Target number of Restricted Stock Units]
“Cumulative Adjusted Net Income Per Share” shall mean the sum of the Company’s Adjusted Net Income Per Share for the three fiscal years in the Measurement Period. “Adjusted Net Income Per Share” for a fiscal year is calculated by dividing Adjusted Net Income by the weighted average diluted common shares outstanding per year. “Adjusted Net Income” for a fiscal year is equal to the Company’s net income as reported in the Form 10-K filed by the Company with respect to such fiscal year, adjusted to (i) exclude gains/losses from certain nonrecurring and unbudgeted capital transactions, including debt prepayment, debt refinancing and similar items, (ii) exclude depreciation and amortization expenses resulting from the revaluation of certain assets at the time of the 2007 merger consistent with the Company’s calculation of its reported adjusted net income, (iii) exclude certain expenses incurred in connection with stock-based compensation related to the 2007 merger consistent with the Company’s calculation of its reported adjusted net income, (iv) exclude acquisition contingent consideration, (v) exclude the impact of significant acts of God or other events outside of the Company’s control that may affect the overall economic environment, and (vi) exclude significant asset impairments.
“Measurement Period” shall mean the period commencing on January 1, 2015 and ending on the Measurement Date.
“Measurement Date” shall mean December 31, 2017.
Upon vesting, all vested Restricted Stock Units shall cease to be considered Restricted Stock Units, subject to the terms and conditions of the Plan and this Agreement, and the Recipient shall be entitled to receive one share of Common Stock for each vested Restricted Stock Unit in the Recipient’s Restricted Stock Unit Account.
5.
Vesting upon Termination by the Company without Cause, by the Recipient for Good Reason or due to Retirement, Disability or Death
. If, from January 1, 2015 until the “Payment Date” (as defined in Section 9), the Recipient experiences a termination of employment by the Company without Cause, by the Recipient due to “Good Reason” as defined in the Recipient’s employment agreement, if the Recipient is a party to an employment agreement with the Company that defines such term, or by reason of Retirement, Disability or death, then the Recipient shall be entitled to receive, on the Payment Date, a number of shares of Common Stock the Recipient would
have been entitled to under Section 4 if he or she had remained employed until the last day of the Period of Restriction (based on actual performance during the Period of Restriction, as described in Section 4) multiplied by a fraction, the numerator of which shall be the number of full calendar months during the period from January 1, 2015 through the date the Recipient’s employment terminated and the denominator of which shall be 36, the total number of months in the Period of Restriction.
6.
Forfeiture upon Termination by the Company for Cause or upon Recipient’s Resignation Without Good Reason
. If, from January 1, 2015 until the “Payment Date” (as defined in Section 9), the Recipient experiences a termination of employment by the Company for Cause or by the Recipient other than for “Good Reason” as defined in the Recipient’s employment agreement, if the Recipient is a party to an employment agreement with the Company that defines such term, then the Recipient shall forfeit any Restricted Stock Units that are subject to the Period of Restriction on the date of such termination of employment.
7.
Vesting upon Change in Control
. Upon a Change in Control occurring during the Measurement Period, the Target number of Restricted Stock Units shall become immediately vested on the date of such Change in Control and shall be paid to the Recipient as soon as administratively feasible thereafter (but in no event later than March 15 of the year following the year in which such Change in Control occurs).
8.
Adjustment in Capitalization
. In the event of any change in the Common Stock through stock dividends or stock splits, a corporate split-off or split-up, or recapitalization, merger, consolidation, exchange of shares, or a similar event, the number of Restricted Stock Units subject to this Agreement shall be equitably adjusted by the Committee.
9.
Delivery of Stock Certificates
. Subject to the requirements of Sections 10 and 11 below, as promptly as practicable after the Committee certifies that Restricted Stock Units ceased to be subject to the Period of Restriction in accordance with this Agreement, but in no event later than March 15 of the year following the year in which the shares became vested (the “Payment Date”), the Company may, if applicable, cause to be issued and delivered to a brokerage account for the benefit of the Recipient certificates or electronic book entry credit for the shares of Common Stock that correspond to the vested Restricted Stock Units.
10.
Tax Withholding
. Whenever Common Stock is to be issued or any payment is to be made under this Agreement, the Company or any Subsidiary shall withhold, or require the Recipient to remit to the Company or such Subsidiary, an amount sufficient to satisfy the statutory minimum federal, state, and local withholding tax requirements relating to such transaction, and the Company or such Subsidiary may defer any payment or issuance of Common Stock until such requirements are satisfied.
11.
Securities Laws
. This Award is a private offer that may be accepted only by a Recipient who satisfies the eligibility requirements outlined in the Plan and the Committee’s administrative procedures. The future value of Common Stock acquired under the Plan is unknown and could increase or decrease.
Neither the Plan nor any offering materials related to the Plan may be distributed to the public. The Common Stock should be resold only on the New York Stock Exchange and should not be resold to the public except in full compliance with local securities laws.
12.
No Guarantee of Employment
. Nothing in this Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate the Recipient’s employment at any time, or confer upon the Recipient any right to continue in the employ of the Company or any Subsidiary.
13.
Compliance with Code Section 409A
. Notwithstanding any provision of the Plan or this Agreement to the contrary, the Award is intended to be exempt from or, in the alternative, comply with Code Section 409A and the interpretive guidance thereunder, including the exceptions for stock rights and short-term deferrals. The Plan and the Agreement will be construed and interpreted in accordance with such intent. References in the Plan and this Agreement to “termination of employment” and similar terms shall mean a “separation from service” within the meaning of that term under Code Section 409A. Any payment or distribution that is to be made to a Recipient who is a “specified employee” of the Company within the meaning of that term under Code Section 409A and as determined by the Committee, on account of a “separation from service” under Code Section 409A, may not be made before the date which is six months after the date of such “separation from service,” unless the payment or distribution is exempt from the application of Code Section 409A by reason of the short-term deferral exemption or otherwise.
14.
Dividend Equivalents
. The Recipient will accrue dividend equivalents with respect to the Award. Dividend equivalents represent the right to receive additional shares of Common Stock in the future, subject to the terms and conditions of this Agreement. Dividend equivalents will be determined based on the dividends that the Recipient would have received, had the Recipient held shares of Common Stock equal to the vested number of Restricted Stock Units from January 1, 2015 until the earlier to occur of the Payment Date or the date of a Change in Control, and assuming that the dividends were reinvested in Common Stock (and any dividends on such shares were reinvested in Common Stock). The dividend equivalents will be subject to the same transfer restrictions and forfeiture and vesting conditions as specified in this Agreement.
15.
No Fractional Shares
. No fractional shares of Common Stock shall be issued or delivered under this Agreement. The Committee shall determine whether cash or other property shall be issued or paid in lieu of such fractional shares of Common Stock or whether such fractional shares of Common Stock or any rights thereto shall be forfeited or otherwise eliminated.
16.
Amendment
. The Committee may at any time amend, modify or terminate this Agreement; provided, however, that no such action of the Committee
shall adversely affect the Recipient’s rights under this Agreement
without the consent of the Recipient. The Committee, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify this Agreement so that the Award qualifies for exemption from or complies with Code Section 409A; provided, however, that the Committee and the Company make no representations that the Award shall be exempt from or comply with Code Section 409A and make no undertaking to preclude Code Section 409A from applying to the Award.
17.
Plan Terms and Committee Authority
. This Agreement and the rights of the Recipient hereunder are subject to all of the terms and conditions of the Plan, as it may be amended from time to time, as well as to such policies, rules and regulations as the Committee may adopt for administration of the Plan, including but not limited to any stock ownership and stock holding guidelines. It is expressly understood that the Committee is authorized to administer, construe and make all determinations necessary or appropriate for the administration of the Plan and this Agreement, all of which shall be binding upon the Recipient. Any inconsistency between this Agreement and the Plan shall be resolved in favor of the Plan. The Recipient hereby acknowledges receipt of a copy of the Plan and this Agreement.
18.
Severability
. If any provision of this Agreement is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or the Agreement under any law deemed applicable by the Board, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Board’s determination, materially altering the intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or person, and the remainder of the Agreement shall remain in full force and effect.
19.
Governing Law and Jurisdiction
. The Plan and this Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, United States of America. The jurisdiction and venue for any disputes arising under, or any action brought to enforce (or otherwise relating to), the Plan will be exclusively in the courts in the State of Indiana, County of Hamilton, United States of America, including the Federal Courts located therein (should Federal jurisdiction exist).
20.
Successors
. All obligations of the Company under this Agreement will be binding on any successor to the Company, whether the existence of the successor results from a direct or indirect purchase of all or substantially all of the business or assets of the Company or both, or a merger, consolidation or otherwise.
21.
Erroneously Awarded Compensation
. This Award shall be subject to any compensation recovery policy adopted by the Company to comply with applicable law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or to comport with good corporate governances practices, as such policy may be amended from time to time.
[signature page follows]
IN WITNESS WHEREOF, the Recipient and the Company have executed this Agreement as of this ___ day of [________], 2015.
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_______________________________
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KAR AUCTION SERVICES, INC.
By: _______________________________
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[NAME]
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Its: _______________________________
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EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James P. Hallett, certify that:
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1)
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I have reviewed this Quarterly Report on Form 10-Q of KAR Auction Services, Inc.;
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2)
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3)
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4)
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a)
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designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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5)
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
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a)
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all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
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b)
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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/s/ JAMES P. HALLETT
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James P. Hallett
Chief Executive Officer
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Date:
May 6, 2015
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Eric M. Loughmiller, certify that:
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1)
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I have reviewed this Quarterly Report on Form 10-Q of KAR Auction Services, Inc.;
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2)
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3)
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4)
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a)
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designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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5)
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
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a)
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all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
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b)
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any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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/s/ ERIC M. LOUGHMILLER
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Eric M. Loughmiller
Executive Vice President and Chief Financial Officer
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Date:
May 6, 2015
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of KAR Auction Services, Inc. (the "Company") for the period ended
March 31, 2015
, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James P. Hallett, as Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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1)
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The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
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2)
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the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ JAMES P. HALLETT
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James P. Hallett
Chief Executive Officer
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Date:
May 6, 2015
EXHIBIT 32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of KAR Auction Services, Inc. (the "Company") for the period ended
March 31, 2015
, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric M. Loughmiller, as Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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1)
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The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
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2)
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the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ ERIC M. LOUGHMILLER
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Eric M. Loughmiller
Executive Vice President and Chief Financial Officer
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Date:
May 6, 2015