10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-34568
________________________________________________________

KAR Auction Services, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or
organization)
 
20-8744739
(I.R.S. Employer
Identification No.)
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 ý    No o
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 ý    No o
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.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of October 31, 2015, 137,534,892 shares of the registrant's common stock, par value $0.01 per share, were outstanding.
 

Table of Contents

KAR Auction Services, Inc.
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
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)
 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Operating revenues
 
 
 
 
 
 
 
ADESA Auction Services
$
351.4

 
$
308.1

 
$
1,024.4

 
$
908.0

IAA Salvage Services
246.2

 
217.5

 
732.8

 
666.3

AFC
69.1

 
63.5

 
200.2

 
184.2

Total operating revenues
666.7

 
589.1


1,957.4


1,758.5

Operating expenses
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
378.1

 
328.0

 
1,096.7

 
974.6

Selling, general and administrative
128.5

 
116.5

 
373.5

 
357.6

Depreciation and amortization
54.1

 
48.9

 
156.8

 
145.3

Total operating expenses
560.7

 
493.4


1,627.0


1,477.5

Operating profit
106.0

 
95.7

 
330.4

 
281.0

Interest expense
24.4

 
20.3

 
67.2

 
65.3

Other income, net
(0.3
)
 
(0.5
)
 
(2.1
)
 
(1.9
)
Loss on extinguishment of debt
—

 
—

 
—

 
30.3

Income before income taxes
81.9

 
75.9


265.3


187.3

Income taxes
29.6

 
28.4

 
99.0

 
68.3

Net income
$
52.3

 
$
47.5


$
166.3


$
119.0

Net income per share
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.34

 
$
1.18

 
$
0.85

Diluted
$
0.37

 
$
0.33

 
$
1.16

 
$
0.84

Dividends declared per common share
$
0.27

 
$
0.25

 
$
0.81

 
$
0.75

   









See accompanying notes to consolidated financial statements

3
Table of Contents

KAR Auction Services, Inc.
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
52.3

 
$
47.5

 
$
166.3

 
$
119.0

Other comprehensive loss
 
 
 
 
 
 
 
Foreign currency translation loss
(14.2
)
 
(10.8
)
 
(29.4
)
 
(11.4
)
Comprehensive income
$
38.1

 
$
36.7


$
136.9


$
107.6

   
























See accompanying notes to consolidated financial statements

4
Table of Contents

KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions)
(Unaudited)
 
September 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
125.3

 
$
152.9

Restricted cash
15.0

 
17.0

Trade receivables, net of allowances of $6.7 and $6.3
562.0

 
401.2

Finance receivables, net of allowances $8.8 and $8.0
1,520.8

 
1,363.1

Deferred income tax assets
41.0

 
41.0

Other current assets
120.2

 
99.7

Total current assets
2,384.3

 
2,074.9

Other assets
 
 
 
Goodwill
1,793.8

 
1,705.2

Customer relationships, net of accumulated amortization of $601.8 and $551.1
438.0

 
484.4

Other intangible assets, net of accumulated amortization of $242.4 and $221.2
306.4

 
306.2

Unamortized debt issuance costs
22.2

 
16.7

Other assets
34.7

 
36.2

Total other assets
2,595.1

 
2,548.7

Property and equipment, net of accumulated depreciation of $552.7 and $507.2
747.1

 
727.9

Total assets
$
5,726.5

 
$
5,351.5

   















See accompanying notes to consolidated financial statements

5
Table of Contents

KAR Auction Services, Inc.
Consolidated Balance Sheets
(In millions, except share and per share data)
(Unaudited)
 
September 30,
 
December 31,
 
2015
 
2014
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
627.6

 
$
471.7

Accrued employee benefits and compensation expenses
78.1

 
77.6

Accrued interest
0.8

 
0.3

Other accrued expenses
124.1

 
114.4

Income taxes payable
12.5

 
5.5

Dividends payable
37.1

 
38.2

Obligations collateralized by finance receivables
1,122.9

 
865.2

Current maturities of long-term debt
144.5

 
17.7

Total current liabilities
2,147.6

 
1,590.6

Non-current liabilities
 
 
 
Long-term debt
1,723.6

 
1,736.6

Deferred income tax liabilities
322.2

 
333.4

Other liabilities
156.1

 
143.8

Total non-current liabilities
2,201.9

 
2,213.8

Commitments and contingencies (Note 8)

 

Stockholders' equity
 
 
 
Preferred stock, $0.01 par value:
 
 
 
Authorized shares: 100,000,000
 

 
 

Issued shares: none
—

 
—

Common stock, $0.01 par value:
 
 
 
Authorized shares: 400,000,000
 

 
 

Issued and outstanding shares:
 

 
 

September 30, 2015: 137,482,040
 

 
 

December 31, 2014: 141,316,444
1.4

 
1.4

Additional paid-in capital
1,400.4

 
1,593.7

Retained earnings (accumulated deficit)
6.2

 
(46.4
)
Accumulated other comprehensive loss
(31.0
)
 
(1.6
)
Total stockholders' equity
1,377.0

 
1,547.1

Total liabilities and stockholders' equity
$
5,726.5

 
$
5,351.5







See accompanying notes to consolidated financial statements

6
Table of Contents

KAR Auction Services, Inc.
Consolidated Statements of Stockholders' Equity
(In millions)
(Unaudited)
 
Common
Stock
Shares
 
Common
Stock
Amount
 
Additional
Paid-In
Capital
 
(Accumulated
Deficit)/Retained Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at December 31, 2014
141.3

 
$
1.4

 
$
1,593.7

 
$
(46.4
)
 
$
(1.6
)
 
$
1,547.1

Net income
 

 
 
 
 
 
166.3

 
 
 
166.3

Other comprehensive loss
 

 
 
 
 
 
 
 
(29.4
)
 
(29.4
)
Issuance of common stock under stock plans
1.5

 
 
 
18.8

 
 
 
 
 
18.8

Stock-based compensation expense
 

 
 
 
9.0

 
 
 
 
 
9.0

Excess tax benefit from stock-based compensation
 

 
 
 
6.5

 
 
 
 
 
6.5

Repurchase and retirement of common stock
(5.3
)
 
 
 
(227.6
)
 
 
 
 
 
(227.6
)
Cash dividends declared to stockholders ($0.81 per share)
 

 
 
 
 
 
(113.7
)
 
 
 
(113.7
)
Balance at September 30, 2015
137.5

 
$
1.4

 
$
1,400.4

 
$
6.2

 
$
(31.0
)
 
$
1,377.0

   





















See accompanying notes to consolidated financial statements

7
Table of Contents

KAR Auction Services, Inc.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
Operating activities
 
 
 
Net income
$
166.3

 
$
119.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
156.8

 
145.3

Provision for credit losses
12.4

 
12.0

Deferred income taxes
(14.4
)
 
(28.7
)
Amortization of debt issuance costs
5.3

 
5.9

Stock-based compensation
9.0

 
26.5

Excess tax benefit from stock-based compensation
(6.5
)
 
(3.2
)
Loss (gain) on disposal of fixed assets
1.3

 
(0.1
)
Loss on extinguishment of debt
—

 
30.3

Other non-cash, net
2.8

 
2.4

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Trade receivables and other assets
(164.0
)
 
(89.2
)
Accounts payable and accrued expenses
146.4

 
107.5

Net cash provided by operating activities
315.4

 
327.7

Investing activities
 
 
 
Net increase in finance receivables held for investment
(177.1
)
 
(191.6
)
Acquisition of businesses, net of cash acquired
(115.2
)
 
(30.9
)
Purchases of property, equipment and computer software
(92.3
)
 
(70.3
)
Proceeds from the sale of property and equipment
0.1

 
0.1

Decrease in restricted cash
2.0

 
2.6

Net cash used by investing activities
(382.5
)
 
(290.1
)
Financing activities
 
 
 
Net increase in book overdrafts
18.1

 
22.2

Net increase in borrowings from lines of credit
130.5

 
—

Net increase in obligations collateralized by finance receivables
268.2

 
90.3

Proceeds from long-term debt
—

 
1,767.2

Payments for debt issuance costs/amendments
(10.9
)
 
(11.7
)
Payments on long-term debt
(16.9
)
 
(1,782.2
)
Payments on capital leases
(14.9
)
 
(14.3
)
Payments of contingent consideration and deferred acquisition costs
(1.2
)
 
(0.2
)
Initial net investment for interest rate caps
(2.2
)
 
—

Issuance of common stock under stock plans
18.8

 
20.9

Excess tax benefit from stock-based compensation
6.5

 
3.2

Repurchase and retirement of common stock
(227.6
)
 
—

Dividends paid to stockholders
(114.8
)
 
(104.7
)
Net cash provided by (used by) financing activities
53.6

 
(9.3
)
Effect of exchange rate changes on cash
(14.1
)
 
(5.0
)
Net (decrease) increase in cash and cash equivalents
(27.6
)
 
23.3

Cash and cash equivalents at beginning of period
152.9

 
191.6

Cash and cash equivalents at end of period
$
125.3

 
$
214.9

Cash paid for interest
$
58.2

 
$
57.3

Cash paid for taxes, net of refunds
$
102.0

 
$
79.4

See accompanying notes to consolidated financial statements

8
Table of Contents

KAR Auction Services, Inc.
Notes to Consolidated Financial Statements
September 30, 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:
•
"we," "us," "our" and "the Company" refer, collectively, to KAR Auction Services, Inc. and all of its subsidiaries;
•
"ADESA" or "ADESA Auctions" refer, collectively, to ADESA, Inc., a wholly-owned subsidiary of KAR Auction Services, and ADESA, Inc.'s subsidiaries, including OPENLANE, Inc. (together with OPENLANE, Inc.'s subsidiaries, "OPENLANE");
•
"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.;
•
"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;
•
"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;
•
"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 "revolving credit facility"), the terms of which are set forth in the Credit Agreement;
•
"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 terms of which are set forth in the Original Credit Agreement;
•
"IAA" refers, collectively, to Insurance Auto Auctions, Inc., a wholly-owned subsidiary of KAR Auction Services, and Insurance Auto Auctions, Inc.'s subsidiaries and other related entities, including HBC Vehicle Services ("HBC"); and
•
"KAR Auction Services" refers to KAR Auction Services, Inc. and not to its subsidiaries.
Business and Nature of Operations
As of September 30, 2015, we have a North American network of 66 ADESA whole car auction sites and 171 IAA salvage vehicle auction sites; in addition, we offer online auctions for both whole car and salvage vehicles. IAA also includes HBC Vehicle Services, which operates from 10 locations in the United Kingdom. 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 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 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.

9
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



IAA is one of the leading providers of salvage vehicle auctions and related services. 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 117 locations throughout the United States and Canada as of September 30, 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. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 addresses the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements, which were not addressed in ASU 2015-03. ASU 2015-15 states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. We do not expect the adoption of these ASUs will have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded 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. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. In accordance with the agreed upon delay, the new guidance is effective for the first annual reporting period and interim periods beginning after December 15, 2017, and will require either retrospective application to each prior reporting period presented or

10
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



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.
Note 2—Acquisitions
In March 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.

In April 2015, ADESA purchased all of the equity interests in MobileTrac LLC (“MobileTrac”). MobileTrac provides retail and wholesale car buyers with instaVIN’s vehicle history reports as well as the instaLEAD and instaDEAL technology through which automotive dealers can attract and structure retail transactions with consumers online. MobileTrac enhances the Company’s portfolio of service offerings to its customers.

In May 2015, AutoVIN, a subsidiary of ADESA, completed the acquisition of the vehicle inspection business from DataScan Field Services. AutoVIN utilizes Internet-based technology to perform vehicle inspection services for major auto manufacturers, financial institutions, leasing companies and warranty companies. The network’s broad geographical reach in the U.S. and Canada will provide expanded coverage for inspection customers, and the acquisition also brings new offerings to the AutoVIN portfolio, including warranty claim inspections, certified pre-owned audits and physical damage appraisals.

In May 2015, ADESA purchased all of the issued and outstanding membership interests in AutoNiq, LLC (“AutoNiq”). AutoNiq provides real-time information such as vehicle pricing, history reports and market guides to dealers. Its mobile app allows used car dealers to scan VINs on mobile devices, view auction run lists and access vehicle history reports and market value reports instantly. AutoNiq offers access to valued resources such as CARFAX and AutoCheck, as well as Black Book Daily, NADA guides, Kelley Blue Book and Galves pricing guide information. It also includes a comprehensive wholesale and retail market report for all markets in the United States. AutoNiq enhances the Company’s portfolio of service offerings to its customers.

In June 2015, ADESA (UK) Limited completed the acquisition of HBC, which specializes in salvage vehicle auctions and related services and is headquartered in Canvey Island, England. HBC provides salvage collection and disposal services for the UK’s top insurance, fleet and accident management companies. HBC conducts business using a variety of sales channels, including online auctions.

Certain of the purchase agreements included contingent payments related to financial results subsequent to the purchase date. The purchased assets included land, buildings, accounts receivable, operating equipment, customer relationships, tradenames, software, inventory and other intangible assets. Financial results for each acquisition have been included in our consolidated financial statements from the date of acquisition.

The aggregate purchase price for the businesses acquired in the first nine months of 2015, net of cash acquired, was approximately $124.8 million, which included estimated contingent payments with a fair value of $9.6 million. The maximum amount of undiscounted contingent payments related to these acquisitions could approximate $18.0 million. The purchase price for the acquired businesses was allocated to acquired assets and liabilities based upon fair values, including $31.6 million to intangible assets, representing the fair value of acquired customer relationships, tradenames and software, which are being amortized over their expected useful lives. The purchase accounting associated with these acquisitions is preliminary, subject to determination of working capital adjustments and final valuation results. The Company does not expect adjustments to the purchase accounting will be material. The acquisitions resulted in aggregate goodwill of $89.6 million. The goodwill is recorded in the ADESA Auctions and IAA reportable segments. The financial impact of these acquisitions, including pro forma financial results, was immaterial to the Company’s consolidated results.


11
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



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 nine months 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 weighted average grant date fair value of the PRSUs and the RSUs was $37.03 and $37.04, respectively, which was the average closing price of the Company's common stock on the dates of grant.
The total income tax benefit recognized in the consolidated statement of income for options, PRSUs and RSUs was approximately $1.2 million and $2.1 million for the three months ended September 30, 2015 and 2014, respectively, and $3.4 million and $9.6 million for the nine months ended September 30, 2015 and 2014, respectively. The following table summarizes our stock-based compensation expense by type of award (in millions):
 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Service options
$
0.8

 
$
1.0

 
$
2.6

 
$
2.9

Exit options
—

 
3.8

 
—

 
21.1

PRSUs
1.7

 
0.9

 
4.6

 
2.5

RSUs
0.7

 
—

 
1.8

 
—

Total stock-based compensation expense
$
3.2

 
$
5.7


$
9.0


$
26.5

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 September 30, 2015, we had repurchased and retired a total of 744,900 shares of common stock in the open market at a weighted average price of $37.04 per share.
In August 2015, as part of the authorized program to repurchase common stock noted above, the Company entered into an accelerated share repurchase agreement under which it paid $200 million for an initial delivery of approximately 4.6 million shares of its common stock. The initial delivery of shares represented 90% of the shares anticipated to be repurchased based on current market prices at that time. The initial delivery of shares also resulted in an immediate reduction in the number of shares used to calculate the weighted average common shares outstanding for basic and diluted net income per share. The actual number of shares repurchased will be determined upon completion of the program, which is expected to occur by February 19, 2016.

12
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
52.3

 
$
47.5

 
$
166.3

 
$
119.0

Weighted average common shares outstanding
139.6

 
140.6

 
140.9

 
140.0

Effect of dilutive stock options and restricted stock awards
2.2

 
1.7

 
2.3

 
1.4

Weighted average common shares outstanding and potential common shares
141.8

 
142.3


143.2


141.4

Net income per share
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.34

 
$
1.18

 
$
0.85

Diluted
$
0.37

 
$
0.33

 
$
1.16

 
$
0.84

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 and PRSUs subject to performance conditions which have not yet been satisfied are excluded from the calculations. No options and approximately 0.5 million options were excluded from the calculation of diluted net income per share for the three months ended September 30, 2015 and 2014, respectively, and no options and approximately 0.5 million options were excluded from the calculation of diluted net income per share for the nine months ended September 30, 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 September 30, 2015 and 2014, respectively, and approximately 0.3 million and approximately 0.1 million PRSUs were excluded from the calculation of diluted net income per share for the nine months ended September 30, 2015 and 2014, respectively. Total options outstanding at September 30, 2015 and 2014 were 4.3 million and 6.5 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. AFC Funding Corporation had committed liquidity of $1.15 billion for U.S. finance receivables at September 30, 2015.
In June 2015, AFC and AFC Funding Corporation entered into the Sixth Amended and Restated Receivables Purchase
Agreement (the “Receivables Purchase Agreement”). The Receivables Purchase Agreement increased AFC Funding's U.S.
committed liquidity from $950 million to $1.15 billion and extended the facility's maturity date from June 30, 2016 to June 29,
2018. In addition, the definition of eligible receivables was expanded and the overcollateralization requirement was reduced.
We also have an agreement for the securitization of Automotive Finance Canada Inc.'s ("AFCI") receivables. AFCI's committed facility is provided through a third party conduit (separate from the U.S. facility) and was C$125 million at September 30, 2015. In June 2015, AFCI entered into the Third Amended and Restated Receivables Purchase Agreement (the “Canadian Receivables Purchase Agreement”). The Canadian Receivables Purchase Agreement increased AFCI's committed liquidity from C$100 million to C$125 million and extended the facility's maturity date from June 30, 2016 to June 29, 2018. In addition, the definition of eligible receivables was expanded. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.

13
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



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.
 
September 30, 2015
 
Net Credit Losses
Three Months Ended
September 30, 2015
 
Net Credit Losses
Nine Months Ended
September 30, 2015
 
Principal Amount of:
 
(in millions)
Receivables
 
Receivables
Delinquent
 
Floorplan receivables
$
1,524.6

 
$
6.8

 
$
2.4

 
$
9.7

Other loans
5.0

 
—

 
—

 
—

Total receivables managed
$
1,529.6

 
$
6.8

 
$
2.4

 
$
9.7


 
December 31, 2014
 
Net Credit Losses
Three Months Ended
September 30, 2014
 
Net Credit Losses
Nine Months Ended
September 30, 2014
 
Principal Amount of:
 
 
(in millions)
Receivables
 
Receivables
Delinquent
 
 
Floorplan receivables
$
1,365.1

 
$
4.2

 
$
3.3

 
$
9.6

Other loans
6.0

 
—

 
—

 
—

Total receivables managed
$
1,371.1

 
$
4.2

 
$
3.3

 
$
9.6


AFC's allowance for losses was $8.8 million and $8.0 million at September 30, 2015 and December 31, 2014, respectively.
As of September 30, 2015 and December 31, 2014, $1,516.8 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 $1,122.9 million and $865.2 million of obligations collateralized by finance receivables at September 30, 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 September 30, 2015, we were in compliance with the covenants in the securitization agreements.


14
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



Note 6—Long-Term Debt
Long-term debt consisted of the following (in millions):
 
Interest Rate
 
 
 
Maturity
 
September 30, 2015
 
December 31, 2014
Term Loan B-1
LIBOR
 
+ 2.50%
 
March 11, 2017
 
$
638.9

 
$
645.1

Term Loan B-2
Adjusted LIBOR
 
+ 2.75%
 
March 11, 2021
 
1,100.9

 
1,111.6

Revolving credit facility
LIBOR
 
+ 2.25%
 
March 11, 2019
 
130.5

 
—

Canadian line of credit
CAD Prime
 
+ 0.50%
 
Repayable upon demand
 
—

 
—

Total debt
 
 
 
 
 
 
1,870.3

 
1,756.7

Unamortized debt discount
 
 
 
 
 
 
(2.2
)
 
(2.4
)
Current portion of long-term debt
 
 
 
 
 
 
(144.5
)
 
(17.7
)
Long-term debt
 
 
 
 
 
 
$
1,723.6

 
$
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 2.88% and 3.50% at September 30, 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 prepay $3.9 million and $6.6 million of Term Loan B-1 and Term Loan B-2, respectively, in the first nine months of 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 September 30, 2015.
On September 30, 2015, $130.5 million was drawn on the revolving credit facility and there were no borrowings on the revolving credit facility at December 31, 2014. In addition, we had related outstanding letters of credit in the aggregate amount of $28.6 million and $25.1 million at September 30, 2015 and December 31, 2014, respectively, which reduce the amount available for borrowings under the revolving credit facility. The $130.5 million of outstanding borrowings under the revolving

15
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



credit facility have been classified as current debt as the Company intends to repay the outstanding borrowings within the next twelve months.
Fair Value of Debt
As of September 30, 2015, the estimated fair value of our long-term debt amounted to $1,864.3 million. The estimates of fair value were based on broker-dealer quotes for our debt as of September 30, 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 2015, we purchased three interest rate caps for an aggregate amount of approximately $1.5 million with an aggregate notional amount of $800 million to manage our exposure to interest rate movements on our variable rate Credit Facility when three-month LIBOR (i) exceeds 2.0% between August 19, 2015 (the effective date) and September 29, 2016 and (ii) exceeds 1.75% between September 30, 2016 and August 19, 2017 (the maturity date).
•
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 matures on March 31, 2017.
•
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 if/when three-month LIBOR exceeded 1.0%. The interest rate cap agreements each matured on August 16, 2015.
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. The following table presents the fair value of our interest rate derivatives included in the consolidated balance sheets for the periods presented (in millions):
 
 
Asset Derivatives
 
 
September 30, 2015
 
December 31, 2014
Derivatives Not Designated as Hedging Instruments
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
2015 Interest rate caps
 
Other assets
 
$
0.8

 
Other assets
 
N/A

2013 Interest rate caps
 
Other assets
 
N/A

 
Other assets
 
$
—

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 following table presents the effect of the interest rate derivatives on our consolidated statements of income for the periods presented (in millions):

16
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



 
 
Location of Gain / (Loss) Recognized in Income on Derivatives
 
Amount of Gain / (Loss)
Recognized in Income on Derivatives
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Derivatives Not Designated as Hedging Instruments
 
 
2015
 
2014
 
2015
 
2014
2015 Interest rate caps
 
Interest expense
 
$
(1.3
)
 
N/A

 
$
(1.5
)
 
N/A

2013 Interest rate caps
 
Interest expense
 
—

 
$
—

 
—

 
$
(0.7
)
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.
Note 9—Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (in millions):
 
September 30, 2015
 
December 31, 2014
Foreign currency translation loss
$
(31.2
)
 
$
(1.8
)
Unrealized gain on postretirement benefit obligation, net of tax
0.2

 
0.2

Accumulated other comprehensive loss
$
(31.0
)
 
$
(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. Beginning in June 2015, the IAA segment includes HBC, which operates salvage vehicle auctions and related services in the United Kingdom.
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.

17
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



Financial information regarding our reportable segments is set forth below for the three months ended September 30, 2015 (in millions):
 
ADESA
Auctions
 
IAA
 
AFC
 
Holding
Company
 
Consolidated
Operating revenues
$
351.4

 
$
246.2

 
$
69.1

 
$
—

 
$
666.7

Operating expenses
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
199.2

 
158.9

 
20.0

 
—

 
378.1

Selling, general and administrative
71.3

 
25.6

 
7.0

 
24.6

 
128.5

Depreciation and amortization          
22.3

 
20.1

 
7.7

 
4.0

 
54.1

Total operating expenses
292.8

 
204.6

 
34.7

 
28.6

 
560.7

Operating profit (loss)
58.6

 
41.6

 
34.4

 
(28.6
)
 
106.0

Interest expense
0.2

 
—

 
6.6

 
17.6

 
24.4

Other (income) expense, net
(1.2
)
 
0.7

 
—

 
0.2

 
(0.3
)
Intercompany expense (income)
14.0

 
9.6

 
(7.9
)
 
(15.7
)
 
—

Income (loss) before income taxes
45.6

 
31.3

 
35.7

 
(30.7
)
 
81.9

Income taxes
16.0

 
11.4

 
13.6

 
(11.4
)
 
29.6

Net income (loss)
$
29.6

 
$
19.9

 
$
22.1

 
$
(19.3
)
 
$
52.3

Total assets
$
2,450.4

 
$
1,272.3

 
$
1,931.2

 
$
72.6

 
$
5,726.5

Financial information regarding our reportable segments is set forth below for the three months ended September 30, 2014 (in millions):
 
ADESA
Auctions
 
IAA
 
AFC
 
Holding
Company
 
Consolidated
Operating revenues
$
308.1

 
$
217.5

 
$
63.5

 
$
—

 
$
589.1

Operating expenses
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
174.6

 
135.4

 
18.0

 
—

 
328.0

Selling, general and administrative
64.1

 
23.5

 
6.8

 
22.1

 
116.5

Depreciation and amortization          
19.7

 
19.1

 
7.7

 
2.4

 
48.9

Total operating expenses
258.4

 
178.0

 
32.5

 
24.5

 
493.4

Operating profit (loss)
49.7

 
39.5

 
31.0

 
(24.5
)
 
95.7

Interest expense
0.2

 
—

 
4.7

 
15.4

 
20.3

Other (income) expense, net
(0.5
)
 
(0.2
)
 
—

 
0.2

 
(0.5
)
Intercompany expense (income)
14.3

 
9.6

 
(5.8
)
 
(18.1
)
 
—

Income (loss) before income taxes
35.7

 
30.1

 
32.1

 
(22.0
)
 
75.9

Income taxes
13.4

 
11.0

 
12.1

 
(8.1
)
 
28.4

Net income (loss)
$
22.3

 
$
19.1

 
$
20.0

 
$
(13.9
)
 
$
47.5

Total assets
$
2,388.5

 
$
1,208.2

 
$
1,708.7

 
$
65.0

 
$
5,370.4


18
Table of Contents
KAR Auction Services, Inc.
Notes to Consolidated Financial Statements (Continued)
September 30, 2015 (Unaudited)



Financial information regarding our reportable segments is set forth below for the nine months ended September 30, 2015 (in millions):
 
ADESA
Auctions
 
IAA
 
AFC
 
Holding
Company
 
Consolidated
Operating revenues
$
1,024.4

 
$
732.8

 
$
200.2

 
$
—

 
$
1,957.4

Operating expenses
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
578.1

 
460.6

 
58.0

 
—

 
1,096.7

Selling, general and administrative
207.3

 
72.6

 
21.0

 
72.6

 
373.5

Depreciation and amortization          
63.8

 
59.1

 
23.2

 
10.7

 
156.8

Total operating expenses
849.2


592.3


102.2


83.3


1,627.0

Operating profit (loss)
175.2


140.5


98.0


(83.3
)

330.4

Interest expense
0.6

 
—

 
17.2

 
49.4

 
67.2

Other (income) expense, net
(1.5
)
 
0.9

 
(1.5
)
 
—

 
(2.1
)
Intercompany expense (income)
43.6

 
28.8

 
(17.4
)
 
(55.0
)
 
—

Income (loss) before income taxes
132.5


110.8


99.7


(77.7
)

265.3

Income taxes
48.4

 
41.3

 
37.9

 
(28.6
)
 
99.0

Net income (loss)
$
84.1


$
69.5


$
61.8


$
(49.1
)

$
166.3


Financial information regarding our reportable segments is set forth below for the nine months ended September 30, 2014 (in millions):
 
ADESA
Auctions
 
IAA
 
AFC
 
Holding
Company
 
Consolidated
Operating revenues
$
908.0

 
$
666.3

 
$
184.2

 
$
—

 
$
1,758.5

Operating expenses
 
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization)
512.5

 
410.3

 
51.8

 
—

 
974.6

Selling, general and administrative
196.7

 
73.6

 
22.1

 
65.2

 
357.6

Depreciation and amortization          
59.0

 
56.6

 
22.7

 
7.0

 
145.3

Total operating expenses
768.2

 
540.5

 
96.6

 
72.2

 
1,477.5

Operating profit (loss)
139.8

 
125.8

 
87.6

 
(72.2
)
 
281.0

Interest expense
0.7

 
0.2

 
13.8

 
50.6

 
65.3

Other income, net
(1.4
)
 
(0.5
)
 
—

 
—

 
(1.9
)
Loss on extinguishment of debt
—

 
—

 
—

 
30.3

 
30.3

Intercompany expense (income)
42.3

 
28.9

 
(17.6
)
 
(53.6
)
 
—

Income (loss) before income taxes
98.2

 
97.2

 
91.4

 
(99.5
)
 
187.3

Income taxes
35.7

 
36.0

 
34.7

 
(38.1
)
 
68.3

Net income (loss)
$
62.5

 
$
61.2

 
$
56.7

 
$
(61.4
)
 
$
119.0



19
Table of Contents

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:
•
our ability to effectively maintain or update information and technology systems;
•
our ability to implement and maintain measures to protect against cyber-attacks;
•
increases in the number of used vehicles purchased on virtual auction platforms;
•
changes in the market value of vehicles auctioned, including changes in the actual cash value of salvage vehicles;
•
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;
•
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;
•
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;

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•
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 auction services in North America and salvage auction services in North America and the United Kingdom. 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 171 salvage vehicle auction sites in the United States and Canada at September 30, 2015. IAA also includes HBC Vehicle Services ("HBC"), which operates from 10 locations in the United Kingdom. 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 September 30, 2015, AFC conducted business at 117 locations in the United States and Canada. The Company also sells vehicle service contracts through Preferred Warranties, Inc. ("PWI").

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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 9.2 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 9.6 million units in 2015, approximately 10 million units in 2016 and over 10 million units in 2017. Our estimates are based on information from the Bureau of Economic Analysis, IHS Automotive, Kontos Total Market Estimates, NAAA's 2014 Annual Review and management estimates. 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 for the salvage vehicle auction industry that tracks the number of salvage vehicle auction volumes 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. For example, the average price per ton of crushed auto bodies has decreased from $312 in December 2013 to $198 in December 2014 to $124 in September 2015. This slide in the price of crushed auto bodies has had an adverse impact on the value of salvage vehicles being sold in the salvage auction industry.
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. With this increased activity, AFC is experiencing increased competition.
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 September 30, 2015.

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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, the cost of vehicles sold under purchase contracts, 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.

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Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Three Months Ended September 30, 2015 and 2014:
 
Three Months Ended 
 September 30,
(Dollars in millions except per share amounts)
2015
 
2014
Revenues
 
 
 
ADESA
$
351.4

 
$
308.1

IAA
246.2

 
217.5

AFC
69.1

 
63.5

Total revenues
666.7

 
589.1

Cost of services*
378.1

 
328.0

Gross profit*
288.6

 
261.1

Selling, general and administrative
128.5

 
116.5

Depreciation and amortization
54.1

 
48.9

Operating profit
106.0

 
95.7

Interest expense
24.4

 
20.3

Other income, net
(0.3
)
 
(0.5
)
Income before income taxes
81.9

 
75.9

Income taxes
29.6

 
28.4

Net income
$
52.3

 
$
47.5

Net income per share
 
 
 
Basic
$
0.37

 
$
0.34

Diluted
$
0.37

 
$
0.33


* Exclusive of depreciation and amortization

Revenue
For the three months ended September 30, 2015, we had revenue of $666.7 million compared with revenue of $589.1 million for the three months ended September 30, 2014, an increase of 13%. 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 $5.2 million, or 11%, to $54.1 million for the three months ended September 30, 2015, compared with $48.9 million for the three months ended September 30, 2014. The increase in depreciation and amortization was primarily the result of acquired assets as well as certain assets placed in service over the last twelve months.
Interest Expense
Interest expense increased $4.1 million, or 20%, to $24.4 million for the three months ended September 30, 2015, compared with $20.3 million for the three months ended September 30, 2014. The increase was primarily attributable to an increase in interest expense at AFC, which resulted from an increase in the average U.S. portfolio financed for the three months ended September 30, 2015 as compared with the three months ended September 30, 2014. The increase in interest expense was also attributable to the change in fair value of our interest caps, as well as interest expense associated with the increased use of the revolving credit facility to support the accelerated share repurchase program.
Income Taxes
We had an effective tax rate of 36.1% for the three months ended September 30, 2015, compared with an effective tax rate of 37.4% for the three months ended September 30, 2014. Excluding the effect of the discrete items, our effective tax rate for the three months ended September 30, 2015 and 2014 would have been 37.7% and 38.2%, respectively.

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Impact of Foreign Currency
The strengthening of the U.S. dollar has had a significant impact on the reporting of our Canadian operations in U.S. dollars. For the three months ended September 30, 2015, fluctuations in the Canadian exchange rate decreased revenue by $15.2 million, operating profit by $5.4 million, net income by $3.0 million and net income per diluted share by $0.02.
ADESA Results
 
Three Months Ended 
 September 30,
(Dollars in millions)
2015
 
2014
ADESA revenue
$
351.4

 
$
308.1

Cost of services*
199.2

 
174.6

Gross profit*
152.2

 
133.5

Selling, general and administrative
71.3

 
64.1

Depreciation and amortization
22.3

 
19.7

Operating profit
$
58.6

 
$
49.7


* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased $43.3 million, or 14%, to $351.4 million for the three months ended September 30, 2015, compared with $308.1 million for the three months ended September 30, 2014. The increase in revenue was primarily a result of a 15% increase in the number of vehicles sold, partially offset by a 1% decrease in revenue per vehicle sold, which included the impact of a decrease in revenues of $11.3 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 10% increase in dealer consignment units sold for the three months ended September 30, 2015 compared with the three months ended September 30, 2014. Online sales volume for ADESA represented approximately 38% of the total vehicles sold in the third quarter of 2015, compared with approximately 36% in the third 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 accounted for over half of ADESA's online sales volume. ADESA sold approximately 146,000 and 120,000 vehicles through its online only offerings in the third quarter of 2015 and 2014, respectively, of which approximately 90,000 and 80,000 represented vehicle sales to grounding dealers in the third quarter of 2015 and 2014, respectively. For the three months ended September 30, 2015, dealer consignment vehicles represented approximately 52% of used vehicles sold at ADESA physical auction locations, compared with approximately 53% for the three months ended September 30, 2014. Vehicles sold at physical auction locations increased 13% in the third quarter of 2015, compared with the third 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, increased to 56.9% for the three months ended September 30, 2015, compared with 54.5% for the three months ended September 30, 2014.
Total revenue per vehicle sold decreased to approximately $561 for the three months ended September 30, 2015, compared with approximately $565 for the three months ended September 30, 2014, and included the impact of a decrease in revenue per vehicle sold of $18 due to fluctuations in the Canadian exchange rate. Physical auction revenue per vehicle sold increased to $699 for the three months ended September 30, 2015, from $697 for the three months ended September 30, 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 lower margin ancillary and other related services revenue, including revenue from AutoVIN, MobileTrac and AutoNiq, partially offset by a decrease in physical auction revenue per vehicle sold of $22 due to fluctuations in the Canadian exchange rate. Online only auction revenue per vehicle sold increased $13 to $110 for the three months ended September 30, 2015, compared with $97 for the three months ended September 30, 2014. The increase in online only auction revenue per vehicle sold was attributable to an increase in fees per car sold, primarily due to an increase in the number of cars sold in open sales, partially offset by a decrease in online only auction revenue per vehicle sold of $4 due to fluctuations in the Canadian exchange rate. The revenue per vehicle sold in an open online only auction is greater than the revenue per vehicle sold in closed sales.

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Gross Profit
For the three months ended September 30, 2015, gross profit for ADESA increased $18.7 million, or 14%, to $152.2 million, compared with $133.5 million for the three months ended September 30, 2014. Gross profit for ADESA was 43.3% of revenue for the three months ended September 30, 2015 and 2014. The increase in gross profit for the three months ended September 30, 2015, compared with the three months ended September 30, 2014, was primarily the result of the increase in vehicles sold.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $7.2 million, or 11%, to $71.3 million for the three months ended September 30, 2015, compared with $64.1 million for the three months ended September 30, 2014, primarily due to increases in selling, general and administrative expenses associated with acquisitions of $3.0 million, compensation expense of $2.5 million, marketing expenses of $1.3 million, incentive-based compensation expense of $1.2 million, the loss on disposal of certain assets of $1.2 million, as well as increases in travel and telecom expenses, partially offset by fluctuations in the Canadian exchange rate of $2.1 million and a decrease in stock-based compensation expense of $1.4 million.
IAA Results
 
Three Months Ended 
 September 30,
(Dollars in millions)
2015
 
2014
IAA revenue
$
246.2

 
$
217.5

Cost of services*
158.9

 
135.4

Gross profit*
87.3

 
82.1

Selling, general and administrative
25.6

 
23.5

Depreciation and amortization
20.1

 
19.1

Operating profit
$
41.6

 
$
39.5


* Exclusive of depreciation and amortization
Revenue
Revenue from IAA increased $28.7 million, or 13%, to $246.2 million for the three months ended September 30, 2015, compared with $217.5 million for the three months ended September 30, 2014. The increase in revenue was a result of an increase in vehicles sold of approximately 16% for the three months ended September 30, 2015, partially offset by a 3% decrease in revenue per vehicle sold, which included the impact of a decrease in revenues of $3.1 million due to fluctuations in the Canadian exchange rate. Revenue per vehicle sold was also negatively impacted by lower average auction prices due to a decrease in scrap prices and the impact of a strong U.S. dollar. IAA's total loss vehicle inventory increased approximately 20% at September 30, 2015, as compared to September 30, 2014. Vehicles sold under purchase agreements were approximately 7% of total salvage vehicles sold for the three months ended September 30, 2015, compared with approximately 6% for the three months ended September 30, 2014. The 1% increase in vehicles sold under purchase agreements is representative of vehicles sold by HBC. Online sales volumes for IAA for the three months ended September 30, 2015 and 2014 represented over half of the total vehicles sold by IAA.
Gross Profit
For the three months ended September 30, 2015, gross profit at IAA increased to $87.3 million, or 35.5% of revenue, compared with $82.1 million, or 37.7% of revenue, for the three months ended September 30, 2014. The increase in gross profit was mainly attributable to a 13% increase in revenue, partially offset by a 17% increase in cost of services related to purchase contracts and volume growth. For the three months ended September 30, 2015, HBC had revenue of approximately $9.8 million and cost of services of approximately $9.1 million, as the majority of HBC's vehicles are sold under purchase contracts. HBC accounted for a 1.2% decrease in IAA's gross profit margin percentage for the three months ended September 30, 2015. In addition, the reduction in gross profit on North American purchase contract vehicles accounted for a 0.4% decrease in IAA's gross profit margin percentage for the three months ended September 30, 2015. 

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Selling, General and Administrative
Selling, general and administrative expenses at IAA increased $2.1 million, or 9%, to $25.6 million for the three months ended September 30, 2015, compared with $23.5 million for the three months ended September 30, 2014. The increase in selling, general and administrative expenses was primarily attributable to increases in telecom costs of $1.0 million, compensation expense of $0.9 million and the inclusion of expenses associated with HBC of $0.8 million, partially offset by a decrease in stock-based compensation expense of $0.8 million.
AFC Results
 
Three Months Ended 
 September 30,
(Dollars in millions except volumes and per loan amounts)
2015
 
2014
AFC revenue
 
 
 
Interest and fee income
$
60.3

 
$
56.9

Other revenue
4.4

 
3.2

Provision for credit losses
(2.7
)
 
(3.3
)
Other service revenue
7.1

 
6.7

Total AFC revenue
69.1

 
63.5

Cost of services*
20.0

 
18.0

Gross profit*
49.1

 
45.5

Selling, general and administrative
7.0

 
6.8

Depreciation and amortization
7.7

 
7.7

Operating profit
$
34.4

 
$
31.0

Loan transactions
405,116

 
358,800

Revenue per loan transaction, excluding "Other service revenue"
$
153

 
$
158


* Exclusive of depreciation and amortization
Revenue
For the three months ended September 30, 2015, AFC revenue increased $5.6 million, or 9%, to $69.1 million, compared with $63.5 million for the three months ended September 30, 2014. The increase in revenue was the result of a 13% increase in loan transactions and an increase of 6% in "Other service revenue" generated by PWI, partially offset by a 3% decrease in revenue per loan transaction for the three months ended September 30, 2015, which included the impact of a decrease in revenues of $0.8 million, or $2 per loan transaction, due to fluctuations in the Canadian exchange rate. In addition, managed receivables increased to $1,529.6 million at September 30, 2015 from $1,285.3 million at September 30, 2014.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased $5, or 3%, primarily as a result of a decrease in fee income, as well as fluctuations in the Canadian exchange rate, partially offset by a decrease in the provision for credit losses and increases in average portfolio duration, other revenue and average loan values. Revenue per loan transaction excludes "Other service revenue."
Gross Profit
For the three months ended September 30, 2015, gross profit for the AFC segment increased $3.6 million, or 8%, to $49.1 million, or 71.1% of revenue, compared with $45.5 million, or 71.7% of revenue, for the three months ended September 30, 2014, primarily as a result of a 9% increase in revenue, partially offset by an 11% increase in cost of services. The floorplan lending business gross profit margin percentage decreased from 78.2% to 77.4% as a result of lower revenue per loan transaction and increased compensation expense. The gross profit margin percentage in the warranty service contract business was approximately 15%.
Selling, General and Administrative
Selling, general and administrative expenses at AFC increased $0.2 million, or 3%, to $7.0 million for the three months ended September 30, 2015, compared with $6.8 million for the three months ended September 30, 2014. The increase was

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primarily attributable to increases in expenses associated with PWI's expansion into new markets and compensation expense, partially offset by a decrease in stock-based compensation expense.
Holding Company Results
 
Three Months Ended 
 September 30,
(Dollars in millions)
2015
 
2014
Selling, general and administrative
$
24.6

 
$
22.1

Depreciation and amortization
4.0

 
2.4

Operating loss
$
(28.6
)
 
$
(24.5
)
Selling, General and Administrative
For the three months ended September 30, 2015, selling, general and administrative expenses at the holding company increased $2.5 million, or 11%, to $24.6 million, compared with $22.1 million for the three months ended September 30, 2014, primarily as a result of increases in professional fees of $0.8 million, other employee related expenses of $0.7 million, compensation expense and other miscellaneous expenses.
Overview of Results of KAR Auction Services, Inc. for the Nine Months Ended September 30, 2015 and 2014:
 
Nine Months Ended 
 September 30,
(Dollars in millions except per share amounts)
2015
 
2014
Revenues
 
 
 
ADESA
$
1,024.4

 
$
908.0

IAA
732.8

 
666.3

AFC
200.2

 
184.2

Total revenues
1,957.4

 
1,758.5

Cost of services*
1,096.7

 
974.6

Gross profit*
860.7

 
783.9

Selling, general and administrative
373.5

 
357.6

Depreciation and amortization
156.8

 
145.3

Operating profit
330.4

 
281.0

Interest expense
67.2

 
65.3

Other income, net
(2.1
)
 
(1.9
)
Loss on extinguishment of debt
—

 
30.3

Income before income taxes
265.3

 
187.3

Income taxes
99.0

 
68.3

Net income
$
166.3

 
$
119.0

Net income per share
 
 
 
Basic
$
1.18

 
$
0.85

Diluted
$
1.16

 
$
0.84


* Exclusive of depreciation and amortization

Revenue
For the nine months ended September 30, 2015, we had revenue of $1,957.4 million compared with revenue of $1,758.5 million for the nine months ended September 30, 2014, an increase of 11%. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.

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Depreciation and Amortization
Depreciation and amortization increased $11.5 million, or 8%, to $156.8 million for the nine months ended September 30, 2015, compared with $145.3 million for the nine months ended September 30, 2014. The increase in depreciation and amortization was primarily the result of acquired assets as well as certain assets placed in service over the last twelve months.
Interest Expense
Interest expense increased $1.9 million, or 3%, to $67.2 million for the nine months ended September 30, 2015, compared with $65.3 million for the nine months ended September 30, 2014. The increase was primarily attributable to an increase in interest expense at AFC, which resulted from an increase in the average U.S. portfolio financed for the nine months ended September 30, 2015 as compared with the nine months ended September 30, 2014. The increase in interest expense was also attributable to interest expense associated with the increased use of the revolving credit facility in the third quarter of 2015, partially offset by a decrease in interest on term loan debt associated with the March 2014 debt refinancing.
Loss on Extinguishment of Debt
In March 2014, we amended and restated our Credit Agreement and recorded a $30.3 million pre-tax 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 37.3% for the nine months ended September 30, 2015, compared with an effective tax rate of 36.5% for the nine months ended September 30, 2014. During the nine months ended September 30, 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 $2.8 million. Excluding the effect of the discrete items, our effective tax rate for the nine months ended September 30, 2015 and 2014 would have been 37.7% and 38.2%, respectively.
Impact of Foreign Currency
The strengthening of the U.S. dollar has had a significant impact on the reporting of our Canadian operations in U.S. dollars. For the nine months ended September 30, 2015, fluctuations in the Canadian exchange rate decreased revenue by $34.9 million, operating profit by $11.8 million, net income by $6.5 million and net income per diluted share by $0.05.
ADESA Results
 
Nine Months Ended 
 September 30,
(Dollars in millions)
2015
 
2014
ADESA revenue
$
1,024.4

 
$
908.0

Cost of services*
578.1

 
512.5

Gross profit*
446.3

 
395.5

Selling, general and administrative
207.3

 
196.7

Depreciation and amortization
63.8

 
59.0

Operating profit
$
175.2

 
$
139.8


* Exclusive of depreciation and amortization
Revenue
Revenue from ADESA increased $116.4 million, or 13%, to $1,024.4 million for the nine months ended September 30, 2015, compared with $908.0 million for the nine months ended September 30, 2014. The increase in revenue was primarily a result of a 12% increase in the number of vehicles sold, as well as a 1% increase in revenue per vehicle sold, which included the impact of a decrease in revenues of $25.2 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 6% increase in dealer consignment units sold for the nine months ended September 30, 2015 compared with the nine months ended September 30, 2014. Online sales volume for ADESA represented approximately 40% of the total vehicles sold in the first nine months of 2015, compared with approximately 38% in the first nine months of 2014. "Online sales" includes the following: (i) selling vehicles directly from a dealership or other interim storage location

29
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(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 accounted for over half of ADESA's online sales volume. ADESA sold approximately 440,000 and 381,000 vehicles through its online only offerings in the first nine months of 2015 and 2014, respectively, of which approximately 272,000 and 240,000 represented vehicle sales to grounding dealers in the first nine months of 2015 and 2014, respectively. For the nine months ended September 30, 2015, dealer consignment vehicles represented approximately 50% of used vehicles sold at ADESA physical auction locations, compared with approximately 52% for the nine months ended September 30, 2014. Vehicles sold at physical auction locations increased 11% in the first nine months of 2015, compared with the first nine months 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, increased to 59.0% for the nine months ended September 30, 2015, compared with 58.7% for the nine months ended September 30, 2014.
Total revenue per vehicle sold increased to approximately $551 for the nine months ended September 30, 2015, compared with approximately $548 for the nine months ended September 30, 2014, and included the impact of a decrease in revenue per vehicle sold of $14 due to fluctuations in the Canadian exchange rate. Physical auction revenue per vehicle sold increased $9, or 1%, to $689 for the nine months ended September 30, 2015, compared with $680 for the nine months ended September 30, 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 lower margin ancillary and other related services revenue, including revenue from AutoVIN, MobileTrac and AutoNiq, partially offset by a decrease in physical auction revenue per vehicle sold of $17 due to fluctuations in the Canadian exchange rate. Online only auction revenue per vehicle sold increased $2 to $105 for the nine months ended September 30, 2015, compared with $103 for the nine months ended September 30, 2014. The increase in online only auction revenue per vehicle sold was attributable to an increase in fees per car sold, primarily due to an increase in the number of cars sold in closed sales to non-grounding dealers, as well as an increase in the number of cars sold in open sales, partially offset by a decrease in online only auction revenue per vehicle sold of $3 due to fluctuations in the Canadian exchange rate.
Gross Profit
For the nine months ended September 30, 2015, gross profit for ADESA increased $50.8 million, or 13%, to $446.3 million, compared with $395.5 million for the nine months ended September 30, 2014. Gross profit for ADESA was 43.6% of revenue for the nine months ended September 30, 2015 and 2014. The increase in gross profit for the nine months ended September 30, 2015, compared with the nine months ended September 30, 2014, was primarily the result of the increase in vehicles sold.
Selling, General and Administrative
Selling, general and administrative expenses for the ADESA segment increased $10.6 million, or 5%, to $207.3 million for the nine months ended September 30, 2015, compared with $196.7 million for the nine months ended September 30, 2014, primarily due to increases in compensation expense of $6.3 million, selling, general and administrative expenses associated with acquisitions of $4.6 million, marketing expenses of $2.8 million, incentive-based compensation expense of $2.5 million, the loss on disposal of certain assets of $2.1 million, increases in acquisition-related professional fees of $1.9 million, travel expenses of $1.5 million, supply expenses of $1.1 million and other professional fees of $0.9 million, partially offset by a decrease in stock-based compensation expense of $8.9 million and fluctuations in the Canadian exchange rate of $4.5 million.

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IAA Results
 
Nine Months Ended 
 September 30,
(Dollars in millions)
2015
 
2014
IAA revenue
$
732.8

 
$
666.3

Cost of services*
460.6

 
410.3

Gross profit*
272.2

 
256.0

Selling, general and administrative
72.6

 
73.6

Depreciation and amortization
59.1

 
56.6

Operating profit
$
140.5

 
$
125.8


* Exclusive of depreciation and amortization
Revenue
Revenue from IAA increased $66.5 million, or 10%, to $732.8 million for the nine months ended September 30, 2015, compared with $666.3 million for the nine months ended September 30, 2014. The increase in revenue was a result of an increase in vehicles sold of approximately 13% for the nine months ended September 30, 2015, partially offset by a 3% decrease in revenue per vehicle sold, which included the impact of a decrease in revenues of $7.9 million due to fluctuations in the Canadian exchange rate. Revenue per vehicle sold was also negatively impacted by lower average auction prices due to a decrease in scrap prices and the impact of a strong U.S. dollar. Vehicles sold under purchase agreements were approximately 7% of total salvage vehicles sold for the nine months ended September 30, 2015, compared with approximately 6% for the nine months ended September 30, 2014. The 1% increase in vehicles sold under purchase agreements is representative of vehicles sold by HBC. Online sales volumes for IAA for the nine months ended September 30, 2015 and 2014 represented over half of the total vehicles sold by IAA.
Gross Profit
For the nine months ended September 30, 2015, gross profit at IAA increased to $272.2 million, or 37.1% of revenue, compared with $256.0 million, or 38.4% of revenue, for the nine months ended September 30, 2014. The increase in gross profit was mainly attributable to a 10% increase in revenue, partially offset by a 12% increase in cost of services related to purchase contracts and volume growth. For the nine months ended September 30, 2015, HBC had revenue of approximately $14.0 million and cost of services of approximately $13.0 million, as the majority of HBC's vehicles are sold under purchase contracts. HBC accounted for a 0.6% decrease in IAA's gross profit margin percentage for the nine months ended September 30, 2015. In addition, the reduction in gross profit on North American purchase contract vehicles accounted for a 0.5% decrease in IAA's gross profit margin percentage for the nine months ended September 30, 2015.
Selling, General and Administrative
Selling, general and administrative expenses at IAA decreased $1.0 million, or 1%, to $72.6 million for the nine months ended September 30, 2015, compared with $73.6 million for the nine months ended September 30, 2014. The decrease in selling, general and administrative expenses was primarily attributable to decreases in stock-based compensation expense of $5.1 million, non-income based taxes of $0.9 million and bad debt expense of $0.8 million, partially offset by increases in telecom costs of $2.9 million, compensation expense of $1.2 million, the inclusion of expenses associated with HBC of $1.1 million and professional fees of $0.8 million.

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AFC Results
 
Nine Months Ended 
 September 30,
(Dollars in millions except volumes and per loan amounts)
2015
 
2014
AFC revenue
 
 
 
Interest and fee income
$
177.8

 
$
166.6

Other revenue
12.1

 
8.5

Provision for credit losses
(10.5
)
 
(9.6
)
Other service revenue
20.8

 
18.7

Total AFC revenue
200.2

 
184.2

Cost of services*
58.0

 
51.8

Gross profit*
142.2

 
132.4

Selling, general and administrative
21.0

 
22.1

Depreciation and amortization
23.2

 
22.7

Operating profit
$
98.0

 
$
87.6

Loan transactions
1,198,473

 
1,071,161

Revenue per loan transaction, excluding "Other service revenue"
$
150

 
$
155


* Exclusive of depreciation and amortization
Revenue
For the nine months ended September 30, 2015, AFC revenue increased $16.0 million, or 9%, to $200.2 million, compared with $184.2 million for the nine months ended September 30, 2014. The increase in revenue was the result of a 12% increase in loan transactions and an increase of 11% in "Other service revenue" generated by PWI, partially offset by a 3% decrease in revenue per loan transaction for the nine months ended September 30, 2015, which included the impact of a decrease in revenues of $1.7 million, or $1 per loan transaction, due to fluctuations in the Canadian exchange rate. In addition, managed receivables increased to $1,529.6 million at September 30, 2015 from $1,285.3 million at September 30, 2014.
Revenue per loan transaction, which includes both loans paid off and loans curtailed, decreased $5, or 3%, primarily as a result of a decrease in fee income and fluctuations in the Canadian exchange rate, partially offset by increases in average loan values, other revenue and average portfolio duration. Revenue per loan transaction excludes "Other service revenue."
Gross Profit
For the nine months ended September 30, 2015, gross profit for the AFC segment increased $9.8 million, or 7%, to $142.2 million, or 71.0% of revenue, compared with $132.4 million, or 71.9% of revenue, for the nine months ended September 30, 2014, primarily as a result of a 9% increase in revenue, partially offset by a 12% increase in cost of services. The floorplan lending business gross profit margin percentage decreased from 78.4% to 77.5% as a result of lower revenue per loan transaction and increased compensation expense. The gross profit margin percentage in the warranty service contract business increased from 13.3% to 15.0% as a result of increased revenue growth and a decreased rate of service contract claims.
Selling, General and Administrative
Selling, general and administrative expenses at AFC decreased $1.1 million, or 5%, to $21.0 million for the nine months ended September 30, 2015, compared with $22.1 million for the nine months ended September 30, 2014. The decrease was primarily attributable to a decrease in stock-based compensation expense of $2.6 million, partially offset by increases in compensation expense and expenses associated with PWI.

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Holding Company Results
 
Nine Months Ended 
 September 30,
(Dollars in millions)
2015
 
2014
Selling, general and administrative
$
72.6

 
$
65.2

Depreciation and amortization
10.7

 
7.0

Operating loss
$
(83.3
)
 
$
(72.2
)
Selling, General and Administrative
For the nine months ended September 30, 2015, selling, general and administrative expenses at the holding company increased $7.4 million, or 11%, to $72.6 million, compared with $65.2 million for the nine months ended September 30, 2014, primarily as a result of increases in compensation expense, incentive-based compensation and other employee related benefits of $5.4 million, acquisition-related professional fees of $1.5 million and other professional fees of $0.8 million, partially offset by a decrease in stock-based compensation expense of $0.9 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)
September 30, 2015
 
December 31, 2014
 
September 30, 2014
Cash and cash equivalents
$
125.3

 
$
152.9

 
$
214.9

Restricted cash
15.0

 
17.0

 
16.2

Working capital
236.7

 
484.3

 
451.3

Amounts available under Credit Facility*
119.5

 
250.0

 
250.0

Cash flow from operations for the nine months ended
315.4

 
 
 
327.7

*
There were related outstanding letters of credit totaling approximately $28.6 million, $25.1 million and $26.4 million at September 30, 2015, December 31, 2014 and September 30, 2014, respectively, which reduced the amount available for borrowings under the revolving credit facility.
We regularly evaluate alternatives for our capital structure and liquidity given our expected cash flows, growth and operating capital requirements as well as capital market conditions.
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. Changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from auctions held near period end. The significant decrease in working capital from December 31, 2014 to September 30, 2015 was primarily a result of the use of our available cash and short-term borrowings on our revolving credit facility to support the share repurchase program and other cash needs.
Our available cash, which excludes cash in transit, was $86.9 million at September 30, 2015. Of this amount, approximately $69.1 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.

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AFC offers short-term inventory-secured financing, also known as floorplan financing, to independent used vehicle dealers. Financing is primarily provided for terms of 30 to 90 days. AFC principally generates its funding through the sale of its receivables. The receivables sold pursuant to the securitization agreements are accounted for as secured borrowings. For further discussion of AFC's securitization arrangements, see "Securitization Facilities."
Credit Facilities
On 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 $3.9 million and $6.6 million of Term Loan B-1 and Term Loan B-2, respectively, in the first nine months of 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 (as defined in the Credit Agreement) plus 2.75% (with an Adjusted LIBOR floor of 0.75% per annum) 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 2.88% and 3.50% at September 30, 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 September 30, 2015, $638.9 million was outstanding on Term Loan B-1, $1,100.9 million was outstanding on Term Loan B-2 and $130.5 million was drawn on the revolving credit facility. In addition, there were related outstanding letters of credit in the aggregate amount of $28.6 million at September 30, 2015, which reduce the amount available for borrowings under the Credit Facility. The Company intends to repay the $130.5 million of outstanding borrowings under the revolving credit facility within the next twelve months. Our Canadian operations also have a C$8 million line of credit which was undrawn as of September 30, 2015. However, there were related letters of credit outstanding totaling approximately C$1.1 million at September 30, 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

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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 September 30, 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 $43.2 million, was 2.83 to 1.0 at September 30, 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 September 30, 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. AFC Funding Corporation had committed liquidity of $1.15 billion for U.S. finance receivables at September 30, 2015.
In June 2015, AFC and AFC Funding Corporation entered into the Sixth Amended and Restated Receivables Purchase
Agreement (the “Receivables Purchase Agreement”). The Receivables Purchase Agreement increased AFC Funding's U.S.
committed liquidity from $950 million to $1.15 billion and extended the facility's maturity date from June 30, 2016 to June 29,
2018. In addition, the definition of eligible receivables was expanded and the overcollateralization requirement was reduced.
We also have an agreement for the securitization of AFCI's receivables. AFCI's committed facility is provided through a third party conduit (separate from the U.S. facility) and was C$125 million at September 30, 2015. In June 2015, AFCI entered into the Third Amended and Restated Receivables Purchase Agreement (the “Canadian Receivables Purchase Agreement”). The Canadian Receivables Purchase Agreement increased AFCI's committed liquidity from C$100 million to C$125 million and extended the facility's maturity date from June 30, 2016 to June 29, 2018. In addition, the definition of eligible receivables was expanded. 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 $1,529.6 million and $1,371.1 million at September 30, 2015 and December 31, 2014, respectively. AFC's allowance for losses was $8.8 million and $8.0 million at September 30, 2015 and December 31, 2014, respectively.
As of September 30, 2015 and December 31, 2014, $1,516.8 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 $1,122.9 million and $865.2 million of obligations collateralized by finance receivables at September 30, 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

35
Table of Contents

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 September 30, 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 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 September 30, 2015
(Dollars in millions)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
Net income (loss)
$
29.6

 
$
19.9

 
$
22.1

 
$
(19.3
)
 
$
52.3

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
16.0

 
11.4

 
13.6

 
(11.4
)
 
29.6

Interest expense, net of interest income
0.1

 
—

 
6.6

 
17.6

 
24.3

Depreciation and amortization
22.3

 
20.1

 
7.7

 
4.0

 
54.1

Intercompany interest
12.2

 
9.4

 
(7.9
)
 
(13.7
)
 
—

EBITDA
80.2

 
60.8

 
42.1

 
(22.8
)
 
160.3

Adjustments per the Credit Agreement
5.7

 
1.1

 
(4.2
)
 
0.2

 
2.8

Adjusted EBITDA
$
85.9

 
$
61.9

 
$
37.9

 
$
(22.6
)
 
$
163.1

 
 
Three Months Ended September 30, 2014
(Dollars in millions)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
Net income (loss)
$
22.3

 
$
19.1

 
$
20.0

 
$
(13.9
)
 
$
47.5

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
13.4

 
11.0

 
12.1

 
(8.1
)
 
28.4

Interest expense, net of interest income
0.1

 
—

 
4.7

 
15.4

 
20.2

Depreciation and amortization
19.7

 
19.1

 
7.7

 
2.4

 
48.9

Intercompany interest
12.8

 
9.4

 
(5.8
)
 
(16.4
)
 
—

EBITDA
68.3

 
58.6

 
38.7

 
(20.6
)
 
145.0

Adjustments per the Credit Agreement
5.6

 
0.7

 
(2.4
)
 
0.2

 
4.1

Adjusted EBITDA
$
73.9

 
$
59.3

 
$
36.3

 
$
(20.4
)
 
$
149.1



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Table of Contents

 
Nine Months Ended September 30, 2015
(Dollars in millions)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
Net income (loss)
$
84.1

 
$
69.5

 
$
61.8

 
$
(49.1
)
 
$
166.3

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
48.4

 
41.3

 
37.9

 
(28.6
)
 
99.0

Interest expense, net of interest income
0.4

 
—

 
17.2

 
49.4

 
67.0

Depreciation and amortization
63.8

 
59.1

 
23.2

 
10.7

 
156.8

Intercompany interest
37.6

 
28.2

 
(17.4
)
 
(48.4
)
 
—

EBITDA
234.3

 
198.1

 
122.7

 
(66.0
)
 
489.1

Adjustments per the Credit Agreement
16.7

 
1.4

 
(12.1
)
 
0.2

 
6.2

Adjusted EBITDA
$
251.0

 
$
199.5

 
$
110.6

 
$
(65.8
)
 
$
495.3


 
Nine Months Ended September 30, 2014
(Dollars in millions)
ADESA
 
IAA
 
AFC
 
Corporate
 
Consolidated
Net income (loss)
$
62.5

 
$
61.2

 
$
56.7

 
$
(61.4
)
 
$
119.0

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
35.7

 
36.0

 
34.7

 
(38.1
)
 
68.3

Interest expense, net of interest income
0.5

 
0.2

 
13.8

 
50.6

 
65.1

Depreciation and amortization
59.0

 
56.6

 
22.7

 
7.0

 
145.3

Intercompany interest
37.6

 
28.3

 
(17.6
)
 
(48.3
)
 
—

EBITDA
195.3

 
182.3

 
110.3

 
(90.2
)
 
397.7

Adjustments per the Credit Agreement
20.8

 
5.1

 
(5.4
)
 
32.1

 
52.6

Adjusted EBITDA
$
216.1

 
$
187.4

 
$
104.9

 
$
(58.1
)
 
$
450.3


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)
December 31,
2014
 
March 31,
2015
 
June 30,
2015
 
September 30,
2015
 
September 30, 2015
Net income (loss)
$
50.3

 
$
54.5

 
$
59.5

 
$
52.3

 
$
216.6

Add back:
 
 
 
 
 
 
 
 
 
Income taxes
27.4

 
34.6

 
34.8

 
29.6

 
126.4

Interest expense, net of interest income
20.8

 
20.9

 
21.8

 
24.3

 
87.8

Depreciation and amortization
51.3

 
50.9

 
51.8

 
54.1

 
208.1

EBITDA
149.8

 
160.9

 
167.9

 
160.3

 
638.9

Other adjustments per the Credit Agreement
0.6

 
0.9

 
2.0

 
2.4

 
5.9

Non-cash charges
2.0

 
4.3

 
4.3

 
5.5

 
16.1

AFC interest expense
(3.9
)
 
(3.9
)
 
(4.2
)
 
(5.1
)
 
(17.1
)
Adjusted EBITDA
$
148.5

 
$
162.2

 
$
170.0

 
$
163.1

 
$
643.8



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Table of Contents

Summary of Cash Flows
 
Nine Months Ended 
 September 30,
(Dollars in millions)
2015
 
2014
Net cash provided by (used by):
 
 
 
Operating activities
$
315.4

 
$
327.7

Investing activities
(382.5
)
 
(290.1
)
Financing activities
53.6

 
(9.3
)
Effect of exchange rate on cash
(14.1
)
 
(5.0
)
Net (decrease) increase in cash and cash equivalents
$
(27.6
)
 
$
23.3

Cash flow from operating activities was $315.4 million for the nine months ended September 30, 2015, compared with $327.7 million for the nine months ended September 30, 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 $382.5 million for the nine months ended September 30, 2015, compared with $290.1 million for the nine months ended September 30, 2014. The increase in net cash used by investing activities was primarily attributable to:
•
an increase in cash used for acquisitions of approximately $84.3 million; and
•
an increase in capital expenditures of approximately $22.0 million. For a discussion of the Company's capital expenditures, see “Capital Expenditures” below;
partially offset by:
•
a decrease in the additional finance receivables held for investment of approximately $14.5 million.
Net cash provided by financing activities was $53.6 million for the nine months ended September 30, 2015, compared with net cash used by financing activities of $9.3 million for the nine months ended September 30, 2014. The increase in net cash from financing activities was primarily attributable to:
•
a larger increase in obligations collateralized by finance receivables of approximately $177.9 million, in part related to the amendment of the securitization agreement, including the reduction of the overcollateralization requirement; and
•
increased borrowings on the revolving credit facility of $130.5 million;
partially offset by:
•
a $227.6 million increase in cash used for the repurchase and retirement of common stock; and
•
a $10.1 million increase in dividends paid to stockholders for the nine months ended September 30, 2015, compared with the same period in 2014.
Capital Expenditures
Capital expenditures for the nine months ended September 30, 2015 and 2014 approximated $92.3 million and $70.3 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 $134 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. 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, with an estimated $19 million of capital expenditures expected in fiscal year 2015. 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.

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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 was paid on July 2, 2015, to stockholders of record at the close of business on June 24, 2015.
•
On August 3, 2015, the Company announced a cash dividend of $0.27 per share that was paid on October 1, 2015, to stockholders of record at the close of business on September 23, 2015.
•
On November 5, 2015, the Company announced a cash dividend of $0.27 per share that is payable on January 7, 2016, to stockholders of record at the close of business on December 22, 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.
Acquisitions
The aggregate purchase price for the businesses acquired in the first nine months of 2015, net of cash acquired, was approximately $124.8 million, which included estimated contingent payments with a fair value of $9.6 million. The maximum amount of undiscounted contingent payments related to these acquisitions could approximate $18.0 million. The purchase price for the acquired businesses was allocated to acquired assets and liabilities based upon fair values, including $31.6 million to intangible assets, representing the fair value of acquired customer relationships, tradenames and software, which are being amortized over their expected useful lives. The purchase accounting associated with these acquisitions is preliminary, subject to determination of working capital adjustments and final valuation results. The Company does not expect adjustments to the purchase accounting will be material. The acquisitions resulted in aggregate goodwill of $89.6 million. The goodwill is recorded in the ADESA Auctions and IAA reportable segments. The financial impact of these acquisitions, including pro forma financial results, was immaterial to the Company’s consolidated results.

In March 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.

In April 2015, ADESA purchased all of the equity interests in MobileTrac LLC (“MobileTrac”). MobileTrac provides retail and wholesale car buyers with instaVIN’s vehicle history reports as well as the instaLEAD and instaDEAL technology through which automotive dealers can attract and structure retail transactions with consumers online. MobileTrac enhances the Company’s portfolio of service offerings to its customers.

In May 2015, AutoVIN, a subsidiary of ADESA, completed the acquisition of the vehicle inspection business from DataScan Field Services. AutoVIN utilizes Internet-based technology to perform vehicle inspection services for major auto manufacturers, financial institutions, leasing companies and warranty companies. The network’s broad geographical reach in the U.S. and Canada will provide expanded coverage for inspection customers, and the acquisition also brings new offerings to the AutoVIN portfolio, including warranty claim inspections, certified pre-owned audits and physical damage appraisals.

In May 2015, ADESA purchased all of the issued and outstanding membership interests in AutoNiq, LLC (“AutoNiq”). AutoNiq provides real-time information such as vehicle pricing, history reports and market guides to dealers. Its mobile app allows used car dealers to scan VINs on mobile devices, view auction run lists and access vehicle history reports and market value reports instantly. AutoNiq offers access to valued resources such as CARFAX and AutoCheck, as well as Black Book Daily, NADA guides, Kelley Blue Book and Galves pricing guide information. It also includes a comprehensive wholesale and retail market report for all markets in the United States. AutoNiq enhances the Company’s portfolio of service offerings to its customers.


39
Table of Contents

In June 2015, ADESA (UK) Limited completed the acquisition of HBC Vehicle Services (“HBC”), which specializes in salvage vehicle auctions and related services and is headquartered in Canvey Island, England. HBC provides salvage collection and disposal services for the UK’s top insurance, fleet and accident management companies. HBC conducts business using a variety of sales channels, including online auctions.

Certain of the purchase agreements included contingent payments related to financial results subsequent to the purchase date. The purchased assets included land, buildings, accounts receivable, operating equipment, customer relationships, tradenames, software, inventory and other intangible assets. Financial results for each acquisition have been included in our consolidated financial statements from the date of acquisition.
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 are 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:
•
On September 30, 2015, $130.5 million was drawn on the revolving credit facility.
•
In the first nine months of 2015, 50% of the net cash proceeds from the sale-leaseback of certain technology and capital equipment were used to prepay $3.9 million and $6.6 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 (the "SEC").
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 SEC. 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 September 30, 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 (the "Exchange Act").


40
Table of Contents

New Accounting Standards
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The update provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. The guidance will not change GAAP for an entity’s accounting for service contracts. The new guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. We do not expect the adoption of ASU 2015-05 will have a material impact on the consolidated financial statements.
In April 2015, the FASB issued 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. In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 addresses the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements, which were not addressed in ASU 2015-03. ASU 2015-15 states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. We do not expect the adoption of these ASUs will have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded 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. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. In accordance with the agreed upon delay, the new guidance is effective for the first annual reporting period and interim periods beginning after December 15, 2017, 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.

41
Table of Contents

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, United Kingdom and 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 dollar, British pound or Mexican peso. Canadian currency translation negatively affected net income by approximately $3.0 million and $6.5 million for the three and nine months ended September 30, 2015, respectively. A 1% change in the average Canadian exchange rate for the three and nine months ended September 30, 2015 would have impacted net income by approximately $0.2 million and $0.5 million, respectively. Currency exposure of our United Kingdom and 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 2015, we purchased three interest rate caps for an aggregate amount of approximately $1.5 million with an aggregate notional amount of $800 million to manage our exposure to interest rate movements on our variable rate Credit Facility when three-month LIBOR (i) exceeds 2.0% between August 19, 2015 (the effective date) and September 29, 2016 and (ii) exceeds 1.75% between September 30, 2016 and August 19, 2017 (the maturity date).
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%, had an effective date of April 16, 2015 and mature on March 31, 2017.
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 if/when three-month LIBOR exceeded 1.0%. The interest rate cap agreements capped three-month LIBOR at 1.0%, had an effective date of August 16, 2013 and matured on August 16, 2015.
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 and nine months ended September 30, 2015 would have resulted in an increase in interest expense of approximately $3.1 million and $8.6 million, respectively.
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 September 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

42
Table of Contents

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 issued a data report related to the sampling event in June 2015. The report did not contain any discussion related to future activities related to the IAA Tukwila facility, nor did it note any violation of any permit term or regulatory requirement related to the facility. 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.

43
Table of Contents

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 September 30, 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)(2)
(Dollars in millions)
July 1 - July 31
 
110,000

 
$
37.83

 
110,000

 
$
273.2

August 1 - August 31
 
4,636,568

 
38.99

 
4,636,568

 
72.4

September 1 - September 30
 
—

 
 
 
—

 
72.4

Total
 
4,746,568

 
$
38.96

 
4,746,568

 
 
 
(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 Exchange Act. The timing and amount of any repurchases is subject to market and other conditions.
(2)
In August 2015, as part of the authorized program to repurchase common stock noted above, the Company entered into an accelerated share repurchase agreement under which it paid $200 million for an initial delivery of approximately 4.6 million shares of its common stock. The initial delivery of shares represented 90% of the shares anticipated to be repurchased based on current market prices at that time. The actual number of shares repurchased and the average purchase price will be determined upon completion of the program, which is expected to occur by February 19, 2016.

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, AFC 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.


44
Table of Contents

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: November 5, 2015
/s/ ERIC M. LOUGHMILLER
 
Eric M. Loughmiller
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and
Accounting Officer)



45
Table of Contents

EXHIBIT INDEX
 
 
 
 
Incorporated by Reference
 
 
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing
Date
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1

 
Amended and Restated Certificate of Incorporation of KAR Auction Services, Inc.
 
S-1/A
 
333-161907
 
3.1
 
12/10/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2

 
Second Amended and Restated By-Laws of KAR Auction Services, Inc.
 
8-K
 
001-34568
 
3.1
 
11/4/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1

 
Form of common stock certificate
 
S-1/A
 
333-161907
 
4.2
 
12/10/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1

 
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)
 
8-K
 
001-34568
 
10.1
 
3/12/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2

*
Conversion Option Plan of KAR Auction Services, Inc. (formerly KAR Holdings, Inc.)
 
S-1/A
 
333-158666
 
10.9
 
6/17/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3

*
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
 
S-1/A
 
333-158666
 
10.13
 
6/17/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4

*
KAR Auction Services, Inc. (formerly KAR Holdings, Inc.) Stock Incentive Plan
 
S-8
 
333-164032
 
10.1
 
12/24/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7

*
Employment Agreement, dated April 13, 2015, between KAR Auction Services, Inc. and Stephane St-Hilaire
 
10-Q
 
001-34568
 
10.7
 
5/6/2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
10-Q
 
001-34568
 
10.11
 
5/6/2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 





46
Table of Contents




 
 
 
 
Incorporated by Reference
 
 
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing
Date
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.13
^
Sixth Amended and Restated Receivables Purchase Agreement, dated June 16, 2015, among AFC Funding Corporation, Automotive Finance Corporation, the entities from time to time parties hereto as Purchasers or Purchaser Agents and Bank of Montreal
 
10-Q
 
001-34568
 
10.13
 
8/4/2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.14
^
Third Amended and Restated Receivables Purchase Agreement, dated June 16, 2015, among Automotive Finance Canada Inc., KAR Auction Services, Inc. and BNY Trust Company of Canada
 
10-Q
 
001-34568
 
10.14
 
8/4/2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 



47
Table of Contents

 
 
 
 
Incorporated by Reference
 
 
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing
Date
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
10.65
 
12/4/2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.29a

*
Form of 2015 Restricted Stock Unit Award Agreement for Section 16 Officers
 
10-Q
 
001-34568
 
10.29a
 
5/6/2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.29b

*
Form of 2015 Restricted Stock Unit Award Agreement for non-Section 16 Officers
 
10-Q
 
001-34568
 
10.29b
 
5/6/2015
 
 


48
Table of Contents

 
 
 
 
Incorporated by Reference
 
 
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing
Date
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.30

*
Form of Performance-Based Restricted Stock Unit Agreement (Total Shareholder Return Percentile Rank vs. S&P 500)
 
8-K
 
001-34568
 
10.2
 
12/17/2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.31

*
Form of Performance-Based Restricted Stock Unit Agreement (Cumulative Adjusted Net Income Per Share)
 
8-K
 
001-34568
 
10.1
 
2/27/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.32

*
Form of 2015 Performance-Based Restricted Stock Unit Agreement (Cumulative Adjusted Net Income Per Share)
 
10-Q
 
001-34568
 
10.32
 
5/6/2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1

 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2

 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1

 
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2

 
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS

 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 

_______________________________________________________________________________
^
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.
 
 
*
Denotes management contract or compensation plan, contract or arrangement.


49