# OPENLANE, Inc. (OPLN) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OPENLANE, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1395942/000139594223000026/kar-20221231.htm
Accession: 0001395942-23-000026
Filing date: 2023-03-09
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OPLN/
All MD&A years: /company/OPLN/mda/
Previous year: /company/OPLN/mda/fy2021/ (FY 2021)
Next year: /company/OPLN/mda/fy2023/ (FY 2023)

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Forward-Looking Statements

This Annual Report on Form 10-K 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-K that are not historical facts (including, but not limited to, expectations, estimates, assumptions and projections regarding the industry, business, future operating results, potential acquisitions and anticipated cash requirements) may be forward-looking statements. Words such as "should," "may," "will," "can," "of the opinion," "confident," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" "continues," "outlook," initiatives," "goals," "opportunities," and similar expressions identify forward-looking statements. Such statements, including statements regarding the potential impacts of the COVID-19 pandemic and adverse market conditions; our future growth; anticipated cost savings, revenue increases, credit losses and capital expenditures; contractual obligations; dividend declarations and payments; common stock repurchases; tax rates and assumptions; strategic initiatives, acquisitions and dispositions; 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" of this Annual Report on Form 10-K and those described from time to time in our future reports filed with the Securities and Exchange Commission. Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.

Sale of ADESA U.S. Physical Auction Business and Discontinued Operations

In February 2022, the Company announced that it had entered into a definitive agreement with Carvana, pursuant to which Carvana would acquire the ADESA U.S. physical auction business from KAR (the “Transaction”). The Transaction was completed in May 2022 for approximately $2.2 billion in cash and included all auction sales, operations and staff at ADESA’s U.S. vehicle logistics centers and use of the ADESA.com marketplace in the U.S. The net proceeds received in connection with the Transaction are included in "Net cash provided by investing activities - discontinued operations" in the consolidated statement of cash flow. In connection with the Transaction, the Company and Carvana entered into various agreements to provide a framework for their relationship after the Transaction, including a transition services agreement for a transitional period and a commercial agreement for a term of 7 years that provides for platform and other fees for services rendered. In addition, KAR will continue to own the ADESA tradename and the ADESA U.S. physical auctions will continue to utilize the tradename, which has an indefinite life. The tradename continues to generate cash flows from our continuing operations and, pursuant to the purchase and commercial agreements with Carvana and its affiliates, Carvana now pays a fee to the Company for use of the tradename for the ADESA U.S. physical auctions for a defined period. In addition, the Company expects to utilize the ADESA tradename to generate revenue and cash flows indefinitely from its remaining operations.

The financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. The business was formerly included in the Company’s Marketplace reportable segment (formerly referenced as ADESA Auctions). Goodwill was allocated to the ADESA U.S. physical auctions based on relative fair value. Discontinued operations included transaction costs of approximately $37.1 million for the year ended December 31, 2022, in connection with the Transaction. These costs consisted of consulting and professional fees associated with the Transaction. The Transaction resulted in a pretax gain on disposal of approximately $521.8 million. The results presented in the "Results of Operations" discussion below only include continuing operations and do not include the results of the ADESA U.S. physical auction business.

Automotive Industry and Economic Impacts on our Business

The automotive industry has experienced unprecedented market conditions, caused in part by supply chain issues, the shortage of semiconductors and associated delays in new vehicle production. These factors have resulted in significant fluctuations in used vehicle values and declines in vehicle volumes in the wholesale market. We expect this volatility to continue.

In addition, macroeconomic factors, including inflationary pressures, rising interest rates, volatility of oil and natural gas prices and declining consumer confidence impact the affordability and demand for new and used vehicles. Declining economic conditions present a risk to our operations and the stability of the automotive industry. Given the nature of these factors, we cannot predict whether or for how long certain trends will continue, nor to what degree these trends will impact us in the future.

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Overview

We are a leading digital marketplace for used vehicles, connecting sellers and buyers across North America and Europe to facilitate fast, easy and transparent transactions. Our business is divided into two reportable business segments, each of which is an integral part of the wholesale used vehicle remarketing industry: Marketplace (formerly referenced as ADESA Auctions) and Finance (formerly referenced as AFC).

•The Marketplace segment serves a domestic and international customer base through digital marketplaces for wholesale vehicles and vehicle logistics center locations across Canada that are developed and strategically located to draw professional sellers and buyers together and allow the buyers to inspect and compare vehicles remotely or in person. Powered with software developed by OPENLANE, comprehensive private label remarketing solutions are offered to automobile manufacturers, captive finance companies and other commercial customers to offer vehicles digitally prior to arrival at on-premise marketplaces. Vehicles sold on our digital platforms are typically sold by commercial fleet operators, financial institutions, rental car companies, new and used vehicle dealers and vehicle manufacturers and their captive finance companies to franchise and independent used vehicle dealers. We also provide value-added ancillary services including inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, titling, administrative and collateral recovery services. Our digital marketplaces also include BacklotCars, an app and web-based dealer-to-dealer wholesale vehicle platform utilized in the United States (CARWAVE was integrated with BacklotCars in the fourth quarter of 2022), TradeRev, an online automotive remarketing platform in Canada where dealers can sell and source used vehicle inventory at any time, ADESA U.K., an online wholesale used vehicle remarketing business in the United Kingdom and ADESA Europe, an online wholesale vehicle marketplace in Continental Europe.

•As noted above, the Marketplace segment results no longer include the ADESA U.S. physical auction locations.

•Through AFC, the Finance segment provides short-term, inventory-secured financing, known as floorplan financing, primarily to independent used vehicle dealers throughout the United States and Canada. In addition, AFC provides liquidity for customer trade-ins which encompasses settling lien holder payoffs. AFC also provides title services for their customers. These services are provided through AFC's digital servicing network as well as its physical locations throughout North America.

Beginning in the first quarter of 2022, results of the ADESA U.S. physical auctions are now reported as discontinued operations (see Note 4). Segment results for prior periods have been reclassified to conform with the new presentation.

Industry Trends

Wholesale Used Vehicle Industry

We believe the U.S. and Canadian wholesale used vehicle industry has a total addressable market of approximately 20 million vehicles, which can fluctuate depending on seasonality and a variety of other macro-economic factors. This wholesale used vehicle industry consists of the commercial market (commercial sellers that sell to franchise and independent dealers) and the dealer-to-dealer market (franchise and independent dealers that both buy and sell vehicles). The Company supports the majority of commercial sellers in North America through our OPENLANE technology. We believe digital applications, such as BacklotCars and TradeRev, may provide an opportunity to expand the total addressable market for dealer-to-dealer transactions. The supply chain issues and current market conditions facing the automotive industry, including the disruption of new vehicle production, low new vehicle supply and historically high used vehicle pricing have had a material impact on the wholesale used vehicle industry.

BacklotCars (including CARWAVE) and TradeRev sold approximately 487,000 vehicles in the North American digital dealer-to-dealer marketplace for the year ended December 31, 2022, compared with approximately 550,000 vehicles for the year ended December 31, 2021. For the three months ended December 31, 2022 and 2021, vehicles sold by these companies in the North American digital dealer-to-dealer marketplace were approximately 107,000 and 135,000, respectively. This volume data includes vehicles sold by CARWAVE prior to its acquisition in October 2021.

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Automotive Finance

AFC works with independent used vehicle dealers to improve their results by providing a comprehensive set of business and financial solutions that leverage its local presence of branches and in-market representatives, industry experience and scale, as well as KAR affiliations. AFC's North American dealer base was comprised of approximately 15,200 dealers in 2022, and loan transactions, which includes both loans paid off and loans curtailed, were approximately 1.6 million in 2022.

Key challenges for the independent used vehicle dealer include demand for used vehicles, disruptions in pricing of used vehicle inventory, access to consumer financing and increased used car retail activity of franchise and public dealerships (most of which do not utilize AFC or its competitors for floorplan financing). These same challenges, to the extent they occur, could result in a material negative impact on AFC's results of operations. A significant decline in used vehicle sales would result in a decrease in consumer auto loan originations and an increased number of dealers defaulting on their loans. In addition, volatility in wholesale vehicle pricing impacts the value of recovered collateral on defaulted loans and the resulting severity of credit losses at AFC. A decrease in wholesale used car pricing could lead to increased losses if dealers are unable to satisfy their obligations.

Seasonality

The volume of vehicles sold through our marketplaces generally fluctuates from quarter-to-quarter. This seasonality is caused by several factors including weather, the timing of used vehicles available for sale from selling customers, holidays, and the seasonality of the retail market for used vehicles, which affects the demand side of the auction industry. Wholesale used vehicle volumes tend to decline during prolonged periods of winter weather conditions. As a result, revenues and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The fourth calendar quarter typically experiences lower used vehicle volume as well as additional costs associated with the holidays and winter weather.

In addition, changes in working capital vary from quarter-to-quarter as a result of the timing of collections and disbursements of funds to consignors from marketplace sales held near period end.

Sources of Revenues and Expenses

The vehicles sold on our marketplaces generate auction fees from buyers and sellers. The Company generally does not take title to these consigned vehicles and records only its auction fees as revenue ("Auction fees" in the consolidated statement of income) because it has no influence on the vehicle auction selling price agreed to by the seller and the buyer at the auction. The Company does not record the gross selling price of the consigned vehicles sold at auction as revenue. The Company generally enforces its rights to payment for seller transactions through net settlement provisions following the sale of a vehicle. Marketplace services such as inbound and outbound transportation logistics, reconditioning, vehicle inspection and certification, collateral recovery services and technology solutions are generally recognized at the time of service ("Service revenue" in the consolidated statement of income). The Company also sells vehicles that have been purchased, which represent approximately 1% of the total volume of vehicles sold. For these types of sales, the Company does record the gross selling price of purchased vehicles sold at auction as revenue ("Purchased vehicle sales" in the consolidated statement of income) and the gross purchase price of the vehicles as "Cost of services." AFC's revenue ("Finance-related revenue" in the consolidated statement of income) is comprised of interest and fee income, provision for credit losses and other revenues associated with our finance receivables, as well as warranty contract revenue prior to 2021.

Although Marketplace revenues primarily include auction fees and service revenue, our related receivables and payables include the gross value of the vehicles sold. Trade receivables include the unremitted purchase price of vehicles purchased by third parties through our marketplaces, fees to be collected from those buyers and amounts due for services provided by us related to certain consigned vehicles. The amounts due with respect to the services provided by us related to certain consigned vehicles are generally deducted from the sales proceeds upon the eventual auction or other disposition of the related vehicles. Accounts payable include amounts due sellers from the proceeds of the sale of their consigned vehicles less any fees.

Our operating expenses consist of cost of services, selling, general and administrative and depreciation and amortization. Cost of services is composed of payroll and related costs, subcontract services, the cost of vehicles purchased, supplies, insurance, property taxes, utilities, service contract claims, maintenance and lease expense related to the auction sites and loan offices. Cost of services excludes depreciation and amortization. Selling, general and administrative expenses are composed of payroll and related costs, sales and marketing, information technology services and professional fees.

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Results of Operations

Overview of Results of KAR Auction Services, Inc. for the Years Ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Dollars in millions except per share amounts)","2022","","2021"],["Revenues from continuing operations"],["Auction fees","$","370.3","","","$","399.2"],["Service revenue","590.3","","","541.3"],["Purchased vehicle sales","182.9","","","220.9"],["Finance-related revenue","375.9","","","289.2"],["Total revenues from continuing operations","1,519.4","","","1,450.6"],["Cost of services*","834.3","","","792.5"],["Gross profit*","685.1","","","658.1"],["Selling, general and administrative","445.1","","","420.7"],["Depreciation and amortization","100.2","","","109.9"],["Gain on sale of property","(33.9)","","","\u2014"],["Operating profit","173.7","","","127.5"],["Interest expense","119.2","","","125.7"],["Other (income) expense, net","(1.3)","","","(12.5)"],["Loss on extinguishment of debt","17.2","","","\u2014"],["Income from continuing operations before income taxes","38.6","","","14.3"],["Income taxes","10.0","","","15.1"],["Income (loss) from continuing operations","28.6","","","(0.8)"],["Income from discontinued operations, net of income taxes","212.6","","","67.3"],["Net income","$","241.2","","","$","66.5"],["Income (loss) from continuing operations per share"],["Basic","$","(0.10)","","","$","(0.27)"],["Diluted","$","(0.10)","","","$","(0.27)"]]
[[/GREPCENT_TABLE]]

* Exclusive of depreciation and amortization

Discontinued Operations

The financial performance of the ADESA U.S. physical auction business is presented as discontinued operations. As a result, revenue, cost of services and all costs of discontinued operations (including the gain on sale) are presented as one line item in the above table as "Income from discontinued operations, net of income taxes."

Overview

For the year ended December 31, 2022, we had revenue of $1,519.4 million compared with revenue of $1,450.6 million for the year ended December 31, 2021, an increase of 5%. Businesses acquired since the fourth quarter of 2021 accounted for an increase in revenue of $50.1 million or 3% of revenue. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.

Depreciation and Amortization

Depreciation and amortization decreased $9.7 million, or 9%, to $100.2 million for the year ended December 31, 2022, compared with $109.9 million for the year ended December 31, 2021. The decrease in depreciation and amortization was primarily the result of assets that have become fully depreciated and a reduction in assets placed in service.

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Gain on Sale of Property

In October 2022, the Company closed on the sale of excess land in Montreal which resulted in a gain of $33.9 million.

Interest Expense

Interest expense decreased $6.5 million, or 5%, to $119.2 million for the year ended December 31, 2022, compared with $125.7 million for the year ended December 31, 2021. The decrease was primarily attributable to a realized gain of $16.7 million related to the discontinuance of hedge accounting and termination of the interest rate swaps, as well as the prepayment of Term Loan B-6 and prepayment of $600 million of senior notes, partially offset by an increase in AFC interest. The average balance on the AFC securitization obligations increased and the average interest rate on the AFC securitization obligations increased to approximately 4.0% for the year ended December 31, 2022, as compared with approximately 2.4% for the year ended December 31, 2021.

Other (Income) Expense, Net

For the year ended December 31, 2022, we had other income of $1.3 million compared with $12.5 million for the year ended December 31, 2021. The decrease in other income was primarily attributable to unrealized losses on investment securities of approximately $7.1 million for the year ended December 31, 2022, compared with unrealized gains on investment securities of approximately $1.4 million for the year ended December 31, 2021, as well as a reduction in realized gains of approximately $32.0 million, partially offset by a decrease in contingent consideration valuation adjustments of $24.3 million, a decrease in foreign currency losses on intercompany balances of $1.3 million and an increase in other miscellaneous income aggregating $3.7 million.

The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. There were no realized gains on these investments for the year ended December 31, 2022. The Company had unrealized losses of $7.1 million for the year ended December 31, 2022. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.

Income Taxes

We had an effective tax rate of 25.9% for the year ended December 31, 2022, compared with an effective tax rate of 105.6% for the year ended December 31, 2021. The effective tax rate for the year ended December 31, 2021 was unfavorably impacted by earnings mix between domestic and foreign, and by the expense for the increase in the estimated value of contingent consideration for which no tax benefit was recorded.

Income from Discontinued Operations

In May 2022, Carvana acquired the ADESA U.S. physical auction business from KAR. As such, the financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the year ended December 31, 2022 and 2021, the Company's financial statements included income from discontinued operations of $212.6 million and $67.3 million, respectively. For further discussion, reference the notes to the consolidated financial statements.

Impact of Foreign Currency

For the year ended December 31, 2022 compared with the year ended December 31, 2021, the change in the euro exchange rate decreased revenue by $24.5 million, operating profit by $0.8 million and net income by $0.5 million. For the year ended December 31, 2022 compared with the year ended December 31, 2021, the change in the Canadian dollar exchange rate decreased revenue by $11.6 million, operating profit by $4.2 million and net income by $2.8 million.

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Marketplace Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Dollars in millions, except per vehicle amounts)","2022","","2021"],["Auction fees","$","370.3","","","$","399.2"],["Service revenue","590.3","","","541.3"],["Purchased vehicle sales","182.9","","","220.9"],["Total Marketplace revenue from continuing operations","1,143.5","","","1,161.4"],["Cost of services*","771.2","","","737.1"],["Gross profit*","372.3","","","424.3"],["Selling, general and administrative","398.6","","","385.5"],["Depreciation and amortization","92.3","","","100.5"],["Gain on sale of property","(33.9)","","","\u2014"],["Operating profit (loss)","$","(84.7)","","","$","(61.7)"],["Commercial vehicles sold","661,000","","","948,000"],["Dealer consignment vehicles sold","636,000","","","651,000"],["Total vehicles sold","1,297,000","","","1,599,000"],["Auction fees per vehicle sold","$","286","","","$","250"],["Gross profit per vehicle sold*","$","287","","","$","265"],["Gross profit percentage, excluding purchased vehicles*","38.8%","","45.1%"]]
[[/GREPCENT_TABLE]]

* Exclusive of depreciation and amortization

Total Marketplace Revenue

Revenue from the Marketplace segment decreased $17.9 million, or 2%, to $1,143.5 million for the year ended December 31, 2022, compared with $1,161.4 million for the year ended December 31, 2021. Businesses acquired since the fourth quarter of 2021 accounted for an increase in revenue of $50.1 million. The change in revenue included the impact of decreases in revenue of $24.5 million and $10.2 million due to fluctuations in the euro exchange rate and the Canadian dollar exchange rate, respectively. When excluding revenue from acquired businesses and the effect of fluctuations in exchange rates, total Marketplace revenue for the year ended December 31, 2022 decreased from the year ended December 31, 2021. The decrease was primarily attributable to the decrease in the number of vehicles sold.

The 19% decrease in the number of vehicles sold was comprised of a 30% decline in commercial volumes and a 2% decrease in dealer consignment volumes. The decrease in the number of vehicles sold was driven by an industry-wide lack of wholesale used vehicle supply.

Auction Fees

Auction fees decreased $28.9 million, or 7%, to $370.3 million for the year ended December 31, 2022, compared with $399.2 million for the year ended December 31, 2021. The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the year ended December 31, 2022 increased $36, or 14%, reflecting higher vehicle values, the introduction of new dealer off-premise auction fees and a smaller mix of lower-fee commercial off-premise vehicles.

Service Revenue

Service revenue increased $49.0 million, or 9%, to $590.3 million for the year ended December 31, 2022, compared with $541.3 million for the year ended December 31, 2021, primarily as a result of increases in repossession and remarketing fees of $32.2 million, platform fees provided to third parties of $19.1 million, transportation revenue of $11.5 million and a net increase in other miscellaneous service revenues aggregating approximately $3.3 million, partially offset by a decrease in inspection service revenue of $17.1 million, resulting from the decrease in commercial vehicles sold.

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Purchased Vehicle Sales

Purchased vehicle sales, which include the entire selling price of the vehicle, decreased $38.0 million, or 17%, to $182.9 million for the year ended December 31, 2022, compared with $220.9 million for the year ended December 31, 2021, primarily as a result of a decrease in the average selling price of purchased vehicles sold as a result of geopolitical events and macroeconomic conditions impacting our European operations.

Gross Profit

For the year ended December 31, 2022, gross profit from the Marketplace segment decreased $52.0 million, or 12%, to $372.3 million, compared with $424.3 million for the year ended December 31, 2021. Cost of services increased 5% for the year ended December 31, 2022, while revenue decreased 2% during the same period. Gross profit from the Marketplace segment was 32.6% of revenue for the year ended December 31, 2022, compared with 36.5% of revenue for the year ended December 31, 2021. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 38.8% and 45.1% for the years ended December 31, 2022 and 2021, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold. Businesses acquired since the fourth quarter of 2021 accounted for an increase in cost of services of $29.3 million for the year ended December 31, 2022.

Gross profit as a percentage of revenue decreased for the year ended December 31, 2022 as compared with the year ended December 31, 2021, primarily due to an increase in arbitration activity for vehicles sold on dealer-to-dealer platforms, an increase in lower margin transportation revenue, as well as a decrease in on-premise auction revenue in Canada without a corresponding decrease in direct costs. In addition, there were no benefits taken under the Canada Emergency Wage Subsidy in 2022, resulting in a reduction to gross profit as a percentage of revenue.

Selling, General and Administrative

Selling, general and administrative expenses from the Marketplace segment increased $13.1 million, or 3%, to $398.6 million for the year ended December 31, 2022, compared with $385.5 million for the year ended December 31, 2021, primarily as a result of increases in selling, general and administrative expenses associated with businesses acquired since the fourth quarter of 2021 of $12.7 million, professional fees of $8.9 million, severance of $5.4 million, bad debt expense of $4.4 million, stock-based compensation of $2.3 million, incentive-based compensation of $2.0 million and travel expenses of $1.2 million, partially offset by decreases in compensation expense of $5.1 million, information technology costs of $4.0 million, medical expenses of $3.3 million, telecom expenses of $1.1 million and reductions in other miscellaneous expenses aggregating $12.4 million. In addition, the Employee Retention Credit provided under the Canada Emergency Wage Subsidy was $2.1 million less for the year ended December 31, 2022, compared with the year ended December 31, 2021.

Gain on Sale of Property

In October 2022, the Company closed on the sale of excess land in Montreal which resulted in a gain of $33.9 million.

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Finance Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Dollars in millions except volumes and per loan amounts)","2022","","2021"],["Finance-related revenue"],["Interest income","$","202.8","","","$","139.7"],["Fee income","171.9","","","144.4"],["Other revenue","11.0","","","8.6"],["Provision for credit losses","(9.8)","","","(3.5)"],["Total Finance revenue","375.9","","","289.2"],["Cost of services*","63.1","","","55.4"],["Gross profit*","312.8","","","233.8"],["Selling, general and administrative","46.5","","","35.2"],["Depreciation and amortization","7.9","","","9.4"],["Operating profit","$","258.4","","","$","189.2"],["Loan transactions","1,562,000","","","1,421,000"],["Revenue per loan transaction","$","241","","","$","204"]]
[[/GREPCENT_TABLE]]

* Exclusive of depreciation and amortization

Revenue

For the year ended December 31, 2022, the Finance segment revenue increased $86.7 million, or 30%, to $375.9 million, compared with $289.2 million for the year ended December 31, 2021. The increase in revenue was primarily the result of an 18% increase in revenue per loan transaction and an 10% increase in loan transactions.

Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $37, or 18%, primarily as a result of an increase in interest yields driven by an increase in prime rates (Federal Reserve raised interest rates 425 basis points in 2022), an increase in loan values and an increase in floorplan fees and other fee income per unit, partially offset by an increase in net credit losses for the year ended December 31, 2022.

The provision for credit losses increased to 0.4% of the average managed receivables for the year ended December 31, 2022 from 0.2% for the year ended December 31, 2021. The provision for credit losses is expected to be under 2%, annually, of the average managed receivables balance. However, the actual losses in any particular quarter could deviate from this range.

Gross Profit

For the year ended December 31, 2022, gross profit for the Finance segment increased $79.0 million, or 34%, to $312.8 million, or 83.2% of revenue, compared with $233.8 million, or 80.8% of revenue, for the year ended December 31, 2021. The increase in gross profit as a percent of revenue was primarily the result of a 30% increase in revenue, partially offset by a 14% increase in cost of services. The increase in cost of services was primarily the result of increases in compensation expense of $3.1 million, incentive-based compensation of $2.2 million, lot check expenses of $2.0 million and credit check expenses of $0.6 million, partially offset by a decrease in other miscellaneous expenses aggregating $0.2 million.

Selling, General and Administrative

Selling, general and administrative expenses for the Finance segment increased $11.3 million, or 32%, to $46.5 million for the year ended December 31, 2022, compared with $35.2 million for the year ended December 31, 2021 primarily as a result of increases in professional fees of $2.4 million, compensation expense of $1.7 million, incentive-based compensation of $1.7 million, information technology costs of $1.5 million, stock-based compensation of $1.1 million and other miscellaneous expenses aggregating $2.9 million.

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Overview of Results of KAR Auction Services, Inc. for the Year Ended December 31, 2020:

An overview of the results of KAR Auction Services, Inc. for the year ended December 31, 2020 was included in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 23, 2022.

Overview of Results of KAR Auction Services, Inc. for the Three Months Ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31,"],["(Dollars in millions except per share amounts)","2022","","2021"],["Revenues from continuing operations"],["Auction fees","$","80.8","","","$","100.8"],["Service revenue","146.3","","","125.8"],["Purchased vehicle sales","45.0","","","51.9"],["Finance-related revenue","100.7","","","79.2"],["Total revenues from continuing operations","372.8","","","357.7"],["Cost of services*","202.0","","","194.2"],["Gross profit*","170.8","","","163.5"],["Selling, general and administrative","93.0","","","102.2"],["Depreciation and amortization","24.0","","","28.2"],["Gain on sale of property","(33.9)","","","\u2014"],["Operating profit","87.7","","","33.1"],["Interest expense","35.4","","","32.0"],["Other (income) expense, net","(7.7)","","","8.0"],["Loss on extinguishment of debt","0.2","","","\u2014"],["Income (loss) from continuing operations before income taxes","59.8","","","(6.9)"],["Income taxes","17.9","","","(22.1)"],["Income from continuing operations","41.9","","","15.2"],["Income (loss) from discontinued operations, net of income taxes","(4.8)","","","(10.1)"],["Net income","$","37.1","","","$","5.1"],["Income from continuing operations per share"],["Basic","$","0.21","","","$","0.04"],["Diluted","$","0.21","","","$","0.04"]]
[[/GREPCENT_TABLE]]

* Exclusive of depreciation and amortization

Discontinued Operations

The financial performance of the ADESA U.S. physical auction business is presented as discontinued operations. As a result, revenue, cost of services and all costs of discontinued operations are presented as one line item in the above table as "Income (loss) from discontinued operations, net of income taxes."

Overview

For the three months ended December 31, 2022, we had revenue of $372.8 million compared with revenue of $357.7 million for the three months ended December 31, 2021, an increase of 4%. For a further discussion of revenues, gross profit and selling, general and administrative expenses, see the segment results discussions below.

Depreciation and Amortization

Depreciation and amortization decreased $4.2 million, or 15%, to $24.0 million for the three months ended December 31, 2022, compared with $28.2 million for the three months ended December 31, 2021. The decrease in depreciation and amortization was primarily the result of assets that have become fully depreciated and a reduction in assets placed in service.

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Gain on Sale of Property

In October 2022, the Company closed on the sale of excess land in Montreal which resulted in a gain of $33.9 million.

Interest Expense

Interest expense increased $3.4 million, or 11%, to $35.4 million for the three months ended December 31, 2022, compared with $32.0 million for the three months ended December 31, 2021. The increase was attributable to an increase in the average balance on the AFC securitization obligations and an increase in the average interest rate on the AFC securitization obligations to approximately 6.2% for the three months ended December 31, 2022, as compared with approximately 2.3% for the three months ended December 31, 2021. This was partially offset by a decrease in interest expense resulting from the prepayment of Term Loan B-6 and $600 million of the senior notes.

Other (Income) Expense, Net

For the three months ended December 31, 2022, we had other income of $7.7 million compared with other expense of $8.0 million for the three months ended December 31, 2021. The increase in other income was primarily attributable to a decrease in unrealized losses on investment securities of approximately $8.7 million, a decrease in contingent consideration valuation adjustments of $4.2 million and an increase in other miscellaneous income aggregating $0.4 million, partially offset by a reduction in realized gains of approximately $4.8 million. In addition, there were foreign currency gains on intercompany balances of $6.1 million for the three months ended December 31, 2022, compared with foreign currency losses on intercompany balances of $1.1 million for the three months ended December 31, 2021.

The Company invests in certain early-stage automotive companies and funds that relate to the automotive industry. We believe these investments have resulted in the expansion of relationships in the vehicle remarketing industry. There were no realized gains on these investments for the three months ended December 31, 2022. The Company had unrealized losses of $0.6 million for the three months ended December 31, 2022. Any future changes in the fair value of these investment securities will be reflected as unrealized gains or losses until these securities are sold.

Income Taxes

We had an effective tax rate of 29.9% for the three months ended December 31, 2022, compared with an effective tax rate of 320.3% on a pre-tax loss for the three months ended December 31, 2021. The effective tax rate for the three months ended December 31, 2021 was impacted by a pre-tax loss driven mostly by expense for the increase in the estimated value of contingent consideration for which no tax benefit was recorded.

Income from Discontinued Operations

In May 2022, Carvana acquired the ADESA U.S. physical auction business from KAR. As such, the financial results of the ADESA U.S. physical auction business have been accounted for as discontinued operations for all periods presented. For the three months ended December 31, 2022 and 2021, the Company's financial statements included a loss from discontinued operations of $4.8 million and $10.1 million, respectively. For further discussion, reference the notes to the consolidated financial statements. The $4.8 million loss from discontinued operations for the three months ended December 31, 2022 was comprised of an adjustment to income taxes of $5.8 million, partially offset by a $1.0 million reduction to stock-based compensation expense resulting from the true-up of performance-based restricted stock units.

Impact of Foreign Currency

For the three months ended December 31, 2022 compared with the three months ended December 31, 2021, the change in the euro exchange rate decreased revenue by $6.0 million, operating profit by $0.3 million and net income by $0.2 million. For the three months ended December 31, 2022 compared with the three months ended December 31, 2021, the change in the Canadian dollar exchange rate decreased revenue by $5.5 million, operating profit by $3.9 million and net income by $2.7 million.

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Marketplace Results

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31,"],["(Dollars in millions, except per vehicle amounts)","2022","","2021"],["Auction fees","$","80.8","","","$","100.8"],["Service revenue","146.3","","","125.8"],["Purchased vehicle sales","45.0","","","51.9"],["Total Marketplace revenue from continuing operations","272.1","","","278.5"],["Cost of services*","186.3","","","179.8"],["Gross profit*","85.8","","","98.7"],["Selling, general and administrative","82.8","","","93.1"],["Depreciation and amortization","22.2","","","25.9"],["Gain on sale of property","(33.9)","","","\u2014"],["Operating profit (loss)","$","14.7","","","$","(20.3)"],["Commercial vehicles sold","151,000","","","162,000"],["Dealer consignment vehicles sold","138,000","","","180,000"],["Total vehicles sold","289,000","","","342,000"],["Auction fees per vehicle sold","$","280","","","$","294"],["Gross profit per vehicle sold*","$","297","","","$","288"],["Gross profit percentage, excluding purchased vehicles*","37.8%","","43.6%"]]
[[/GREPCENT_TABLE]]

* Exclusive of depreciation and amortization

Total Marketplace Revenue

Revenue from the Marketplace segment decreased $6.4 million, or 2%, to $272.1 million for the three months ended December 31, 2022, compared with $278.5 million for the three months ended December 31, 2021. The change in revenue included the impact of decreases in revenue of $6.0 million and $4.7 million due to fluctuations in the euro exchange rate and the Canadian dollar exchange rate, respectively. When excluding the effect of fluctuations in exchange rates, total Marketplace revenue in the fourth quarter of 2022 increased from the fourth quarter of 2021. The increase was primarily attributable to the increase in service revenues (discussed below).

The 15% decrease in the number of vehicles sold was comprised of a 7% decline in commercial volumes and a 23% decrease in dealer consignment volumes. The decrease in the number of vehicles sold was driven by an industry-wide lack of wholesale used vehicle supply.

Auction Fees

Auction fees decreased $20.0 million, or 20%, to $80.8 million for the three months ended December 31, 2022, compared with $100.8 million for the three months ended December 31, 2021. The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the three months ended December 31, 2022 decreased $14, or 5%, reflecting lower vehicle values.

Service Revenue

Service revenue increased $20.5 million, or 16%, to $146.3 million for the three months ended December 31, 2022 compared with $125.8 million for the three months ended December 31, 2021, primarily as a result of increases in repossession and remarketing fees of $10.1 million, platform fees provided to third parties of $5.8 million, transportation revenue of $3.7 million, inspection service revenue of $1.4 million and a net increase in other miscellaneous service revenues aggregating approximately $0.9 million, partially offset by a decrease in reconditioning revenue of $1.4 million.

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Purchased Vehicle Sales

Purchased vehicle sales, which include the entire selling price of the vehicle, decreased $6.9 million, or 13%, to $45.0 million for the three months ended December 31, 2022, compared with $51.9 million for the three months ended December 31, 2021, primarily as a result of a decrease in the average selling price of purchased vehicles sold as a result of geopolitical events and macroeconomic conditions impacting our European operations.

Gross Profit

For the three months ended December 31, 2022, gross profit for the Marketplace segment decreased $12.9 million, or 13%, to $85.8 million, compared with $98.7 million for the three months ended December 31, 2021. Gross profit for the Marketplace segment was 31.5% of revenue for the three months ended December 31, 2022, compared with 35.4% of revenue for the three months ended December 31, 2021. Excluding purchased vehicle sales, gross profit as a percentage of revenue was 37.8% and 43.6% for the three months ended December 31, 2022 and 2021, respectively. The entire selling and purchase price of the vehicle is recorded as revenue and cost of services for purchased vehicles sold.

Gross profit as a percentage of revenue decreased for the three months ended December 31, 2022 as compared with the three months ended December 31, 2021, primarily due to an increase in lower margin transportation revenue and an increase in arbitration activity for vehicles sold on dealer-to-dealer platforms, as well as a decrease in on-premise auction revenue in Canada with a smaller decrease in direct costs.

Selling, General and Administrative

Selling, general and administrative expenses for the Marketplace segment decreased $10.3 million, or 11%, to $82.8 million for the three months ended December 31, 2022, compared with $93.1 million for the three months ended December 31, 2021, primarily as a result of decreases in stock-based compensation of $5.6 million, compensation expense of $4.2 million, information technology costs of $3.3 million and reductions in other miscellaneous expenses aggregating $3.0 million, partially offset by increases in incentive-based compensation of $3.7 million and severance of $2.1 million.

Gain on Sale of Property

In October 2022, the Company closed on the sale of excess land in Montreal which resulted in a gain of $33.9 million.

Finance Results

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31,"],["(Dollars in millions except volumes and per loan amounts)","2022","","2021"],["Finance-related revenue"],["Interest income","$","59.7","","","$","39.7"],["Fee income","44.7","","","36.4"],["Other revenue","3.3","","","2.2"],["Net recovery (provision) for credit losses","(7.0)","","","0.9"],["Total Finance revenue","100.7","","","79.2"],["Cost of services*","15.7","","","14.4"],["Gross profit*","85.0","","","64.8"],["Selling, general and administrative","10.2","","","9.1"],["Depreciation and amortization","1.8","","","2.3"],["Operating profit","$","73.0","","","$","53.4"],["Loan transactions","392,000","","","342,000"],["Revenue per loan transaction","$","257","","","$","232"]]
[[/GREPCENT_TABLE]]

* Exclusive of depreciation and amortization

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Revenue

For the three months ended December 31, 2022, the Finance segment revenue increased $21.5 million, or 27%, to $100.7 million, compared with $79.2 million for the three months ended December 31, 2021. The increase in revenue was primarily the result of a 15% increase in loan transactions and an 11% increase in revenue per loan transaction.

Revenue per loan transaction, which includes both loans paid off and loans curtailed, increased $25, or 11%, primarily as a result of an increase in interest yields driven by an increase in prime rates (Federal Reserve raised interest rates 125 basis points in the fourth quarter), an increase in average portfolio duration and an increase in floorplan fees and other fee income per unit, partially offset by an increase in net credit losses and a decrease in loan values.

The provision for credit losses increased to 1.1% of the average managed receivables for the three months ended December 31, 2022 from (0.2%) for the three months ended December 31, 2021. The provision for credit losses is expected to be under 2%, annually, of the average managed receivables balance. However, the actual losses in any particular quarter could deviate from this range.

Gross Profit

For the three months ended December 31, 2022, gross profit for the Finance segment increased $20.2 million, or 31%, to $85.0 million, or 84.4% of revenue, compared with $64.8 million, or 81.8% of revenue, for the three months ended December 31, 2021. The increase in gross profit as a percent of revenue was primarily the result of a 27% increase in revenue, partially offset by a 9% increase in cost of services. The increase in cost of services was primarily the result of increases in lot check expenses of $0.7 million, compensation expense of $0.3 million, incentive-based compensation of $0.2 million and other miscellaneous expenses aggregating $0.1 million.

Selling, General and Administrative

Selling, general and administrative expenses for the Finance segment increased $1.1 million, or 12%, to $10.2 million for the three months ended December 31, 2022, compared with $9.1 million for the three months ended December 31, 2021 primarily as a result of increases in professional fees of $0.7 million, information technology costs of $0.7 million, incentive-based compensation of $0.3 million and other miscellaneous expenses aggregating $0.8 million, partially offset by a decrease in stock-based compensation of $1.4 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.

[[GREPCENT_TABLE]]
[["","December 31,"],["(Dollars in millions)","2022","","2021"],["Cash and cash equivalents","$","225.7","","","$","177.6"],["Restricted cash","52.0","","","25.8"],["Working capital","379.2","","","382.5"],["Amounts available under the Revolving Credit Facility","161.0","","","297.4"],["Cash provided by operating activities for the year ended","4.1","","","233.9"]]
[[/GREPCENT_TABLE]]

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. 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 marketplace sales held near period end.

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Approximately $164.1 million of available cash was held by our foreign subsidiaries at December 31, 2022. If funds held by our foreign subsidiaries were to be repatriated, state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits.

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 September 19, 2019, we entered into the seven-year, $950 million Term Loan B-6 and the $325 million, five-year Revolving Credit Facility. In May 2022, the Company prepaid the $926.2 million outstanding balance on Term Loan B-6 with proceeds from the Transaction. As a result of the prepayment, we incurred a non-cash loss on the extinguishment of debt of $7.7 million in the second quarter of 2022. The loss was primarily a result of the write-off of unamortized debt issuance costs/discounts associated with Term Loan B-6.

The Revolving Credit Facility, with a maturity date of September 19, 2024, is available for letters of credit, working capital, permitted acquisitions and general corporate purposes. The Revolving Credit Facility also includes a $50 million sub-limit for issuance of letters of credit and a $60 million sub-limit for swingline loans.

As set forth in the Credit Agreement, loans under the Revolving Credit Facility will bear interest at a rate calculated based on the type of borrowing (either adjusted LIBOR or Base Rate) and the Company’s Consolidated Senior Secured Net Leverage Ratio (as defined in the Credit Agreement), with such rate ranging from 2.25% to 1.75% for adjusted LIBOR loans and from 1.25% to 0.75% for Base Rate loans. The Company also pays a commitment fee between 25 to 35 basis points, payable quarterly, on the average daily unused amount of the Revolving Facility based on the Company’s Consolidated Senior Secured Net Leverage Ratio, from time to time.

As of December 31, 2022, $145.0 million was drawn on the Revolving Credit Facility and there were no borrowings on the Revolving Credit Facility at December 31, 2021. We had related outstanding letters of credit in the aggregate amount of $19.0 million and $27.6 million at December 31, 2022 and December 31, 2021, respectively, which reduce the amount available for borrowings under the Revolving Credit Facility. Our European operations have lines of credit aggregating $32.1 million (€30 million) of which $3.7 million was drawn at December 31, 2022.

The obligations of the Company under the Credit Facilities are guaranteed by certain of our domestic subsidiaries (the "Subsidiary Guarantors") and are secured by substantially all of the assets of the Company and the Subsidiary Guarantors, including but not limited to: (a) pledges of and first priority security interests in 100% of the equity interests of certain of the Company's and the Subsidiary Guarantors' domestic subsidiaries and 65% of the equity interests of certain of the Company's and the Subsidiary Guarantors' first tier foreign subsidiaries and (b) first priority security interests in substantially all other tangible and intangible assets of the Company and each Subsidiary Guarantor, subject to certain exceptions.

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 the lenders under the Credit Agreement to declare all amounts borrowed immediately due and payable. The Credit Agreement contains a financial covenant requiring compliance with a Consolidated Senior Secured Net Leverage Ratio not to exceed 3.5 as of the last day of each fiscal quarter if revolving loans are outstanding. The Consolidated Senior Secured Net Leverage Ratio is calculated as consolidated total debt (as defined in the Credit Agreement) divided by the last four quarters consolidated Adjusted EBITDA. Consolidated total debt includes term loan borrowings, revolving loans, finance lease liabilities and other obligations for borrowed money less unrestricted 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-based compensation 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) consulting expenses incurred for cost reduction, operating restructuring and business improvement efforts; (i) 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; (j) expenses incurred in connection with permitted acquisitions; (k) any impairment charges or write-offs of intangibles; and (l) any extraordinary, unusual or non-recurring charges, expenses or losses. Our Consolidated Senior Secured Net Leverage Ratio was negative at December 31, 2022.

In addition, the Credit Agreement and the indenture governing our senior notes (see Note 12, "Long-Term Debt" for additional information) contain certain limitations on our ability to pay dividends and other distributions, make certain acquisitions or investments, grant liens and sell assets, and the Credit Agreement contains certain limitations on our ability to incur

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indebtedness. The applicable 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 and the indenture governing our senior notes at December 31, 2022.

Senior Notes

On May 31, 2017, we issued $950 million of 5.125% senior notes due June 1, 2025. The Company pays interest on the senior notes semi-annually in arrears on June 1 and December 1 of each year. The senior notes may be redeemed at 101.281% currently and at par as of June 1, 2023. The senior notes are guaranteed by the Subsidiary Guarantors. In August 2022, we conducted a cash tender offer to purchase up to $600 million principal amount of the senior notes. The tender offer was oversubscribed and as such, $600 million of the senior notes were accepted for prepayment and were prepaid in August 2022 with proceeds from the Transaction. We incurred a loss on the extinguishment of the senior notes of $9.5 million in 2022 primarily representative of the early repayment premium and the write-off of unamortized debt issuance costs associated with the portion of the senior notes repaid.

Expected Use of Proceeds from the Transaction

The Company generated gross proceeds from the sale of the U.S. physical auction business of approximately $2.2 billion. The Transaction closed in May 2022. Under terms of the Credit Agreement, net cash proceeds from the Transaction were used to repay Term Loan B-6 within three days of the Transaction. The Company also prepaid $600 million of the senior notes in August 2022. The terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. The Company is required to redeem or repay approximately $140 million of senior notes by May 9, 2023, subject to the terms of the indenture governing our senior notes.

Liquidity

At December 31, 2022, $140.0 million of the remaining senior notes are classified as current debt, as the terms of the senior notes specify that excess proceeds must be reinvested or used to pay down a portion of the senior notes. As of December 31, 2022, $145.0 million was drawn on the Revolving Credit Facility and is classified as current debt based on the Company’s past practice of using the Revolving Credit Facility for short term borrowings. However, the terms of the Revolving Credit Facility do not require repayment until maturity at September 19, 2024.

At December 31, 2022, cash totaled $225.7 million and there was an additional $161.0 million available for borrowing under the Revolving Credit Facility (net of $19.0 million in outstanding letters of credit). Funds held by our foreign subsidiaries could be repatriated, at which point state and local income tax expense and withholding tax expense would need to be recognized, net of any applicable foreign tax credits.

The Company’s auction volumes have been adversely impacted by the supply chain disruptions and associated challenges in the automotive industry. We expect to see an improvement in the used vehicle market in the coming years, which is expected to increase the volume of vehicles entering our auction platforms and have a positive impact on our operating results. 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 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 foreseeable future. A lack of recovery in market conditions, or further deterioration in market conditions, could materially affect the Company's liquidity.

Securitization Facilities

AFC sells the majority of its U.S. dollar denominated finance receivables on a revolving basis and without recourse to AFC Funding Corporation. A securitization agreement allows for the revolving sale by AFC Funding Corporation to a group of bank purchasers of undivided interests in certain finance receivables subject to committed liquidity. The agreement expires on January 31, 2026. AFC Funding Corporation had committed liquidity of $2.0 billion for U.S. finance receivables at December 31, 2022.

In September 2022, AFC and AFC Funding Corporation entered into the Tenth Amended and Restated Receivables Purchase Agreement (the "Receivables Purchase Agreement"). The Receivables Purchase Agreement increased AFC Funding's U.S. committed liquidity from $1.70 billion to $2.0 billion and extended the facility's maturity date from January 31, 2024 to January 31, 2026. In addition, the discount rate is now based on the SOFR reference rate, provisions designed to provide additional lending and operational flexibility were modified or added and provisions providing for a mechanism for determining an alternative rate of interest were modified. We capitalized approximately $10.5 million of costs in connection with the Receivables Purchase Agreement.

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We also have an agreement for the securitization of AFCI's receivables, which expires on January 31, 2026. AFCI's committed facility is provided through a third-party conduit (separate from the U.S. facility) and was C$225 million at December 31, 2022. In September 2022, AFCI entered into the Sixth Amended and Restated Receivables Purchase Agreement (the "Canadian Receivables Purchase Agreement"). The Canadian Receivables Purchase Agreement extended the facility's maturity date from January 31, 2024 to January 31, 2026. In addition, provisions designed to provide additional lending and operational flexibility were modified or added. We capitalized approximately $1.1 million of costs in connection with the Canadian Receivables Purchase Agreement. The receivables sold pursuant to both the U.S. and Canadian securitization agreements are accounted for as secured borrowings.

AFC managed total finance receivables of $2,416.6 million and $2,529.0 million at December 31, 2022 and December 31, 2021, respectively. AFC's allowance for losses was $21.5 million and $23.0 million at December 31, 2022 and December 31, 2021, respectively.

As of December 31, 2022 and December 31, 2021, $2,396.6 million and $2,482.2 million, respectively, of finance receivables and a cash reserve of 1 or 3 percent of the obligations collateralized by finance receivables served as security for the $1,677.6 million and $1,692.3 million of obligations collateralized by finance receivables at December 31, 2022 and December 31, 2021, respectively. The amount of the cash reserve depends on circumstances which are set forth in the securitization agreements. There were unamortized securitization issuance costs of approximately $19.4 million and $15.1 million at December 31, 2022 and December 31, 2021, respectively. After the occurrence of a termination event, as defined in the U.S. securitization agreement, the banks may, and could, cause the stock of AFC Funding Corporation to be transferred to the bank facility, though as a practical matter the bank facility would look to the liquidation of the receivables under the transaction documents as their primary remedy.

Proceeds from the revolving sale of receivables to the bank facilities are used to fund new loans to customers. AFC, AFC Funding Corporation and AFCI must maintain certain financial covenants including, among others, limits on the amount of debt AFC and AFCI can incur, minimum levels of tangible net worth, and other covenants tied to the performance of the finance receivables portfolio. The securitization agreements also incorporate the financial covenants of our Credit Facility. At December 31, 2022, 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.

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The following tables reconcile EBITDA and Adjusted EBITDA to income (loss) from continuing operations for the periods presented:

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31, 2022"],["(Dollars in millions)","Marketplace","","Finance","","Consolidated"],["Income (loss) from continuing operations","$","5.8","","","$","36.1","","","$","41.9"],["Add back:"],["Income taxes","4.5","","","13.4","","","17.9"],["Interest expense, net of interest income","6.8","","","28.1","","","34.9"],["Depreciation and amortization","22.2","","","1.8","","","24.0"],["Intercompany interest","5.3","","","(5.3)","","","\u2014"],["EBITDA","44.6","","","74.1","","","118.7"],["Non-cash stock-based compensation","(4.7)","","","(1.0)","","","(5.7)"],["Loss on extinguishment of debt","0.2","","","\u2014","","","0.2"],["Acquisition related costs","0.3","","","\u2014","","","0.3"],["Securitization interest","\u2014","","","(25.8)","","","(25.8)"],["Gain on sale of property","(33.9)","","","\u2014","","","(33.9)"],["Severance","4.0","","","0.2","","","4.2"],["Foreign currency (gains)/losses","(6.1)","","","\u2014","","","(6.1)"],["Net change in unrealized (gains) losses on investment securities","\u2014","","","0.6","","","0.6"],["Professional fees related to business improvement efforts","2.6","","","0.5","","","3.1"],["Other","0.7","","","0.2","","","0.9"],["Total addbacks/(deductions)","(36.9)","","","(25.3)","","","(62.2)"],["Adjusted EBITDA","$","7.7","","","$","48.8","","","$","56.5"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Three Months Ended December 31, 2021"],["(Dollars in millions)","Marketplace","","Finance","","Consolidated"],["Income (loss) from continuing operations","$","(13.8)","","","$","29.0","","","$","15.2"],["Add back:"],["Income taxes","(31.5)","","","9.4","","","(22.1)"],["Interest expense, net of interest income","21.2","","","10.5","","","31.7"],["Depreciation and amortization","25.9","","","2.3","","","28.2"],["Intercompany interest","\u2014","","","\u2014","","","\u2014"],["EBITDA","1.8","","","51.2","","","53.0"],["Non-cash stock-based compensation","1.0","","","0.3","","","1.3"],["Acquisition related costs","2.1","","","\u2014","","","2.1"],["Securitization interest","\u2014","","","(8.3)","","","(8.3)"],["Loss on asset sales","0.1","","","\u2014","","","0.1"],["Severance","1.3","","","0.2","","","1.5"],["Foreign currency (gains)/losses","1.1","","","\u2014","","","1.1"],["Contingent consideration adjustment","4.2","","","\u2014","","","4.2"],["Net change in unrealized (gains) losses on investment securities","\u2014","","","9.3","","","9.3"],["Other","0.1","","","(0.1)","","","\u2014"],["Total addbacks/(deductions)","9.9","","","1.4","","","11.3"],["Adjusted EBITDA","$","11.7","","","$","52.6","","","$","64.3"]]
[[/GREPCENT_TABLE]]

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Table of Contents

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["(Dollars in millions)","Marketplace","","Finance","","Consolidated"],["Income (loss) from continuing operations","$","(105.7)","","","$","134.3","","","$","28.6"],["Add back:"],["Income taxes","(36.4)","","","46.4","","","10.0"],["Interest expense, net of interest income","37.6","","","78.9","","","116.5"],["Depreciation and amortization","92.3","","","7.9","","","100.2"],["Intercompany interest","8.4","","","(8.4)","","","\u2014"],["EBITDA","(3.8)","","","259.1","","","255.3"],["Non-cash stock-based compensation","14.2","","","3.3","","","17.5"],["Loss on extinguishment of debt","17.2","","","\u2014","","","17.2"],["Acquisition related costs","1.2","","","\u2014","","","1.2"],["Securitization interest","\u2014","","","(70.7)","","","(70.7)"],["Gain on sale of property","(33.9)","","","\u2014","","","(33.9)"],["(Gain)/Loss on asset sales","(0.1)","","","\u2014","","","(0.1)"],["Severance","11.7","","","0.7","","","12.4"],["Foreign currency (gains)/losses","2.5","","","\u2014","","","2.5"],["Net change in unrealized (gains) losses on investment securities","\u2014","","","7.1","","","7.1"],["Professional fees related to business improvement efforts","13.3","","","1.9","","","15.2"],["Other","7.1","","","0.4","","","7.5"],["Total addbacks/(deductions)","33.2","","","(57.3)","","","(24.1)"],["Adjusted EBITDA","$","29.4","","","$","201.8","","","$","231.2"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2021"],["(Dollars in millions)","Marketplace","","Finance","","Consolidated"],["Income (loss) from continuing operations","$","(126.2)","","","$","125.4","","","$","(0.8)"],["Add back:"],["Income taxes","(26.4)","","","41.5","","","15.1"],["Interest expense, net of interest income","85.3","","","39.5","","","124.8"],["Depreciation and amortization","100.5","","","9.4","","","109.9"],["Intercompany interest","0.2","","","(0.2)","","","\u2014"],["EBITDA","33.4","","","215.6","","","249.0"],["Non-cash stock-based compensation","12.1","","","2.2","","","14.3"],["Acquisition related costs","7.1","","","\u2014","","","7.1"],["Securitization interest","\u2014","","","(29.8)","","","(29.8)"],["(Gain)/Loss on asset sales","0.1","","","(0.8)","","","(0.7)"],["Severance","2.9","","","0.4","","","3.3"],["Foreign currency (gains)/losses","3.8","","","\u2014","","","3.8"],["Contingent consideration adjustment","24.3","","","\u2014","","","24.3"],["Net change in unrealized (gains) losses on investment securities","\u2014","","","(1.4)","","","(1.4)"],["Other","0.6","","","(0.3)","","","0.3"],["Total addbacks/(deductions)","50.9","","","(29.7)","","","21.2"],["Adjusted EBITDA","$","84.3","","","$","185.9","","","$","270.2"]]
[[/GREPCENT_TABLE]]

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Certain of our loan covenant calculations utilize financial results for the most recent four consecutive fiscal quarters (total KAR results, including the ADESA U.S. physical auctions shown as discontinued operations). The following table reconciles EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:

[[GREPCENT_TABLE]]
[["","Three Months Ended","","Twelve Months Ended"],["(Dollars in millions)","March 31, 2022","","June 30, 2022","","September 30, 2022","","December 31, 2022","","December 31, 2022"],["Net income (loss)","$","(0.3)","","","$","210.2","","","$","(5.8)","","","$","37.1","","","$","241.2"],["Less: Income from discontinued operations","8.1","","","215.6","","","(6.3)","","","(4.8)","","","212.6"],["Income (loss) from continuing operations","(8.4)","","","(5.4)","","","0.5","","","41.9","","","28.6"],["Add back:"],["Income taxes","(4.7)","","","(9.9)","","","6.7","","","17.9","","","10.0"],["Interest expense, net of interest income","25.5","","","25.2","","","30.9","","","34.9","","","116.5"],["Depreciation and amortization","26.0","","","25.9","","","24.3","","","24.0","","","100.2"],["EBITDA","38.4","","","35.8","","","62.4","","","118.7","","","255.3"],["Non-cash stock-based compensation","5.2","","","14.5","","","3.5","","","(5.7)","","","17.5"],["Loss on extinguishment of debt","\u2014","","","7.7","","","9.3","","","0.2","","","17.2"],["Acquisition related costs","0.3","","","0.3","","","0.3","","","0.3","","","1.2"],["Securitization interest","(10.4)","","","(14.3)","","","(20.2)","","","(25.8)","","","(70.7)"],["Gain on sale of property","\u2014","","","\u2014","","","\u2014","","","(33.9)","","","(33.9)"],["(Gain)/Loss on asset sales","(0.1)","","","\u2014","","","\u2014","","","\u2014","","","(0.1)"],["Severance","3.4","","","3.3","","","1.5","","","4.2","","","12.4"],["Foreign currency (gains)/losses","1.2","","","3.3","","","4.1","","","(6.1)","","","2.5"],["Net change in unrealized (gains) losses on investment securities","3.0","","","3.2","","","0.3","","","0.6","","","7.1"],["Professional fees related to business improvement efforts","8.1","","","0.8","","","3.2","","","3.1","","","15.2"],["Other","\u2014","","","1.5","","","5.1","","","0.9","","","7.5"],["Total addbacks/(deductions)","10.7","","","20.3","","","7.1","","","(62.2)","","","(24.1)"],["Adjusted EBITDA from continuing ops","$","49.1","","","$","56.1","","","$","69.5","","","$","56.5","","","$","231.2"],["Adjusted EBITDA from discontinued ops","22.6","","","2.2","","","\u2014","","","\u2014","","","24.8"],["Adjusted EBITDA","$","71.7","","","$","58.3","","","$","69.5","","","$","56.5","","","$","256.0"]]
[[/GREPCENT_TABLE]]

Summary of Cash Flows

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(Dollars in millions)","2022","","2021"],["Net cash provided by (used by):"],["Operating activities - continuing operations","$","4.1","","","$","233.9"],["Operating activities - discontinued operations","(459.1)","","","179.3"],["Investing activities - continuing operations","70.0","","","(1,186.4)"],["Investing activities - discontinued operations","2,077.4","","","(32.2)"],["Financing activities - continuing operations","(1,621.9)","","","204.0"],["Financing activities - discontinued operations","10.8","","","6.4"],["Less: Net change in cash balances of discontinued operations","12.4","","","15.6"],["Effect of exchange rate on cash","(19.4)","","","(1.5)"],["Net increase (decrease) in cash, cash equivalents and restricted cash","$","74.3","","","$","(580.9)"]]
[[/GREPCENT_TABLE]]

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Cash flow from operating activities (continuing operations) Net cash provided by operating activities (continuing operations) was $4.1 million for the year ended December 31, 2022, compared with $233.9 million for the year ended December 31, 2021. Cash provided by continuing operations for 2022 consisted primarily of cash earnings and a decrease in trade receivables and other assets, partially offset by a decrease in accounts payable and accrued expenses and the portion of contingent consideration payments classified in operating activities. Cash provided by continuing operations for 2021 consisted primarily of cash earnings and an increase in accounts payable and accrued expenses, partially offset by an increase in trade receivables and other assets. 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 marketplace sales held near period-ends. Specifically, accounts payable and accrued expenses represented a $240.8 million use of cash for the year ended December 31, 2022, compared with a $143.9 million source of cash for the year ended December 31, 2021 (timing and impact of changes in wholesale vehicle values).

Cash flows from operations can be significantly impacted by changes in working capital in any given period. In addition to other items, the timing of working capital changes are impacted by AFC's operations. For the year ended December 31, 2022, of the $240.8 million of operating cash used for the change in accounts payable and accrued expenses, approximately $90 million related to the accounts payable and accrued expenses at AFC. The $90 million decrease in accounts payable and accrued expenses at AFC was primarily the result of the changes in wholesale vehicle values. In contrast, for the year ended December 31, 2021, the change in AFC's accounts payable and accrued expenses provided cash of approximately $127 million. The value of vehicles included in AFC's accounts payable at December 31, 2021 were near all-time highs compared with continuing declining values throughout 2022.

Changes in AFC’s accounts payable balance are presented in cash flows from operating activities while changes in AFC’s finance receivables are presented in cash flows from investing activities. Changes in these balances can cause variations in operating and investing cash flows.

Cash flow from investing activities (continuing operations) Net cash provided by investing activities (continuing operations) was $70.0 million for the year ended December 31, 2022, compared with net cash used by investing activities of $1,186.4 million for the year ended December 31, 2021. The cash provided by investing activities in 2022 was primarily from a decrease in finance receivables held for investments and proceeds from the sale of property and equipment, partially offset by purchases of property and equipment. The cash used by investing activities in 2021 was primarily due to an increase in finance receivables held for investments, the acquisition of businesses and purchases of property and equipment.

Cash flow from financing activities (continuing operations) Net cash used by financing activities (continuing operations) was $1,621.9 million for the year ended December 31, 2022, compared with net cash provided by financing activities of $204.0 million for the year ended December 31, 2021. The cash used by financing activities in 2022 was primarily due to payments made on the Company’s long-term debt and repurchases and retirement of common stock, partially offset by borrowings from lines of credit. The cash provided by financing activities in 2021 was primarily due to an increase in obligations collateralized by finance receivables, partially offset by repurchases and retirement of common stock.

Cash flow from operating activities (discontinued operations) Net cash used by operating activities (discontinued operations) was $459.1 million for the year ended December 31, 2022, compared with net cash provided by operating activities of $179.3 million for the year ended December 31, 2021. The cash used by operating activities for the year ended December 31, 2022 is primarily attributable to income taxes paid associated with the taxable gain on the sale of the ADESA U.S. physical auction business and a decrease in accounts payable and accrued expenses. The cash provided by operating activities for the year ended December 31, 2021 primarily consisted of cash earnings and an increase in accounts payable and accrued expenses.

Cash flow from investing activities (discontinued operations) Net cash provided by investing activities (discontinued operations) was $2,077.4 million for the year ended December 31, 2022, compared with net cash used by investing activities of $32.2 million for the year ended December 31, 2021. The cash provided by investing activities for the year ended December 31, 2022 is primarily attributable to the proceeds from the sale of the ADESA U.S. physical auction business, partially offset by purchases of property and equipment. The cash used by investing activities for the year ended December 31, 2021 is primarily attributed to purchases of property and equipment, partially offset by proceeds from the sale of property and equipment.

Cash flow from financing activities (discontinued operations) Net cash provided by financing activities (discontinued operations) was $10.8 million for the year ended December 31, 2022, compared with $6.4 million for the year ended December 31, 2021. The cash provided by financing activities in both periods is primarily attributable to a net increase in book overdrafts.

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Capital Expenditures

Capital expenditures for the years ended December 31, 2022 and 2021 approximated $60.9 million and $64.2 million, respectively. Capital expenditures were funded from internally generated funds. We continue to invest in our core information technology capabilities and our service locations. Capital expenditures related to continuing operations are expected to be approximately $65 million for fiscal year 2023. Future capital expenditures could vary substantially based on capital project timing, capital expenditures related to acquired businesses and the initiation of new information systems projects to support our business strategies.

Contractual Obligations

To provide a clear picture of matters potentially impacting our liquidity position, the table below sets forth a summary of our contractual obligations as of December 31, 2022. Some of the figures included in this table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal and other factors. Because these estimates and assumptions are necessarily subjective, the obligations we may actually pay in future periods could vary from those reflected in the table. This table does not include the obligations related to our Series A Preferred Stock discussed in Note 15 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The following table summarizes our contractual cash obligations as of December 31, 2022 (in millions):

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["Contractual Obligations","Total","","1 year or Less","","More than 1 Year"],["Long-term debt"],["$325 million Revolving Credit Facility (a)","$","145.0","","","$","145.0","","","$","\u2014"],["Senior notes (a)","350.0","","","140.0","","","210.0"],["European lines of credit","3.7","","","3.7","","","\u2014"],["Finance lease obligations (b)","2.9","","","2.0","","","0.9"],["Interest payments relating to long-term debt (c)","39.3","","","23.5","","","15.8"],["Operating leases (d)","117.2","","","15.4","","","101.8"],["Contingent consideration related to acquisitions (e)","15.0","","","15.0","","","\u2014"],["Total contractual cash obligations","$","673.1","","","$","344.6","","","$","328.5"]]
[[/GREPCENT_TABLE]]

________________________________________

(a)The Company has historically included the Revolving Credit Facility in current debt based on its intent to repay the amount outstanding within one year; however, the Company is not contractually obligated to repay the borrowings until the maturity of the Revolving Credit Facility (September 2024). In addition, subject to the terms of the indenture governing our senior notes, the table assumes $140 million of the senior notes will be repaid in early 2023 with proceeds from the sale of the ADESA U.S. physical auction business.

(b)We have entered into finance leases for furniture, fixtures, equipment and software. The amounts include the interest portion of the finance leases. Future finance lease obligations would change if we entered into additional finance lease agreements.

(c)Interest payments on long-term debt are projected based on the contractual rates of the debt securities. Interest rates for the variable rate term debt instruments were held constant at rates as of December 31, 2022.

(d)Operating leases are entered into in the normal course of business. We lease some of our vehicle logistics center facilities, as well as other property and equipment under operating leases. Some lease agreements contain options to renew the lease or purchase the leased property. Future operating lease obligations would change if the renewal options were exercised and/or if we entered into additional operating lease agreements.

(e)Contingent consideration related to acquisitions represents the maximum amount of contingent payments.

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Dividends

The Series A Preferred Stock ranks senior to the shares of the Company’s common stock, par value $0.01 per share, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The holders of the Series A Preferred Stock are entitled to a cumulative dividend at the rate of 7% per annum, payable quarterly in arrears. Dividends were payable in kind through the issuance of additional shares of Series A Preferred Stock for the first eight dividend payments (through June 30, 2022), and thereafter, in cash or in kind, or in any combination of both, at the option of the Company. For the year ended December 31, 2022, the holders of the Series A Preferred Stock received cash dividends aggregating $22.2 million and for the years ended December 31, 2022 and 2021, the holders of the Series A Preferred Stock received dividends in kind with a value in the aggregate of approximately $21.6 million and $41.1 million, respectively. The holders of the Series A Preferred Stock are also entitled to participate in dividends declared or paid on our common stock on an as-converted basis.

The Company has suspended its quarterly common stock dividend. 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 and the indenture governing our senior notes, 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.

Off-Balance Sheet Arrangements

As of December 31, 2022, we had no off-balance sheet arrangements pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that we believe are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.

Critical Accounting Estimates

In preparing the financial statements in accordance with U.S. generally accepted accounting principles, management must often 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. Some of those judgments can be subjective and complex. Consequently, actual results could differ from those estimates. Accounting measurements that management believes are most critical to the reported results of our operations and financial condition include: (1) allowance for credit losses; (2) business combinations; and (3) goodwill and other intangible assets.

In addition to the critical accounting estimates, there are other items used in the preparation of the consolidated financial statements that require estimation, but are not deemed critical. Changes in estimates used in these and other items could have a material impact on our financial statements.

We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. In cases where management estimates are used, they are based on historical experience, information from third-party professionals, and various other assumptions believed to be reasonable. In addition, our most significant accounting policies are discussed in Note 2 and elsewhere in the notes to the consolidated financial statements for the year ended December 31, 2022, which are included in this Annual Report on Form 10-K.

Allowance for Credit Losses

We maintain an allowance for credit losses for estimated losses resulting from the inability of customers to make required payments. Delinquencies and losses are monitored on an ongoing basis and this historical experience provides the primary basis for estimating the allowance. The allowance for credit losses is also based on management's evaluation of the receivables portfolio under current economic conditions, the size of the portfolio, overall portfolio credit quality, review of specific collection matters and such other factors which, in management's judgment, deserve recognition in estimating losses. Specific collection matters can be impacted by the outcome of negotiations, litigation and bankruptcy proceedings with individual customers.

AFC controls credit risk through credit approvals, credit limits, underwriting and collateral management monitoring procedures, including approximately 60,000 lot audits and holding vehicle titles where permitted. The estimates are based on management’s evaluation of many factors, including AFC’s historical credit loss experience, the value of the underlying collateral, delinquency trends and economic conditions. The estimates are based on information available as of each reporting date and reflect the expected credit losses over the entire expected term of the receivables. Actual losses may differ from the original estimates due to actual results varying from those assumed in our estimates.

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As a measure of sensitivity, if we had experienced a 10% increase in net charge-offs of finance receivables for the years ended December 31, 2022 and 2021, our provision for credit losses would have increased by approximately $0.9 million and $0.2 million in 2022 and 2021, respectively.

Business Combinations

When we acquire businesses, we estimate and recognize the fair values of tangible assets acquired, liabilities assumed and identifiable intangible assets acquired. The excess of the purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. The purchase accounting process requires management to make significant estimates and assumptions in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets and contingent consideration.

Critical estimates are often developed using valuation models that are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, growth rates, the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which could affect the accuracy or validity of such estimates.

Goodwill and Other Intangible Assets

We assess goodwill for impairment annually during the second quarter or more frequently if events or changes in circumstances indicate that impairment may exist. Important factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results; significant negative industry or economic trends; and our market valuation relative to our book value. When evaluating goodwill for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that a reporting unit’s fair value is not more likely than not greater than its carrying value, then we calculate the estimated fair value of the reporting unit using discounted cash flows and market approaches.

When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for a reporting unit in a given year is influenced by a number of factors, including the size of the reporting unit’s goodwill, the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of a reporting unit’s goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and apply judgment when estimating future cash flows and earnings, including projected revenue growth and operating expenses related to existing businesses, as well as utilizing valuation multiples of similar publicly traded companies and selecting an appropriate discount rate based on the estimated cost of capital that reflects the risk profile of the related business. Estimates of revenue growth and operating expenses are based on internal projections considering the reporting unit’s past performance and forecasted growth, strategic initiatives and changes in economic conditions. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approach are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. Prior to its sale, ADESA U.S. was part of the ADESA Auctions operating segment. As a result of the sale of the ADESA U.S. physical auction business in 2022, we allocated approximately $1.1 billion of goodwill related to the ADESA Auctions operating segment to the disposal group in connection with the disposition of ADESA U.S. The goodwill was allocated to the disposal group based on the relative fair value of ADESA U.S. compared to the fair value of the remainder of the operating segment. In connection with the reallocation, we performed a quantitative impairment assessment in the second quarter and no impairment was identified. At our annual test date, a qualitative impairment assessment was performed for the Company's remaining reporting units and no impairment was identified. In 2021, we performed a qualitative impairment assessment for our reporting units and based on our assessments, the Company did not identify any impairment. In 2020, we performed a quantitative impairment assessment for our reporting units and this assessment resulted in the impairment of goodwill totaling $25.5 million in our ADESA Remarketing Limited reporting unit (doing business as ADESA U.K.). For additional information, see Note 9 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Following the sale of the ADESA U.S. physical auction business in 2022, the Company realigned its reporting units within the Marketplace segment (formerly referenced as ADESA Auctions) and allocated goodwill to the new reporting unit structure. As such, we reviewed goodwill for impairment again in the fourth quarter of 2022 before and after the realignment. This review concluded that the fair value of each reporting unit was substantially in excess of its carrying value, with the exception of our U.S. Dealer-to-Dealer reporting unit within the Marketplace segment, which exceeded its carrying value by approximately 4%. Significant assumptions used in the determination of the estimated fair value of this reporting unit were the revenues and earnings growth rates and the discount rate. The revenues and expense growth rates are dependent on wholesale used vehicle supply, the competitive environment, inflation and our ability to pass price increases along to our customers, and business

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activities that impact market share. As a result, the revenues growth rate could be adversely impacted by market conditions, macroeconomic factors or an increased competitive environment. The discount rate, which is consistent with a weighted average cost of capital that is likely to be expected by a market participant, is based upon the Company’s required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted in the future by adverse changes in the macroeconomic environment, volatility in the equity markets and the interest rate environment. While management can and has implemented strategies to address these events, changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that would trigger future impairment charges of the goodwill within the U.S. Dealer-to-Dealer reporting unit described above. As of December 31, 2022, the carrying value of this reporting unit’s goodwill was $306.2 million.

As with goodwill, we assess indefinite-lived tradenames for impairment annually during the second quarter or more frequently if events or changes in circumstances indicate that impairment may exist. When assessing indefinite-lived tradenames for impairment using a qualitative assessment, we evaluate if changes in events or circumstances have occurred that indicate that impairment may exist and whether the tradenames continue to have an indefinite life. If we do not perform a qualitative impairment assessment or if changes in events and circumstances indicate that a quantitative assessment should be performed, management is required to calculate the fair value of the tradename asset group. The fair value calculation includes estimates of revenue growth, which are based on past performance and internal projections for the tradename asset group's forecasted growth, and royalty rates, which are adjusted for our particular facts and circumstances. The discount rate is selected based on the estimated cost of capital that reflects the risk profile of the related assets. These estimates are highly subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies. In connection with the sale of the ADESA U.S. physical auction business in 2022, we performed a quantitative impairment test on the ADESA tradename and concluded that the fair value was substantially in excess of carrying value.

We review other intangible assets for possible impairment whenever circumstances indicate that their carrying amount may not be recoverable. If it is determined that the carrying amount of an other intangible asset exceeds the total amount of the estimated undiscounted future cash flows from that asset, we would recognize a loss to the extent that the carrying amount exceeds the fair value of the asset. Management judgment is involved in both deciding if testing for recovery is necessary and in estimating undiscounted cash flows. Our impairment analysis is based on the current business strategy, expected growth rates and estimated future economic conditions. In 2020, this analysis resulted in the impairment of customer relationships of approximately $4.3 million in our ADESA Remarketing Limited reporting unit (doing business as ADESA U.K.). For additional information, see Note 9 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

New Accounting Standards

For a description of new accounting standards that could affect the Company, reference the "New Accounting Standards" section of Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

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