OPENLANE, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial figures are in millions unless noted. OPENLANE operates digital wholesale vehicle marketplaces (Marketplace) and dealer floorplan financing (Finance). The ADESA U.S. physical auction business was sold to Carvana in May 2022 and is reported as discontinued operations for comparative periods.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Continuing-operations revenue | $416.9 | $384.2 | $837.5 | $753.6 |
| Operating income (loss) | $(194.5) | $22.3 | $(129.1) | $36.0 |
| Continuing-operations net income (loss) | $(193.8) | $(5.4) | $(181.1) | $(13.8) |
| Net income (loss), including discontinued operations | $(193.8) | $210.2 | $(181.1) | $209.9 |
| Continuing-operations diluted loss per share | $(1.87) | $(0.10) | $(1.86) | $(0.23) |
| Adjusted EBITDA, non-GAAP | $83.8 | $56.1 | $142.7 | $105.2 |
- Q2 revenue rose 9%; six-month revenue rose 11%. Q2 Marketplace revenue was $319.4, up 9%, and Finance revenue was $97.5, up 6%.
- Q2 Marketplace sold 344,000 vehicles versus 343,000 a year earlier; six-month volume fell 3% to 674,000, which the company attributed to industry-wide wholesale vehicle supply constraints. Q2 gross merchandise value was approximately $6.4 billion.
- Q2 Marketplace gross profit was $113.3, or 35.5% of revenue; excluding purchased vehicle sales, the reported gross profit percentage was 43.8%. Finance gross profit was $81.0, or 83.1% of revenue.
- The $250.8 non-cash goodwill and intangible impairment drove the reported Q2 operating loss. It comprised $218.9 for U.S. Dealer-to-Dealer goodwill, $6.4 for Europe goodwill, and $25.5 for the ADESA tradename.
- Other income included a $20.0 receipt for early termination of an IAA contractual arrangement. Six-month other income also reflected an $11.0 impairment of an investment and related note receivable.
- Q2 interest expense increased 50% to $38.8; six-month expense increased 50% to $77.1. Management cited higher AFC securitization borrowing rates, partly offset by repayments of corporate debt.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $242.4 and restricted cash was $30.1; working capital was $437.9. The company reported $105.0 available under its revolving credit facility after letters of credit.
- Continuing-operations operating cash flow was $142.6 for the first six months, versus cash used of $29.2 in the comparable 2022 period. Continuing-operations investing cash use was $51.6 and financing cash use was $111.9. Cash, cash equivalents and restricted cash declined $5.2 to $272.5.
- Corporate debt totaled $397.9 gross, including $162.0 drawn on the revolving facility, $210.0 of 5.125% senior notes due 2025, and $25.9 of European lines of credit. The balance sheet reports $187.9 current maturities and $201.0 long-term debt. Separately, obligations collateralized by finance receivables were $1,717.4.
- In June, OPENLANE replaced its prior revolver with a $325 million secured revolving facility due June 2028 and repaid $140 million of senior notes at par. The company reported compliance with applicable credit and securitization covenants at quarter-end.
- Series A preferred stock was $612.5 in temporary equity and carries a cumulative 7% annual dividend. OPENLANE paid $22.2 in preferred dividends during the first half; its common stock dividend is suspended.
Changes, outlook, and risks
- Compared with Q2 2022, revenue and adjusted EBITDA increased, but reported net income moved from a profit to a substantial loss. The prior-year profit included $215.6 of discontinued-operations income, primarily related to the ADESA U.S. physical auction sale; the comparison is therefore affected by the divestiture and its gain.
- Management expects used-vehicle market improvement in coming years to support auction volumes, but says supply-chain effects, wholesale vehicle volume, vehicle values, inflation, interest rates, energy-price volatility, and consumer confidence remain uncertain. It expects market volatility to continue and says deterioration or a lack of recovery could materially affect liquidity.
- Management expects capital expenditures of approximately $60 million for fiscal 2023. AFC’s provision for credit losses was 2.0% of average managed receivables for the first half; management expects the annual rate to be 2% or less, while noting quarterly actual losses may differ.
- No full-year revenue or earnings guidance is provided in the filing text. The company expects the ADESA tradename’s remaining $97.3 carrying value to be amortized over approximately six years, adding about $16 million in annual amortization expense.
- Goodwill impairment valuations rely on forecasts and other Level 3 assumptions. The U.S. Dealer-to-Dealer and Europe reporting units’ post-impairment carrying values approximate fair value; further deterioration in forecasts or market conditions could lead to additional impairment. The Canada reporting unit’s fair value exceeded carrying value by approximately 14% at the latest test.
- OPENLANE received approximately $57.0 net cash inflow in the first half under its Carvana commercial and transition-services agreements. The commercial agreement has a seven-year term. The company reports ordinary-course litigation and does not currently expect its resolution to have a material adverse effect.
Key facts for investors to verify
- Whether Marketplace volume and vehicle supply recover as management anticipates, and whether revenue growth converts to sustainable operating profit.
- Credit performance at AFC, including delinquencies, charge-offs, and losses relative to management’s annual provision expectation.
- Cash generation and liquidity availability, including revolver borrowings, letters of credit, securitization funding, and covenant compliance.
- The assumptions behind goodwill and tradename valuations, and the effect of ongoing ADESA tradename amortization.
- The sustainability of adjusted EBITDA and the contribution of unusual items, notably the $20.0 contractual-termination receipt and the $250.8 impairment charge.