OPENLANE, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; amounts are U.S. dollars unless noted. OPENLANE operates digital wholesale vehicle marketplaces and AFC, which provides dealer floorplan financing. The former ADESA U.S. physical auction business is reported as discontinued operations following its 2022 sale.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $416.3 million | $393.0 million | $1,253.8 million | $1,146.6 million |
| Operating profit (loss) | $66.5 million | $50.0 million | ($62.6) million | $86.0 million |
| Continuing-operations income (loss) | $12.7 million | $0.5 million | ($168.4) million | ($13.3) million |
| Net income (loss) | $12.7 million | ($5.8) million | ($168.4) million | $204.1 million |
| Operating cash flow, continuing operations | Not provided for quarter | Not provided for quarter | $216.2 million | ($76.1) million |
- Q3 revenue rose 6% year over year. Gross profit was $200.3 million, versus $183.4 million; gross margin was approximately 48.1%, versus 46.7%.
- Q3 Marketplace revenue increased 8% to $316.6 million; vehicles sold rose 8% to 339,000. Marketplace operating loss narrowed to $1.3 million from $18.8 million. Finance revenue was $99.7 million and operating profit was $67.8 million.
- For the nine months, revenue grew 9%, but the operating loss included $250.8 million of non-cash goodwill and intangible impairment charges. Net income in the 2022 comparison included $217.4 million from discontinued operations, primarily related to the sale of the physical auction business.
- Q3 interest expense increased 22% to $39.4 million; nine-month interest expense increased 39% to $116.5 million, mainly reflecting higher AFC securitization rates.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $110.3 million, restricted cash was $41.8 million, and working capital was $432.1 million. Cash and cash equivalents were $225.7 million at December 31, 2022.
- OPENLANE reported $247.3 million available under its $325 million revolving facility, net of $54.7 million in letters of credit. It had $23.0 million drawn. Total reported long-term debt was $252.3 million before unamortized issuance costs; $210.0 million of 5.125% senior notes are due June 2025.
- Obligations collateralized by finance receivables were $1,695.3 million. These AFC funding obligations are separate from the corporate debt figures above and are backed by finance receivables. AFC managed receivables totaled $2,379.1 million.
- Nine-month investing cash use from continuing operations was $39.2 million, including $39.8 million of capital expenditures. Financing cash use from continuing operations was $312.1 million, including debt repayments, $33.3 million of preferred dividends and $22.2 million of share repurchases. Cash, cash equivalents and restricted cash decreased $125.6 million overall.
Changes, outlook and risks
- Marketplace gross profit improved year over year: Q3 rose 17% to $117.3 million, with reported gross margin increasing to 37.0% from 34.2%. Management cited service mix, dealer-to-dealer platform profitability and cost savings. Auction fees per vehicle increased 6% to $301; service revenue declined 3% in Q3.
- AFC’s Q3 provision for credit losses was $11.6 million, versus $1.5 million a year earlier; the nine-month provision was $35.8 million, versus $2.8 million. Management said annual provisions are expected to be 2% or less of average managed receivables, while actual quarterly losses may vary. Delinquent floorplan receivables were $18.1 million at quarter-end.
- Second-quarter impairment charges reflected slower expected vehicle-volume recovery and the combination of European reporting units. The OPENLANE rebrand also ended the indefinite useful life of the ADESA tradename; its remaining $97.3 million carrying value is to be amortized over approximately six years. Management cautioned that revised forecasts, discount rates or market conditions could cause further impairments.
- Management expects used-vehicle market improvement in coming years but said volatility may continue. Risks include wholesale vehicle supply and volume, inflation, higher interest rates, vehicle affordability, weaker consumer confidence, industry work disruptions, dealer defaults and collateral-value declines. Management believes available liquidity is sufficient for foreseeable operating needs and debt service, but warns that continued weak or deteriorating market conditions could materially affect liquidity.
- Continuing-operations capital expenditures were approximately $39.8 million for the first nine months; fiscal 2023 capex was expected to be approximately $55 million. On October 25, the board extended the share repurchase program through December 31, 2024 and increased its authorization; approximately $125.0 million remained available after that action.
- The company reported compliance with credit and securitization covenants at September 30, 2023. Its maximum secured net leverage covenant is 3.5 when revolver borrowings are outstanding; the reported ratio was negative. Management said ordinary-course litigation is not expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Marketplace volume and margin gains persist amid constrained wholesale vehicle supply, and whether the U.S. dealer-to-dealer and Europe reporting units remain near their estimated fair values.
- AFC credit losses, delinquencies and securitization funding costs, including performance against management’s annual provision expectation.
- The quality and repeatability of operating cash flow, given the filing’s explanation that working-capital timing materially affected the nine-month comparison.
- Liquidity after preferred dividends, debt service and repurchases; the senior notes’ June 2025 maturity; and continued covenant compliance.
- The effects of the OPENLANE rebrand, ADESA tradename amortization and any further impairment or tax valuation allowance changes.