OPENLANE, Inc. (identified in this filing as KAR Auction Services, Inc.) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing reports consolidated KAR results, not standalone OPENLANE results. Financial amounts are in millions of U.S. dollars unless stated otherwise.
Business context
KAR operated through ADESA Auctions and Automotive Finance Corporation (AFC). In February 2022, KAR agreed to sell its ADESA U.S. physical auction business to Carvana for $2.2 billion. That business was classified as held for sale and presented as discontinued operations; continuing-operation results exclude it. The continuing ADESA business includes digital marketplaces and operations outside the U.S. physical auctions.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Continuing revenue | $369.4 | $369.8 |
| Gross profit | $158.6 | $166.0 |
| Operating profit | $13.7 | $31.8 |
| Continuing-operations income (loss) | $(8.4) | $26.2 |
| Net income (loss), including discontinued operations | $(0.3) | $50.9 |
| Continuing-operations diluted EPS | $(0.16) | $0.10 |
| Net cash from (used by) continuing operating activities | $(9.5) | $150.2 |
- Continuing revenue was essentially flat. Operating margin declined to about 3.7% from 8.6%; gross margin was about 42.9% versus 44.9%.
- Continuing ADESA revenue fell 6% to $285.2 million and its operating loss widened to $42.9 million from $9.3 million. Vehicles sold declined 23% to 351,000, principally because high vehicle values constrained supply. AFC revenue rose 28% to $84.2 million, and operating profit increased to $56.6 million from $41.1 million.
- Interest expense was $25.6 million, down from $30.8 million; the 2022 amount included an $8.7 million unrealized gain recognized after hedge accounting was discontinued. Other expense was $1.2 million, versus $49.7 million of other income in 2021, largely reflecting the swing from investment gains to losses.
- Continuing operating cash flow was negative $9.5 million, compared with positive $150.2 million. Continuing investing cash use was $246.7 million, including a $229.4 million increase in finance receivables held for investment; continuing financing provided $250.6 million. Cash, cash equivalents and restricted cash ended at $160.5 million.
- At March 31, cash and cash equivalents were $134.2 million. Total debt was $1.992 billion, including $926.2 million on the term loan, $101.0 million drawn on the revolver and $950.0 million of senior notes. Separately, obligations collateralized by finance receivables were $1.867 billion. The term loan was classified as current because KAR expected to repay it with sale proceeds.
- Working capital was $939.4 million. Revolver availability was $224.0 million after outstanding letters of credit. KAR reported covenant compliance and a 2.1 secured net leverage ratio; the credit agreement’s maximum ratio was 3.5 when revolving loans are outstanding.
Material changes, outlook and risks
- The ADESA U.S. physical auction business generated Q1 revenue of $220.0 million and income from discontinued operations of $8.1 million, compared with $236.2 million and $24.7 million, respectively, in Q1 2021.
- KAR expected the Carvana transaction to close in May 2022, subject to customary conditions. It expected approximately $1.65 billion in net proceeds after taxes and transaction costs, first to repay the term loan and revolver; remaining proceeds were expected to be used to redeem, repay or retire senior notes within 365 days. These were expectations at the filing date, not completed actions.
- Management cited continuing automotive supply-chain disruption, semiconductor-related new-vehicle production constraints, high used-vehicle values and reduced commercial auction volumes. It said future industry volumes could not be estimated. COVID-19, macroeconomic and geopolitical conditions, inflation, foreign currency and financing-market disruption were also identified as risks.
- The sale and shift toward digital operations could disrupt customer relationships, add transition or systems-separation costs, and fail to deliver anticipated benefits. KAR also noted that the smaller post-sale business could face challenges accessing or refinancing capital.
- Continuing-operations capital expenditures were expected to be approximately $75–$80 million for fiscal 2022. The common-stock dividend remained suspended; preferred stock carried a cumulative 7% annual dividend, paid in kind for Q1. On April 27, 2022, the board increased the repurchase authorization by $200 million and extended the program through December 31, 2023.
- Management stated that liquidity sources were sufficient for foreseeable operating needs and debt service, while warning that a lack of recovery or further market deterioration could materially affect liquidity. Ordinary-course litigation was not considered likely to have a material adverse effect; no significant change from previously disclosed proceedings was reported.
Important facts for investors to verify
- Whether and when the Carvana sale closed, actual net proceeds, and the resulting debt repayment and senior-note treatment.
- Post-sale digital marketplace performance, customer retention, transition arrangements and any costs or disruptions from separating the U.S. physical auction business.
- Commercial vehicle supply and auction volumes, ADESA’s operating losses, and whether AFC’s elevated revenue and lower credit-loss provision persist.
- Cash conversion and finance-receivable growth, including the funding, collateral and covenant implications of AFC’s securitization obligations.
- Investment fair-value movements and interest-rate swap settlement: the filing estimated a realized gain of approximately $10–$15 million upon termination after repayment of the term loan.