OPENLANE, Inc. — Filing Summary
Entity and period: The supplied filing is KAR Auction Services, Inc.’s Form 10-K for the fiscal year ended December 31, 2022. The company did business as KAR Global; OPENLANE is identified as a subsidiary and digital marketplace. The filing is not an OPENLANE, Inc. 10-K, so confirm the issuer and filing intended.
Business context and reporting period
KAR operated two continuing reportable segments: Marketplace, including digital wholesale vehicle marketplaces and related services, and Finance, principally AFC dealer floorplan financing. In May 2022, it sold its U.S. physical auction business to Carvana for approximately $2.2 billion. That business is reported as discontinued operations for all periods presented. The company facilitated approximately 1.3 million vehicle sales in 2022.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Continuing-operations revenue | $1,519.4 million | $1,450.6 million |
| Operating profit | $173.7 million | $127.5 million |
| Continuing-operations income (loss) | $28.6 million | $(0.8) million |
| Net income, including discontinued operations | $241.2 million | $66.5 million |
| Adjusted EBITDA, continuing operations (non-GAAP) | $231.2 million | $270.2 million |
| Continuing-operations cash from operations | $4.1 million | $233.9 million |
| Cash and cash equivalents | $225.7 million | $177.6 million |
Net income includes $212.6 million of after-tax income from discontinued operations, including a $521.8 million pretax disposal gain. Continuing-operations diluted EPS was $(0.10); consolidated net income per diluted share was $1.30. The filing attributes the difference in continuing EPS presentation in part to preferred-stock participation and dividends.
- Marketplace: Revenue was $1,143.5 million, down 2%; operating loss was $84.7 million. Vehicles sold fell 19% to 1.297 million. Gross profit excluding purchased-vehicle sales was 38.8% of revenue, versus 45.1% in 2021.
- Finance: Revenue rose 30% to $375.9 million; operating profit increased to $258.4 million from $189.2 million. Loan transactions grew 10% to 1.562 million. Credit-loss provision was $9.8 million, or 0.4% of average managed receivables for the year.
- Cash flow: Continuing investing activities provided $70.0 million; continuing financing activities used $1,621.9 million, primarily for debt repayment and share repurchases. Discontinued investing activities provided $2,077.4 million, principally sale proceeds. Cash flow from continuing operations was affected substantially by working-capital timing, including a $240.8 million use of cash from accounts payable and accrued expenses.
- Debt and liquidity: Corporate debt was $498.7 million at year-end, excluding AFC securitization obligations. Cash was $225.7 million, restricted cash $52.0 million, and available revolver capacity $161.0 million, net of letters of credit. AFC had $1,677.6 million of obligations collateralized by finance receivables. Working capital was $379.2 million.
Material changes versus the prior comparable period
- Revenue from continuing operations increased 5%, but Marketplace vehicle volume and gross margin declined amid industry-wide wholesale supply constraints. Higher fees per vehicle partly offset lower volumes.
- Finance revenue increased with higher interest yields, fees and loan transactions as rates rose; credit-loss provision also increased.
- Continuing operating cash flow fell sharply from $233.9 million to $4.1 million, with management citing working-capital and payment-timing effects.
- The Carvana transaction reshaped KAR into a more digital and asset-light business. KAR repaid the $926.2 million Term Loan B-6 balance and $600 million of senior notes using transaction proceeds; $350 million of senior notes remained at year-end.
- Marketplace revenue and operating results exclude the divested U.S. physical auctions. Comparisons are therefore on a continuing-operations basis, with prior periods reclassified.
Outlook, commentary, risks and unusual items
- Management expects used-vehicle market improvement in coming years to support higher marketplace volumes, but says supply-chain disruption, used-vehicle pricing volatility, inflation, rising rates and consumer confidence make the timing and extent uncertain. No specific revenue or earnings guidance is provided.
- Management expects approximately $65 million of capital expenditures in 2023 and stated available liquidity should fund operating needs, capital requirements and debt service for the foreseeable future; it cautioned that further market deterioration or failure of a recovery could materially affect liquidity.
- The remaining senior notes include $140 million classified as current and expected to be repaid or redeemed by May 9, 2023 under the transaction proceeds provisions. The $145 million revolver draw is classified as current based on the company’s stated practice, although contractual maturity is September 2024.
- The company recorded a $33.9 million gain on the sale of excess Montreal land and a $17.2 million loss on extinguishment of debt. It repurchased 12.65 million shares for $182.2 million during 2022. The common-stock dividend is suspended; Series A preferred stock carries a 7% cumulative dividend.
- Control issue: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to a material weakness in cash-flow statement review, involving discontinued-operation cash flows and contingent-consideration payment classifications. KPMG issued an adverse opinion on internal control. Management said 2022 misstatements were corrected before filing and quarterly 2022 periods were in the process of being restated; it reported no impact on prior-year financial statements.
- Other key risks include AFC dealer credit losses and collateral values, vehicle supply and competition, dependence on Carvana agreements and systems after the sale, technology and cybersecurity, regulation, foreign exchange and the potential for goodwill impairment. The U.S. Dealer-to-Dealer reporting unit’s fair value exceeded carrying value by approximately 4%, with $306.2 million of goodwill.
- Management said ordinary-course litigation was not expected to have a material adverse effect based on information then available. Environmental matters and other contingencies remain subject to uncertainty.
Important facts for investors to verify
- Confirm the intended issuer: the filing is KAR Auction Services, Inc. (KAR Global), not a standalone OPENLANE, Inc. filing.
- Review the status and scope of the 2022 quarterly cash-flow restatements and evidence that the material weakness has been remediated.
- Assess continuing Marketplace performance and whether vehicle supply, volumes and margins recover after the U.S. physical-auction divestiture.
- Verify repayment of the required $140 million senior-note amount and the company’s liquidity, revolver usage and debt-service capacity.
- Track AFC delinquencies, charge-offs, credit-loss allowance and securitization funding costs as interest rates and used-vehicle values change.
- Separate recurring continuing-operations earnings and cash generation from the disposal gain, land-sale gain and other nonrecurring adjustments; assess non-GAAP Adjusted EBITDA reconciliations.