OPENLANE, Inc. — filing identity and reporting period
Important entity mismatch: The supplied filing is KAR Auction Services, Inc. (doing business as KAR Global), not a standalone OPENLANE, Inc. 10-K. The filing identifies Openlane as a wholly owned subsidiary within ADESA. The summary below covers KAR’s fiscal year ended December 31, 2020, including fourth-quarter results.
Business context
KAR operated two reportable segments: ADESA Auctions, a digital and physical wholesale vehicle remarketing business, and AFC, which provides floorplan financing to independent used-car dealers. ADESA generated 88% of 2020 revenue and AFC 12%. KAR reported facilitating approximately 3.1 million vehicle sales and serving customers through 74 North American auction facilities. In 2020, ADESA moved sales to digital marketplaces amid COVID-19 restrictions.
Financial performance
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Revenue | $2,187.7 million | $2,781.9 million | Down 21% |
| Gross profit | $902.9 million | $1,164.8 million | Down 23% |
| Operating profit | $136.4 million | $314.1 million | Down 57% |
| Interest expense | $128.9 million | $189.5 million | Down 32% |
| Income from continuing operations | $0.5 million | $92.4 million | Down 99% |
| Net cash from continuing operations | $384.4 million | $380.8 million | Up $3.6 million |
| Capital expenditures | $101.4 million | $161.6 million | Down $60.2 million |
Gross margin was approximately 41.3%, versus 41.9% in 2019. Adjusted EBITDA, a non-GAAP measure, was $375.3 million versus $510.0 million. Reported net income from continuing operations was $0.5 million; after $21.6 million of preferred dividends, net loss attributable to common stockholders was $21.1 million and basic and diluted continuing-operations EPS were each $(0.16). The 2019 total net income of $188.5 million included $96.1 million from discontinued operations, primarily the former IAA salvage auction business.
Segment and fourth-quarter performance
- ADESA: FY revenue fell 21% to $1,920.1 million; operating loss was $3.0 million, compared with operating profit of $111.7 million. Vehicle sales declined 19% to 3.062 million: on-premise sales fell 29%, while off-premise sales fell 6%. Off-premise transactions represented 49% of North American ADESA sales, up from 42% in 2019.
- AFC: FY revenue fell 24% to $267.6 million and operating profit fell 31% to $139.4 million. Loan transactions declined 15% to 1.519 million; provision for credit losses rose to $38.6 million from $35.3 million, and equaled 2.1% of average managed receivables versus 1.7%.
- Q4 consolidated: Revenue was $529.6 million, down 21%; operating profit was $13.9 million, versus $61.6 million; and continuing-operations net loss was $17.1 million, versus income of $15.3 million.
- Q4 ADESA: Revenue was $464.2 million, down 20%; vehicles sold fell 23% to 681,000; operating loss was $22.5 million versus profit of $10.9 million.
- Q4 AFC: Revenue was $65.4 million, down 26%; loan transactions fell 26% to 327,000, while revenue per loan transaction excluding warranty revenue rose 4% to $186. Operating profit was $36.4 million, down from $50.7 million.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $752.1 million, restricted cash was $60.2 million, working capital was $924.6 million, and total assets were $6,798.2 million.
- Reported total debt, net of issuance costs and discounts, was $1,878.1 million; principal debt obligations were approximately $1.9 billion. These figures exclude AFC securitization obligations, which were $1,261.2 million net at year-end and are supported by receivables and reserves.
- The $325 million revolving facility had no borrowings; $28.5 million of letters of credit reduced borrowing availability. The filing’s stated availability is $325 million before those letters of credit.
- KAR reported a 0.7 secured net leverage ratio and compliance with its credit agreement and senior-note covenants at year-end. Senior notes comprise $950 million at 5.125%, due 2025; the Term Loan B-6 had $938.1 million outstanding, due 2026.
- Operating cash flow was broadly stable, while investing cash outflow was $326.6 million and financing provided $194.8 million. Ending cash, cash equivalents and restricted cash totaled $812.3 million.
- KAR issued Series A convertible preferred stock for approximately $528.2 million net proceeds. It carries a cumulative 7% dividend, initially payable in additional preferred shares; $21.6 million of dividends in kind had accrued by year-end. The preferred shares rank ahead of common stock for dividends and liquidation.
Material changes, outlook and risks
- COVID-19: Temporary suspension of on-premise sales began March 20, 2020; digital-only sales expanded thereafter. The pandemic reduced volumes and service activity, and management said future industry volumes and the duration of business effects remained uncertain. Cost actions included furloughs, workforce reductions, salary cuts, travel and service restrictions, delayed or cancelled capital projects, and suspension of the common dividend.
- Unusual charges and transactions: KAR recorded $29.8 million of non-cash impairment charges in ADESA U.K. ($25.5 million goodwill and approximately $4.3 million customer relationships). It acquired BacklotCars in November for approximately $421 million net of cash acquired; preliminary goodwill was $354.8 million. It sold PWI on December 1, 2020, receiving $24.3 million in cash plus a deferred payment. IAA had been spun off in June 2019, affecting year-over-year comparability.
- Management outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Planned 2021 capital expenditures were approximately $125 million. Management said liquidity sources were expected to meet operating, capital and debt-service needs for the foreseeable future, while warning that prolonged disruption or deteriorating conditions could materially affect liquidity.
- Strategy: KAR aimed to build a leading digital used-vehicle marketplace, grow dealer consignment and commercial business, and improve customer experience. Management cited reduced labor per transaction and lower SG&A as potential durable benefits of digital operations, while acknowledging execution risks.
- Key risks: Continuing pandemic and economic uncertainty; vehicle supply, volumes and used-car pricing; digital competition and lower revenue per vehicle; AFC dealer defaults and credit losses; cybersecurity and technology dependence; substantial debt and variable interest rates; foreign-exchange exposure; environmental obligations and litigation; and potential future impairment. The filing reports no environmental liabilities accrued at year-end and says ordinary-course litigation was not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Confirm the intended issuer: this is KAR Auction Services, Inc.’s 10-K, not OPENLANE, Inc.’s standalone filing.
- Assess whether vehicle volumes, service revenue and margins recovered after pandemic-related digital-only operations, particularly given the sharp ADESA decline and Q4 operating loss.
- Review AFC portfolio performance, allowance adequacy, delinquencies, charge-offs and securitization triggers; its allowance rose to $22.0 million from $15.0 million.
- Reconcile corporate debt and AFC securitization obligations, and distinguish the revolving commitment from availability net of letters of credit.
- Evaluate the preferred stock’s 7% cumulative dividend, conversion and change-of-control terms, and its effect on common-shareholder economics.
- Track BacklotCars integration, the preliminary purchase accounting and goodwill, and whether expected digital-marketplace benefits materialize.