Business context and reporting period
This is KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The filing identifies OPENLANE as part of ADESA; it reports consolidated KAR results, not standalone OPENLANE financials. KAR operates whole-car auctions (ADESA), salvage auctions (IAA), and dealer floorplan financing (AFC).
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $773.8m | $666.7m | $2,290.6m | $1,957.4m |
| Operating profit | $123.3m | $106.0m | $387.1m | $330.4m |
| Net income | $54.4m | $52.3m | $176.9m | $166.3m |
| Diluted EPS | $0.39 | $0.37 | $1.27 | $1.16 |
| Operating cash flow | Not separately stated | Not separately stated | $283.8m | $315.4m |
- Q3 revenue increased 16%; operating profit rose 16% and net income rose 4%. Nine-month revenue increased 17%, operating profit 17%, and net income 6%.
- Q3 gross profit was $330.1m, or 42.7% of revenue, versus $288.6m, or 43.3%, a modest margin decline. Operating margin was approximately 15.9% in both quarters. For nine months, gross profit was $997.3m (43.5% of revenue) versus $860.7m (44.0%); operating margin was approximately 16.9% in both periods.
- Q3 segment revenue: ADESA $441.6m (+26%), IAA $261.0m (+6%), and AFC $71.2m (+3%). ADESA operating profit rose to $82.0m from $58.6m; IAA to $43.9m from $41.6m; AFC to $34.8m from $34.4m.
- ADESA Q3 vehicle sales rose 17% (6% excluding acquisitions); revenue per vehicle increased 7%. IAA sales volume rose approximately 5%. AFC loan transactions rose 5%, but revenue per transaction fell 3% to $148, reflecting higher credit-loss provision and lower yield and floorplan fees.
- AFC’s provision for credit losses was $8.0m in Q3 versus $2.7m; provision equaled 1.8% of average managed receivables versus 0.7% a year earlier. Nine-month provision was $19.0m versus $10.5m.
- Interest expense rose 49% in Q3 to $36.3m and 50% for nine months to $100.8m, primarily reflecting the 2016 refinancing, higher Term Loan B-2 pricing, and growth in AFC’s financed portfolio. Nine-month results also included a $4.0m debt-extinguishment charge.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $323.1m, versus $155.0m at year-end 2015; working capital was $650.4m versus $232.2m. The company reported $300m available under its revolving credit facility, with $29.7m of letters of credit outstanding and no revolver borrowings.
- Long-term debt was $2,371.8m and current maturities were $24.7m. Gross term-loan principal was $2,430.8m. Separately, $1,275.1m of obligations collateralized by finance receivables funded AFC lending; managed finance receivables totaled $1,785.4m.
- Cash from operations was $283.8m for nine months, down from $315.4m. Investing used $630.9m, including $354.5m for acquisitions and $118.5m for capital expenditures. Financing provided $512.5m, including refinancing activity. Cash increased $168.1m over the period.
- Management said available cash, operating cash flow, working capital, and credit availability should fund operations, debt service, announced acquisitions, and dividends for the next 12 months. The company was in compliance with credit and securitization covenants at quarter-end; reported secured leverage was 3.08x against a 3.75x limit when applicable.
Changes, outlook and risks
- Growth reflected stronger auction volumes and revenue per vehicle, as well as acquisitions. In 2016, ADESA acquired Brasher’s eight auctions and Sanford Auto Dealers Exchange, and KAR acquired U.K. online remarketer GRS. Acquisition spending was approximately $355m net of cash acquired; the acquisitions added $218.3m of goodwill. Management said their consolidated pro forma impact was immaterial.
- In March, KAR refinanced debt with a new seven-year Term Loan B-3 and a new $300m five-year revolver, using proceeds to repay Term Loan B-1 and the old revolver. Term Loan B-2 and B-3 rates were 4.06% and 4.38% at quarter-end. Variable-rate exposure remains; a hypothetical 100-basis-point short-rate increase was estimated to raise interest expense by approximately $5.8m for the quarter or $16.4m for nine months, after interest-rate caps.
- Management estimated 2016 capital expenditures of approximately $155m; $118.5m had been spent through September, including $20.3m for ADESA Chicago greenfield development. The filing estimated North American whole-car auction volumes would exceed 10 million units in 2016–2018, with rising off-lease supply a key expected driver; this is an industry estimate, not company earnings guidance.
- Subject to board approval, management expected a $0.32 quarterly dividend in 2017. A new authorization for repurchases of up to $500m through October 2019 was approved after quarter-end. No shares were repurchased during Q3 under the prior program.
- Risks include auction-volume and vehicle-price fluctuations, lower salvage proceeds and commodity prices, AFC delinquencies and credit losses, competition, acquisition integration, cybersecurity and systems, variable interest rates, foreign exchange, substantial debt and restrictive covenants, seasonality, weather, and environmental and legal exposure. The filing notes the Lower Duwamish Waterway matter involving IAA; the company said it could not determine IAA’s responsibility or estimate any loss. Ordinary-course litigation was not considered likely to have a material adverse effect by management.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No specific full-year earnings guidance was provided in the filing.
Important facts for investors to verify
- Confirm whether the analysis sought is KAR consolidated performance or OPENLANE-specific performance; this filing does not provide standalone OPENLANE financial results.
- Track AFC credit-loss provisions, delinquencies, recoveries, and managed receivable growth against management’s stated expected annual provision range of 1.5%–2% of average managed receivables.
- Assess refinancing effects on interest expense, variable-rate exposure, debt maturities, covenant headroom, and actual revolver availability after letters of credit.
- Separate organic operating growth from acquisition contributions and monitor acquisition integration, goodwill, and capital spending.
- Monitor salvage vehicle proceeds and commodity prices, auction volume and conversion, and the unresolved environmental liability exposure at the Lower Duwamish Waterway.
- Verify subsequent dividend and share-repurchase decisions, which remain subject to board approval, market conditions, and debt-agreement restrictions.