KAR Auction Services, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The filing is by KAR Auction Services, Inc., the parent of ADESA, which includes OPENLANE. It is not a standalone OPENLANE, Inc. filing.
Business context and results
KAR operates whole-car auctions (ADESA), salvage-vehicle auctions (IAA), and dealer floorplan financing (AFC). It reported 67 ADESA and 163 IAA auction sites and 104 AFC locations at quarter-end.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $557.6 million | $506.9 million |
| Operating profit | $78.1 million | $74.8 million |
| Net income | $29.1 million | $26.0 million |
| Diluted EPS | $0.21 | $0.19 |
| Operating cash flow | $90.8 million | $74.5 million |
| Capital expenditures | $22.6 million | $13.3 million |
Revenue grew 10%; operating profit rose 4% and net income rose 12%. Gross profit, as presented excluding depreciation and amortization, fell to $226.2 million from $237.5 million; the corresponding gross margin was approximately 40.6%, versus 46.9%. Operating margin was approximately 14.0%, versus 14.8%; net margin was approximately 5.2%, versus 5.1%.
- ADESA: Revenue increased 5% to $283.6 million as vehicle sales rose 3% and revenue per vehicle rose 2%. Segment operating profit increased to $39.1 million from $30.9 million; gross profit was nearly flat at $122.0 million.
- IAA: Revenue increased 17% to $221.6 million, with vehicles sold up approximately 13%. Segment operating profit declined to $25.5 million from $41.2 million, largely due to Superstorm Sandy processing costs.
- AFC: Revenue increased 12% to $52.4 million; loan transactions rose 8% to 345,368. Segment operating profit increased to $29.4 million from $25.5 million.
Liquidity, debt and cash flows
Cash and cash equivalents were $322.1 million at March 31, 2013, versus $108.7 million at year-end 2012; working capital was $315.3 million. The company reported $250 million available under its revolving facility before considering $23.6 million of letters of credit. The quarter’s cash increase was $213.4 million, including $149.1 million of financing cash flow; cash generation therefore reflects financing activity as well as operations.
Total debt was $1,969.9 million, including $1,819.9 million outstanding on Term Loan B and $150 million of floating-rate notes due in 2014. In March, KAR repriced Term Loan B to adjusted LIBOR plus 2.75% from plus 3.75%; its stated rate was 3.75% at quarter-end. The amendment generated a $3.8 million pretax charge. In April, the company used incremental term-loan proceeds to redeem the $150 million notes and made a $39.4 million excess-cash-flow prepayment. The company said it was compliant with debt and securitization covenants; its reported senior secured leverage ratio was 3.2x.
AFC managed finance receivables of $1,003.5 million, with $674.8 million of related collateralized obligations. Receivables delinquent 31 days or more were $4.1 million; Q1 net credit losses were $2.7 million. Operating cash flow exceeded capital spending by $68.2 million.
Material changes, outlook and risks
- IAA recorded a non-recurring $10.8 million pretax net loss on Superstorm Sandy vehicles in Q1: more than 40,000 vehicles generated $26.6 million of revenue and $37.4 million of service costs. Excluding Sandy, IAA’s gross margin would have been 37.7%, according to management. IAA’s total-loss vehicle inventory was up more than 10% year over year at quarter-end.
- Management estimated North American whole-car auction volumes, including OPENLANE, would exceed 8.5 million units in 2013 and 9 million by 2015. These are industry estimates, not company revenue or earnings guidance. KAR expected 2013 capital expenditures of approximately $95 million, compared with $102 million in 2012.
- The board approved a $0.19-per-share quarterly dividend; the company said it expected to pay that amount quarterly in 2013, subject to board approval and contractual restrictions.
- Key business risks include auction-volume and vehicle-price fluctuations, competitive pressure, dealer credit and collections, variable interest rates, substantial debt and restrictive covenants, weather and catastrophe costs, regulatory and environmental liabilities, and litigation. KAR noted that salvage proceeds and margins could be pressured if used-vehicle or commodity prices moderate.
- IAA’s potential responsibility at the Lower Duwamish Waterway Superfund site remained undetermined; the company said it could not estimate any resulting loss. Management reported no significant change in the other legal and regulatory proceedings previously disclosed.
Most important facts for investors to verify
- Whether revenue and earnings growth can persist after the temporary Sandy-related volume and costs roll off, and how IAA margins normalize.
- How much of the increase in operating cash flow reflects sustainable operations versus timing changes in receivables, payables and accrued expenses.
- Debt balances and post-quarter repayments, interest-rate exposure, covenant headroom, and the effect of the refinancing on interest costs.
- Whether AFC’s receivables quality and securitization capacity remain sound, including delinquency and loss trends and the June 2014 facility expirations.
- Whether projected auction-market volumes, approximately $95 million of 2013 capital spending, and the planned dividend remain achievable under market and debt-agreement constraints.
- Potential environmental or other litigation exposure where the filing does not provide a clear estimated loss.