OPENLANE, Inc. quarterly report, Q1 FY2012

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Business context and reporting period

This unaudited Form 10-Q is for KAR Auction Services, Inc. for the three months ended March 31, 2012, compared with the same 2011 quarter. The filing identifies OPENLANE, Inc. as a wholly owned ADESA subsidiary; results below are KAR consolidated results, not standalone OPENLANE results. KAR operates ADESA whole-car auctions, IAA salvage auctions and AFC dealer floorplan financing.

Financial performance and position

Amounts are in millions of dollars except per-share data and percentages.

MetricQ1 2012Q1 2011 / comparison
Revenue$506.9$484.7; up 5%
Gross profit, excluding depreciation and amortization$237.5; 46.9% of revenue$220.2; 45.4%
Operating profit$74.8; 14.8% margin$73.4; 15.1% margin
Income before taxes$44.4$40.8
Income taxes / effective tax rate$18.4 / 41.4%$1.0 / 2.5%
Net income / diluted EPS$26.0 / $0.19$39.8 / $0.29
Adjusted EBITDA (non-GAAP)$134.9$127.3
Operating cash flow$74.5$81.3
  • Segment revenue: ADESA $270.6 million (+1%); IAA $189.4 million (+8%); AFC $46.9 million (+16%). Segment operating profit was ADESA $30.9 million, IAA $41.2 million and AFC $25.5 million.
  • Cash and cash equivalents were $125.2 million at March 31, up from $97.4 million at year-end. Management reported available cash, excluding cash in transit, of $62.1 million. Working capital was $237.4 million.
  • Long-term debt was $1.813 billion, with $17.0 million current maturities; total debt before discount and current classification was $1.837 billion. The $1.7 billion Term Loan B carried a 5.0% rate. No borrowings were outstanding on the $250 million revolver; $24.8 million of letters of credit reduced its borrowing availability. Finance-receivable-backed obligations were a separate $586.0 million.
  • Cash used in investing activities was not reported: net cash provided by investing activities was $2.7 million, including $13.3 million of capital spending. Financing activities used $49.6 million. Cash increased $27.8 million during the quarter.

Material changes versus prior period

  • Revenue increased 5%, while operating profit rose only 2%; net income fell 35% and EPS declined from $0.29 to $0.19.
  • The tax comparison was materially affected by a $14.4 million reversal of uncertain-tax-position reserves in Q1 2011. Excluding that discrete benefit, the filing says the prior-year effective tax rate would have been 37.9%; Q1 2012 also included $5.2 million of nondeductible profit-interest expense.
  • ADESA vehicle sales rose 9% including OPENLANE, but revenue per vehicle fell 7% to about $540. Excluding OPENLANE, ADESA same-store volume fell 6%; online sales were about 32% of ADESA units versus 24% a year earlier. ADESA operating profit declined, partly reflecting OPENLANE integration-related SG&A and higher depreciation.
  • IAA vehicle sales rose about 6%; its gross margin declined to 41.2% from 42.9%, as higher processing, towing and purchased-vehicle costs offset revenue growth.
  • AFC loan transactions rose 17% to 318,859 and managed receivables grew to $867.6 million from $746.8 million a year earlier. AFC revenue per loan transaction declined 1% to $147.
  • Interest expense decreased 9% to $30.3 million, primarily reflecting 2011 debt repayments. Operating cash flow decreased from $81.3 million; financing cash flow shifted from $34.1 million provided to $49.6 million used, primarily because the company repaid $68.9 million drawn on its revolver.

Outlook, risks and unusual items

  • Management estimated North American whole-car auction volume, including OPENLANE, at about 8 million units for 2012, with volumes approaching 8.4 million in 2013 and nearly 9 million by 2015. It expected whole-car and salvage volumes at the company to be softer in Q2 2012 than Q1.
  • Expected 2012 capital expenditures were approximately $90 million, mainly for information systems, OPENLANE integration, facility maintenance and expansion. Management believed liquidity would cover operating needs, capital requirements and debt service for the next 12 months.
  • The company reported compliance with credit and securitization covenants. Its senior secured leverage ratio was 3.3:1 at March 31; the maximum covenant applies when revolving loans are outstanding and tightens over time. Debt covenants restrict, among other things, additional debt, acquisitions, dividends and capital expenditures.
  • Key stated risks include auction supply and demand, vehicle prices, competition, AFC credit losses and collections, interest and foreign-exchange movements, substantial debt and restrictive covenants, integration and technology execution, environmental liabilities, litigation, weather and seasonality.
  • IAA remained subject to potential liability relating to the Lower Duwamish Waterway Superfund site. The company said it could not determine IAA’s responsibility or estimate any loss; no payment or action beyond an information response had been demanded by the EPA at the time of filing.
  • Q1 included a $0.9 million contingent-consideration expense tied to prior acquisitions. The filing reports ordinary-course litigation and says there was no significant change in previously disclosed legal and regulatory matters. Management concluded disclosure controls were effective and reported no material quarter-over-quarter change in internal control over financial reporting.

Important facts for investors to verify

  1. Confirm the legal reporting entity and obtain OPENLANE’s standalone results if that is the intended investment subject; the figures here are KAR consolidated and OPENLANE is included in ADESA.
  2. Review the tax reconciliation and nondeductible profit-interest expense to distinguish recurring earnings from the unusually low Q1 2011 tax expense.
  3. Verify usable liquidity: the filing’s liquidity table lists $250 million available under the revolver, while its note says $24.8 million of letters of credit reduces availability.
  4. Assess ADESA unit trends and per-vehicle revenue, including OPENLANE’s contribution and the expected Q2 softness.
  5. Review debt maturities, covenant headroom, variable-rate exposure and AFC securitization terms, as well as the unresolved environmental contingency.