Filing summary
Entity and period: The supplied filing is KAR Auction Services, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed February 22, 2013. It is not a standalone OPENLANE, Inc. filing; OPENLANE is included within KAR’s ADESA business.
Business context
KAR operates whole-car auctions and online remarketing through ADESA, salvage vehicle auctions through IAA, and dealer floorplan financing through AFC. It reported 230 physical auction locations and facilitated sales of more than 3.3 million vehicles in 2012. Revenue mix was ADESA 54%, IAA 36%, and AFC 10%.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $1,963.4 | $1,886.3 |
| Gross profit | $876.3 | $851.1 |
| Operating profit | $267.0 | $281.9 |
| Net income | $92.0 | $72.2 |
| Diluted earnings per share | $0.66 | $0.52 |
| Cash from operations | $290.2 | $305.8 |
| Capital expenditures | $102.0 | $85.8 |
| Cash and cash equivalents at year-end | $108.7 | $97.4 |
| Working capital at year-end | $294.5 | $177.0 |
Gross margin was approximately 44.6% versus 45.1%; operating margin was approximately 13.6% versus 14.9%; net margin was approximately 4.7% versus 3.8%. The 2012 effective tax rate was 39.3%, compared with 19.8% in 2011; the prior-year rate benefited from an $18.6 million tax-reserve reversal. The filing reports no goodwill or intangible impairment in 2012.
Segments and key operating trends
- ADESA: Revenue rose 4% to $1,053.5 million. Vehicles sold increased 8%, including OPENLANE, while revenue per vehicle fell 4% to about $560. Operating profit declined to $111.6 million from $127.4 million, with acquisition-related and other SG&A increases.
- IAA: Revenue increased 2% to $716.1 million, with units sold up approximately 3%. Operating profit fell to $128.7 million from $136.7 million; gross margin declined to 37.2% from 40.7%, including costs from Superstorm Sandy and purchased-vehicle activity.
- AFC: Revenue increased 15% to $193.8 million and operating profit rose to $107.3 million from $84.4 million. Loan transactions increased 16% to 1,239,755; managed receivables reached $1,004.2 million. Revenue per loan transaction decreased 2% to $156.
Debt and liquidity
Year-end total debt was $1,824.5 million before unamortized discount and current maturities; the selected-data presentation reports debt net of discount of $1,818.3 million. This excludes $713.3 million of obligations collateralized by AFC finance receivables. Term Loan B outstanding was $1,674.5 million, and $150.0 million of floating-rate notes mature in May 2014. The term loan rate was 5.0% at year-end. No borrowings were outstanding on the $250 million revolving facility; letters of credit were $23.6 million. The reported senior secured leverage ratio was 3.3x, against a 4.0x maximum when the covenant applies. KAR said it was in compliance with debt and securitization covenants.
Operating cash flow decreased from $305.8 million. Investing outflow was $227.6 million, including $102.0 million of capital expenditures; financing outflow was $53.5 million, including repayment of the $68.9 million revolver balance and $26.0 million of dividends. AFC’s U.S. and Canadian securitization facilities, each with a June 30, 2014 expiry, had committed liquidity of $650 million and C$100 million, respectively. Management said liquidity was sufficient for foreseeable needs and the next 12 months.
Changes, outlook, risks, and unusual items
- Revenue grew 4%, but operating profit declined about 5%; net income rose 27%, helped in part by lower interest expense and no 2012 debt-extinguishment charge. Interest expense fell 17% to $119.4 million.
- Management estimated North American whole-car auction volumes at about 8 million in 2012, forecast approximately 8.4 million in 2013, and nearly 9 million by 2015, including OPENLANE. These are estimates, not company revenue or earnings guidance. 2013 capital expenditures were expected to be about $95 million.
- KAR began a quarterly dividend in 2012: $0.19 per share, or $0.76 annualized. The board declared another $0.19 dividend payable April 4, 2013; future dividends remain discretionary and subject to financial and contractual constraints.
- Superstorm Sandy produced a $9.1 million pretax net loss in Q4 2012; KAR expected an additional approximately $10 million pretax loss in the first half of 2013. The filing describes higher towing, temporary-site, and labor costs. Sandy-related capital spending contributed to 2012 capex.
- Principal risks include vehicle supply and demand volatility, competition and migration to online-only channels, used-vehicle price changes, AFC credit losses and funding costs, variable-rate debt, refinancing and covenant constraints, technology and cybersecurity risks, foreign-exchange exposure, weather and catastrophic events, and environmental and regulatory liabilities.
- IAA received a second EPA potential-liability notice concerning the Lower Duwamish Waterway Superfund Site. The company could not determine responsibility or estimate any loss; no payment or remedial action had been demanded from IAA as of the filing. Environmental liabilities accrued across facilities were $0.2 million at year-end.
- KPMG gave an unqualified opinion on the financial statements and internal control; management and the auditor reported effective internal control over financial reporting with no material weaknesses identified.
Important facts for investors to verify
- Confirm the issuer distinction: this is KAR Auction Services’ consolidated 10-K, with OPENLANE reported within ADESA, not an OPENLANE standalone filing.
- Track ADESA’s underlying same-store volumes and revenue per vehicle separately from the acquired OPENLANE contribution, and assess whether online growth changes economics.
- Monitor IAA margins and the realized total cost and proceeds of Sandy-related vehicle processing, including the expected 2013 loss.
- Review debt maturities, floating-rate exposure, covenant headroom, and the renewal or refinancing of AFC securitization facilities expiring in June 2014.
- Assess whether cash generation can support debt reduction, planned capital spending, and dividends; the filing estimated a $39.4 million excess-cash-flow debt payment in Q2 2013.
- Follow developments in the Lower Duwamish environmental matter and any change in the company’s ability to estimate exposure.