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, 2017—not a standalone OPENLANE filing. OPENLANE is identified as a subsidiary within ADESA. KAR operates whole-car auctions (ADESA), salvage auctions (IAA), and dealer floorplan financing (AFC), alongside online remarketing services.
Financial performance
Amounts are in millions of dollars except per-share data. Year-over-year comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $843.0 | $789.6 | $2,567.6 | $2,336.4 |
| Gross profit | $363.8 | $330.1 | $1,105.5 | $997.3 |
| Operating profit | $141.9 | $123.3 | $442.6 | $387.1 |
| Net income | $62.8 | $54.4 | $189.2 | $176.9 |
| Diluted EPS | $0.46 | $0.39 | $1.37 | $1.27 |
| Operating cash flow | Not separately stated | Not separately stated | $487.9 | $290.9 |
- Q3 revenue grew 7%; operating profit rose 15% and net income rose 15%. For the nine months, revenue grew 10%, operating profit 14%, and net income 7%.
- Calculated gross margin was 43.2% in Q3 versus 41.8% a year earlier; operating margin was 16.8% versus 15.6%. Nine-month gross margin was 43.1% versus 42.7%; operating margin was 17.2% versus 16.6%.
- Q3 segment revenue: ADESA $477.1 million, up 4%; IAA $287.7 million, up 10%; AFC $78.2 million, up 10%. Nine-month segment revenue was $1,464.3 million, $883.8 million, and $219.5 million, respectively.
- Cash and cash equivalents were $432.1 million at September 30, 2017, versus $201.8 million at year-end 2016. Working capital was $826.5 million. The $350 million revolving facility had no borrowings; $35.9 million of letters of credit reduced availability.
- Long-term debt, net of issuance costs and current maturities, was $2,671.0 million; gross debt was $2,711.7 million. AFC obligations collateralized by finance receivables were a separate $1,259.3 million. Nine-month capital expenditures were $110.1 million.
Material changes and notable items
- ADESA’s Q3 vehicle sales rose 8% to 788,000, with online-only sales increasing to 241,000 from 180,000. Physical auction conversion improved to 61.3% from 57.2%. Growth included acquisitions; management reported a 5% sales-volume increase excluding acquisitions.
- IAA Q3 vehicles sold increased 9% to 562,000. Hurricane Harvey and Irma response incurred approximately $4.3 million of excess costs, net of revenue, in the quarter. IAA expected to recover those costs as affected vehicles were sold in Q4 2017 and Q1 2018.
- AFC’s nine-month credit-loss provision increased to $27.5 million from $19.0 million; as a share of average managed receivables it rose to 2.1% from 1.5%. Q3 provision performance improved year over year, contributing to stronger quarterly revenue and profit.
- May refinancing replaced prior term loans and the revolver with new term loans and $950 million of 5.125% senior notes due 2025. The transaction extended the maturity of the notes but generated a $27.5 million noncash debt-extinguishment loss. Interest expense increased 14% in Q3 and 21% for the nine months, reflecting higher average debt and rates.
- Nine-month operating cash flow increased to $487.9 million from $290.9 million, while investing cash use declined to $201.0 million from $630.9 million, largely because acquisition spending was lower. Financing used $73.1 million, including $100 million of share repurchases and $131.5 million of dividends paid.
Outlook, risks, and contingencies
- Management forecast 2017 capital expenditures of approximately $150 million, including about $8 million related to Texas and Florida catastrophic events. It expected AFC’s 2017 credit-loss provision to be approximately 1.75%–2.25% of average managed receivables, with improvement anticipated in the second half.
- Management stated that cash, working capital, operating cash flow, and credit-facility availability should fund operating needs, debt service, announced acquisitions, and dividends for the next twelve months. It also expected, subject to board approval, a $0.35 quarterly dividend in 2018 ($1.40 annualized); future dividends remain subject to conditions and restrictions.
- In October 2017, after quarter-end, KAR acquired the remaining interest in TradeRev for $50 million cash, plus $15 million contingent on specified terms and $60 million contingent on performance, payable over four years. TradeRev results were to be consolidated beginning in Q4 2017; purchase accounting was incomplete.
- Key risks include substantial debt and restrictive covenants, variable-rate exposure, competition and pricing pressure, vehicle-volume and used/salvage-price fluctuations, AFC credit losses, acquisition integration, cybersecurity and technology risks, weather events, and foreign-currency movements. KAR had $1.2 billion of variable-rate term loans and used interest-rate caps; a hypothetical 100-basis-point LIBOR increase was estimated to raise interest expense by $3.1 million for the quarter and $13.1 million for the nine months.
- IAA remains a potentially responsible party in the Lower Duwamish Waterway Superfund matter. The EPA had not specified IAA’s factual responsibility or demanded payment or action beyond an information response, and KAR said it could not estimate any loss. Management stated ordinary-course litigation was not expected to materially affect the company, but actual losses could exceed accruals.
Investor verification points
- Confirm the filing entity and reporting scope: the document is KAR Auction Services’ 10-Q, with OPENLANE described as an ADESA subsidiary.
- Assess whether ADESA’s online growth, conversion gains, and acquisition contribution are sustainable, and track dealer-consignment trends.
- Monitor IAA’s realization of hurricane-related vehicle proceeds and the timing of recovery of its extraordinary response costs.
- Review AFC delinquencies, net credit losses, allowance adequacy, and progress toward management’s full-year provision range.
- Evaluate refinancing effects on interest expense, leverage, covenant headroom, and cash available after dividends, repurchases, capital spending, and the TradeRev acquisition.
- Track the TradeRev contingent consideration and integration, and developments in the Lower Duwamish environmental matter.