Filing summary: KAR Auction Services, Inc. Q1 2018
Entity note: The supplied filing is KAR Auction Services, Inc.’s Form 10-Q for the quarter ended March 31, 2018—not a filing by OPENLANE, Inc. The filing identifies Openlane as a subsidiary within ADESA.
Business context and reporting period
KAR operates whole-car auctions and related services through ADESA, salvage-vehicle auctions through IAA, and dealer floorplan financing through AFC. The unaudited quarter is compared with the three months ended March 31, 2017. KAR reported 75 ADESA whole-car auction sites, 175 IAA salvage sites, and 130 AFC locations in the U.S. and Canada.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $950.5 million | $866.6 million |
| Gross profit | $415.5 million | $365.4 million |
| Operating profit | $157.8 million | $143.5 million |
| Net income | $90.0 million | $69.2 million |
| Diluted EPS | $0.66 | $0.50 |
| Operating cash flow | $152.3 million | $142.0 million |
| Capital expenditures | $38.7 million | $37.2 million |
Revenue rose 10%, gross profit 14%, operating profit 10%, and net income 30%. Gross margin was approximately 43.7% versus 42.2%; operating margin was approximately 16.6% in both periods. The effective tax rate fell to 22.7% from 33.0%, primarily reflecting the 2017 Tax Cuts and Jobs Act. Interest expense increased 3% to $41.5 million.
Segment revenue increased at ADESA to $528.1 million (+6%), IAA to $337.3 million (+13%), and AFC to $85.1 million (+20%). Segment operating profit was $82.1 million at ADESA (down from $92.7 million), $76.0 million at IAA (up from $59.2 million), and $47.0 million at AFC (up from $34.3 million). ADESA sold 878,000 vehicles, IAA 643,000, and AFC recorded 464,000 loan transactions.
Balance sheet, debt, and liquidity
At March 31, 2018, cash and cash equivalents were $330.8 million, restricted cash $20.6 million, working capital $783.2 million, and total assets $7.27 billion. Long-term debt, including current maturities and net of issuance costs, was $2.68 billion; gross corporate debt was $2.70 billion. Separately, obligations collateralized by finance receivables were $1.35 billion. The $350 million revolving facility had no borrowings; $32.4 million of letters of credit reduced availability. KAR reported a 1.96-to-1.0 secured leverage ratio and compliance with debt and securitization covenants.
Operating cash flow increased to $152.3 million. Investing cash use was $91.5 million, including the $23.3 million STRATIM acquisition and $38.7 million of capital expenditures. Financing cash use was $41.8 million, including $47.0 million of dividends paid. Cash, cash equivalents, and restricted cash increased $14.8 million to $351.4 million.
Material changes, outlook, and risks
- ADESA growth reflected higher institutional and online-only volumes; online sales were about 52% of ADESA vehicle sales versus 44% a year earlier. Higher ADESA SG&A, including acquisition-related costs, contributed to lower segment operating profit.
- IAA’s vehicle volumes and revenue per vehicle increased. AFC benefited from higher interest yields and fees and lower credit-loss provision; management expected annual provision for credit losses below 2% of average managed receivables, while noting quarterly results could vary.
- Management forecast approximately $185 million of 2018 capital expenditures, about half technology-related. It expected a $0.35 quarterly dividend in 2018, subject to board approval and applicable restrictions. KAR stated liquidity sources were expected to meet operating needs, debt service, announced acquisitions, and dividends for the next 12 months.
- KAR announced a proposed spin-off of IAA on February 27, 2018, expected to be tax-free and targeted within 12 months, subject to approvals and other conditions. The filing cautions that it may be delayed, not completed, taxable, costly, or disruptive to operations and business relationships.
- Other key exposures include competition, auction volumes and vehicle prices, AFC dealer defaults and collateral values, interest-rate and foreign-currency changes, technology and cyber risks, substantial debt and restrictive covenants, and weather or catastrophic events. A Superfund-related matter involving IAA at the Lower Duwamish Waterway remained unresolved; the company said it could not estimate IAA’s responsibility or potential loss.
- The company adopted revenue-recognition Topic 606 in Q1, reducing opening retained earnings by $3.0 million. It said the forthcoming lease standard was expected to significantly affect its statements because of its substantial operating leases.
Important facts for investors to verify
- Whether the IAA spin-off proceeds, its timing, tax treatment, separation costs, and effects on KAR and IAA.
- Underlying ADESA and IAA auction-volume and pricing trends, especially ADESA’s declining physical-auction and dealer-consignment volumes.
- AFC’s credit performance, delinquency and loss trends, and continued access to receivables securitization facilities.
- Debt service, covenant headroom, and actual revolver availability after letters of credit.
- Potential liability, if any, from the Lower Duwamish Waterway matter and the financial effects of lease-accounting adoption.