Business context and reporting period
This summary covers KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The filing describes KAR’s ADESA Auctions and AFC businesses; Openlane is identified as part of ADESA, not as the reporting issuer. ADESA provides wholesale vehicle auction and remarketing services, while AFC provides floorplan financing to independent dealers.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $535.2 million | $593.6 million | $1,702.2 million | $1,658.1 million |
| Gross profit | $222.1 million | $263.9 million | $725.5 million | $698.7 million |
| Operating profit | $43.3 million | $86.4 million | $165.1 million | $122.5 million |
| Net income (loss) | ($1.0) million | $47.1 million | $61.4 million | $17.6 million |
| Diluted EPS | ($0.10) | $0.23 | $0.20 | $0.04 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $352.6 million | $431.9 million |
Q3 gross margin was approximately 41.5% versus 44.5%; operating margin was approximately 8.1% versus 14.6%. For the nine-month periods, gross margin was approximately 42.6% versus 42.1%, and operating margin approximately 9.7% versus 7.4%.
At September 30, cash and cash equivalents were $631.9 million and restricted cash was $52.4 million. Working capital was $771.5 million. Long-term debt was $1,890.6 million gross, including $950 million of 5.125% senior notes and $931 million outstanding under the term loan; there were no revolver borrowings. Separately, $1,385.7 million of obligations collateralized by finance receivables were reported as current liabilities. The company reported a 0.8 secured net leverage ratio and compliance with applicable debt and securitization covenants.
Material changes versus prior comparable periods
- Q3 revenue fell 10%, primarily as ADESA vehicle sales declined 33% to 586,000; commercial volumes fell sharply amid constrained vehicle supply and high prices. Higher auction fees per vehicle and acquisitions partly offset lower volume.
- ADESA Q3 operating results weakened: segment operating loss was $7.8 million versus $51.8 million operating profit a year earlier. AFC operating profit rose to $51.1 million from $34.6 million, helped by improved credit-loss results and higher revenue per loan transaction.
- Nine-month revenue grew 3%, while net income increased to $61.4 million from $17.6 million. The prior-year period included a $29.8 million goodwill and intangible impairment; 2021 also benefited from investment gains and lower AFC credit-loss provisions.
- Nine-month operating cash flow declined by $79.3 million year over year. Investing activities used $415.0 million, including increased finance receivables held for investment and acquisition spending. Financing activities used $62.7 million, including $180.9 million of common-stock repurchases.
- Cash and cash equivalents decreased from $752.1 million at year-end 2020. Common shares outstanding declined following repurchases of approximately 10.8 million shares during the first nine months.
Outlook, commentary, risks and unusual items
- Management said semiconductor-related new-vehicle production shortages, elevated vehicle values, and fewer off-lease and repossessed vehicles reduced commercial auction supply; these conditions were expected to continue for the foreseeable future. Management could not estimate future industry volumes.
- Management believed available cash, operating cash flows, working capital and credit-facility capacity would meet operating and capital needs for the foreseeable future, while warning that continued disruption or further market deterioration could materially affect liquidity.
- Fiscal 2021 capital expenditures were expected to be approximately $115 million. No specific earnings or revenue guidance was provided.
- Other expense in Q3 included a $20.9 million net reduction in unrealized investment gains and a $4.4 million contingent-consideration valuation increase, partly offset by $10.0 million of realized investment gains. For nine months, investment gains contributed to other income, while contingent consideration adjustments added $20.1 million of expense.
- In May, ADESA acquired Auction Frontier for approximately $92.2 million, including contingent consideration; the preliminary purchase accounting included $73.8 million of goodwill. After quarter-end, ADESA acquired CARWAVE on October 14, 2021, for approximately $450 million. The filing also reports a $30 million stock issuance in connection with that acquisition; transaction consideration details merit verification.
- The common dividend remained suspended. Preferred stock dividends accrue at 7% annually; $30.6 million was recorded as in-kind preferred dividends during the first nine months. The company extended its $300 million share-repurchase authorization through December 31, 2022, with approximately $109 million remaining at the filing date.
- COVID-19, vehicle-market and supply conditions, auction volume, dealer credit quality, used-vehicle prices, interest rates, foreign exchange, acquisition integration, investment valuations and litigation are among the disclosed uncertainties. Management said ordinary-course litigation was not expected to have a material adverse effect; no significant change in previously disclosed proceedings was reported.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for KAR Auction Services, Inc., with Openlane described as a subsidiary/business within ADESA.
- Track auction volumes and the mix of commercial versus dealer-consignment vehicles, and assess whether higher fees per vehicle can offset lower throughput and fixed costs.
- Separate recurring operating performance from investment valuation gains/losses, contingent-consideration adjustments, acquisition effects and prior-year impairment charges.
- Review AFC receivables growth, credit-loss trends, securitization funding capacity and related covenant compliance.
- Verify CARWAVE’s final purchase consideration, funding mix and integration impact, and monitor remaining repurchase authorization, preferred dividends and suspended common dividends.