Business context and reporting period
This is KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing identifies Openlane, Inc. as a wholly owned subsidiary within ADESA Auctions; it does not provide standalone Openlane financial results. KAR’s continuing operations comprise ADESA Auctions, including online remarketing services, and AFC, which provides floorplan financing to used-vehicle dealers. The comparable 2019 results exclude IAA, spun off in June 2019.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages, and volumes.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $419.0 | $719.1 | $1,064.5 | $1,408.7 |
| Gross profit | $183.9 | $301.7 | $434.8 | $597.4 |
| Operating income (loss) | $(4.7) | $90.6 | $36.1 | $166.8 |
| Continuing-operations net income (loss) | $(32.3) | $27.4 | $(29.5) | $42.7 |
| Continuing-operations diluted EPS | $(0.27) | $0.20 | $(0.24) | $0.32 |
| Operating cash flow, continuing operations | Not provided separately | Not provided separately | $268.9 | $161.7 |
- Revenue declined 42% in Q2 and 24% for the first half. Calculated gross margin was 43.9% in Q2 versus 41.9%; first-half gross margin was 40.8% versus 42.4%. Calculated operating margin was -1.1% versus 12.6% in Q2 and 3.4% versus 11.8% for the first half.
- Q2 impairment charges totaled $29.8, comprising $25.5 of goodwill and approximately $4.3 of customer relationships at ADESA Remarketing Limited. The charges were non-cash.
- At June 30, cash and cash equivalents were $968.5, restricted cash $50.0, working capital $1,241.8, and stated availability under the revolving credit facility $325.0. Cash included approximately $528.2 of net preferred-stock proceeds.
- Long-term debt, including current maturities and European lines of credit, was $1,910.3 gross; the balance-sheet carrying value after issuance costs and current maturities was $1,856.9. Separately, obligations collateralized by finance receivables were $735.9. Six-month capital expenditures were $46.7, compared with $78.4.
- Common dividends were suspended during the quarter. The company had declared $0.19 per share for the first half, and the filing reports $49.0 of dividends paid during the six months.
Material changes versus the prior comparable period
- COVID-19 restrictions sharply reduced auction activity, particularly in April. Q2 ADESA vehicles sold fell to 648,000 from 994,000; all Q2 sales were online, compared with 59% online in Q2 2019. AFC loan transactions declined to 420,000 from 437,000.
- Management reported a sequential improvement during Q2: April vehicle sales were about 27% of April 2019 volume; May was about 65% of May 2019; June volume was 8% above June 2019. These monthly comparisons are management-reported.
- AFC’s credit-loss provision rose to $19.0 in Q2 from $8.4, and to $35.9 for the first half from $16.6. The provision was 4.3% of average managed receivables in Q2 versus 1.7% a year earlier.
- Lower operating activity and the IAA-related debt paydown helped reduce interest expense: $30.9 in Q2 versus $55.6 and $68.9 for the first half versus $112.1. Six-month continuing-operations cash flow increased year over year, with management attributing the change partly to working-capital timing and non-cash adjustments.
Outlook, management commentary, and risks
- No quantified earnings or revenue guidance is provided. Management expected 2020 whole-car auction volumes and AFC loan transaction volumes to be below 2019, and stated that the pandemic’s duration and financial impact remained uncertain. The company could not estimate 2020 capital expenditures.
- Management said digital auction processes and lower staffing and overhead needs may be sustainable. It reported furloughing approximately 11,000 employees in April, recalling about 5,000, and initiating a reduction in force affecting approximately 3,000 employees.
- Liquidity measures included expense and compensation reductions, delayed or canceled capital projects, rent deferrals, the common-dividend suspension, and the June issuance of $550 million of perpetual convertible preferred stock for approximately $528.2 million net proceeds. The preferred stock carries a cumulative 7% annual dividend, initially payable in kind.
- A May 2020 credit-agreement amendment waived the financial covenant through June 30, 2021, imposed a monthly minimum-liquidity covenant of $225 million through September 30, 2021, and restricted certain investments, acquisitions, payments, and additional secured debt through the waiver period. The company reported covenant compliance at June 30, 2020 and said available liquidity was sufficient for foreseeable needs, while warning that continued market disruption could materially affect liquidity.
- Key risks include further COVID-19 disruption, used-vehicle supply, demand and pricing volatility, dealer defaults and recoveries, elevated credit losses, debt and covenant constraints, cybersecurity and remote-technology risks, and possible further goodwill or intangible impairments. Management reported no significant change in disclosed continuing-operations legal proceedings and considered ordinary-course matters unlikely to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer and reporting scope: the filing is KAR Auction Services, Inc.’s 10-Q, not a standalone Openlane, Inc. filing.
- Track auction volumes, conversion rates, digital transaction economics, and whether the June recovery continued after quarter-end.
- Monitor AFC delinquencies, credit-loss provisions, dealer relief-program effects, and collateral values.
- Review liquidity against the $225 million minimum covenant, debt restrictions, preferred-stock dividends and potential conversion dilution, and the suspended common dividend.
- Assess whether COVID-19 assumptions underlying the $29.8 million impairment remain appropriate and whether further impairments or cash needs emerge.