OPENLANE, Inc. — filing summary
Filing identity: The supplied filing is KAR Auction Services, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, filed February 20, 2018. It identifies Openlane as a KAR subsidiary within ADESA; it is not a standalone OPENLANE 10-K. Annual figures below compare 2017 with 2016; fourth-quarter figures compare the three months ended December 31.
Business context
KAR operated whole-car auctions and related services through ADESA, salvage-vehicle auctions through IAA, and dealer floorplan financing through AFC. It reported 250 North American auction locations and facilitated approximately 5.5 million used and salvage vehicle sales in 2017. It generally acted as an auction agent rather than taking title to consigned vehicles.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $3,458.0 million | $3,150.1 million | +10% |
| Operating profit | $566.0 million | $499.0 million | +13% |
| Net income | $362.0 million | $222.4 million | +63% |
| Diluted EPS | $2.62 | $1.60 | +64% |
| Cash from operations | $588.8 million | $378.0 million | +$210.8 million |
| Capital expenditures | $152.2 million | $155.1 million | −2% |
- Consolidated gross profit was $1,470.8 million, or approximately 42.5% of revenue; operating margin was approximately 16.4%.
- Segment revenue and operating profit: ADESA $1,937.5 million and $340.5 million; IAA $1,219.2 million and $240.9 million; AFC $301.3 million and $153.9 million.
- At year-end, cash and cash equivalents were $317.2 million, working capital was $748.2 million, and total assets were $6,984.3 million.
- Corporate debt was approximately $2.7 billion gross, or $2,680.1 million net of issuance costs and discounts. The company also reported $1,358.1 million of obligations collateralized by AFC finance receivables; these are separate from corporate debt.
- The $350 million senior secured revolving facility had no borrowings at year-end; $42.8 million of letters of credit reduced borrowing capacity. The company reported a 2.01:1 senior secured leverage ratio and compliance with debt covenants.
- Cash dividends paid were $174.8 million and share repurchases were $150.0 million in 2017. The company reported $1,251.1 million of future operating lease payments under existing agreements.
Material changes versus the prior comparable period
- ADESA revenue increased 10%, with vehicles sold rising 10% to 3.18 million; online-only sales rose to 938,000 from 743,000. Its physical-auction conversion rate improved to 60.4% from 58.0%.
- IAA revenue increased 11%, with vehicles sold up approximately 8% to 2.369 million. Its gross margin rose to 36.2% from 35.5%; results included costs and revenue related to Hurricanes Harvey and Irma.
- AFC revenue increased 5% and operating profit rose to $153.9 million from $144.1 million. Loan transactions declined 2%, while revenue per transaction increased 7%; credit-loss provision was $33.9 million versus $30.7 million.
- Interest expense increased 18% to $164.0 million, primarily reflecting higher average corporate debt, higher rates, and increased AFC financing costs.
- Cash from operations rose substantially, partly due to improved profitability and the timing of collections and consignor payments. Investing cash outflow fell to $379.8 million from $765.3 million, chiefly because acquisition spending was lower than in 2016.
Outlook, commentary, risks, and unusual items
- Management expected North American whole-car auction volumes to remain above 11 million units annually in 2018–2020 and forecast salvage-auction industry growth of 5%–7% annually. These are industry expectations, not company earnings guidance.
- Management estimated a 26%–28% future effective tax rate following U.S. tax reform and planned approximately $185 million of 2018 capital expenditures, about half related to technology. A quarterly dividend of $0.35 per share in 2018 was expected subject to board approval.
- 2017 net income included a $102.7 million deferred-tax benefit from remeasuring deferred tax balances under the Tax Cuts and Jobs Act, partly offset by $11.1 million of transition-tax expense. The resulting 9.0% effective tax rate is not directly representative of the anticipated future rate.
- Other notable items included a $21.6 million noncash gain from remeasuring KAR’s previously held TradeRev interest when it acquired the remaining 50%, and a $27.5 million noncash debt-extinguishment charge from the May 2017 refinancing.
- In the fourth quarter, net income was $172.8 million versus $45.5 million a year earlier; the quarter included the tax remeasurement benefit and the TradeRev gain. Fourth-quarter operating profit was $123.4 million versus $111.9 million.
- Principal risks include competition from online marketplaces and direct selling, volume and vehicle-price swings, reliance on key institutional and insurance consignors, AFC dealer credit losses, cybersecurity and technology execution, acquisition integration, weather and catastrophe exposure, variable-rate debt, foreign exchange, and environmental or regulatory liabilities.
- IAA’s potential responsibility at the Lower Duwamish Waterway Superfund site remained undetermined and the company could not estimate a loss. The site cleanup plan was estimated by EPA at $342 million overall; that amount is not an estimate of KAR’s or IAA’s share.
- KAR acquired DRIVIN, Dependable Auto Shippers, the remaining TradeRev interest, and POIS during 2017; it acquired STRATIM in February 2018. Management stated that 2017 acquisitions had an immaterial effect on consolidated results. Acquisition consideration included contingent payments, with maximum undiscounted contingent payments for 2017 acquisitions of approximately $60 million.
Important facts for investors to verify
- Confirm the reporting entity: the filing is for KAR Auction Services, Inc., with Openlane described as a subsidiary and technology platform.
- Separate recurring operating performance from the $102.7 million tax remeasurement benefit, the $21.6 million TradeRev remeasurement gain, and the $27.5 million debt-extinguishment charge.
- Review corporate debt and AFC’s receivables-backed obligations separately, including interest-rate exposure, covenant terms, and actual revolver availability after letters of credit.
- Assess whether auction volume, online-only mix, segment margins, and AFC credit losses support the company’s industry outlook and planned capital spending.
- Monitor the unresolved Lower Duwamish Waterway matter, acquisition-related contingent payments, and the company’s ability to recover remaining hurricane-response costs.