OPENLANE, Inc. — Filing Summary
Filing identity: The supplied filing is KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2015. It identifies OPENLANE as a wholly owned subsidiary of ADESA, not as the registrant. Accordingly, the financial results below are for KAR Auction Services on a consolidated basis.
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. ADESA’s online offerings use OPENLANE technology. Results cover the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $666.7 million | $589.1 million | $1,957.4 million | $1,758.5 million |
| Operating profit | $106.0 million | $95.7 million | $330.4 million | $281.0 million |
| Net income | $52.3 million | $47.5 million | $166.3 million | $119.0 million |
| Diluted EPS | $0.37 | $0.33 | $1.16 | $0.84 |
| Cash flow from operations | Not separately stated | Not separately stated | $315.4 million | $327.7 million |
- Q3 revenue rose 13% and operating profit rose 11%; nine-month revenue rose 11% and operating profit rose 18%. Net income increased 10% in Q3 and 40% year to date. The 2014 year-to-date comparison included a $30.3 million debt-extinguishment charge.
- Q3 gross profit was $288.6 million, or 43.3% of revenue, versus $261.1 million, or 44.3%. Nine-month gross profit was $860.7 million, or 44.0%, versus $783.9 million, or 44.6%. IAA margin pressure and growth in lower-margin services affected margins.
- At September 30, cash and cash equivalents were $125.3 million, working capital was $236.7 million, and availability under the revolving facility was $119.5 million. Working capital declined from $484.3 million at year-end 2014, primarily reflecting cash use and short-term borrowing for share repurchases and other needs.
- Reported debt was $1,870.3 million, including $130.5 million drawn on the revolving facility; the company intended to repay that draw within twelve months. Separately, $1,122.9 million of obligations collateralized by finance receivables funded AFC’s lending business. The company reported covenant compliance and a 2.83-to-1.0 senior secured leverage ratio, against a 3.75-to-1.0 maximum for the quarter.
- Operating cash flow was $315.4 million; investing cash outflow was $382.5 million, including $115.2 million for acquisitions and $92.3 million for capital spending. Financing provided $53.6 million, including share repurchases, dividends, revolver borrowing and increased receivables-backed obligations. Cash fell $27.6 million to $125.3 million.
Material changes and segment results
- ADESA: Q3 revenue increased 14% to $351.4 million, primarily as vehicles sold increased 15%. Online sales were about 38% of volume. Operating profit rose to $58.6 million. For nine months, revenue rose 13% to $1,024.4 million and operating profit to $175.2 million.
- IAA: Q3 revenue increased 13% to $246.2 million as vehicle sales rose approximately 16%, but revenue per vehicle declined 3%. Operating profit increased to $41.6 million. Gross margin fell to 35.5% from 37.7%, partly reflecting HBC and purchase-contract vehicles. Lower scrap prices also weighed on revenue per vehicle.
- AFC: Q3 revenue increased 9% to $69.1 million, with loan transactions up 13%; operating profit rose to $34.4 million. Managed receivables were $1,529.6 million, up from $1,285.3 million a year earlier. The portfolio was reported as over 99% current at September 30.
- ADESA acquired Pittsburgh Auto Auction, MobileTrac, a vehicle-inspection business from DataScan Field Services, AutoNiq and UK salvage-auction operator HBC. Aggregate nine-month acquisition consideration, net of cash acquired, was approximately $124.8 million; the acquisitions’ consolidated financial impact was described as immaterial.
Outlook, commentary, risks and unusual items
- Management estimated North American whole-car auction volumes of approximately 9.6 million units in 2015, 10 million in 2016 and over 10 million in 2017, citing expected growth in off-lease, repossessed, rental and dealer-consigned vehicles. These are estimates, not company guidance.
- Management expected 2015 capital expenditures of approximately $134 million. The planned ADESA Chicago greenfield facility was estimated to cost $30 million to $35 million over two years, including about $19 million in 2015.
- Management said existing cash, operating cash flow, working capital and credit availability should meet operating needs, capital requirements and debt service for the foreseeable future and the next twelve months.
- Salvage economics are exposed to vehicle and commodity prices: the average crushed-auto-body price fell from $312 per ton in December 2013 to $124 in September 2015. A stronger U.S. dollar also reduced nine-month revenue by $34.9 million, operating profit by $11.8 million and net income by $6.5 million.
- Other key risks include auction volumes and conversion rates, dealer credit losses, competition, interest-rate exposure, debt and restrictive covenants, technology and cybersecurity, acquisition integration, weather, regulation and environmental liabilities. A hypothetical 100-basis-point increase in short-term rates was estimated to increase interest expense by $8.6 million for the nine-month period, taking interest-rate caps into account.
- The company paid $200 million under an accelerated share repurchase arrangement in August for an initial delivery of approximately 4.6 million shares; final shares and average price were to be determined by expected completion on February 19, 2016. The company declared a $0.27-per-share quarterly dividend and announced another payment for January 2016, subject to board approval and applicable restrictions.
- IAA remains a potentially responsible party in the Lower Duwamish Waterway Superfund matter. The EPA had not specified the basis for IAA’s potential responsibility or demanded payment or remediation; the company said it could not estimate any potential loss. The overall site cleanup estimate was $342 million, not an estimate of IAA’s share.
Most important facts for investors to verify
- Confirm the registrant and reporting scope: this is KAR Auction Services’ consolidated filing, not a standalone OPENLANE filing.
- Track whether higher auction volumes translate into sustained margins, especially at IAA amid lower scrap prices and purchase-contract mix.
- Review the use of cash for repurchases and dividends, the remaining revolver capacity, and repayment of the $130.5 million revolver draw.
- Assess AFC receivables quality, delinquency and credit-loss trends, and the capacity and covenants of its receivables-backed funding facilities.
- Monitor foreign-exchange and interest-rate effects, acquisition integration and contingent consideration, and developments in the Lower Duwamish matter.