Business context and reporting period
Filing identity: The supplied filing is KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011. It is not identified in the filing as OPENLANE, Inc.; verify the issuer before relying on this summary.
KAR operated whole-car auctions through ADESA, salvage-vehicle auctions through IAAI, and dealer floorplan financing through AFC. At quarter-end, it reported 70 ADESA auctions, 159 IAAI sites, and 89 AFC loan production offices.
Financial performance and position
Amounts below are in millions of dollars except per-share data, percentages, and operating statistics.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $470.6 | $470.0 | $953.3 | $928.4 |
| Operating profit | $75.3 | $85.7 | $148.7 | $149.8 |
| Net income (loss) | $(14.3) | $28.6 | $25.5 | $36.7 |
| Net income (loss) per share | $(0.11) | $0.21 | $0.19 | $0.27 |
| Operating cash flow | Not separately presented | Not separately presented | $157.5 | $327.9 |
| Adjusted EBITDA (non-GAAP) | $132.1 | $131.0 | $259.4 | $251.1 |
Q2 gross profit, calculated as revenue less cost of services, was $217.8 million (about 46.3% of revenue), versus $218.3 million (about 46.4%). Operating margin was about 16.0%, versus 18.2%. For the six months, gross profit was $437.4 million (about 45.9%), versus $420.7 million (about 45.3%); operating margin was about 15.6%, versus 16.1%.
At June 30, 2011, cash and cash equivalents were $200.3 million, working capital $286.6 million, and total assets $4.65 billion. Total debt was $1.85 billion at face value ($1.825 billion long-term carrying value plus $17 million current maturities); obligations collateralized by finance receivables were a separate $536.4 million. The company reported no revolver borrowings and $250 million of stated facility availability; $29.6 million of letters of credit reduced borrowing availability. It was in compliance with debt and securitization covenants.
Material changes versus comparable periods
- Q2 revenue was nearly flat, but operating profit fell 12% and the company reported a net loss, compared with prior-year net income. The $53.5 million debt-extinguishment loss and higher interest expense were major factors.
- For the first half, revenue rose about 3%, while operating profit was slightly lower and net income declined about 31%. Operating cash flow fell to $157.5 million from $327.9 million; management attributed much of the comparison to working-capital movements and 2010 finance-receivable accounting effects.
- ADESA revenue fell 8% in Q2 and 5% in the first half, mainly as vehicle sales volumes declined 14% and 10%, respectively. Higher revenue per vehicle partly offset the volume decline; lower conversion rates and a shift toward dealer consignments pressured results.
- IAAI revenue rose 10% in both periods, supported by higher salvage volumes, average selling prices, and non-insurance vehicle sales. AFC revenue rose 22% in Q2 and 34% year to date, reflecting more loan transactions, higher revenue per transaction, and portfolio growth.
- ADESA operating profit declined, while IAAI and AFC operating profit increased. Corporate expense increased, including higher non-cash stock-based compensation.
Outlook, management commentary, risks, and unusual items
- Management expected 2011 capital expenditures of approximately $85 million; $39.3 million had been spent in the first half. Management stated that cash, operating cash flow, working capital, and credit availability should cover operating needs, capital requirements, and debt service for the next 12 months.
- Management expected an approximately 25% effective tax rate for 2011, reflecting tax deductions not expected to recur. The first-half tax benefit included a $14.4 million reversal of uncertain-tax-position reserves after statutes of limitation expired.
- Management said industry whole-car auction volumes were likely to be below 8 million units in 2011, with supply shortages expected to continue into 2012. This is industry commentary, not a specific company earnings forecast.
- In May 2011, KAR refinanced its prior credit agreement with a $1.7 billion, six-year secured term loan and a $250 million, five-year secured revolver. The new term loan carried a 5.0% rate at quarter-end, with an adjusted LIBOR floor, and quarterly principal payments were scheduled to begin September 30, 2011. KAR also repaid $450 million of 8.75% notes and $131.1 million of 10% subordinated notes.
- The refinancing and note repayments produced a $53.5 million debt-extinguishment charge. Terminating a $650 million interest-rate swap required a $14.5 million payment, recognized in interest expense. A $5.9 million reversal of contingent acquisition consideration increased other income.
- Material risks cited include vehicle supply and demand, auction volumes and pricing, dealer credit losses, interest rates, substantial debt and restrictive covenants, competition, regulation, environmental exposure, litigation, and execution of acquisitions and technology initiatives. The filing described ordinary-course litigation and a potential environmental matter involving IAAI’s site near Seattle’s Lower Duwamish Waterway; no EPA payment demand or action had been made at the filing date.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm issuer identity: the filing names KAR Auction Services, Inc., not OPENLANE, Inc.
- Assess the extent to which the Q2 loss and higher interest expense reflect nonrecurring refinancing and swap-termination charges, versus ongoing earnings and funding costs.
- Track ADESA vehicle volumes, conversion rates, and consignor mix against the continued industry supply shortage.
- Review AFC portfolio growth, delinquencies, credit losses, and dependence on receivables securitization; the filing reported $2.3 million of delinquent managed receivables against $789.5 million total managed.
- Reconcile stated revolver availability with outstanding letters of credit, and monitor debt-service requirements, interest-rate exposure, and covenant headroom.
- Evaluate the sustainability of cash generation, planned capital spending, tax-rate expectations, and the environmental and other contingent exposures.