Business Context and Reporting Period
Company: KAR Auction Services, Inc. (formerly KAR Holdings, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: The Company operates three primary segments: ADESA (whole car auctions), IAAI (salvage vehicle auctions), and AFC (floorplan financing for used vehicle dealers). As of September 30, 2009, the network included 62 ADESA auctions and 152 IAAI auctions.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Operating Revenues | $430.1 | $1,311.7 |
| Operating Profit | $47.5 | $152.4 |
| Net Income | $8.6 | $17.9 |
| Operating Cash Flow | N/A | $239.1 |
| Long-Term Debt | $2,522.9 | $2,522.9 |
| Cash and Cash Equivalents | $380.8 | $380.8 |
| Working Capital | $447.3 | $447.3 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 3% ($14.5 million) for the quarter and 5% ($63.5 million) for the nine months compared to 2008, driven by lower vehicle volumes and reduced revenue per vehicle in the ADESA segment and lower average selling prices in the IAAI segment.
- Profitability Improvement: The Company returned to profitability, reporting a net income of $8.6 million for the quarter and $17.9 million for the nine months, compared to net losses of $169.9 million and $166.9 million, respectively, in the prior year periods. This turnaround is primarily due to the absence of a $164.4 million goodwill impairment charge recorded in the AFC segment in Q3 2008.
- Interest Expense Reduction: Interest expense decreased 25% ($12.8 million) for the quarter and 18% ($28.7 million) for the nine months, attributed to lower interest rates on variable debt and the replacement of a higher-rate interest rate swap.
- Segment Performance:
- ADESA: Revenue down 5% (quarter) and 3% (nine months); Operating profit up 38% (quarter) and 22% (nine months) due to cost controls and higher conversion rates.
- IAAI: Revenue flat (quarter) and down 3% (nine months); Operating profit up 15% (quarter) and down 2% (nine months).
- AFC: Revenue up 4% (quarter) and down 30% (nine months); Operating profit improved significantly from a loss of $160.8 million (quarter) and $136.9 million (nine months) in 2008 to profits of $8.0 million and $11.6 million in 2009, excluding the prior year impairment.
Guidance, Outlook, and Risks
- Outlook: Management expects capital expenditures of approximately $70 million for fiscal year 2009. The Company anticipates continued pressure from the economic downturn, including reduced consumer demand for used vehicles and potential declines in off-lease vehicle supply starting in 2011.
- Debt and Liquidity: The Company maintains a $300 million revolving credit facility (undrawn as of period end) and a $1.5 billion term loan. On October 23, 2009, the Company entered into an amendment to its Credit Agreement contingent on an IPO and debt prepayment, which would allow for equity ownership changes and debt restructuring.
- Risks:
- Economic Sensitivity: Significant exposure to the automotive industry cycle, consumer credit availability, and fuel prices.
- Debt Covenants: Substantial indebtedness ($2.5 billion) subjects the Company to restrictive covenants regarding leverage, dividends, and additional borrowing.
- Environmental Liability: Ongoing EPA investigation regarding the Lower Duwamish Waterway Superfund Site involving IAAI; potential liability cannot be estimated.
- Goodwill Impairment: Approximately $1.5 billion in goodwill remains on the balance sheet, which could be subject to future impairment charges if profitability declines.
Investor Verification Checklist
- Verify the status and conditions of the October 23, 2009 Credit Agreement amendment, specifically the requirement for an IPO and $250 million debt prepayment.
- Monitor the AFC segment's credit loss trends and delinquency rates, as the portfolio size has been reduced by 32% to mitigate risk.
- Assess the potential financial impact of the EPA investigation at the Lower Duwamish Waterway Superfund Site.
- Review the Company's ability to maintain compliance with senior secured leverage ratio covenants given the high debt load.
- Track the supply of off-lease vehicles, as management projects a decline in this inventory source beginning in 2011 due to reduced new vehicle lease originations.