OPENLANE, Inc. (then KAR Auction Services, Inc.) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. The filing was issued under KAR Auction Services, Inc. The company announced it would change its name to OPENLANE, Inc., effective May 15, 2023, while retaining NYSE ticker KAR.
Business context
The company operates digital wholesale used-vehicle marketplaces and AFC, a dealer floorplan-financing business, across North America and Europe. Results for the ADESA U.S. physical auction business, sold to Carvana in May 2022, are reported as discontinued operations. Q1 2023 results therefore reflect continuing operations and are not directly comparable to the prior-year business mix.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue from continuing operations | $420.6 million | $369.4 million |
| Operating profit | $65.4 million | $13.7 million |
| Income (loss) from continuing operations | $12.7 million | $(8.4) million |
| Net income (loss) | $12.7 million | $(0.3) million |
| Basic and diluted EPS | $0.01 | $(0.09) net EPS |
| Operating cash flow—continuing operations | $96.1 million | $(22.6) million |
Revenue increased 14%. Cost of services was $224.2 million, leaving gross profit of $196.4 million, compared with $158.6 million. SG&A declined to $108.0 million from $118.9 million. Interest expense rose 50% to $38.3 million, principally reflecting higher AFC securitization rates; other expense was $7.1 million, including an $11.0 million impairment of an equity investment and related note receivable. The effective tax rate was 36.5%.
- Marketplace: Revenue rose 13% to $321.0 million, while vehicles sold fell 6% to 330,000 amid constrained wholesale supply. Service revenue increased 20% to $165.6 million; auction fees edged down 1% to $99.9 million. Segment operating loss narrowed to $3.6 million from $42.9 million. Gross profit excluding purchased vehicles was 42.6% of revenue, versus 37.4%.
- Finance: Revenue increased 18% to $99.6 million; loan transactions rose 13% to 420,000. Operating profit was $69.0 million, up from $56.6 million. The credit-loss provision increased to $12.0 million from $1.4 million.
Cash and liquidity at March 31: Cash and cash equivalents were $219.6 million; restricted cash was $32.2 million; working capital was $408.6 million. The company reported $241.0 million available under its revolving credit facility, net of letters of credit. Continuing-operations investing cash outflow was $13.6 million and financing cash outflow was $116.5 million. Cash, cash equivalents and restricted cash totaled $251.8 million at quarter-end, down $25.9 million during the quarter.
Debt and financing: Reported long-term debt was $435.8 million before $4.0 million of issuance costs/discounts; $225.8 million was classified as current. This included $350 million of 5.125% senior notes due 2025, $65 million drawn on the revolving facility, and $20.8 million on European credit lines. Separately, current obligations collateralized by finance receivables were $1,638.2 million. The company was in compliance with applicable debt and securitization covenants. It had $2.0 billion of committed U.S. receivables-facility liquidity; the Canadian facility was increased to C$300 million.
Material changes and unusual items
- Marketplace revenue and operating results improved despite lower vehicle volumes, reflecting higher service revenue and reduced SG&A. The former U.S. physical auction business contributed $220.0 million revenue and $8.1 million after-tax income in Q1 2022, but none in Q1 2023, as it is now discontinued.
- Higher interest rates materially increased AFC financing costs: the average rate on AFC securitization obligations was approximately 6.6%, compared with 2.3% in Q1 2022. The company cited a 450-basis-point increase in the federal funds rate since March 31, 2022.
- Cash of approximately $30 million was received in Q1 under commercial and transition-services agreements with Carvana. The company also reported $7.0 million of final sale proceeds from discontinued operations in investing cash flow.
- The company recorded an $11.0 million impairment involving an investee that filed for bankruptcy reorganization. It comprised a $3.7 million equity-investment impairment and a credit impairment on a $7.3 million note receivable.
- A material weakness in cash-flow presentation controls identified in Q4 2022 was reported as remediated during Q1 2023. Management concluded disclosure controls were effective.
Outlook, risks and contingencies
- Management expects volatility in used-vehicle values and wholesale volumes to continue, citing supply-chain constraints, reduced new-vehicle production, inflation, higher interest rates, energy-price volatility and weaker consumer confidence. It expects used-vehicle market conditions and platform volumes to improve in coming years, but provides no quantified revenue or earnings guidance.
- For 2023, continuing-operations capital expenditures are expected to be approximately $65 million. AFC’s credit-loss provision is expected to be 2% or less of average managed receivables annually, though quarterly losses may vary.
- Management said cash, operating cash flow, working capital and available credit should fund foreseeable operating needs, capital requirements and debt service; it cautioned that absent recovery or further deterioration in market conditions could materially affect liquidity.
- The company was required to offer to redeem or repay approximately $140 million of senior notes within 10 business days of May 10, 2023, under the indenture’s excess-proceeds terms. The filing classifies $140 million of notes as current debt.
- The planned OPENLANE brand transition may trigger a non-cash impairment review in Q2 2023 of the $122.8 million ADESA tradename and certain other tradenames carried at $1.3 million, and a reassessment of the ADESA tradename’s useful life.
- Risks include AFC credit losses and collateral values, used-vehicle supply and pricing, interest-rate exposure, foreign-currency movements, customer and dealer demand, and ordinary-course litigation. Management did not expect outstanding legal matters to have a material adverse effect based on information then available.
Important facts for investors to verify
- Whether Marketplace volume and profitability improve as wholesale supply conditions change, and whether service-revenue growth persists.
- Actual AFC credit losses, delinquencies and portfolio performance relative to management’s annual expectation of 2% or less.
- Cash flow quality: Q1 operating cash flow benefited from timing-related working-capital movements, including accounts payable and accrued expenses.
- Execution and funding of the approximately $140 million senior-note redemption or repayment, alongside upcoming debt maturities and covenant compliance.
- Any Q2 2023 impairment charge or useful-life change resulting from the OPENLANE rebranding and ADESA tradename review.
- Continuing cash availability, including the location and potential tax costs of repatriating approximately $160.5 million held by foreign subsidiaries.