Business context and reporting period
This is KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The filing identifies Openlane as a subsidiary and online marketplace within ADESA; it is not an OPENLANE, Inc. filing. KAR operated ADESA Auctions, a wholesale vehicle remarketing business, and AFC, which provides floorplan financing to used-vehicle dealers.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $585.4 million | $419.0 million | $1,167.0 million | $1,064.5 million |
| Operating profit (loss) | $66.6 million | $(4.7) million | $121.8 million | $36.1 million |
| Net income (loss) | $11.5 million | $(32.3) million | $62.4 million | $(29.5) million |
| Diluted EPS | $0.01 | $(0.27) | $0.26 | $(0.24) |
| Operating cash flow | Not separately presented | Not separately presented | $295.7 million | $268.9 million |
Q2 revenue rose 40% year over year, with acquired businesses contributing $39.7 million. First-half revenue increased 10%, including $64.9 million from acquisitions. First-half net income included $35.4 million of other income, principally realized and unrealized investment gains; this is a significant factor when assessing earnings quality. Q2 other expense was $14.8 million, including a $4.5 million contingent-consideration valuation increase and a reduction in unrealized investment gains.
Q2 gross profit was $252.2 million, or 43.1% of revenue, compared with $183.9 million, or 43.9%, a year earlier. First-half gross profit was $503.4 million, or 43.1% of revenue, versus $434.8 million, or 40.8%. ADESA’s gross margin excluding purchased vehicle sales was 47.1% in both Q2 and the first half; purchased vehicle sales affect reported margin because the full vehicle sale price and cost are recorded.
Segments and operating trends
- ADESA Auctions: Q2 revenue increased 43% to $516.8 million; vehicles sold rose 10% to 711,000. First-half revenue rose 11% to $1,032.6 million, while vehicles sold fell 3% to 1.464 million. Commercial volumes declined 18% in Q2 and 19% in the first half. Higher vehicle values and a shift toward dealer consignments supported auction fees per vehicle.
- AFC: Q2 revenue rose 21% to $68.6 million, while loan transactions fell 15% to 356,000. First-half revenue was nearly flat at $134.4 million, with transactions down 16% to 728,000. Lower credit-loss provisions supported results: 0.4% of average managed receivables in Q2 and 0.7% for the first half, versus 4.3% and 3.8%, respectively, in 2020.
Cash, debt and liquidity
- At June 30, 2021, cash and cash equivalents were $621.6 million and restricted cash was $53.8 million, down from $752.1 million and $60.2 million at year-end 2020. Working capital was $731.3 million, versus $924.6 million at year-end.
- First-half operating cash flow was $295.7 million. Investing activities used $325.7 million, principally reflecting increased finance receivables held for investment, the Auction Frontier acquisition and securities investments. Financing activities used $113.3 million, including $180.9 million of common-stock repurchases. Cash, cash equivalents and restricted cash declined by $136.9 million during the period.
- Long-term debt was $1,851.8 million, with $22.7 million of current maturities; gross debt before unamortized costs and discounts was $1,896.6 million. The company also had $1,324.2 million of obligations collateralized by finance receivables. No Revolving Credit Facility borrowings were outstanding; the $325 million facility was subject to $29.7 million of outstanding letters of credit.
- The company reported a 0.8 consolidated senior secured net leverage ratio and compliance with applicable debt and securitization covenants. It stated that available cash, operating cash flow and credit capacity should meet operating and debt-service needs for the foreseeable future, while warning that further deterioration in market conditions could materially affect liquidity.
Material changes, outlook and risks
- Results improved markedly against Q2 2020, when pandemic-related operating disruption and a $29.8 million ADESA U.K. goodwill and customer-relationship impairment contributed to a loss. Q2 2021 had no impairment charge.
- In May 2021, ADESA acquired Auction Frontier, owner of the Velocicast simulcast technology. The preliminary purchase price was $92.2 million, including $79.8 million net cash paid and $12.4 million estimated contingent consideration; preliminary goodwill was $73.8 million. The acquisition’s reported-period impact was described as immaterial.
- The company cited semiconductor-related shortages of new vehicles, elevated used-vehicle prices, fewer off-lease vehicles and fewer repossessions as factors weighing on commercial auction volumes. It cautioned that COVID-19 effects and future industry volumes remained uncertain.
- No specific revenue or earnings forecast was provided. Management expected 2021 capital expenditures of approximately $125 million. The common-stock dividend remained suspended; Series A preferred stock carried a cumulative 7% annual dividend, paid in kind during the first half.
- Other risks include changes in used-vehicle demand and pricing, AFC dealer defaults and collateral recoveries, variable interest rates, foreign-currency movements, acquisition-related contingent payments, and ordinary-course litigation. Management said litigation was not generally expected to have a material adverse effect. Disclosure controls were reported effective.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for KAR Auction Services, Inc.; Openlane is described as a subsidiary/platform, not the registrant.
- Assess how much first-half earnings depended on investment gains, including $31.6 million of unrealized gains, and on the sharp reduction in AFC credit-loss provisions.
- Track commercial vehicle volumes and whether improved auction revenue per vehicle can offset lower volumes and mix changes.
- Review cash conversion and working-capital movements, including the growth in finance receivables and related securitized obligations.
- Monitor acquisition accounting and contingent consideration, covenant compliance, facility availability after letters of credit, and the timing of any common-dividend reinstatement.