OPENLANE, Inc. quarterly report, Q3 FY2014

Business context and reporting period

This is KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014—not a standalone OPENLANE filing. OPENLANE is identified as a wholly owned ADESA subsidiary whose technology supports online remarketing; the filing does not provide separate OPENLANE financial results. KAR operates ADESA whole-car auctions, IAA salvage auctions, and AFC dealer financing.

Financial performance

Amounts are in millions of dollars, except per-share data. Comparisons are with the corresponding 2013 periods.

• Q3 revenue rose 10%; operating profit and net income increased substantially. Nine-month revenue rose 8%, operating profit 24%, and net income 40%.
• Revenue grew across all three segments. Q3 ADESA revenue increased 12% and IAA 9%, principally on higher vehicles sold; AFC revenue increased 7%, supported by higher loan transactions and PWI service-contract revenue.
• Q3 consolidated gross profit, defined as revenue less cost of services before depreciation and amortization, was $261.1 million versus $237.5 million. SG&A was $116.5 million versus $120.3 million.
• Nine-month results include a $30.3 million pretax, non-cash debt extinguishment charge from the March refinancing. The 2013 comparison included $5.4 million of debt modification/extinguishment charges.
• For the nine months, total other comprehensive loss was $11.4 million, mainly foreign-currency translation; comprehensive income was $107.6 million.

Cash, debt and liquidity

• At September 30, 2014, cash and cash equivalents were $214.9 million, working capital $451.3 million, and reported available cash excluding cash in transit $148.6 million. Approximately $49.4 million of available cash was held by foreign subsidiaries.
• Nine-month operating cash flow was $327.7 million; investing cash outflow was $290.1 million, including a $191.6 million net increase in finance receivables held for investment, $30.9 million for acquisitions and equity-method investments, and $70.3 million in capital expenditures. Financing cash outflow was $9.3 million. Cash increased $23.3 million.
• Corporate term-loan principal was $1,759.6 million before unamortized discount; balance-sheet long-term debt was $1,740.9 million, with $16.1 million of current maturities. AFC also reported $858.8 million of obligations collateralized by finance receivables.
• The $250 million revolving facility had no borrowings; $26.4 million of letters of credit reduced borrowing availability. The company reported a 2.83-to-1.0 senior secured leverage ratio and compliance with credit covenants.
• March 2014 refinancing established Term Loan B-1 due 2017 and Term Loan B-2 due 2021, at September 30 rates of 2.75% and 3.50%, respectively. Management said lower borrowing rates reduced interest expense and expected liquidity to cover operating needs, capital requirements, and debt service for the next 12 months.

Outlook, risks and notable items

• Management estimated North American whole-car auction volumes of approximately 9.1 million units in 2014, 9.5 million in 2015, and 9.7 million in 2016. These are industry estimates, not company revenue or earnings guidance.
• Fiscal 2014 capital expenditures were expected to be approximately $105 million. The company said it expected, subject to board approval, quarterly dividends of $0.27 per share in 2015. A separate authorization permits up to $300 million of share repurchases from October 29, 2014 through October 28, 2016; timing and amounts are subject to market and other conditions.
• ADESA acquired a 50% interest in TradeRev for $30 million cash in August 2014 to support dealer-to-dealer online auctions. The investment’s asset allocation remained under evaluation; KAR recorded $0.2 million of its share of TradeRev losses through August 31.
• IAA’s first nine months of 2013 included a $13.5 million pretax net loss from processing more than 45,000 Superstorm Sandy vehicles, affecting year-over-year segment margin comparisons. Excluding Sandy, IAA reported nine-month revenue and volume growth of 12% and 11%, respectively.
• Key risks include auction supply and demand, vehicle pricing, competition and online-platform shifts, AFC dealer defaults and credit losses, variable interest rates, foreign currency, substantial debt and restrictive covenants, weather, environmental matters, and litigation. The company had not hedged Canadian or Mexican currency exposure. A hypothetical 100-basis-point increase in short-term rates would have increased interest expense by about $3.0 million for Q3 and $7.9 million for the nine-month period.
• IAA’s potential responsibility at the Lower Duwamish Waterway Superfund site remained undetermined; the filing said the company could not estimate any related loss. Management stated ordinary-course litigation was not generally expected to materially affect the company.
• Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Investor verification points

• Confirm the correct issuer and scope: this is KAR Auction Services’ consolidated filing, with OPENLANE included within ADESA and no standalone OPENLANE results.
• Assess the quality and sustainability of earnings growth, including segment cost trends, AFC credit-loss provisions, and the non-cash refinancing charge.
• Reconcile liquidity and debt availability, including letters of credit, AFC securitization obligations, and covenant definitions and headroom.
• Check whether projected capital spending, the anticipated dividend, and the authorized buyback proceeded as described, and their effect on cash and leverage.
• Monitor TradeRev investment performance, foreign-exchange effects, salvage pricing and volume, and the unresolved environmental contingency.