OPENLANE, Inc. quarterly report, Q1 FY2021

Business context and reporting period

This is KAR Auction Services, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2021, compared with the same 2020 quarter. The filing is for KAR Auction Services, not a standalone OPENLANE, Inc. filing; Openlane is identified as part of the ADESA Auctions business. KAR operates ADESA Auctions, a vehicle remarketing and auction business, and AFC, which provides floorplan financing to used-vehicle dealers.

Key financial metrics

MetricQ1 2021Q1 2020 or comparison
Revenue$581.6 million$645.5 million; down 10%
Gross profit$251.2 million; 43.2% of revenue$250.9 million; 38.9% of revenue
Operating profit$55.2 million; 9.5% margin$40.8 million; 6.3% margin
Net income$50.9 million; diluted EPS $0.25$2.8 million; diluted EPS $0.02
Cash from operations$164.5 million$(49.2) million
Cash, including restricted cash$811.5 million at March 31, 2021$812.3 million at December 31, 2020
Working capital$869.5 million$924.6 million at December 31, 2020
Debt$1,906.6 million gross debt; $1,883.2 million carrying value, including current maturitiesGross debt was $1,902.9 million at December 31, 2020

Q1 net income included $50.2 million of other income, principally $60.5 million in realized and unrealized investment gains, partly offset by an $11.2 million increase in estimated contingent consideration. The $43.5 million unrealized gain related to an investment that became publicly traded. Accordingly, reported earnings benefited materially from investment gains that may not recur.

Material changes versus the prior comparable period

  • Revenue declined 10%, reflecting fewer vehicles sold and lower AFC revenue; 2020 acquisitions contributed $25.2 million of Q1 2021 revenue.
  • ADESA revenue fell 9% to $515.8 million. Vehicles sold declined 13% to 753,000: on-premise sales fell 25%, while off-premise sales rose 3%. Higher revenue per vehicle and lower operating costs helped raise ADESA operating profit to $14.1 million from a $0.5 million loss.
  • AFC revenue declined 16% to $65.8 million. Loan transactions fell 17% to 372,000, and revenue no longer included PWI warranty-contract revenue following its December 2020 sale. Lower credit-loss provision helped offset these factors.
  • Interest expense decreased 19% to $30.9 million, attributed primarily to lower average interest rates and debt balances, and lower AFC finance-receivable balances.
  • Operating cash flow improved to $164.5 million from cash used of $49.2 million. Management said timing of collections and payments to auction consignors was an important factor.
  • During Q1, KAR repurchased 5.2 million common shares for $80.8 million. The common-stock dividend remained suspended; preferred dividends of approximately $10.0 million were paid in kind.

Outlook, commentary, risks and unusual items

  • No earnings or revenue guidance is provided. The company expected fiscal 2021 capital expenditures of approximately $125 million.
  • Management said the pandemic’s continuing effects on vehicle volumes, operating conditions and liquidity remained uncertain. All ADESA sales were conducted through digital marketplaces in Q1; management cited lower labor needs for online transactions and expense reductions as potentially sustainable benefits.
  • Liquidity sources included $759.0 million of unrestricted cash, operating cash flow and revolving-credit availability. The $325 million revolver had no borrowings outstanding; $29.8 million of letters of credit reduced availability. The company reported compliance with applicable credit and securitization covenants and a 0.6 secured net leverage ratio.
  • Principal debt included $950 million of 5.125% senior notes due 2025 and a $950 million term loan facility due 2026. AFC had $1,239.1 million of obligations collateralized by finance receivables. Finance receivables managed totaled $1,984.4 million, with $25.5 million in allowance for credit losses.
  • In May 2021, after quarter-end, ADESA acquired Auction Frontier for $80 million cash plus up to $15 million contingent consideration. The business owns the Velocicast auction simulcast technology.
  • Risks discussed include pandemic-related disruptions and uncertain recovery, used-vehicle auction volumes and pricing, dealer defaults and credit losses, foreign-exchange exposure, variable interest rates, litigation and the possibility that estimated contingencies or asset values change. Management reported no significant change in previously disclosed legal proceedings and no off-balance-sheet arrangements.

Important facts for investors to verify

  1. Confirm the issuer and scope: this filing is KAR Auction Services’ consolidated 10-Q, not a standalone OPENLANE filing.
  2. Assess how much of Q1 earnings depended on the $60.5 million investment gains, including the $43.5 million unrealized gain, and whether those gains are repeatable.
  3. Track auction volumes, particularly the divergence between lower on-premise and growing off-premise sales, and whether service revenue and margins recover.
  4. Review AFC loan growth, dealer credit quality, credit-loss provisions and securitization capacity against the $1.98 billion managed receivables portfolio.
  5. Monitor liquidity and debt, including the effect of working-capital timing, planned capital spending, share repurchases, preferred dividends and the suspended common dividend.
  6. Evaluate the continuing impact of COVID-19 and the May 2021 Auction Frontier acquisition, including its cash and contingent-cost implications.