OPENLANE, Inc. — Filing summary
Entity and period: The supplied filing is KAR Auction Services, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018, not a standalone OPENLANE, Inc. filing. It identifies Openlane as a wholly owned ADESA subsidiary and technology provider. The reported results are consolidated KAR results; they do not separately disclose Openlane’s financial performance.
Business context and reporting period
KAR operated three reportable businesses: ADESA whole-car auctions and related services, IAA salvage auctions, and AFC dealer floorplan financing. At quarter-end, its network included 75 ADESA whole-car auction sites, 178 IAA salvage auction sites, and 130 AFC locations in the U.S. and Canada. The filing presents third-quarter and nine-month results through September 30, 2018, compared with the same periods in 2017; balance-sheet comparisons are with December 31, 2017.
Financial results and liquidity
Amounts are in millions of dollars, except per-share data, percentages, and vehicle volumes.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $933.5 | $843.0 | $2,840.6 | $2,567.6 |
| Gross profit | $400.3 | $363.8 | $1,241.1 | $1,105.5 |
| Operating profit | $148.7 | $141.9 | $482.1 | $442.6 |
| Net income | $77.5 | $62.8 | $260.7 | $189.2 |
| Diluted EPS | $0.57 | $0.46 | $1.92 | $1.37 |
| Adjusted EBITDA, non-GAAP | $215.7 | $209.3 | $687.3 | $643.4 |
Revenue increased 11% in both comparison periods. Calculated gross margin was approximately 42.9% in Q3 2018 versus 43.2% a year earlier, and 43.7% for the first nine months versus 43.1%. Calculated operating margin was approximately 15.9% versus 16.8% in Q3 and 17.0% versus 17.2% year to date. Net margin was approximately 8.3% versus 7.5% in Q3 and 9.2% versus 7.4% year to date.
- Segment trends: Q3 revenue rose 10% at ADESA to $527.0, 12% at IAA to $321.1, and 9% at AFC to $85.4. Q3 operating profit was $75.5 at ADESA, $65.5 at IAA, and $52.1 at AFC. ADESA operating profit declined from $88.4 despite increased volume and revenue, reflecting higher expenses, including acquisition-related costs, and lower gross margin. IAA and AFC operating profit increased.
- Cash flow: Nine-month operating cash flow was $585.8, compared with $487.9; investing cash outflow was $234.1 versus $200.3; financing cash outflow was $205.7 versus $73.1. Cash, cash equivalents, and restricted cash increased $141.1 to $477.7. Capital expenditures were $121.1; the filing expected approximately $185 for full-year 2018.
- Liquidity: September 30 cash and cash equivalents were $455.1, restricted cash $22.6, and working capital $846.7. The $350 revolving credit facility had no borrowings; $32.4 of letters of credit reduced borrowing availability. Management said available liquidity was sufficient for foreseeable operating needs and the next 12 months’ capital requirements, debt service, announced acquisitions, and dividends.
- Debt: Long-term debt, net of issuance costs and current maturities, was $2,657.6; total stated debt before those deductions was $2,694.9. Separately, $1,366.3 of obligations collateralized by AFC finance receivables was reported as current liabilities. The company reported a 1.89-to-1.0 senior secured leverage ratio against a 3.5-to-1.0 covenant limit applicable when revolving loans are outstanding, and said it was in compliance with debt covenants.
- Other financial items: Interest expense increased 19% to $49.2 in Q3 and 14% to $139.2 year to date, chiefly due to higher rates and, for the year-to-date period, higher average corporate debt. Effective tax rates fell to 24.5% for Q3 and 25.0% year to date, primarily reflecting the 2017 U.S. tax law change. Dividends declared were $0.35 per share per quarter in 2018.
Material changes versus prior periods
- Growth reflected more auction transactions, higher revenue per vehicle in some channels, and increased AFC loan transactions and yield. Acquisitions contributed $10.6 of Q3 revenue and $26.3 of nine-month revenue.
- ADESA sold 876,000 vehicles in Q3, up 11%; online-only volume rose to 343,000 from 241,000. For the first nine months, ADESA volume increased 9%, while physical-auction volume fell 4%. TradeRev expansion contributed to online growth but remained investment-intensive.
- IAA sold 597,000 vehicles in Q3, up 6%, and 1,863,000 year to date, up 8%. AFC loan transactions were 433,000 in Q3, up 8%, and 1,332,000 year to date, up 5%.
- Nine-month net income benefited from the lower tax rate and the absence of the $27.5 debt-extinguishment loss recorded in 2017. Higher interest expense and corporate/segment SG&A partly offset operating growth. The share count was lower year over year; KAR repurchased $50.0 of shares in the first nine months of 2018 and none in Q3.
- KAR adopted revenue-recognition Topic 606 using the modified retrospective method, reducing opening retained earnings by $3.0; prior periods were not restated. The STRATIM acquisition closed February 1, 2018, for approximately $23.3 net of acquired cash, and its reported impact was immaterial to consolidated results.
Outlook, commentary, risks, and contingencies
- KAR expected the proposed IAA salvage-auction spin-off to be completed in 2019, subject to approvals, final board approval, intercompany agreements, and other conditions. IAA had filed an initial Form 10 registration statement and an amendment. The company could change or abandon the transaction; completion and tax-free treatment were not assured. Management cited potential distraction, transaction costs, business-partner disruption, and tax exposure if the spin-off were taxable.
- Management estimated North American whole-car auction volumes would exceed 11 million units annually in 2018–2020 and expected salvage-auction industry volumes to grow 5%–7% annually. These are estimates, not company earnings guidance. It expected 2018 capital expenditures of approximately $185 and quarterly dividends of $0.35 per share, subject to board approval. AFC’s provision for credit losses was expected to remain below 2% annually of average managed receivables, while quarterly outcomes could vary.
- TradeRev recorded operating losses of $14.8 in Q3 and $37.3 for the first nine months, attributed to its market rollout. Key sensitivities include auction supply and demand, vehicle prices, salvage and commodity values, weather and catastrophe volumes, dealer defaults and collateral recoveries, competition, interest rates, foreign exchange, cyber and technology risks, and KAR’s substantial debt and restrictive covenants.
- IAA reported Q3 catastrophic-event gross losses of $1.2 and nine-month losses of $4.0. KAR disclosed potential environmental liability relating to IAA’s leased property near the Lower Duwamish Waterway Superfund site. The EPA had not specified IAA’s factual responsibility or demanded payment, and KAR said it could not estimate IAA’s potential loss. The site cleanup estimate of $342 relates to the overall site, not an estimate of IAA’s exposure.
- KAR said ordinary-course litigation was not generally expected to have a material adverse effect and reported no significant change in the previously disclosed proceedings. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the intended issuer: this filing covers KAR Auction Services, Inc. consolidated results, not standalone OPENLANE, Inc. results.
- Track IAA spin-off timing, final terms, tax opinion, registration-statement status, separation costs, and any effects on customers or KAR’s capital structure.
- Assess whether online and physical auction volume, per-vehicle economics, and segment operating profit trends support ongoing growth, particularly at ADESA amid TradeRev losses and higher SG&A.
- Monitor AFC receivable delinquencies, net credit losses, allowance adequacy, and securitization capacity and covenant compliance.
- Review corporate debt, floating-rate exposure and hedges, revolver availability after letters of credit, and the company’s capacity to sustain capital expenditures and dividends.
- Follow developments in the Lower Duwamish Waterway matter and any new estimate or accrual for IAA’s potential environmental exposure.