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, 2019, not a standalone OPENLANE, Inc. filing. The filing identifies Openlane as an ADESA subsidiary and technology provider. Following the June 28 spin-off of salvage-auction business IAA, KAR reported continuing operations in two segments: ADESA Auctions and AFC, which provides floorplan financing to used-car dealers. Prior periods were reclassified to show IAA as discontinued operations.
Financial results and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue from continuing operations | 719.1 | 623.4 | 1,408.7 | 1,236.6 |
| Operating profit | 90.6 | 101.2 | 166.8 | 184.3 |
| Income from continuing operations | 27.4 | 37.4 | 42.7 | 71.6 |
| Net income, including discontinued operations | 55.6 | 93.2 | 133.4 | 183.2 |
| Diluted EPS from continuing operations | $0.20 | $0.28 | $0.32 | $0.53 |
| Operating cash flow, continuing operations | Not separately stated for the quarter | 161.7 | 205.7 |
- Q2 revenue rose 15%; excluding revenue from purchased vehicles, management reported 7% growth. Acquisitions contributed $51.2 million of Q2 revenue. For the first half, revenue rose 14%, or 8% excluding purchased-vehicle revenue; acquisitions contributed $83.1 million.
- Profitability weakened: Q2 operating margin was about 12.6%, versus 16.2% a year earlier; continuing-operations income fell 27%. Six-month operating margin was about 11.8%, versus 14.9%. Higher operating costs and interest expense weighed on results.
- Q2 ADESA revenue increased 17%, with vehicles sold up 10%; operating profit declined to $79.6 million from $91.5 million. Online sales were about 59% of ADESA units sold, versus 54%. AFC revenue grew 2% and operating profit rose to $53.2 million from $51.1 million.
- Q2 AFC provision for credit losses was $8.4 million, up from $7.1 million; it was 1.7% of average managed receivables, versus 1.5%. Management said it expected annual provisions to remain below 2%, while noting quarterly results may vary.
- Six-month adjusted EBITDA, a non-GAAP measure, was $258.8 million versus $268.3 million. Q2 adjusted EBITDA was $135.9 million versus $139.0 million.
- At June 30, cash and cash equivalents were $233.0 million, restricted cash $23.7 million, working capital $380.5 million, and revolving-credit availability $278.0 million. Continuing-operations operating cash flow fell from $205.7 million to $161.7 million.
- Long-term debt, net of issuance costs and current maturities, was $1,390.8 million; total debt before issuance costs was $1,499.0 million. Separately, obligations collateralized by AFC finance receivables were $1,422.3 million. The company prepaid about $1.28 billion of term loans using cash distributed by IAA. It reported a 0.93 senior secured leverage ratio and compliance with debt covenants.
- Six-month capital expenditures were $78.4 million, compared with $51.4 million. Total dividends declared were $0.70 per share for the first half, unchanged year over year.
Material changes, outlook and risks
- IAA spin-off: The separation closed June 28, 2019. KAR shareholders received IAA shares, and IAA distributed approximately $1.278 billion in cash to KAR, principally used to repay term loans. IAA results are presented as discontinued operations. Its Q2 net contribution was $28.2 million, including approximately $30.5 million of spin-related transaction costs; six-month contribution was $90.7 million and included approximately $31.3 million of those costs.
- Acquisitions and unusual items: KAR acquired Dent-ology and CarsOnTheWeb in January. The first-half aggregate purchase price was approximately $169.2 million, including contingent and deferred amounts; purchase accounting remained preliminary. ADESA disclosed a $5.4 million High Tech Locksmiths inventory loss and said recovery was uncertain. TradeRev reported operating losses of $32.8 million for the first half, versus $22.4 million a year earlier.
- Management outlook: No company-wide earnings or revenue guidance is provided in the supplied filing text. Management estimated North American whole-car auction volumes would exceed 11 million units in each of 2019, 2020 and 2021. It expected 2019 capital expenditures of approximately $154 million, about half technology-related, and stated liquidity was expected to cover operating needs, debt service, announced acquisitions and dividends for the next 12 months. KAR intended to refinance and extend existing term loans and revolving commitments during 2019, subject to market conditions and with no assurance of completion.
- Risks: Results are exposed to auction volumes, used-vehicle supply and pricing, online competition, acquisition integration, TradeRev investment, AFC dealer defaults and collateral values, interest rates, foreign exchange, cyber and technology risks, environmental liabilities, litigation, and substantial debt and restrictive covenants. A 100-basis-point short-term rate increase was estimated to raise variable-rate corporate debt interest expense by about $1.7 million for the quarter and $3.4 million for the first half, after considering interest-rate caps.
- Contingencies and reporting: Management said ordinary-course litigation was not expected to materially harm continuing operations. The Lower Duwamish Waterway matter described relates to IAA; associated salvage-business liabilities were transferred to IAA at separation. The filing says disclosure controls were effective and identifies no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the correct issuer and scope: this filing is KAR Auction Services' 10-Q, with Openlane only identified as an ADESA subsidiary, not a standalone OPENLANE report.
- Assess continuing-operations performance separately from IAA discontinued operations and the one-time spin-off costs; reported net income includes IAA results.
- Evaluate whether revenue and unit growth can translate into improved margins, given lower ADESA gross margins, higher costs, and declining operating profit.
- Review debt balances and refinancing progress, AFC securitization exposure, available revolver capacity, and covenant headroom after the IAA-funded debt repayment.
- Track AFC credit-loss rates and recoveries, TradeRev losses, the $5.4 million inventory-loss recovery, acquisition integration, and actual capital spending against the stated estimate.