OPENLANE, Inc. annual report, FY2019

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Business context and reporting period

This is KAR Auction Services, Inc.’s (doing business as KAR Global) 10-K for the fiscal year ended December 31, 2019, filed February 19, 2020. It is an annual report, not a standalone Q4 filing. The filing identifies Openlane as a wholly owned subsidiary and technology platform; the registrant is KAR Auction Services, not OPENLANE, Inc.

KAR operated ADESA Auctions, a whole-car remarketing business, and AFC, a dealer floorplan-financing business. ADESA accounted for 87% of 2019 revenue and AFC 13%. The IAA salvage-auction business was spun off on June 28, 2019, and is reported as discontinued operations.

Financial performance and liquidity

Amounts below are in millions of dollars except per-share amounts. Continuing operations are compared with 2018; results include acquisitions and reflect the IAA separation.

  • Revenue: $2,781.9, up 14% from $2,442.8. Acquisitions contributed $193.0 of the increase. ADESA revenue rose 16% to $2,429.0; AFC revenue rose 4% to $352.9.
  • Profit and margins: Gross profit was $1,164.8 versus $1,121.3; gross margin was approximately 41.9% versus 45.9%. Operating profit fell 8% to $314.1 from $340.1, with operating margin approximately 11.3% versus 13.9%. Continuing net income declined to $92.4 from $117.6, and diluted continuing EPS was $0.70 versus $0.87. Total net income was $188.5 versus $328.0, including discontinued-operation income of $96.1 versus $210.4.
  • Cash flow and investment: Continuing-operations operating cash flow was $380.8, down from $438.6. Continuing investing cash outflow was $415.0, including $120.7 for acquisitions and $161.6 in capital expenditures. Capital expenditures rose from $131.3.
  • Debt: Corporate debt was approximately $1.9 billion at year-end, excluding AFC obligations collateralized by finance receivables. The balance-sheet carrying amount of debt, net of issuance costs and discounts, was $1,890.1. KAR had $950.0 of 5.125% senior notes due 2025 and $947.6 outstanding on Term Loan B-6, due 2026; its year-end Term Loan B-6 rate was 4.06%. AFC had $1,461.2 of obligations collateralized by finance receivables.
  • Liquidity: Cash and cash equivalents were $507.6, restricted cash $53.3, and working capital $726.8. The revolving facility was $325.0, with $27.4 of outstanding letters of credit reducing borrowing availability. KAR reported a 1.7 secured net leverage ratio, compliance with debt covenants, and stated its liquidity was sufficient for foreseeable needs.
  • Q4 snapshot: Revenue was $671.3, up 13% year over year; operating profit was $61.6 versus $70.2; continuing net income was $15.3 versus $15.1. Q4 total net income of $19.8 included $4.5 from discontinued operations.

Material changes versus the prior comparable period

  • ADESA sold 3.784 million vehicles, up from 3.472 million. The online share increased to 58% from 54%; North American physical-auction conversion improved to 62.8% from 61.6%.
  • ADESA gross margin declined to 37.4% from 41.4%, partly because purchased-vehicle sales—especially from CarsOnTheWeb and ADESA Assurance—record both sale proceeds and vehicle costs as revenue and expense. Excluding purchased-vehicle sales, ADESA gross margin was 42.6% versus 43.9%.
  • AFC loan transactions increased to 1.783 million from 1.760 million; revenue per transaction, excluding warranty revenue, rose to $178 from $175. Its provision for credit losses was $35.3 versus $32.9.
  • CarsOnTheWeb and Dent-ology were acquired in 2019 for aggregate purchase consideration of approximately $169.2, net of cash acquired, including estimated contingent consideration. The acquisitions added $142.6 of goodwill.
  • The IAA spin-off materially changed the business and comparability of reported results. KAR received approximately $1.278 billion from IAA and used the proceeds to prepay term debt. 2019 continuing cash flows and earnings exclude IAA, while total net income includes discontinued operations.

Outlook, commentary, risks and unusual items

  • Outlook: Management estimated North American whole-car auction volumes would exceed 11.5 million units annually in 2020–2022. It expected 2020 capital expenditures of approximately $135 million, about half for technology. Management also expected quarterly dividends of $0.19 per share, subject to board approval.
  • Strategy and execution: Priorities include digital marketplaces, data and analytics, international expansion, mobility offerings, and integrating businesses. TradeRev incurred operating losses of $71.5 in 2019, up from $53.0 in 2018.
  • Key risks: Competition from physical and digital auction platforms; changing vehicle supply and online-only mix; used-vehicle price movements; AFC borrower defaults and collateral values; cybersecurity, technology and privacy risks; acquisition integration; foreign exchange and interest-rate exposure; substantial debt and restrictive covenants; and environmental, regulatory, litigation and self-insurance exposures. Major institutional supplier arrangements can generally be canceled on 30–90 days’ notice. No customer represented 10% or more of consolidated revenue.
  • Unusual items: The company recorded $2.2 of pretax debt-extinguishment expense in 2019. IAA separation costs were approximately $31.3 in 2019 and $8.1 in 2018, within discontinued operations. High Tech Locksmiths recorded a $5.4 inventory loss, and KAR recovered approximately $4.0 of prior-quarter expenses in December.
  • Subsequent events and contingencies: In January 2020, KAR entered into $500 million of five-year pay-fixed interest-rate swaps. The filing warns that the IAA spin-off’s tax-free treatment could be challenged; it also reports ordinary-course litigation and environmental matters, with no environmental liabilities accrued at year-end. The auditor issued unqualified opinions on the financial statements and internal control; management reported effective controls, excluding the 2019 acquisitions from its controls assessment during integration.

Important facts for investors to verify

  • Reconcile continuing-operations performance with total results and assess the post-IAA business on a comparable basis.
  • Track organic ADESA volume, online-only mix, revenue per vehicle and margins excluding purchased-vehicle sales and acquired businesses.
  • Monitor TradeRev’s losses and progress toward profitable growth, alongside integration and returns from the CarsOnTheWeb acquisition.
  • Review AFC delinquencies, charge-offs, allowance adequacy and securitization capacity; managed finance receivables were $2,115.2, with $28.8 delinquent at year-end.
  • Confirm debt reduction, variable-rate exposure, revolver availability after letters of credit, covenant headroom and cash-flow coverage of investment and dividends.
  • Assess the tax, indemnity and other residual risks associated with the IAA separation, as well as the assumptions underlying contingent acquisition consideration and goodwill.