OPENLANE(KAR) - 2019 Q4 - Annual Report

Part I Business KAR Auction Services is a leading provider of used vehicle auctions and remarketing services, operating through its ADESA and AFC segments - The company operates as two reportable business segments: ADESA Auctions (87% of 2019 revenue) and AFC (13% of 2019 revenue)[30] - In 2019, KAR facilitated the sale of approximately 3.8 million used vehicles through its 74 North American physical auction locations and various online platforms[12] - The company's strategic initiatives are centered on digital platforms, data and analytics, international expansion, mobility solutions, and the seamless integration of its businesses[21][22] - In 2019, the company separated from its salvage auction business, IAA, through a tax-free spin-off; IAA now operates as a separate public entity[16] Our Industry The North American used vehicle auction market is a highly consolidated industry, with ADESA and its main competitor representing approximately 70% of the market share - The North American used vehicle auction market volume was estimated at approximately 12 million vehicles in 2019, including online and mobile application volumes[18] - The market is largely consolidated, with Manheim and ADESA accounting for an estimated 70% of the North American whole car auction market, with ADESA's share at 30%[19] Our Business Segments The company's operations are divided into the ADESA segment for whole car auctions and the AFC segment for floorplan financing to independent dealers ADESA Online Sales Volume | Metric | 2019 | | :--- | :--- | | Online Sales Volume (% of total) | 58% | AFC Key Metrics (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | Active Dealers | ~12,900 | | Average Line of Credit | ~$270,000 | | Average Vehicles Floorplanned per Dealer | ~16 | | Average Value Outstanding per Vehicle | ~$10,000 | - AFC utilizes securitization facilities to fund its operations, with a committed facility of $1.70 billion for U.S. finance receivables and C$175 million for Canadian receivables as of December 31, 2019[54][55] Risk Factors The company faces risks from competition, technology, operations, economic conditions, a substantial debt load, and regulations - The company faces significant competition from direct competitors like Manheim, new online entrants (e.g., ACV Auctions, EBlock), and customers selling directly to end-users[70][73][74] - The business is exposed to information technology risks, including system disruptions and cyber-attacks, which could compromise confidential data and harm the company's reputation and operations[87][88][89] - A decrease in the supply of used vehicles, particularly off-lease vehicles, or a market shift towards online-only platforms could adversely affect revenues and profitability[91][93] - As of December 31, 2019, the company had total corporate debt of approximately $1.9 billion, which could limit financial flexibility and expose it to interest rate fluctuation risks[110][116] - If the spin-off of IAA fails to qualify as a tax-free transaction, the company and its stockholders could be subject to substantial U.S. federal income tax liabilities[126][128] Properties The company operates from a leased corporate headquarters and numerous owned or leased auction and financing locations across North America - ADESA operates 74 used vehicle auction facilities in North America, with an average size of approximately 75 acres per site[142] - AFC has 121 locations in North America, with 84 physically located at auction facilities (63 at ADESA sites); most AFC branches are leased[143] Legal Proceedings The company is involved in ordinary course legal proceedings not expected to have a material adverse effect on its financial condition - The company is subject to routine litigation incidental to its business but does not expect these proceedings to have a material adverse effect on its financial condition[145][519] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, with a $300 million share repurchase program authorized in October 2019 - In October 2019, the board of directors authorized a new share repurchase program of up to $300 million through October 30, 2021; no shares were repurchased under this authorization as of December 31, 2019[140][147] Cumulative Total Stockholder Return (2014-2019) | Company/Index | 12/31/2014 | 12/31/2019 | | :--- | :--- | :--- | | KAR Auction Services, Inc. | $100 | $191.50 | | S&P 400 Midcap Index | $100 | $154.07 | | S&P 500 Index | $100 | $173.86 | Selected Financial Data This section presents a five-year summary of key financial data, showing 2019 revenues of $2.78 billion and total debt of $1.89 billion Selected Financial Data (Years Ended Dec 31) | (Dollars in millions) | 2019 | 2018 | | :--- | :--- | :--- | | Total operating revenues | $2,781.9 | $2,442.8 | | Operating profit | $314.1 | $340.1 | | Income from continuing operations | $92.4 | $117.6 | | Total assets from continuing operations | $6,581.2 | $5,699.4 | | Total debt, net | $1,890.1 | $2,667.4 | | Net cash provided by operating activities - continuing operations | $380.8 | $438.6 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, revenue grew 14% to $2.8 billion, while operating profit and net income from continuing operations declined Consolidated Results Overview (FY 2019 vs. FY 2018) | (Dollars in millions) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total revenues | $2,781.9 | $2,442.8 | +14% | | Operating profit | $314.1 | $340.1 | -8% | | Net income from continuing operations | $92.4 | $117.6 | -21% | - The spin-off of the salvage auction business, IAA, was completed on June 28, 2019; IAA's financial results are now reported as discontinued operations[180] - In September 2019, the company amended its Credit Agreement, refinancing existing term loans with a new $950 million Term Loan B-6 and establishing a new $325 million Revolving Credit Facility[178][229] Results of Operations ADESA's revenue grew 16% while its operating profit declined, whereas AFC's revenue and operating profit both increased in 2019 ADESA Segment Performance (FY 2019 vs. FY 2018) | (Dollars in millions, except where noted) | 2019 | 2018 | | :--- | :--- | :--- | | Total ADESA revenue | $2,429.0 | $2,101.9 | | Operating profit | $264.1 | $307.8 | | Vehicles sold (thousands) | 3,784 | 3,472 | | Percentage of vehicles sold online | 58% | 54% | AFC Segment Performance (FY 2019 vs. FY 2018) | (Dollars in millions, except where noted) | 2019 | 2018 | | :--- | :--- | :--- | | Total AFC revenue | $352.9 | $340.9 | | Operating profit | $220.6 | $203.5 | | Loan transactions (thousands) | 1,783 | 1,760 | | Revenue per loan transaction | $178 | $175 | - TradeRev, a key digital growth initiative, incurred operating losses of $71.5 million in 2019, up from $53.0 million in 2018, reflecting continued investment[167] Liquidity and Capital Resources The company maintains liquidity through cash from operations and credit facilities, having prepaid $1.3 billion in debt after the IAA spin-off Liquidity Position (as of Dec 31) | (Dollars in millions) | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $507.6 | $277.1 | | Working capital | $726.8 | $450.3 | | Available under revolving credit facility | $325.0 | $350.0 | - In June 2019, the company prepaid approximately $1.28 billion of its Term Loan B-4 and Term Loan B-5 using cash received from the IAA separation[228] - AFC managed total finance receivables of $2.12 billion as of December 31, 2019, funded primarily through securitization facilities with committed liquidity of $1.70 billion in the U.S. and C$175 million in Canada[241][242][243] Critical Accounting Estimates Management identifies critical accounting estimates related to credit losses, business combinations, goodwill impairment, and legal contingencies - Key critical accounting estimates include: (1) allowance for credit losses, (2) business combinations, (3) goodwill and other intangible assets, and (4) legal proceedings and other loss contingencies[267] - The allowance for credit losses is sensitive to changes in charge-offs; a hypothetical 10% increase in net charge-offs for 2019 would have increased the provision for credit losses by approximately $3.4 million[272] - Goodwill is tested for impairment annually in the second quarter; in 2019, the company performed a qualitative assessment and did not identify any impairment[275][277] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from foreign currency fluctuations, particularly the Canadian dollar, and interest rate changes - The company's primary foreign currency exposure is to the Canadian dollar; a 1% decrease in the average Canadian exchange rate in 2019 would have impacted net income by approximately $0.3 million[104][284] - The company is exposed to interest rate risk on its variable rate corporate debt; a hypothetical 100 basis point increase in LIBOR for 2019 would have increased interest expense by approximately $6.1 million[288] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's unqualified opinion - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[301] - The company adopted new accounting standards for Leases (Topic 842) effective January 1, 2019, and for Revenue from Contracts with Customers (Topic 606) effective January 1, 2018[303][304] Consolidated Financial Statements For 2019, the company reported total operating revenues of $2.8 billion and net income of $188.5 million, including discontinued operations Consolidated Statement of Income Highlights (FY 2019) | (In millions) | Amount | | :--- | :--- | | Total operating revenues | $2,781.9 | | Operating profit | $314.1 | | Income from continuing operations | $92.4 | | Income from discontinued operations, net | $96.1 | | Net income | $188.5 | Consolidated Balance Sheet Highlights (as of Dec 31, 2019) | (In millions) | Amount | | :--- | :--- | | Total current assets | $3,244.5 | | Total assets | $6,581.2 | | Total current liabilities | $2,517.7 | | Long-term debt | $1,861.3 | | Total stockholders' equity | $1,650.2 | Consolidated Statement of Cash Flows Highlights (FY 2019) | (In millions) | Amount | | :--- | :--- | | Net cash provided by operating activities - continuing | $380.8 | | Net cash used by investing activities - continuing | ($415.0) | | Net cash used by financing activities - continuing | ($1,163.8) | | Net increase in cash | $256.2 | Notes to Consolidated Financial Statements The notes detail significant accounting policies, acquisitions, the IAA spin-off, and the company's long-term debt structure - In January 2019, the company acquired CarsOnTheWeb (an online auction company in Europe) and Dent-ology for an aggregate purchase price of $169.2 million, resulting in $142.6 million of goodwill[403][404][406] - The spin-off of IAA was completed on June 28, 2019; in connection with the separation, KAR received a cash distribution of approximately $1.28 billion from IAA, which was used to prepay a portion of KAR's term loans[420] - As of December 31, 2019, long-term debt consisted primarily of a $947.6 million Term Loan B-6 due 2026 and $950.0 million in 5.125% senior notes due 2025[469] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[538] - There were no changes in internal control over financial reporting during the fourth quarter of 2019 that materially affected, or are reasonably likely to materially affect, internal controls[540] Part III Directors, Executive Officers and Corporate Governance This section lists the company's executive officers and confirms the adoption of a Code of Business Conduct and Ethics - The report lists the key executive officers of the company, including James P. Hallett (CEO), Eric M. Loughmiller (CFO), John C. Hammer (President of ADESA), and James E. Money (President of AFC)[543] - The company has adopted a Code of Business Conduct and Ethics and a Code of Ethics for Principal Executive and Senior Financial Officers, both available on its website[554] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on the company's equity compensation plans as of December 31, 2019 Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holder(s) | 2,035,813 | $9.07 | 5,147,288 | Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K - This section provides an index of all exhibits filed with the Form 10-K, including debt agreements, compensation plans, and material contracts[563][564]