OPENLANE(KAR) - 2020 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements (Unaudited) The company experienced significant revenue decline and a net loss in Q2 and H1 2020 due to COVID-19, offset by a $550 million preferred stock issuance and a $29.8 million impairment charge Consolidated Statements of Income Consolidated Income Statement Highlights (in millions, except per share data) | Metric | Q2 2020 | Q2 2019 | YoY Change | H1 2020 | H1 2019 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $419.0 | $719.1 | -41.7% | $1,064.5 | $1,408.7 | -24.4% | | Operating Profit (Loss) | $(4.7) | $90.6 | - | $36.1 | $166.8 | -78.4% | | Income (Loss) from Continuing Operations | $(32.3) | $27.4 | - | $(29.5) | $42.7 | - | | Net Income (Loss) | $(32.3) | $55.6 | - | $(29.5) | $133.4 | - | | Diluted EPS from Continuing Operations | $(0.27) | $0.20 | - | $(0.24) | $0.32 | - | - The company recorded a goodwill and other intangibles impairment charge of $29.8 million in the second quarter and first half of 2020, which was not present in the prior year[9] - Dividends declared per common share were suspended in Q2 2020, compared to $0.35 in Q2 2019 For the first half of the year, dividends were $0.19 per share in 2020 versus $0.70 in 2019[9] Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in millions) | Metric | June 30, 2020 | Dec 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $968.5 | $507.6 | +$460.9 | | Finance receivables, net | $1,526.3 | $2,100.2 | -$573.9 | | Goodwill | $1,790.9 | $1,821.7 | -$30.8 | | Total Assets | $6,494.0 | $6,581.2 | -$87.2 | | Obligations collateralized by finance receivables | $735.9 | $1,461.2 | -$725.3 | | Long-term debt | $1,856.9 | $1,861.3 | -$4.4 | | Series A convertible preferred stock | $528.2 | $— | +$528.2 | | Total Stockholders' Equity | $1,554.5 | $1,650.2 | -$95.7 | - The company's cash position significantly increased, largely due to the issuance of $528.2 million in Series A convertible preferred stock in Q2 2020[15][18] Consolidated Statements of Cash Flows Consolidated Cash Flow Highlights (in millions) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities - continuing | $268.9 | $161.7 | | Net cash provided by (used by) investing activities - continuing | $485.9 | $(268.9) | | Net cash used by financing activities - continuing | $(279.9) | $(1,387.6) | | Net increase (decrease) in cash | $457.6 | $(48.0) | - Cash from investing activities was positive in H1 2020 primarily due to a net decrease in finance receivables held for investment of $532.6 million[27] - Financing activities in H1 2020 included proceeds of $550.1 million from the issuance of Series A Preferred Stock, offset by a $720.5 million net decrease in obligations collateralized by finance receivables In H1 2019, financing activities were dominated by a $1.29 billion payment on long-term debt[27] Condensed Notes to Consolidated Financial Statements Key notes detail business segments, the 2019 IAA spin-off, a $29.8 million goodwill impairment due to COVID-19, debt covenant amendments, and a $550 million preferred stock issuance to bolster liquidity - The company's operations are grouped into two reportable segments: ADESA Auctions (wholesale vehicle auctions) and AFC (floorplan financing for dealers)[30][35][101] - Due to the economic impact of the COVID-19 pandemic, the company recorded a non-cash goodwill impairment charge of $25.5 million and a customer relationship impairment of $4.3 million in its ADESA Remarketing Limited reporting unit during Q2 2020[67][69] - In June 2020, the company issued 550,000 shares of Series A Convertible Preferred Stock for aggregate proceeds of approximately $550 million to affiliates of Apax and Periphas[87] - On May 29, 2020, the company amended its Credit Agreement to provide a financial covenant 'holiday' through June 30, 2021, and established a minimum liquidity covenant of $225.0 million[72] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant negative impact of COVID-19 on Q2 2020 operations, leading to a 42% revenue decline, with responses including cost-cutting, liquidity enhancement, and a strong intra-quarter recovery in sales volumes Impact of COVID-19 - In response to the pandemic, the company temporarily suspended physical auction operations on March 20, 2020, shifting to Simulcast-only digital sales[116] - Significant cost-saving measures were implemented, including furloughing approximately 11,000 employees in April (about 5,000 have returned), reducing executive and board compensation, and suspending the quarterly dividend[124] - The company received government assistance, recording $7.9 million in employee retention credits under the CARES Act and $9.7 million under the Canada Emergency Wage Subsidy in Q2 2020[121] Results of Operations Q2 2020 revenue fell 42% to $419.0 million, resulting in an operating loss, with ADESA revenue down 43% and AFC revenue down 34%, despite a strong intra-quarter recovery in sales volumes - The company experienced a significant business recovery within Q2 2020 April vehicle sales were only 27% of April 2019 levels, improving to 65% in May, and exceeding prior year levels by 8% in June 2020[145][146][147] ADESA Segment Performance - Q2 2020 vs Q2 2019 | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $362.2M | $632.4M | -43% | | Operating Profit (Loss) | $(2.5)M | $79.6M | - | | Vehicles Sold | 648,000 | 994,000 | -35% | | Percentage of vehicles sold online | 100% | 59% | +41 p.p. | AFC Segment Performance - Q2 2020 vs Q2 2019 | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $56.8M | $86.7M | -34% | | Operating Profit | $30.7M | $53.2M | -42% | | Provision for credit losses | $(19.0)M | $(8.4)M | +126% | | Loan Transactions | 420,000 | 437,000 | -4% | Liquidity and Capital Resources The company significantly enhanced liquidity, with cash rising to $968.5 million due to a $528.2 million preferred stock issuance, alongside credit facility amendments and customer relief programs, ensuring sufficient operating funds - Cash and cash equivalents increased to $968.5 million at June 30, 2020, from $507.6 million at year-end 2019, bolstered by approximately $528.2 million in net proceeds from the issuance of perpetual convertible preferred stock[193][195] - The company amended its Credit Agreement on May 29, 2020, to provide a financial covenant 'holiday' through June 30, 2021, and established a monthly minimum liquidity covenant of $225.0 million[199] - AFC's securitization facilities, with committed liquidity of $1.70 billion in the U.S. and C$175 million in Canada, were amended to permit a Customer Relief Program, allowing eligible customers to defer payments through June 30, 2020[210][211][215] Adjusted EBITDA Reconciliation (Consolidated, in millions) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income (Loss) from Continuing Operations | $(32.3) | $27.4 | $(29.5) | $42.7 | | EBITDA | $40.2 | $139.0 | $129.9 | $261.0 | | Adjusted EBITDA | $80.0 | $135.9 | $168.6 | $258.8 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency fluctuations from Canadian operations and interest rate risk on variable debt, mitigated by $500 million in interest rate swaps, with a 100 basis point rate increase impacting Q2 2020 interest expense by $1.1 million - Foreign currency exposure is mainly from Canadian operations A 1% decrease in the Canadian exchange rate would have impacted Q2 2020 net income by approximately $0.1 million[237] - To manage interest rate risk, the company entered into three pay-fixed interest rate swaps in January 2020 with an aggregate notional amount of $500 million, maturing in 2025[239] - A hypothetical 100 basis point increase in LIBOR would have increased interest expense by approximately $1.1 million for Q2 2020 and $2.2 million for H1 2020[240] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[241] - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[242] PART II—OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, which management believes are not likely to have a material adverse effect on its financial condition, results of operations, or cash flows - The company is involved in litigation and disputes arising in the ordinary course of business, which management believes are not likely to have a material adverse effect on its financial condition[245] Risk Factors The primary risk factor is the ongoing and uncertain adverse impact of the COVID-19 pandemic on the company's business, operations, and financial condition, influenced by government measures and economic changes - The COVID-19 pandemic continues to create significant uncertainty and is expected to have an ongoing adverse impact on the business, results of operations, and financial condition[248] - The extent of the pandemic's impact depends on highly uncertain future developments, including the duration and spread of the outbreak, government actions, and the pace of economic recovery[251] Unregistered Sales of Equity Securities and Use of Proceeds Unregistered equity sales were previously disclosed, and while a $300 million share repurchase program is authorized through October 2021, no shares were repurchased during the quarter ended June 30, 2020 - The company did not repurchase any of its common stock during the quarter ended June 30, 2020[253] - As of June 30, 2020, the full $300 million authorized under the current share repurchase program, which runs through October 30, 2021, remains available[253] Exhibits This section lists exhibits filed with the Form 10-Q, including amendments to credit and receivables purchase agreements, the Employee Stock Purchase Plan, and CEO/CFO certifications - Key exhibits filed include the Fourth Amendment to the Credit Agreement, amendments to AFC's Receivables Purchase Agreements, and the Amended and Restated Employee Stock Purchase Plan[261][263][267]