OPENLANE(US:KAR)2020-11-04 19:42PART I—FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for the period ended September 30, 2020, detail the company's financial performance, position, and cash flows, accompanied by condensed notes Consolidated Statements of Income In Q3 2020, total operating revenues declined by 15.4% year-over-year, while income from continuing operations increased, contrasting with a significant decline in both for the nine-month period Consolidated Income Statement Highlights (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | YoY Change | Nine Months 2020 | Nine Months 2019 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $593.6 | $701.9 | -15.4% | $1,658.1 | $2,110.6 | -21.4% | | Operating Profit | $86.4 | $85.7 | +0.8% | $122.5 | $252.5 | -51.5% | | Income from Continuing Operations | $47.1 | $34.4 | +36.9% | $17.6 | $77.1 | -77.2% | | Net Income | $47.1 | $35.3 | +33.4% | $17.6 | $168.7 | -89.6% | | Diluted EPS from Continuing Operations | $0.23 | $0.26 | -11.5% | $0.04 | $0.58 | -93.1% | Consolidated Balance Sheets Total assets increased to $6.91 billion as of September 30, 2020, primarily due to a significant rise in cash and cash equivalents, while total liabilities and stockholders' equity saw slight reductions Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,276.7 | $507.6 | | Total current assets | $3,674.6 | $3,244.5 | | Total assets | $6,909.9 | $6,581.2 | | Total current liabilities | $2,354.5 | $2,517.7 | | Long-term debt | $1,854.8 | $1,861.3 | | Total liabilities | $4,762.9 | $4,931.0 | | Series A convertible preferred stock | $540.0 | $— | | Total stockholders' equity | $1,607.0 | $1,650.2 | Consolidated Statements of Cash Flows Net cash from operating activities increased for the nine months ended September 30, 2020, with investing activities providing cash and financing activities shifting from a large use to a provision of cash Cash Flow Summary - Continuing Operations (Nine Months Ended, in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $431.9 | $291.1 | | Net cash provided by (used by) investing activities | $263.6 | $(367.3) | | Net cash provided by (used by) financing activities | $88.9 | $(1,140.5) | | Net increase in cash, cash equivalents and restricted cash | $770.5 | $227.2 | Condensed Notes to Consolidated Financial Statements These notes detail significant financial events and accounting policies, including a pending acquisition, the IAA spin-off, impairment charges, preferred stock issuance, and debt amendments - The company entered into an agreement to acquire BacklotCars, Inc. for $425 million in cash, expected to close in Q4 202047 - The financial results of the salvage auction business, IAA, which was spun-off on June 28, 2019, are accounted for as discontinued operations4849 - A non-cash impairment charge of $29.8 million was recorded in Q2 2020, comprising $25.5 million for goodwill and $4.3 million for customer relationships in the ADESA Remarketing Limited reporting unit, due to the economic impact of COVID-196970 - In June 2020, the company issued 550,000 shares of Series A Convertible Preferred Stock for an aggregate purchase price of approximately $550 million90 - The company's two reportable business segments are ADESA Auctions (wholesale vehicle auctions) and AFC (floorplan financing for independent dealers)103 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for Q3 and the first nine months of 2020, highlighting the COVID-19 impact, operational responses, segment performance, and strengthened liquidity Impact of COVID-19 The company responded to COVID-19 by transitioning to all-digital auctions, implementing cost-saving measures, bolstering liquidity through preferred stock issuance, and utilizing government aid - Temporarily suspended physical sale operations on March 20, 2020, and transitioned to digital platforms like Simulcast-only and Simulcast+118119 - Implemented significant cost-saving measures, including executive salary reductions, employee furloughs (approximately 11,000 initially), and suspension of the quarterly dividend120143 - Strengthened liquidity by raising net proceeds of approximately $528.2 million from a convertible preferred stock issuance in June 2020121 - Utilized government aid, recording approximately $8.3 million in employee retention credits under the CARES Act and $14.3 million under the Canada Emergency Wage Subsidy121 Results of Operations Consolidated revenue declined in Q3 and the nine-month period of 2020, while ADESA's operating profit increased due to digital sales efficiencies, contrasting with declines in the AFC segment ADESA Segment Performance - Q3 2020 vs Q3 2019 | Metric | Q3 2020 | Q3 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $526.7M | $613.6M | -14% | | Operating Profit | $81.4M | $68.5M | +19% | | Vehicles Sold | 871,000 | 957,000 | -9% | | Percentage of vehicles sold online | 100% | 59% | +41 p.p. | | Gross Profit % (excl. purchased vehicles) | 49.3% | 42.5% | +6.8 p.p. | AFC Segment Performance - Q3 2020 vs Q3 2019 | Metric | Q3 2020 | Q3 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $66.9M | $88.3M | -24% | | Operating Profit | $38.2M | $55.1M | -31% | | Loan Transactions | 324,000 | 442,000 | -27% | | Revenue per loan transaction | $179 | $180 | -1% | Liquidity and Capital Resources The company significantly improved its liquidity to $1.28 billion by September 30, 2020, through preferred stock issuance and credit facility amendments, ensuring compliance with debt covenants - Cash and cash equivalents increased to $1.28 billion at September 30, 2020, including approximately $528.2 million in net proceeds from the June 2020 issuance of perpetual convertible preferred stock191192 - The Credit Agreement was amended twice in 2020, first providing a financial covenant 'holiday' in May, then eliminating it in September as business conditions improved196197 - AFC's U.S. and Canadian securitization facilities were amended in September 2020, extending their maturity dates to January 2024209210 - The company was in compliance with its Consolidated Senior Secured Net Leverage Ratio covenant, which was negative 0.6 at September 30, 2020, well below the maximum of 3.5204 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign currency fluctuations, mainly from Canadian operations, and interest rate changes on variable debt, mitigated by interest rate swaps - Foreign currency exposure is primarily from Canadian operations, with a 1% decrease in the Canadian exchange rate estimated to impact net income by approximately $0.3 million for Q3 2020238 - In January 2020, the company entered into interest rate swaps with an aggregate notional amount of $500 million to hedge against interest rate risk on its variable rate term loan240 - A hypothetical 100 basis point increase in short-term rates would have increased interest expense by approximately $1.1 million for Q3 2020, after accounting for the interest rate swaps241 Item 4. Controls and Procedures As of September 30, 2020, the CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the period242 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls243 PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal disputes not expected to materially affect its financial condition, results of operations, or cash flows - The company is involved in ordinary course litigation which is not expected to have a material adverse effect on its financial condition or results246 Item 1A. Risk Factors This section refers to previously disclosed risk factors, noting that the COVID-19 pandemic exacerbates many of these existing risks - The report directs readers to the risk factors in the 2019 Form 10-K and prior 2020 Form 10-Qs, stating that the COVID-19 pandemic exacerbates those risks248 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common stock was repurchased in Q3 2020, with the full $300 million authorized under the October 2019 share repurchase program remaining available - No shares of common stock were repurchased during the three months ended September 30, 2020250 - As of September 30, 2020, the full $300 million authorized under the October 2019 share repurchase program was still available250 Item 6. Exhibits This section provides an index of all exhibits filed with the Form 10-Q, including amendments to credit agreements and certifications