Auto-auction firm KAR Auction Services (NYSE:KAR) said on Aug. 7 that its second-quarter net income from continuing operations fell 27% from a year ago, to $27.4 million, on lower margins in its core auction business, and expenses related to a corporate spinoff in June. Revenue rose 15% to $719.1 million.

Excluding one-time items, KAR's post-spinoff operations earned $0.30 per share, falling short of Wall Street's consensus estimate of $0.37. But revenue, which rose 15% to $719.1 million, beat analysts' $691.5 million estimate.

Shares fell sharply after the news was announced.

A modern five-story office building with the KAR logo

KAR Auction Services' headquarters in Carmel, Indiana. Image source: KAR Auction Services.

The raw numbers

Metric Q2 2019 Change vs. Q2 2018
Revenue $719.1 million 15%
EBITDA $139.0 milion (2.7%)
Adjusted EBITDA* $135.9 million (2%)
Net income from continuing operations** $27.4 million (27%)
Adjusted earnings per share from continuing operations* ** $0.30 (17%)

EBITDA = earnings before interest, taxes, depreciation, and amortization. Data source: KAR Auction Services.
* "Adjusted" figures exclude one-time items. KAR had $13.3 million in one-time charges in the second quarter of 2019, most related to a corporate spinoff.
** Figures from continuing operations exclude results from spun-off businesses.

What happened at KAR Auction Services in the second quarter?

  • KAR completed the planned spinoff of its salvage-auction business, now trading as IAA (NYSE:IAA), on June 28. Its core business now consists of ADESA, a used-car auction company, and AFC, which provides financing to independent auto dealers, meaning those that aren't franchised by an automaker.
  • ADESA earned adjusted EBITDA of $122.6 million in the second quarter, down 4.1% from a year ago. While revenue rose 17.5% to $632.4 million, losses in what KAR calls ADESA's "ancillary" businesses -- including an inventory loss of over $5 million at a locksmith subsidiary -- and higher costs related to the ongoing rollout of its mobile wholesaling platform, TradeRev, hurt results.
  • AFC's adjusted EBITDA of $42.5 million was up slightly (0.2%) from a year ago. While revenue rose 1.9% to $86.7 million, most of that gain was offset by an increase in AFC's provision for loan losses. Total loan transactions were flat year over year.

What KAR's management had to say

In a conference call with analysts, CEO James Hallett said that the spinoff of IAA will now allow KAR to focus on its core business of remarketing used vehicles, which in turn should unlock more value for KAR shareholders over time:

Investors have expressed support for a more focused and somewhat simpler business model for KAR. Now, I believe we need to demonstrate the strength of KAR to our shareholders as we look to grow earnings, consistently generate strong free cash flows, and provide performance that will cause our investors to recognize the value of our business in the higher multiple that we believe our business deserves.

Looking ahead

KAR maintained the full-year 2019 guidance it provided before the IAA spinoff was completed in June. For 2019, it expects:

  • Adjusted EBITDA between $530 million and $550 million
  • Capital expenditures of about $154 million
  • Net income from continuing operations between $123 million and $137 million
  • Adjusted earnings per share from continuing operations between $1.24 and $1.34