Copart, Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: Quarterly and six-month periods ended January 31, 2021; comparative periods ended January 31, 2020. The interim financial statements are unaudited. Copart operates online vehicle auctions and remarketing services in the U.S. and international markets, primarily serving insurers and other vehicle sellers.
Key Financial Metrics
| Metric | Three months ended Jan. 31, 2021 | Change vs. 2020 | Six months ended Jan. 31, 2021 | Change vs. 2020 |
|---|---|---|---|---|
| Total revenue | $617.0 million | +7.3% | $1,210.0 million | +7.1% |
| Service revenue | $532.6 million | +4.4% | $1,048.0 million | +5.0% |
| Vehicle sales | $84.4 million | +29.7% | $162.0 million | +23.0% |
| Operating income | $258.2 million | +23.0% | $506.8 million | +22.0% |
| Operating margin | 41.9% | Up from 36.5% | 41.9% | Up from 36.8% |
| Net income | $193.4 million | +14.7% | $393.7 million | +1.8% |
| Diluted EPS | $0.81 | Up from $0.71 | $1.64 | Up from $1.62 |
Cash flow and liquidity: Six-month operating cash flow was $393.0 million, compared with $356.9 million in the prior-year period. Capital expenditures were $283.2 million, down from $400.4 million, producing net investing cash use of $283.1 million. Cash, cash equivalents and restricted cash increased to $616.4 million from $477.7 million at July 31, 2020. Working capital was $854.5 million, up from $607.7 million.
Balance sheet and debt: Total assets were $3.93 billion and stockholders’ equity was $2.94 billion at January 31, 2021. Long-term debt and finance lease liabilities were $402.7 million. The company had no borrowings under its $1.05 billion revolving facility, which matures July 21, 2023. Senior secured notes have aggregate principal of $400.0 million and maturities from 2024 through 2029. Management reported a consolidated total net leverage ratio of negative 0.15:1, minimum liquidity of $1.6 billion, and compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher revenue per vehicle, higher average auction selling prices, increased U.S. vehicle sales, and favorable demand and vehicle mix, partially offset by lower processed volumes.
- COVID-19 reduced miles driven, accident frequency, vehicle assignments and auction volumes. Higher selling prices more than offset the volume decline during the periods presented.
- Yard operations expense declined 8.3% in the quarter and 6.1% for the six months, although cost per vehicle increased and depreciation rose as new and expanded facilities entered service.
- General and administrative expense declined 1.4% in the quarter and 2.0% for the six months, partly due to lower travel and the nonrecurrence of certain prior-year legal costs.
- Vehicle sales increased faster than service revenue, raising vehicle sales to 14% of quarterly revenue from 11% and to 13% of six-month revenue from 12%.
- The effective tax rate increased to 23.4% from 17.7% for the quarter and to 21.1% from 5.0% for the six months. Prior-year results benefited substantially more from excess tax benefits related to employee stock option exercises.
- Copart opened or began operating additional facilities, including five U.S. locations during fiscal 2021 and a Houston, Texas location in December 2020. The company continues to pursue facility expansion, acquisitions and international growth.
- No shares were repurchased under the company’s repurchase program during the six months. The program had 81.5 million shares remaining available for repurchase at January 31, 2021.
Outlook, Commentary, Risks and Unusual Items
Management expects available cash and operating cash flow to satisfy operating and working capital needs for the foreseeable future, while continuing to invest in new and existing facilities. New yard development costs are estimated at approximately $3 million to $50 million per location, depending on size, location and infrastructure. Management may use cash for acquisitions, facility expansion, debt repayment, dividends or share repurchases; however, Copart has not paid a cash dividend since becoming public in 1994.
The principal near-term uncertainty is the COVID-19 pandemic, including potential additional restrictions, outbreaks at facilities, reduced miles driven, title-processing disruptions and weaker economic conditions. Other material risks include dependence on a limited number of major vehicle sellers, vehicle supply and auction-price volatility, seasonality and severe weather, capacity and zoning constraints, international expansion and foreign exchange exposure, cybersecurity and online platform disruptions, environmental liabilities, regulatory and tax changes, competition, and the ability to integrate acquisitions and new facilities.
Stock-based compensation increased to $17.8 million for the six months from $11.7 million. A market-based vesting condition for a 1.0 million-option grant to the chief executive officer was satisfied during the first quarter of fiscal 2021; the filing expects total compensation expense of approximately $25.5 million over the service period. There were no material pending legal proceedings, no off-balance-sheet arrangements, and no material changes to contractual obligations reported in the prior Form 10-K.
Important Facts for Investors to Verify
- Whether higher auction prices continue to offset COVID-19-related or other declines in vehicle volumes.
- U.S. and international vehicle assignment volumes, revenue per vehicle, average selling prices and the effect of vehicle mix.
- Progress, utilization and returns from newly opened or expanded facilities, including required capital expenditures.
- Cash conversion and working-capital movements, particularly accounts receivable, advance charges and vehicle pooling costs.
- Debt maturities, interest rates, covenant compliance and continued availability of the $1.05 billion revolving facility.
- Changes in effective tax rates as unusually large prior-year stock-option tax benefits do not recur.
- Exposure to major vehicle sellers, international operations, foreign currency movements, cybersecurity incidents and regulatory or environmental claims.