Copart, Inc. Form 10-Q Summary
Business Context and Reporting Period
Copart provides online vehicle auctions and remarketing services through its VB3 platform. Sellers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, at certain locations, the general public. The filing covers the three and six months ended January 31, 2019, the second quarter of fiscal 2019. Results are unaudited and include U.S. and international operating segments.
Key Financial Metrics
| Metric | Q2 FY2019 | Q2 FY2018 | Six Months FY2019 | Six Months FY2018 |
|---|---|---|---|---|
| Total revenue | $484.9 million | $459.1 million | $946.3 million | $878.3 million |
| Service revenue | $416.8 million | $402.0 million | $811.6 million | $776.1 million |
| Vehicle sales | $68.1 million | $57.2 million | $134.7 million | $102.2 million |
| Operating income | $164.7 million | $150.9 million | $316.2 million | $274.9 million |
| Net income attributable to Copart | $131.4 million | $103.3 million | $245.5 million | $180.8 million |
| Diluted EPS | $0.55 | $0.43 | $1.01 | $0.75 |
| Operating margin | 34.0% | 32.9% | 33.4% | 31.3% |
| Net margin | 27.1% | 22.5% | 25.9% | 20.6% |
- Q2 revenue increased 5.6%, operating income increased 9.1%, and net income attributable to Copart increased 27.2% year over year.
- For the six-month period, revenue increased 7.7%, operating income increased 15.0%, and net income attributable to Copart increased 35.8%.
- Six-month operating cash flow was $215.2 million, compared with $186.4 million in the prior-year period.
- Six-month capital expenditures were $136.7 million, up from $110.8 million. Net cash used in investing activities was $119.2 million.
- Cash and cash equivalents were $108.2 million at January 31, 2019, down from $274.5 million at July 31, 2018. Working capital was $256.4 million, down from $431.9 million.
- Total current and long-term debt and capital lease obligations reported on the balance sheet were approximately $492.9 million. This included $93.3 million outstanding under the revolving facility and approximately $398.7 million of long-term obligations.
- The revolving facility had total commitments of $850 million and matured July 21, 2021. The January 31, 2019 interest rate was one-month LIBOR of 2.50% plus a 1.00% margin.
- Management reported a consolidated total net leverage ratio of 0.53:1, minimum liquidity of approximately $0.8 billion, and compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Service revenue increased 3.7% in Q2 and 4.6% for the first six months. International service revenue grew 18.0% in Q2 and 18.9% for the six-month period, while U.S. service revenue grew 1.8% and 2.7%, respectively.
- Vehicle sales increased 19.1% in Q2 and 31.8% for the six-month period, driven primarily by international growth, higher average auction selling prices and increased volume.
- Yard operations expense decreased 0.8% in Q2 and 2.7% for the six-month period. The comparison benefited from abnormal Hurricane Harvey-related costs incurred in the prior-year period, including temporary storage, subhauler premiums, overtime, travel and equipment expenses.
- Cost of vehicle sales increased 21.7% in Q2 and 34.3% for the six-month period, primarily reflecting higher international volume and purchase prices.
- General and administrative expense increased 6.9% in Q2 and 10.0% for the six-month period due primarily to growth initiatives, litigation costs and international expansion.
- The effective tax rate declined to 20.4% in Q2 and 21.8% for the six-month period, compared with 28.5% and 30.1%, respectively, in the prior-year periods. The reduction reflects the Tax Cuts and Jobs Act and excess tax benefits from stock option exercises.
- Copart repurchased 7.6 million shares for $365.0 million during the six months ended January 31, 2019, at a weighted-average price of $47.81 per share. No shares were repurchased in the prior-year period.
- New facilities were opened or developed in the U.S., Germany and Brazil, and Finnish operations were obtained through acquisitions. The filing states that no acquisition-related cash purchase occurred during the six-month period.
Guidance, Outlook, Risks and Unusual Items
- No specific quantitative financial guidance was provided. Management expects cash and cash generated from operations to satisfy operating and working-capital requirements for at least the next 12 months, while continuing to expand and develop facilities.
- Management identified total loss frequency, accident frequency, salvage and used-vehicle prices, commodity prices, product mix, foreign exchange rates, weather, supplier volumes and capital expenditures as key business drivers.
- The business is seasonal; winter volumes at most facilities are typically 10% to 30% higher than at other times, increasing working-capital requirements.
- Copart adopted ASC 606 on August 1, 2018 using the modified retrospective method. The adoption reduced opening retained earnings by $23.0 million, primarily through adjustments to accounts receivable, vehicle pooling costs and deferred taxes, but did not materially affect current-period earnings.
- Vehicle pooling costs increased to $80.6 million from $34.3 million at July 31, 2018, reflecting costs deferred until the related vehicles are sold.
- The company faces risks from dependence on major vehicle sellers, international expansion and integration, foreign exchange, Brexit, facility capacity and zoning, weather events, commodity and used-car prices, cyberattacks, privacy regulation, environmental liabilities and competition.
- A legal dispute with KPIT remained subject to post-trial motions. Copart reported jury awards in its favor, a reduced professional-negligence award of $9.1 million, a potential $6.3 million restitution alternative, and a $4.9 million counterclaim award to KPIT; the ultimate outcome was not determinable.
- A Georgia sales-tax dispute was confidentially settled and dismissed after the disputed principal amount had been reduced to $2.6 million plus interest.
- The company reported $30.4 million of long-term liabilities for unrecognized tax benefits, including interest and penalties, and remains subject to tax examinations.
Important Facts for Investors to Verify
- Whether revenue and margin growth continues after the favorable comparison with Hurricane Harvey-related costs in the prior year.
- The sustainability of international growth, particularly in Germany and other recently expanded markets, and the associated facility and integration costs.
- Cash conversion and working-capital requirements, including the effect of vehicle pooling costs and advance charges receivable.
- The pace of capital expenditures and share repurchases relative to operating cash flow and the resulting cash balance.
- Revolving debt utilization, interest-rate exposure, covenant compliance and the availability of the $850 million facility.
- Exposure to weather, salvage supply, commodity prices, used-vehicle prices and foreign currency movements.
- The status and potential financial effect of the KPIT litigation and other tax, environmental, regulatory and insurance matters.
- The impact of the ASC 606 adoption and the expected balance-sheet effects of the forthcoming lease accounting standard.