Copart, Inc. Fiscal 2019 Form 10-K Summary
Business context and reporting period
Copart operates online vehicle auctions and remarketing services through its VB3 platform in the United States, Canada, the United Kingdom, Brazil, Ireland, Germany, Finland, the United Arab Emirates, Oman, Bahrain and Spain. Sellers are primarily insurance companies; buyers include dismantlers, rebuilders, dealers, exporters and, where permitted, the general public. The filing covers the fiscal year ended July 31, 2019. The requested fourth-quarter figures are included below where disclosed.
- Reportable segments: United States and International.
- Fiscal 2019 revenue mix: United States 81.1%; International 18.9%.
- Insurance-company sellers supplied 80% of vehicles processed in fiscal 2019, compared with 78% in fiscal 2018.
- Fiscal 2019 expansion included 11 new U.S. facilities, seven new German facilities, one new Brazilian facility and the acquisition of a Greenville, Kentucky facility.
Financial performance and key metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total revenue | $2.042 billion | $1.806 billion | +13.1% |
| Service revenue | $1.756 billion | $1.579 billion | +11.2% |
| Vehicle sales | $286.3 million | $227.2 million | +26.0% |
| Operating income | $716.5 million | $584.3 million | +22.6% |
| Income before taxes | $705.0 million | $562.5 million | +25.3% |
| Net income attributable to Copart | $591.7 million | $417.9 million | +41.6% |
| Diluted EPS | $2.46 | $1.73 | +42.2% |
| Operating margin | 35.1% | 32.4% | +2.7 percentage points |
| Net margin | 29.0% | 23.1% | +5.9 percentage points |
Fiscal 2019 operating expenses were $1.325 billion, or 65% of revenue, versus 68% in fiscal 2018. Yard operations were 43% of revenue, cost of vehicle sales 13%, and general and administrative expense 9%. The effective tax rate declined to 16.1% from 25.7%, aided by $10.2 million of discrete tax benefits related to amended prior-year tax returns and $46.1 million of excess tax benefits from stock-option exercises.
| Fiscal 2019 fourth quarter | Amount |
|---|---|
| Revenue | $542.6 million |
| Gross profit | $242.6 million |
| Operating income | $192.8 million |
| Income before taxes | $187.1 million |
| Net income attributable to Copart | $153.5 million |
| Diluted EPS | $0.64 |
Cash flow, liquidity and debt
- Cash provided by operating activities was $646.6 million, up from $535.1 million.
- Investing cash outflow was $356.3 million, including $373.9 million of capital expenditures and $0.7 million for acquisitions, net of cash acquired.
- Financing cash outflow was $370.3 million, primarily reflecting $365.0 million of share repurchases and $46.9 million of employee stock-based tax withholding payments.
- Cash and cash equivalents were $186.3 million at July 31, 2019, down from $274.5 million. Working capital was $405.2 million, down from $431.9 million.
- Total debt was approximately $401.2 million, consisting primarily of $400.0 million of senior secured notes. There were no borrowings under the $850 million revolving credit facility.
- The senior notes mature in installments from 2024 through 2029 and bear fixed interest rates from 4.07% to 4.35%.
- Net leverage was 0.30:1, minimum liquidity was reported as $1.0 billion, and the company was in compliance with debt covenants.
- Management stated that available cash and operating cash flow should satisfy operating and working-capital needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven by increased vehicle volume, new and expanded insurance-company contracts, higher average auction selling prices and increased total-loss frequency.
- International revenue growth was 12.9% for service revenue and 37.7% for vehicle sales, excluding foreign-exchange effects that reduced international vehicle-related revenue by approximately $8.9 million.
- U.S. service revenue benefited from volume growth and higher revenue per vehicle, partly offset by the comparison against the prior year’s Hurricane Harvey-related volume.
- Yard operations expense increased only 4.9%, materially below revenue growth, supporting operating-margin expansion.
- The fiscal 2018 $1.1 million impairment charge and the fiscal 2017 $19.4 million software-related impairment did not recur in fiscal 2019.
- Copart adopted ASC 606 using the modified retrospective method. Beginning retained earnings declined by $23.0 million, with no material impact on fiscal 2019 earnings. Vehicle pooling costs increased to $76.5 million from $34.3 million as certain inbound transportation and titling costs began to be deferred.
- Copart repurchased 7.6 million shares for $365.0 million in fiscal 2019; no shares were repurchased in fiscal 2018 or 2017.
- Property and equipment increased to $1.428 billion from $1.163 billion, reflecting significant facility investment.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantitative fiscal 2020 revenue or earnings guidance. Management intends to continue expanding facilities, pursuing national and regional vehicle-supply agreements, broadening services and extending the VB3 platform internationally. New-yard development costs may range from $3 million to $50 million per location.
- Key operating drivers include accident frequency, total-loss frequency, used-car prices, commodity prices, vehicle mix, buyer participation, weather, foreign exchange and vehicle-supply agreements.
- Seasonality is meaningful: winter volumes at most facilities are typically 5% to 20% higher, increasing working-capital needs.
- Major risks include dependence on vehicle sellers, competition, limited yard capacity, international expansion and integration, foreign-exchange volatility, Brexit-related uncertainty, regulatory and environmental liabilities, cyberattacks, system outages, privacy compliance, and changes in vehicle technology or accident rates.
- Goodwill was $333.3 million. The fourth-quarter qualitative impairment review identified no material impairment risk.
- Unrecognized tax benefits and accrued interest and penalties totaled approximately $35.1 million; tax authorities are examining certain U.S. periods beginning in fiscal 2014.
- There were no material pending legal proceedings and no off-balance-sheet arrangements. Letters of credit outstanding were $25.1 million, primarily supporting insurance obligations.
- Management identified and remediated a material weakness in information-technology general controls related to change management during the most recent quarter. No financial-statement misstatements or restatements resulted, and management and Ernst & Young concluded internal control over financial reporting was effective at year-end.
- After year-end, the CEO exercised options for 4.0 million shares through a cashless exercise and received 1.9 million net shares.
Important facts for investors to verify
- Whether revenue and margin growth can continue as comparisons normalize after Hurricane Harvey and as international operations expand.
- The sustainability of the unusually low 16.1% effective tax rate, including the effect of discrete tax benefits and stock-option exercises.
- Capital-expenditure requirements, facility capacity and the cash-flow impact of future expansion.
- Vehicle supply, total-loss frequency, salvage prices, used-car prices, commodity prices and international foreign-exchange exposure.
- Execution of international acquisitions and new facilities, particularly in Germany and other principal-market operations.
- Debt covenant capacity, the 2024–2029 senior-note maturities and the company’s future use of repurchases, acquisitions, debt repayment or dividends.
- Implementation of ASC 606 and the anticipated fiscal 2020 adoption of lease accounting, which management expected to add approximately $120 million to $135 million of right-of-use assets and lease liabilities.
- Progress in maintaining cyber, privacy and information-technology controls following the remediated material weakness.