Copart, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended April 30, 2016; comparative periods ended April 30, 2015. Financial statements are unaudited. Copart operates online vehicle auctions and remarketing services across North America, the U.K., Brazil, the U.A.E., Oman, Bahrain, Ireland, India, Germany and Spain.
Financial Performance and Position
| Metric | Three months ended April 30, 2016 | Change vs. 2015 | Nine months ended April 30, 2016 | Change vs. 2015 |
|---|---|---|---|---|
| Total revenue | $347.2 million | 16.9% | $935.8 million | 8.3% |
| Service revenue | $303.5 million | 18.3% | $814.9 million | 9.9% |
| Vehicle sales | $43.7 million | 7.8% | $120.9 million | (1.0%) |
| Operating income | $121.9 million | 28.7% | $300.3 million | 16.6% |
| Net income | $74.0 million | 28.6% | $185.4 million | 14.2% |
| Diluted EPS | $0.64 | $0.20 | $1.51 | $0.28 |
Margins: Operating margin was approximately 35.1% in the quarter and 32.1% for the nine months, compared with approximately 31.9% and 29.8%, respectively, in the prior-year periods. Net margin was approximately 21.3% in the quarter and 19.8% year to date, versus approximately 19.4% and 18.8%.
- Quarterly service revenue growth was driven primarily by North American volume growth, new and expanded insurance contracts, increased salvage frequency and higher volume in the U.K. and other international markets.
- Lower commodity prices, foreign-exchange movements and vehicle mix reduced average auction selling prices and partially offset revenue growth.
- Nine-month operating expenses increased 4.8%, slower than revenue growth. General and administrative expense declined 3.8%, while yard operations expense increased 8.4%.
- Effective income tax rates were 36.5% for the quarter and 36.0% for the nine months, compared with 34.8% and 35.2% in the prior-year periods.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was $207.5 million for the nine months, compared with $203.4 million in the prior-year period.
- Capital expenditures were $143.8 million, compared with $49.1 million, primarily for facility development, land and lease buyouts, software and equipment.
- Financing cash flow was a use of $379.6 million, principally reflecting $442.9 million of share repurchases, $37.5 million of debt principal payments and partially offset by $93.5 million of new debt issuance.
- Cash and cash equivalents were $137.7 million at April 30, 2016, down from $456.0 million at July 31, 2015. Working capital declined to $260.9 million from $521.5 million.
- Approximately $96.4 million of cash was held by foreign subsidiaries and was intended to remain permanently invested outside the United States.
- Total debt and capital lease obligations were approximately $700.9 million, including $300.0 million of variable-rate term loans and approximately $416.7 million of fixed-rate senior notes. No revolving facility borrowings were outstanding.
- The March 2016 debt amendment increased revolving commitments to $350.0 million, added a $93.8 million incremental term loan and extended relevant maturities to March 15, 2021. The company was in compliance with debt covenants at April 30, 2016.
Material Changes and Unusual Items
- Copart repurchased 2.94 million shares for $117.9 million during the nine months and completed a December 2015 modified Dutch auction tender offer for 8.33 million shares at $39.00 per share, totaling $325.0 million.
- Shares outstanding declined to 109.2 million at April 30, 2016 from 120.2 million at July 31, 2015, contributing to higher per-share results.
- The company opened or began operating greenfield facilities in India, Texas and Ireland during the period. No acquisitions occurred during the nine months.
- Foreign currency translation reduced accumulated other comprehensive income by $15.3 million for the nine months, while quarterly comprehensive income benefited from a $15.6 million currency translation gain.
- The company sold all marketable securities during the quarter, generating approximately $0.4 million of realized gain.
- Interest-rate swaps expired in December 2015; the company remains exposed to variable-rate debt without those hedges.
Outlook, Risks and Contingencies
Management stated that available cash and expected operating cash flow should satisfy operating and working-capital requirements for at least the next 12 months. The company expects continued facility expansion and may require additional debt or equity financing for future growth, acquisitions or capacity investments. No formal earnings guidance was provided.
- Revenue and margins are sensitive to salvage frequency, accident volumes, used-car values, commodity prices, vehicle mix, foreign-exchange rates, weather, buyer demand and the availability of vehicles from major sellers.
- Growth depends on retaining insurance-company supply agreements, expanding facility capacity and successfully integrating international operations and new technology systems.
- The Georgia Department of Revenue issued a $96.1 million sales-tax assessment, including penalties and interest, relating to 2007–2011 activity. Copart appealed the assessment, believes it has strong defenses and states that it has adequately provided for its best estimate of the probable outcome; an adverse resolution could materially affect results and financial condition.
- Copart is pursuing litigation against KPIT relating to a terminated enterprise-resource-planning implementation and is defending KPIT’s related claims. Management believes any ultimate liability will not be material, but the amount cannot be determined with certainty.
- Key additional risks include cybersecurity and system interruptions, privacy and data-protection requirements, environmental and zoning obligations, competition, self-insurance claims, goodwill impairment, international regulatory and anti-bribery compliance, and foreign-currency exposure.
Investor Verification Checklist
- Reconcile the $442.9 million of financing cash outflows with the $325.0 million tender offer and $117.9 million program repurchases.
- Review the debt amendment, maturity profile, interest-rate exposure and covenant calculations, including the absence of interest-rate swaps after December 2015.
- Assess the potential cash and earnings impact of the $96.1 million Georgia sales-tax assessment and related accrued provision.
- Monitor whether facility expansion and elevated capital expenditures convert into sustained volume and margin growth.
- Evaluate the effect of foreign-exchange movements, lower commodity prices and vehicle-selling-price trends on service revenue.
- Review customer concentration, contract renewal risk and the company’s ability to secure sufficient salvage-vehicle supply.
- Consider the potential effects of international expansion, technology implementation, cybersecurity incidents and future goodwill or software impairment.