Copart, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended April 30, 2018. The unaudited results cover Copart’s online vehicle auction and remarketing operations in the United States and international markets, including Canada, the U.K., Ireland, Brazil, Germany, Finland, the Middle East and Spain.
Financial Performance and Position
| Metric | Three months ended Apr. 30, 2018 | Three months ended Apr. 30, 2017 | Nine months ended Apr. 30, 2018 | Nine months ended Apr. 30, 2017 |
|---|---|---|---|---|
| Total revenue | $478.2 million | $373.9 million | $1.356 billion | $1.069 billion |
| Operating income | $174.6 million | $136.8 million | $449.5 million | $350.5 million |
| Operating margin | 36.5% | 36.6% | 33.1% | 32.8% |
| Net income attributable to Copart | $127.3 million | $90.5 million | $308.1 million | $323.9 million |
| Diluted EPS | $0.52 | $0.38 | $1.28 | $1.37 |
| Operating cash flow | Not separately provided | Not separately provided | $377.2 million | $347.8 million |
- Quarterly revenue increased 27.9%, driven by higher U.S. and international volumes, higher average auction selling prices, favorable vehicle mix and higher commodity prices. Nine-month revenue increased 26.8%.
- Service revenue increased 23.6% in the quarter and 25.0% year to date. Vehicle sales increased 62.4% in the quarter and 41.4% year to date.
- Quarterly net income attributable to Copart increased 40.6%. Nine-month net income declined 4.9%, primarily because the prior-year period benefited from substantially larger excess tax benefits related to employee stock-option exercises.
- Quarterly net margin was approximately 26.6%, compared with 24.2% in the prior-year quarter. Nine-month net margin was approximately 22.7%, compared with 30.3% in the prior-year period.
- As of April 30, 2018, cash and cash equivalents were $204.3 million, working capital was $360.3 million, and total assets were $2.165 billion.
- Debt consisted primarily of approximately $400 million of senior secured fixed-rate notes, reported at $380.8 million fair value, with no borrowings outstanding under the $850 million revolving facility. The consolidated total net leverage ratio was 0.33:1, and the company was in compliance with its debt covenants.
- Capital expenditures, including acquisitions, were $188.5 million for the nine months, compared with $134.7 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- U.S. service revenue rose 22.3% in the quarter and 25.2% year to date; international service revenue rose 32.7% and 23.9%, respectively.
- Operating income increased 27.7% in the quarter and 28.3% year to date, while operating margin remained broadly stable.
- Yard operations expense increased 21.0% in the quarter and 26.5% year to date. Cost of vehicle sales increased 65.4% and 43.9%, respectively, reflecting higher volumes, purchase prices and vehicle mix.
- The company repaid $231.0 million of revolving debt during the nine months, compared with $73.0 million in the prior-year period.
- Copart acquired Finnish salvage auction company Autovahinkokeskus Oy for approximately $8.9 million and continued investing in new and expanded facilities, including locations in Finland, Germany and the U.K.
- Foreign currency translation produced a $10.3 million cumulative gain during the nine months, compared with a $5.1 million loss in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- No formal numerical revenue or earnings guidance was provided. Management expects available cash, operating cash flow and revolving-facility capacity to fund operating and working-capital needs for at least the next 12 months, while continuing to pursue facility expansion and acquisitions.
- Hurricane Harvey generated an extraordinary volume of flood-damaged vehicles. Copart incurred $68.6 million of abnormal costs during the nine months, including temporary storage, subhauler premiums, overtime, employee travel and equipment leases. These costs were expensed as incurred; substantially all incremental Harvey vehicles had been sold by April 30, 2018.
- The Tax Cuts and Jobs Act resulted in a provisional net tax charge of approximately $11.0 million through April 30, 2018. The company had not completed its accounting for the legislation and expected further adjustments as additional guidance and foreign-earnings information became available.
- On May 22, 2018, after the reporting period, a jury awarded Copart $21.0 million on fraud and professional-negligence claims against KPIT, while awarding KPIT $4.9 million on a counterclaim. The potential $21.0 million recovery was treated as a gain contingency and was not recognized in the financial statements.
- A Georgia sales-tax dispute had been reduced from the original $96.1 million assessment to $2.6 million of principal, plus interest. Copart has provided for its best estimate of the probable outcome but warned that an adverse resolution could be material.
- Key operating risks include dependence on major vehicle sellers, weather and salvage-volume fluctuations, commodity and used-vehicle prices, foreign exchange, international expansion and integration, facility capacity and zoning, cybersecurity, privacy regulation, environmental liabilities, tax examinations and competition.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Facts Investors Should Verify
- Whether the unusually high salvage volumes and $68.6 million of Harvey-related abnormal costs have fully normalized and how future weather events may affect capacity and margins.
- The sustainability of revenue growth from new and expanded insurance-company contracts, higher auction prices and increased total-loss frequency.
- The final accounting for the Tax Cuts and Jobs Act, including the provisional transition-tax estimate and any future effects on the effective tax rate.
- The ultimate resolution and collectability of the KPIT jury award, including post-trial proceedings and the $4.9 million counterclaim.
- The outcome of the remaining Georgia sales-tax dispute and whether additional tax liabilities could arise from ongoing examinations.
- Capital spending, international facility expansion, acquisition integration and utilization of the substantial unused revolving-credit capacity.