Copart, Inc. Form 10-Q Summary
Business Context and Reporting Period
Copart operates online vehicle auctions and remarketing services through its VB3 platform. Its sellers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, at certain locations, the general public. The company reports U.S. and International operating segments.
This unaudited report covers the three and six months ended January 31, 2018, compared with the corresponding periods ended January 31, 2017. The balance sheet is presented as of January 31, 2018, compared with July 31, 2017.
Key Financial Metrics
| Metric | Three Months Ended January 31, 2018 | Three Months Ended January 31, 2017 | Six Months Ended January 31, 2018 | Six Months Ended January 31, 2017 |
|---|---|---|---|---|
| Total revenue | $459.1 million | $349.5 million | $878.3 million | $695.5 million |
| Service revenue | $402.0 million | $310.0 million | $776.1 million | $617.1 million |
| Vehicle sales | $57.2 million | $39.5 million | $102.2 million | $78.4 million |
| Operating income | $150.9 million | $108.9 million | $274.9 million | $213.7 million |
| Operating margin | 32.9% | 31.1% | 31.3% | 30.7% |
| Net income attributable to Copart | $103.3 million | $66.1 million | $180.8 million | $233.3 million |
| Diluted EPS | $0.43 | $0.28 | $0.75 | $0.99 |
| Net margin attributable to Copart | 22.5% | 18.9% | 20.6% | 33.5% |
- Six-month operating cash flow was $186.4 million, versus $155.5 million in the prior-year period.
- Capital expenditures, including acquisitions, were $110.8 million, versus $92.4 million.
- Cash and cash equivalents were $195.3 million at January 31, 2018, down from $210.1 million at July 31, 2017.
- Total current and long-term debt, revolving facility and capital lease obligations were approximately $512.5 million, including $110.7 million outstanding under the revolving facility and approximately $400.0 million of senior secured notes, before debt discounts and related adjustments.
- Working capital was $291.4 million, compared with $285.1 million at July 31, 2017.
- The company reported a consolidated total net leverage ratio of 0.56:1 and minimum liquidity of $906.6 million at January 31, 2018. It was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Three-month total revenue increased 31.4%; six-month revenue increased 26.3%. Service revenue increased 29.6% and 25.8%, respectively, while vehicle sales increased 44.7% and 30.3%.
- U.S. growth was driven by higher vehicle volume, new and expanded insurance-company contracts, increased total-loss frequency, higher average auction selling prices and Hurricane Harvey flood vehicles. International growth also reflected higher volume and favorable foreign exchange effects.
- Operating income increased 38.6% for the quarter and 28.6% for the six-month period. Operating margin improved primarily because revenue growth exceeded the increase in operating expenses.
- General and administrative expense increased 7.3% in the quarter and 2.1% for the six-month period, slower than revenue growth.
- Six-month net income declined 22.5% despite higher operating income, primarily because the prior-year period included a substantially larger employee stock-option-related tax benefit. The prior-year effective tax rate was negative 15.2%, compared with 30.1% in the current six-month period.
- Debt-related financing cash flows changed from $72.0 million of revolving-facility proceeds in the prior-year period to $120.3 million of net repayments in the current period.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management did not provide specific numerical revenue or earnings guidance in the filing. It stated that available cash, cash generated from operations and borrowing capacity are expected to satisfy operating and working-capital needs for at least the next 12 months.
- Management expects continued investment in new and existing facilities, including potential greenfield yards, acquisitions and expansion. New-yard development costs may range from $3.0 million to $50.0 million per location.
- Hurricane Harvey generated $62.4 million of abnormal costs in the six months ended January 31, 2018, including temporary storage, subhauler premiums, overtime, employee travel and lodging, and equipment leases. These costs were expensed as incurred. The majority of incremental Harvey-related vehicles had been sold by quarter-end.
- The Tax Cuts and Jobs Act resulted in a provisional $10.6 million transition-tax expense for the six-month period, partially offset by a $0.6 million deferred-tax remeasurement benefit. The company had not completed its accounting for the Tax Act and expected further updates through the quarter ending January 31, 2019.
- The company repatriated $51.7 million of previously taxed U.K. earnings in January 2018 and expected to repatriate an additional $42.2 million around February 28, 2018, without material additional taxes based on its current assessment.
- Material risks include dependence on vehicle supply from major sellers, salvage-volume and commodity-price volatility, adverse weather and capacity constraints, foreign exchange exposure, international expansion and integration, cyber and systems risks, regulatory and environmental requirements, and competition.
- Copart is defending litigation involving KPIT relating to a terminated enterprise-resource-planning implementation; a jury trial was scheduled for April 2018. Management believes any ultimate liability will not be material, but the outcome cannot be determined with certainty.
- A Georgia sales-tax dispute was reduced from the original $96.1 million assessment to $2.6 million of principal plus applicable interest. The company has provided for its best estimate but cautioned that an adverse resolution could materially affect results and financial position.
- The company expects adoption of the new lease standard to significantly increase reported assets and liabilities. It was also evaluating the future impact of the new revenue-recognition standard, which could change the timing of revenue and related cost recognition.
Important Facts for Investors to Verify
- Whether the unusually strong revenue growth, particularly from Hurricane Harvey volumes, persists after the related salvage inventory is processed.
- The normalization of yard-operation costs after the $62.4 million of Harvey-related abnormal expenses.
- The completed accounting impact of the Tax Cuts and Jobs Act, including transition-tax estimates, deferred taxes and future effective tax rates.
- Progress and resolution of the KPIT litigation and the remaining Georgia sales-tax dispute.
- Cash deployment priorities, including capital expenditures, debt repayment, acquisitions, potential repurchases and the absence of cash dividends.
- The effect of foreign exchange, commodity prices, used-vehicle prices, total-loss frequency and international expansion on future margins and cash flow.
- The eventual balance-sheet impact of new lease accounting and the revenue-recognition changes beginning in fiscal 2019.