Copart, Inc. Form 10-Q Summary
Reporting period: Three months ended October 31, 2017, compared with the three months ended October 31, 2016. The unaudited results cover Copart’s online vehicle auction and remarketing operations in the U.S. and international markets.
Business Context
Copart primarily provides auction, towing, storage, processing, and remarketing services for salvage vehicles, principally for insurance companies. It generally acts as an agent, while certain U.K. operations purchase and resell vehicles as principal. Revenue is generated through seller and buyer fees, transportation and related services, and vehicle sales.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total service revenues and vehicle sales | $419.2 million | $346.0 million | +21.1% |
| Service revenues | $374.1 million | $307.1 million | +21.8% |
| Vehicle sales | $45.0 million | $38.9 million | +15.8% |
| Operating income | $123.9 million | $104.8 million | +18.2% |
| Operating margin | 29.6% | 30.3% | Down approximately 70 bps |
| Income before taxes | $114.1 million | $102.5 million | +11.3% |
| Net income attributable to Copart | $77.5 million | $167.3 million | -53.7% |
| Diluted EPS | $0.32 | $0.70 | -54.3% |
| Net cash from operating activities | $93.4 million | $74.3 million | +25.7% |
Net income was materially affected by the prior-year recognition of $101.4 million of excess tax benefits from employee stock-option exercises. The current quarter included only $3.8 million of such benefits. The effective tax rate was 32.0%, compared with a benefit rate of 63.1% in the prior-year quarter.
Operating expenses were $295.2 million, up 22.4%. Yard operations increased 29.8%, including $35.8 million of abnormal Hurricane Harvey-related costs. General and administrative expense declined 2.8%. Operating income increased despite the Harvey costs, but the operating margin declined because yard expenses grew faster than revenue.
Liquidity, Cash Flow, and Debt
- Cash and cash equivalents were $224.2 million at October 31, 2017, up from $210.1 million at July 31, 2017.
- Working capital was $365.2 million, up $80.1 million from July 31, 2017.
- Capital expenditures, including acquisitions, were $41.4 million; investing cash outflow was $39.3 million.
- Financing cash flow was an outflow of $39.8 million, including a $49.0 million repayment on the revolving facility.
- Revolving facility borrowings were $182.0 million, down from $231.0 million at July 31, 2017. The facility had total commitments of $850.0 million and matures July 21, 2021.
- Senior secured notes had aggregate principal of $400.0 million, with maturities from 2024 through 2029. Reported debt fair value, including the revolver, was $580.1 million.
- The consolidated total net leverage ratio was 0.69:1, minimum liquidity was $859.2 million, and the company reported compliance with all debt covenants.
- Management expects cash, cash generated from operations, and available financing to satisfy operating and working-capital requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- U.S. service revenue increased 22.6%, driven by higher revenue per vehicle, increased volume, new and expanded insurance-company contracts, higher commodity prices, and Hurricane Harvey flood vehicles.
- International service revenue increased 16.1%, including a $1.1 million favorable foreign-exchange impact.
- Hurricane Harvey generated extraordinary vehicle volume and $35.8 million of abnormal costs for temporary storage, subhaulers, overtime, employee travel, and equipment leases. Most incremental Harvey vehicles remained unsold at quarter-end.
- The company opened new facilities in Andrews, Texas, and Exeter, Rhode Island, during the quarter. No acquisitions occurred during the quarter.
- Goodwill declined to $339.0 million from $340.2 million, primarily due to purchase-price allocation adjustments related to prior acquisitions.
- No shares were repurchased under the authorized repurchase program. The company had 89.1 million shares remaining under the authorization.
Outlook, Risks, Contingencies, and Unusual Items
Management expects to continue using operating cash flow to fund working capital, facility development, and growth. It anticipates acquiring or developing additional locations and expanding existing facilities, although the timing and scale of expansion are not predictable. The filing does not provide quantitative earnings or revenue guidance.
- Results are sensitive to total-loss frequency, accident rates, used-car and commodity prices, vehicle mix, foreign-exchange rates, weather, vehicle supply, and buyer demand.
- Seasonality generally increases processing volumes and working-capital needs during winter months.
- The Georgia Department of Revenue tax dispute was reduced from a $96.1 million assessment to $2.6 million of disputed principal tax plus interest. Discovery was expected to be completed in early 2018; the company believes it has adequately provided for the probable outcome but warns that an adverse resolution could be material.
- Copart is involved in ongoing litigation with KPIT relating to a terminated enterprise-resource-planning implementation. Management believes any ultimate liability will not be material, although the amount and outcome cannot be determined with certainty.
- Key risks include dependence on major vehicle sellers, international expansion and foreign exchange, capacity constraints following severe weather, cybersecurity and system availability, regulatory and environmental compliance, competition, tax law changes, and potential goodwill or software impairment.
- The company expects future adoption of the new lease standard to significantly increase reported assets and liabilities. The potential effect of the new revenue standard was still under evaluation and could change the timing of revenue and related-cost recognition.
Investor Verification Checklist
- Verify the sustainability of revenue growth associated with Hurricane Harvey and distinguish recurring volume growth from storm-related activity.
- Assess whether the $35.8 million Harvey cost and related capacity pressures affect subsequent-quarter margins and cash flow.
- Reconcile the tax-rate comparison against the unusually large prior-year stock-option tax benefit.
- Review debt maturities, variable-rate exposure, covenant calculations, and the availability under the $850.0 million revolving facility.
- Monitor the Georgia tax proceeding and KPIT litigation for changes in expected cash exposure.
- Evaluate the timing and effects of new lease and revenue-recognition standards, as well as future software or goodwill impairment risk.