COPART INC annual report, FY2016

Copart, Inc. Fiscal 2016 Form 10-K Summary

Business Context and Reporting Period

Copart provides online vehicle auctions and remarketing services for salvage and other vehicles. Its primary sellers are insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, in certain locations, the general public. The company operates primarily as an agent, but also purchases and resells vehicles for its own account, particularly in the U.K.

The filing covers the fiscal year ended July 31, 2016. Reportable segments are the U.S. and International regions, which represented 80.1% and 19.9% of fiscal 2016 revenue, respectively. Copart opened facilities in the U.S., India, Ireland and Spain during the year and continued expanding its VB3 online auction platform.

Financial Performance and Key Metrics

Metric	FY 2016	FY 2015	Change
Total revenue	$1.268 billion	$1.146 billion	+10.7%
Service revenue	$1.104 billion	$985.4 million	+12.1%
Vehicle sales	$164.1 million	$160.7 million	+2.1%
Operating income	$406.5 million	$344.4 million	+18.0%
Income before taxes	$395.9 million	$332.1 million	+19.2%
Net income	$270.4 million	$219.8 million	+23.0%
Diluted EPS	$2.21	$1.67	+32.3%
Operating margin	32.0%	30.1%	Improved
Net margin	21.3%	19.2%	Improved

U.S. service revenue increased 13.0%, driven primarily by higher vehicle volume, increased salvage frequency and new or expanded insurance-company contracts. International service revenue increased 6.3% as reported, or approximately 14.9% excluding a $11.8 million foreign-currency headwind, primarily from growth in the U.K.

Operating expenses increased 7.5% overall. Yard operations increased 10.8% with higher volume, while general and administrative expense declined 0.6%. Fiscal 2016 included no impairment charge, compared with a $29.1 million software-related impairment charge in fiscal 2014.

Quarterly fourth-quarter revenue was $332.7 million, operating income was $106.2 million, net income was $84.1 million and diluted EPS was $0.71. Fourth-quarter net income and EPS benefited from the early adoption of ASU 2016-09, which produced a $14.7 million excess tax benefit recognized through income tax expense.

Cash Flow, Liquidity, Debt and Capital Allocation

Operating cash flow was $332.5 million, up 25.4% from $265.1 million in fiscal 2015.
Investing cash flow was an outflow of $172.9 million, primarily reflecting $173.9 million of capital expenditures, including facility development, lease buyouts, equipment and software.
Financing cash flow was an outflow of $448.5 million, primarily due to share repurchases and debt repayment.
Cash and cash equivalents declined to $155.8 million from $456.0 million; working capital declined to $220.5 million from $521.5 million.
Total debt was $640.5 million at July 31, 2016, compared with $644.5 million at the prior year-end. Cash of $155.8 million was partly offset by $111.2 million held by foreign subsidiaries intended to remain invested outside the U.S.
The revolving credit facility was increased to $850.0 million and had $238.0 million outstanding at year-end. The company prepaid $242.5 million of term loans in July 2016. Senior secured notes totaled $400.0 million, with maturities from 2024 through 2029.
Copart repurchased 2.9 million shares under its repurchase program for $117.9 million and completed a $325.0 million modified Dutch auction tender offer. Total fiscal 2016 common-stock repurchases, including tender-offer and other transactions, were $457.9 million.
Management stated that cash on hand and operating cash flow should be sufficient for operating and working-capital requirements for at least the next 12 months, although additional borrowing may be used for expansion.

Material Changes Versus Prior Comparable Period

Revenue growth accelerated substantially, led by U.S. volume growth and improved International operating performance excluding currency effects.
Operating margin expanded from approximately 30.1% to 32.0%, aided by revenue growth, operating leverage and the absence of the fiscal 2014 software impairment charge.
Net income growth exceeded revenue growth, partly because the effective tax rate declined to 31.7% from 33.8% and because of the $14.7 million ASU 2016-09 tax benefit.
Capital expenditures increased materially to $173.9 million from $79.2 million as Copart expanded and upgraded facilities.
Cash declined significantly because of share repurchases, capital expenditures, debt repayments and operating working-capital changes.
International reported results were adversely affected by foreign-currency movements, particularly involving the British pound and Brazilian real.
The company changed its financing structure by refinancing term debt, expanding revolving capacity and extending the revolving facility maturity to July 2021.

Guidance, Outlook, Commentary, Risks and Unusual Items

The filing does not provide quantitative revenue or earnings guidance. Management expects to continue developing facilities, expanding online auctions and pursuing vehicle-supply agreements, including in international markets. New-yard development costs may range from approximately $1 million to $30 million per location, depending on size, location and infrastructure.

Georgia sales-tax assessment: The Georgia Department of Revenue issued a $96.1 million assessment, including taxes, penalties and interest, for the 2007–2011 audit period. Copart appealed, believes the transactions were nontaxable sales for resale, and states that it has provided for its best estimate of the probable outcome. An adverse resolution could be material.
International and currency exposure: Expansion creates integration, regulatory, political, tax and foreign-exchange risks. A hypothetical 10% adverse currency movement would have reduced fiscal 2016 operating income by an estimated $6.6 million. Brexit may increase currency, economic and cross-border uncertainty.
Debt and interest-rate risk: The company has secured debt, variable-rate borrowings and covenants limiting certain acquisitions, distributions and repurchases. A hypothetical 10% increase in interest rates would have increased interest expense by approximately $2.4 million.
Supply, weather and market risk: Results depend on vehicle volume, insurance-company relationships, salvage frequency, used-vehicle values, commodity prices, accident rates and weather. Seller agreements are generally cancellable on 30–90 days’ notice.
Technology and cybersecurity: Copart relies heavily on its proprietary auction platform and internally developed international systems. The company disclosed prior unauthorized access to member information in 2015 and continuing risks from cyberattacks and system interruptions.
Subsequent events: In September 2016, executives exercised options covering 9.0 million shares and received 3.7 million net shares after withholding. Copart also drew $135.0 million under its revolving facility to fund general purposes and related tax-withholding obligations.

Most Important Facts for Investors to Verify

Whether the Georgia tax assessment is ultimately reduced, settled or upheld, and whether the recorded reserve is adequate.
Whether U.S. vehicle volumes, salvage frequency and insurance-company supply agreements support continued revenue growth.
The effect of lower commodity prices, used-vehicle values and foreign-exchange movements on revenue per vehicle and margins.
Actual utilization of the $850.0 million revolving facility, leverage ratios, interest costs and compliance with debt covenants.
Whether elevated capital expenditures and international facility openings generate expected returns and operating leverage.
The recurring versus one-time impact of the $14.7 million share-based-payment tax benefit on fiscal 2016 earnings.
Progress and reliability of Copart’s internally developed international operating systems and cybersecurity controls.
The effect of executive option exercises, share repurchases and future financing activity on diluted share count and per-share earnings.