Copart, Inc. Fiscal 2015 Form 10-K Summary
Reporting period: Annual report for the fiscal year ended July 31, 2015. The filing also provides unaudited fourth-quarter data; it is not a standalone quarterly filing.
Business Context
Copart operates online vehicle auctions and vehicle remarketing services in North America, the United Kingdom, Brazil, the United Arab Emirates, Oman, Bahrain, Germany and Spain. Its primary sellers are insurance companies, and its principal buyers are dismantlers, rebuilders, repair businesses, used-vehicle dealers and exporters. Most auctions are conducted through the VB3 Internet platform.
- North America, Brazil and Middle Eastern operations primarily act as agents and earn seller and buyer fees, towing, storage and related service revenue.
- The U.K. uses both agency and principal models, with Copart purchasing and reselling some vehicles for its own account.
- Insurance company sellers represented 83% of vehicles processed in fiscal 2015; no single customer represented more than 10% of revenue.
- New facilities opened in Moncton, Canada; Manama, Bahrain; and Muscat, Oman.
Financial Performance and Liquidity
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $1.146 billion | $1.163 billion | (1.5%) |
| Service revenue | $985.4 million | $958.4 million | 2.8% |
| Vehicle sales | $160.7 million | $205.1 million | (21.6%) |
| Operating income | $344.4 million | $274.9 million | 25.3% |
| Net income | $219.8 million | $178.7 million | 23.0% |
| Diluted EPS | $1.67 | $1.36 | 22.8% |
| Operating cash flow | $265.1 million | $262.6 million | 0.9% |
- Operating margin increased to approximately 30% from 23%; net margin increased to approximately 19% from 15%.
- Service revenue growth reflected higher vehicle volume, partly offset by lower revenue per vehicle from lower commodity prices and average auction selling prices.
- Vehicle sales declined primarily because of lower U.K. insurance volume, lower average selling prices and reduced open-market purchasing activity.
- Operating expenses decreased 9.8% to $801.7 million. Fiscal 2014 included a $29.1 million impairment charge related primarily to discontinued third-party enterprise software development.
- Interest expense increased to $18.1 million from $8.8 million following additional debt issued in December 2014.
| Balance-sheet and cash-flow metric | July 31, 2015 |
|---|---|
| Cash and cash equivalents | $456.0 million |
| Working capital | $521.5 million |
| Total assets | $1.800 billion |
| Total debt | $645.8 million |
| Stockholders' equity | $964.5 million |
| Capital expenditures, including acquisitions | $79.2 million |
Cash increased by $297.3 million during fiscal 2015. Financing cash flow was $120.4 million, including approximately $698.9 million of net debt issuance proceeds, $350.0 million of debt principal repayments and $237.3 million of share repurchases. Management stated that available cash and operating cash flow were expected to fund operating and working-capital needs for at least the next 12 months.
Fourth-Quarter Fiscal 2015 Data
| Metric | Fourth Quarter 2015 |
|---|---|
| Revenue | $282.3 million |
| Gross margin | $118.8 million |
| Operating income | $86.8 million |
| Net income | $57.4 million |
| Diluted EPS | $0.44 |
Debt, Capital Allocation and Liquidity
- In December 2014, Copart entered into a secured credit agreement with a $300 million term loan and a $300 million revolving facility. The revolving facility was undrawn at July 31, 2015, and term-loan borrowings were $243.8 million.
- Copart issued $400 million of senior secured notes with maturities from 2024 through 2029 and fixed interest rates from 4.07% to 4.35%.
- Total future payments on the term loan and senior notes were $643.8 million as of July 31, 2015.
- The company was in compliance with its debt covenants at year-end.
- Copart completed a modified Dutch auction tender offer for 6.254 million shares at $36 per share, totaling $225.1 million, funded with long-term debt. It also repurchased 231,500 shares under its existing authorization.
- The company has not paid cash dividends since becoming public and intends to retain earnings for business purposes, although additional repurchases, debt repayment, dividends and acquisitions were identified as potential uses of cash.
Material Changes Versus the Prior Period
- Revenue decreased modestly because a 2.8% increase in service revenue was more than offset by a 21.6% decline in vehicle sales.
- Profitability improved substantially because of the absence of the prior-year $29.1 million software impairment, lower general and administrative expense, lower vehicle-sale costs and operating efficiencies.
- General and administrative expense declined 15.5%, primarily due to completed technology relocation and integration activities, lower technology spending and lower stock-based compensation.
- Foreign currency translation produced a $49.5 million loss in other comprehensive income, compared with a $26.4 million gain in fiscal 2014.
- Goodwill declined to $271.9 million, primarily due to foreign-exchange effects; annual impairment testing found no goodwill impairment.
- International revenue declined to $243.2 million from $269.9 million, largely reflecting lower U.K. revenue and foreign-exchange effects.
Outlook, Risks and Unusual Items
- Management’s strategy remains focused on expanding facilities, obtaining national and regional seller agreements, increasing VB3 adoption and expanding services internationally. No formal fiscal 2016 revenue or earnings guidance is provided in the filing.
- Results are seasonal, with winter weather generally increasing accident frequency, vehicle volumes and working-capital requirements. Mild weather can reduce salvage supply, while extreme weather can create capacity and abnormal operating costs.
- A major contingency is the Georgia Department of Revenue sales-tax assessment of $96.1 million, including penalties and interest, issued August 4, 2015. Copart appealed the assessment on September 3, 2015, believes it has strong defenses and states that it has provided for its best estimate of the probable outcome. An adverse resolution could materially affect results and financial position.
- In April 2015, unauthorized third parties accessed member information considered personal information in certain jurisdictions. Copart investigated, engaged an external security firm and made required notifications; future cyber incidents could result in operational disruption, liability, regulatory action and reputational damage.
- Copart is transitioning from the discontinued third-party enterprise system to an internally developed international system. Implementation failures, delays or service interruptions could affect operations and financial reporting.
- Key operating risks include dependence on insurance-company vehicle supply, competition, foreign-exchange exposure, commodity and used-vehicle prices, regulatory and environmental requirements, facility capacity, acquisitions and self-insured claims.
- The company held $82.0 million of cash outside the United States and intended to permanently reinvest those funds abroad; repatriation could create additional U.S. taxes.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify the ultimate resolution, reserve adequacy and cash impact of the $96.1 million Georgia sales-tax assessment.
- Assess whether service-revenue growth and operating-margin expansion can continue despite lower vehicle selling prices and foreign-exchange pressure.
- Review debt-amortization requirements, secured-covenant restrictions and the 2019 maturity of the term loan and revolving facility.
- Monitor execution of the internally developed international operating system and any related capitalization or impairment charges.
- Evaluate insurance-company concentration, contract cancellation provisions and the sustainability of vehicle supply.
- Track cybersecurity remediation, member-data protection and potential litigation or regulatory costs.
- Reconcile annual and fourth-quarter results with the audited financial statements and the unaudited quarterly schedule in the filing.