Copart, Inc. Fiscal 2013 Form 10-K Summary
Business context and reporting period
Copart provides Internet-based vehicle auctions and remarketing services in North America, the United Kingdom, Brazil, the United Arab Emirates, Germany and Spain. Its sellers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, at certain locations, the general public. The company primarily operates as an agent, but records vehicle sales on a gross basis where it purchases and resells vehicles, particularly in the United Kingdom.
The filing covers the fiscal year ended July 31, 2013. The requested fourth-quarter period ended July 31, 2013; quarterly figures below are unaudited.
Financial performance and key metrics
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $1,046.4 million | $924.2 million | 13.2% increase |
| Service revenue | $849.7 million | $757.3 million | 12.2% increase |
| Vehicle sales | $196.7 million | $166.9 million | 17.9% increase |
| Operating income | $283.0 million | $286.4 million | 1.2% decrease |
| Operating margin | 27.0% | 31.0% | Down approximately 4.0 points |
| Net income | $180.0 million | $182.1 million | 1.1% decrease |
| Net margin | 17.2% | 19.7% | Down approximately 2.5 points |
| Diluted EPS | $1.39 | $1.39 | Flat |
| Cash flow from operations | $199.3 million | $229.7 million | 13.2% decrease |
Fourth-quarter fiscal 2013 revenue was $263.7 million, operating income was $63.1 million and net income was $41.3 million, compared with fourth-quarter fiscal 2012 revenue of $226.6 million, operating income of $69.5 million and net income of $44.9 million. Fourth-quarter basic and diluted EPS were $0.33 and $0.32, respectively.
Fiscal 2013 operating expenses increased faster than revenue. Yard operations rose to $458.2 million from $377.6 million, cost of vehicle sales increased to $167.2 million from $137.0 million, and general and administrative expense increased to $137.9 million from $114.5 million. The company cited international expansion, acquisitions, higher processing costs and Hurricane Sandy response costs as significant contributors.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $63.6 million at July 31, 2013, down from $140.1 million a year earlier.
- Working capital was $67.9 million, compared with $134.9 million at July 31, 2012.
- Total debt was $372.5 million, including $368.8 million outstanding under the term loan. The term loan requires quarterly amortization and matures on December 14, 2015.
- No borrowings were outstanding under the $100 million revolving credit facility, and the company reported compliance with all debt covenants.
- Interest-rate swaps hedge the term loan's variable-rate exposure. The applicable credit facility rate was 0.20% Eurocurrency Rate plus a 1.5% margin at year-end.
- Capital expenditures were $130.3 million, and acquisition-related cash expenditures were $84.0 million. Total cash used in investing activities was $208.0 million.
- The company repurchased 500,000 shares for $15.0 million during fiscal 2013. A further 47.7 million shares remained authorized for repurchase at year-end. The company has not paid cash dividends and expects to retain earnings for business needs.
- Management stated that available cash and expected operating cash flow should satisfy operating and working-capital requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven by international expansion, the full-year impact of a major insurance-provider contract, market-share gains, increased salvage frequency and Hurricane Sandy-related vehicle volume.
- Hurricane Sandy generated extraordinary flood-damaged vehicle volume but also caused abnormal temporary-storage, subhauler, overtime, travel, lodging and equipment costs. Those incremental vehicles had been sold by July 31, 2013.
- Copart expanded through acquisitions in Brazil, the United Arab Emirates, Germany, Spain and North America. Fiscal 2013 acquisitions had a preliminary total purchase price of $87.9 million and added $73.4 million of goodwill.
- Goodwill increased to $267.5 million from $196.4 million; no goodwill impairment was recorded in fiscal 2013.
- Cash from operations declined despite higher revenue, primarily because of increases in accounts receivable, prepaid and other assets, income taxes receivable and vehicle pooling costs.
- The company began transitioning its data center to a third-party provider and accelerated depreciation on certain data-center and Fairfield, California IT assets. This produced $7.0 million of additional depreciation in fiscal 2013 and is expected to add approximately $2.9 million in fiscal 2014.
- Implementation of a new enterprise resource planning system was planned in phases through fiscal 2014 and 2015.
Outlook, risks, contingencies and unusual items
Management's strategy is to expand through acquisitions and new facilities, obtain additional national and regional vehicle-supply agreements, broaden online auction and remarketing services, and deploy its VB2 technology in new markets. The filing does not provide quantitative fiscal 2014 revenue or earnings guidance.
- Key operating risks include dependence on insurance-company vehicle supply, cancellable seller agreements, competition from auction companies and vehicle dismantlers, changing salvage frequency, used-car and commodity prices, weather-related volatility and facility-capacity constraints.
- International expansion creates integration, foreign-currency, regulatory, political, anti-bribery, market-adoption and principal-model inventory risks. A 10% change in the U.S. dollar relative to relevant foreign currencies was estimated to affect annual revenue by approximately $22.8 million.
- The Georgia Department of Revenue proposed a $73.8 million sales and use tax assessment, including penalties and interest, for January 2007 through June 2011. Copart is contesting the assessment, believes it has strong defenses, and has provided for the assessment in its financial statements; an adverse outcome could be material.
- Outstanding contractual obligations included $368.8 million of term-loan principal, $131.2 million of operating-lease commitments, $15.1 million of estimated debt interest and $18.8 million of letters of credit.
- Pending litigation and Hurricane Sandy-related zoning and environmental proceedings were disclosed. Management believes the ultimate liabilities will not materially affect consolidated results, although outcomes cannot be determined with certainty.
- Foreign-currency translation produced a cumulative loss of $45.4 million in accumulated other comprehensive loss at July 31, 2013.
Most important facts for investors to verify
- Whether revenue growth from acquisitions, insurance contracts and salvage-frequency trends can continue without further deterioration in operating margins.
- The final outcome and adequacy of the $73.8 million Georgia sales-tax provision.
- Copart's ability to fund the $368.8 million term-loan maturity and required amortization by December 2015 while continuing acquisition and capital-expenditure programs.
- Integration progress and profitability of the Brazil, U.A.E., Germany, Spain and North American acquisitions, including the carrying value of $267.5 million of goodwill.
- Actual costs and implementation risks associated with the ERP conversion and outsourced data-center transition.
- Exposure to Hurricane Sandy-type events, severe weather, foreign exchange movements, fuel costs and changes in used-vehicle and commodity prices.
- Current seller concentration, contract retention and vehicle volumes, because seller agreements are generally cancellable with 30 to 90 days' notice.