CPRT

Copart, Inc. 10-Q Summary: Quarter Ended April 30, 2006

Business Context and Reporting Period

This filing covers the quarterly period ended April 30, 2006 (the third quarter of fiscal 2006) and the nine months ended on that date. Copart, Inc. operates as a leading provider of salvage vehicle sales services, utilizing its proprietary "VB 2" Internet auction technology to sell damaged and recovered vehicles to dismantlers, rebuilders, and exporters. The company operates approximately 120 facilities across North America.

Key Financial Metrics

Note: Net income for the nine-month period includes a $16.5 million loss from discontinued operations (Motors Auction Group). Operating margins were impacted by abnormal costs related to Hurricanes Katrina and Rita.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 17.0% ($21.7 million) for the quarter and 16.1% ($54.2 million) for the nine months compared to the prior year periods. Growth was driven by increased vehicle sales volume and higher auction proceeds per vehicle.
• Expense Increases: Yard operations expenses rose 16.3% for the quarter. This included approximately $2.6 million in "abnormal" costs for the quarter (and $12.0 million for the nine months) directly attributable to Hurricanes Katrina and Rita, charged to operations under SFAS 151.
• Discontinued Operations: The company recorded a $21.8 million goodwill impairment and a $0.5 million covenant impairment related to the discontinuation of its public auction business (Motors Auction Group). Conversely, it recognized a $3.0 million gain on the sale of one MAG location.
• Tax Adjustment: A $1.8 million out-of-period reduction to deferred tax liabilities was recorded, lowering the effective tax rate for the nine-month period.

Guidance, Outlook, and Risks

• Hurricane Impact: Approximately 64% of incremental salvage vehicles received due to the hurricanes remained unsold as of April 30, 2006. Management expects to sell the majority in the next two quarters, contingent on no further severe weather in the Gulf Coast. Continued processing of these vehicles is expected to negatively impact gross and operating margins.
• Technology Outlook: While the VB 2 platform has driven recent growth, management does not expect to continue experiencing the same incremental favorable impact from the technology as it has been fully implemented for two years.
• Liquidity: The company maintains strong liquidity with approximately $252 million in cash and short-term investments. It has no long-term debt and a $10.6 million revolving credit facility (which was terminated in May 2006 per terms).
• Legal Risks: Significant litigation includes a patent infringement suit filed by Manheim Services Corp. regarding VB 2 technology and a class action regarding storage liens. Management believes these will not have a material effect on financial position.

Investor Verification Checklist

• Hurricane Inventory Turnover: Verify the rate at which the 64% of unsold hurricane-related vehicles are being sold and the associated margin impact in subsequent quarters.
• Discontinued Operations: Confirm the final disposition of the remaining two Motors Auction Group (MAG) locations and the realization of the deferred $2.5 million gain on the real estate sale.
• Legal Proceedings: Monitor the status of the Manheim patent infringement lawsuit and the Richard M. Gray class action regarding storage liens.
• Supplier Concentration: Review the stability of relationships with the top two suppliers, which accounted for approximately 23% of revenues in the third quarter.
• Share Repurchases: Track the execution of the remaining 5 million shares authorized under the current repurchase program.