Copart, Inc. — Fiscal 2017 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Copart provides online vehicle auctions and remarketing services through its VB3 platform. Sellers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, in some markets, the general public. The company operates in the United States and multiple international markets, primarily under an agency model; certain U.K. operations purchase and resell vehicles as principal.
This unaudited Form 10-Q covers the three and nine months ended April 30, 2017, compared with the corresponding periods ended April 30, 2016. The company completed a two-for-one stock split in April 2017; prior per-share and share amounts were adjusted accordingly.
Financial Results and Key Metrics
| Metric | Three Months Ended April 30, 2017 | Year-over-Year Change | Nine Months Ended April 30, 2017 | Year-over-Year Change |
|---|---|---|---|---|
| Total service revenues and vehicle sales | $373.9 million | +7.7% | $1.069 billion | +14.3% |
| Service revenues | $332.3 million | +9.5% | $949.5 million | +16.5% |
| Vehicle sales | $41.5 million | -5.1% | $119.9 million | -0.8% |
| Operating income | $136.8 million | +12.2% | $350.5 million | +16.7% |
| Net income | $90.5 million | +21.3% | $323.9 million | +73.9% |
| Diluted EPS | $0.38 | +$0.06 | $1.37 | +$0.62 |
- Operating margin was approximately 36.6% for the quarter and 32.8% for the nine-month period, compared with approximately 35.1% and 32.1%, respectively, in the prior-year periods.
- Net margin was approximately 24.2% for the quarter and 30.3% for the nine-month period, compared with approximately 21.5% and 19.9%, respectively.
- The nine-month effective tax rate was unusually low at 2.9%, versus 35.8% in the prior-year period, primarily because the company recognized $106.7 million of excess tax benefits from employee stock-option exercises. The quarterly effective tax rate was 30.9%, versus 36.0%.
- Nine-month operating cash flow was $347.8 million, up 66.9% from $208.3 million. Capital expenditures and acquisitions totaled $134.7 million, resulting in operating cash flow substantially exceeding investment spending.
- Cash and cash equivalents were $189.6 million at April 30, 2017, up from $155.8 million at July 31, 2016. Approximately $155.0 million was held by foreign subsidiaries and was intended to remain permanently reinvested outside the United States.
- Working capital was $372.1 million, compared with $220.5 million at July 31, 2016.
- Total debt carrying amounts were approximately $566.9 million, consisting primarily of $165.0 million outstanding under the revolving facility and approximately $401.3 million of fixed-rate senior notes. The revolving facility had $850.0 million of commitments and matured July 21, 2021.
- The consolidated total net leverage ratio was 0.74:1, minimum liquidity was $851.7 million, and the company reported compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- U.S. service revenue increased 10.4% in the quarter and 18.0% for the nine months, driven primarily by higher volumes from new and expanded insurance-company contracts, increased existing-supplier volumes and higher average auction prices.
- International service revenue increased 3.8% in the quarter and 6.8% for the nine months. Reported growth was reduced by foreign-currency effects, primarily the weaker British pound; excluding those effects, international growth was stronger.
- Vehicle sales declined despite higher average selling prices, partly because certain seller volumes shifted from the principal model to the agency model and because of foreign-currency effects.
- Yard operations expense rose 9.7% in the quarter and 17.4% for the nine months, reflecting higher volumes, modestly higher processing costs and depreciation from new and expanded U.S. facilities.
- General and administrative expense was essentially flat in the quarter but increased 10.9% for the nine months, partly due to payroll taxes associated with stock-option exercises, professional services and tax-related adjustments.
- Financing cash outflows were $175.6 million, including a $73.0 million net repayment on the revolving facility and $134.6 million of employee stock-based tax withholdings. No shares were repurchased under the company’s repurchase program during the period.
- The company acquired an excavation and site-development business for $10.0 million to enhance land-development capabilities. The acquisition was not material to consolidated results.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash on hand and cash generated from operations should be sufficient to meet operating and working-capital needs for at least the next twelve months. The company expects to continue developing new yards, expanding existing facilities and pursuing acquisitions, which could require additional revolving debt or equity financing.
- No formal numerical revenue or earnings guidance was provided in the filing.
- Business performance is influenced by total-loss frequency, accident rates, used-car values, commodity prices, vehicle mix, international buyer demand, foreign-exchange rates and seasonal weather patterns.
- The company depends on a limited number of major vehicle sellers, although no single customer represented more than 10% of consolidated revenue for the nine months ended April 30, 2017. Seller agreements are generally cancellable with 30 to 90 days’ notice.
- International expansion creates integration, regulatory, foreign-currency, Brexit, anti-bribery and market-adoption risks. Principal-model operations also create inventory and gross-margin risks.
- Georgia sales-tax litigation was substantially reduced from the historical $96.1 million assessment. Following a May 22, 2017 consent order, the remaining disputed principal was $2.6 million plus applicable interest. The company believes it has adequately provided for the probable outcome but warned that an adverse resolution could materially affect results and financial position.
- Claims involving the terminated KPIT enterprise-resource-planning implementation remained pending, with competing summary-judgment motions filed in January 2017. Management did not expect a material ultimate liability but stated that the outcome could not be predicted with certainty.
- The company identified cybersecurity, system implementation, capacity, environmental, self-insurance, competition, regulatory and goodwill-impairment risks. Management reported no material goodwill impairment risk as of April 30, 2017.
- The company expects the future adoption of new lease accounting guidance to significantly increase reported assets and liabilities, although the filing did not quantify the impact.
Most Important Facts for Investors to Verify
- Whether service-revenue growth and higher auction prices continue after the reported increase in U.S. volume.
- The sustainability of earnings and cash flow excluding the $106.7 million nine-month excess tax benefit from stock-option exercises.
- The effect of continued yard expansion and rising yard-operating expenses on future operating margins and capital intensity.
- The location, availability and tax implications of the $155.0 million of cash held by foreign subsidiaries.
- Future foreign-exchange exposure, particularly to the British pound, and the business impact of Brexit-related developments.
- The final resolution and cash cost of the remaining Georgia sales-tax dispute and the KPIT litigation.
- Debt covenant compliance, interest-rate exposure on the revolving facility and the company’s future use of debt for expansion.
- Whether new facilities and international operations achieve expected volumes, synergies and returns.