Copart, Inc. — Fiscal 2012 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Copart provides Internet-based vehicle auction and remarketing services in the United States, Canada and the United Kingdom, primarily for insurance companies and other vehicle sellers. North American operations generally act as agents, while UK operations include both agency and principal vehicle sales. The filing covers the three and nine months ended April 30, 2012, compared with the corresponding 2011 periods. The financial statements are unaudited.
- The company operated 152 facilities as of April 30, 2012.
- Copart reincorporated in Delaware in January 2012 and completed a one-for-one stock dividend in March 2012; per-share data and prior-period share amounts were adjusted accordingly.
Financial Performance and Position
| Metric | Three Months Ended April 30, 2012 | Three Months Ended April 30, 2011 | Nine Months Ended April 30, 2012 | Nine Months Ended April 30, 2011 |
|---|---|---|---|---|
| Total revenue | $244.1 million | $236.8 million | $697.6 million | $656.8 million |
| Operating income | $87.9 million | $82.0 million | $216.9 million | $201.8 million |
| Net income | $55.5 million | $50.1 million | $137.2 million | $125.9 million |
| Diluted EPS | $0.43 | $0.35 | $1.04 | $0.79 |
| Operating margin | 36.0% | 34.7% | 31.1% | 30.7% |
| Net margin | 22.7% | 21.2% | 19.7% | 19.2% |
- Third-quarter revenue increased 3.1%, operating income increased 7.2%, and net income increased 10.6% year over year.
- Nine-month revenue increased 6.2%, operating income increased 7.4%, and net income increased 9.0% year over year.
- Third-quarter service revenue increased 3.7% to $203.5 million, while vehicle sales were essentially unchanged at $40.6 million. Nine-month service revenue increased 5.3% to $578.8 million, and vehicle sales increased 10.7% to $118.8 million.
- Growth was supported by higher average selling prices, supplier mix and expansion or migration toward the agency model. Lower vehicle volumes and lower insurance claims partially offset growth.
- Third-quarter effective tax rate was 34.4%, versus 37.6% in the prior-year quarter. The nine-month effective tax rate was 34.8%, versus 37.5%.
- Nine-month operating cash flow was $197.0 million, compared with $200.7 million in the prior-year period. Capital expenditures were $28.5 million, compared with $56.5 million.
- Cash and cash equivalents were $207.1 million at April 30, 2012, compared with $74.0 million at July 31, 2011. Reported working capital was $184.6 million.
- Total term debt outstanding was $462.5 million, with $75.0 million scheduled for repayment within one year and final maturity on December 14, 2015. No revolving credit borrowings were outstanding.
- The company reported compliance with all credit-facility covenants and 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 and profitability increased despite lower unit volumes in the third quarter, primarily because of higher revenue per vehicle and average selling prices.
- Cost of vehicle sales increased 4.0% in the quarter and 15.5% for the nine-month period, reflecting higher costs per unit and changes in units sold.
- Nine-month general and administrative expense, excluding impairment, depreciation and amortization, declined 2.9%, primarily due to lower marketing and headquarters-relocation expenses.
- The company recorded an $8.8 million nine-month impairment charge related primarily to real estate, computer hardware and private aircraft removed from operations and held for sale. No impairment was recorded in the comparable 2011 period.
- Interest expense increased by $1.2 million in the quarter and $6.0 million for the nine-month period, reflecting the term loan.
- Cash used for stock repurchases was $137.7 million during the nine months, compared with $603.4 million in the prior-year period. The company repurchased 6.1 million shares at an average price of $22.18 and had 51.0 million shares remaining under its authorization.
- The company recognized $3.8 million of foreign-currency translation loss in accumulated other comprehensive income during the nine months, and the interest-rate swaps had a $3.0 million liability at April 30, 2012.
Outlook, Commentary, Risks and Unusual Items
- No specific revenue, earnings or other formal financial guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year or future results.
- Management expects continued growth through new and acquired facilities, seller agreements, expanded services and broader use of the VB2 Internet auction platform. The company also planned a phased conversion to a new ERP system through 2013.
- Results are sensitive to salvage-vehicle supply, accident frequency, weather, commodity prices, used-car prices, fuel costs, seller and buyer mix, seasonality, acquisitions, foreign currency movements and competitive conditions.
- One customer accounted for 10% of quarterly revenue. Seller agreements are generally cancellable on 30 to 90 days’ notice, creating customer-concentration and supply risk.
- The Georgia Department of Revenue proposed a $73.8 million sales and use tax assessment, including penalties and interest, relating to January 2007 through June 2011. Copart has not accrued the assessment, believes it has strong defenses and has filed an administrative appeal, but an adverse outcome could materially affect results and financial position.
- The company is relocating its headquarters to Dallas and incurred $1.4 million of severance and $2.1 million of employee-relocation costs during the nine months.
- Pending litigation includes employment-related class actions, a vehicle-fire property-damage claim and other ordinary-course matters. Management believes ultimate liabilities will not be material, but outcomes are uncertain.
- Copart is partially self-insured, with approximately $6.1 million reserved for certain medical, liability and workers’ compensation exposures.
- Interest-rate swaps hedge the term loan but could become ineffective if the debt is retired early or a counterparty becomes unable to perform. Foreign-currency translation exposure is not hedged.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the period.
Important Facts for Investors to Verify
- Resolution and potential cash impact of the $73.8 million Georgia sales-tax assessment.
- Future vehicle volumes, supplier concentration and renewal or cancellation of major seller contracts.
- Effects of UK principal-model operations on revenue growth, gross-margin comparability and inventory risk.
- Term-loan amortization, interest expense, covenant compliance and refinancing requirements before the December 2015 maturity.
- Execution and potential disruption from the ERP conversion and headquarters relocation.
- Whether higher average selling prices, commodity prices and used-car prices are sustainable.
- Potential future impairment of $197.8 million of goodwill and other long-lived assets.