Copart, Inc. Form 10-Q Summary
Business context and reporting period
Copart provides online vehicle auctions and vehicle remarketing services through its VB3 platform. Sellers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, at certain locations, the general public. The company operates in the United States and international markets, including Canada, the United Kingdom, Brazil, Germany, Spain and the Middle East.
This unaudited Form 10-Q covers the three and six months ended January 31, 2020, Copart’s fiscal second quarter and first half of fiscal 2020, compared with the corresponding 2019 periods. The company reports U.S. and International operating segments.
Key financial metrics
| Metric | Three months ended January 31, 2020 | Year-over-year change | Six months ended January 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $575.1 million | 18.6% | $1.130 billion | 19.4% |
| Service revenue | $510.0 million | 22.4% | $997.9 million | 23.0% |
| Vehicle sales | $65.1 million | (4.4%) | $131.7 million | (2.2%) |
| Operating income | $209.9 million | 27.4% | $415.3 million | 31.3% |
| Net income | $168.7 million | 28.4% | $386.9 million | 57.6% |
| Diluted EPS | $0.71 | 29.1% | $1.62 | 60.4% |
| Operating margin | 36.5% | +2.5 percentage points | 36.8% | +3.3 percentage points |
| Net margin | 29.3% | +2.2 percentage points | 34.3% | +8.4 percentage points |
Six-month operating cash flow was $356.9 million, compared with $215.2 million in the prior-year period. Capital expenditures increased substantially to $400.4 million from $136.7 million, primarily for facility expansion, land and lease buyouts, equipment and software. Investing cash flow was negative $398.7 million, and total cash decreased by $92.8 million to $93.5 million at January 31, 2020.
At January 31, 2020, total assets were $3.049 billion and stockholders’ equity was $2.125 billion. Accounts receivable increased to $446.0 million from $367.3 million at July 31, 2019, while property and equipment increased to $1.789 billion from $1.428 billion.
Debt, liquidity and capital allocation
- Outstanding debt included $400.0 million of senior secured notes, $13.6 million drawn on the revolving facility and approximately $1.4 million of finance lease liabilities.
- The revolving facility has an $850.0 million commitment and matures July 21, 2021. The January 31, 2020 interest rate was the prime rate of 4.75% with no applicable margin.
- Cash and cash equivalents were $93.5 million, of which $72.5 million was held by foreign subsidiaries and intended to remain permanently reinvested outside the United States.
- Management reported minimum liquidity of $895.3 million, a consolidated total net leverage ratio of 0.38:1 and compliance with debt covenants.
- No shares were repurchased under the company’s repurchase program during the six months. The company remitted $101.3 million for employee stock-based tax withholding related to a cashless option exercise.
- Copart has not paid a cash dividend since becoming public in 1994.
Material changes versus the prior comparable period
- Service revenue growth was led by the United States, which increased 23.6% in the quarter and 24.5% for the six-month period. Management attributed the increase primarily to higher vehicle volume from new and expanded insurance-company contracts, existing-supplier growth and higher revenue per car.
- International service revenue increased 14.4% in the quarter and 12.9% for the six-month period, primarily from increased volume, partly offset by foreign-exchange effects.
- Vehicle sales declined because international volume decreased as contracts shifted from purchase arrangements to fee-based service arrangements. U.S. vehicle sales increased due to higher volume and average auction prices.
- Operating income grew faster than revenue as cost of vehicle sales declined and operating expenses represented a smaller percentage of revenue. Yard operations expense nevertheless increased 19.4% in the quarter and 17.7% for the six-month period, reflecting higher volume, processing costs and depreciation from new and expanded facilities.
- The six-month effective tax rate fell to 5.0% from 21.8%, primarily because of $77.2 million of excess tax benefits from employee stock-option exercises, compared with $5.0 million in the prior-year period. This materially increased net-income and EPS growth.
- Copart adopted the new lease accounting standard in fiscal 2020, recording operating lease right-of-use assets of $104.4 million and operating lease liabilities of $105.2 million at January 31, 2020, without a material income-statement impact.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative revenue, earnings or margin guidance. Management expects operating cash flow, existing cash and available borrowing capacity to fund working capital requirements for at least the next 12 months, while continuing to acquire or develop facilities and expand existing locations. New-yard development costs may range from $3.0 million to $50.0 million per location.
Management identified seasonality as a factor: winter weather typically increases vehicle processing volumes by 10% to 30% at most facilities but also increases working-capital needs. Results may be affected by total-loss frequency, accident rates, used-vehicle and commodity prices, foreign-exchange rates, vehicle-seller contracts, buyer demand, weather, facility capacity, acquisitions and capital expenditures.
- Dependence on a limited number of major vehicle sellers and the risk of losing or changing seller contracts.
- International expansion, integration of acquired operations, Brexit-related uncertainty and foreign-currency volatility.
- Capacity constraints, zoning and permitting challenges, and the cost and availability of suitable yards.
- Cybersecurity, system availability, online auction disruptions, data privacy requirements and technology implementation risks.
- Environmental liabilities, regulatory compliance, self-insured claims and litigation exposure.
- Potential goodwill or capitalized-software impairment; goodwill was $338.3 million at January 31, 2020.
- Tax audits and changes in tax law. The company was under examination by certain U.S. taxing authorities for fiscal years 2014 through 2018 but did not expect a material impact.
The company reported no material pending legal proceedings and no off-balance-sheet arrangements. Management stated that disclosure controls were effective and that no material changes had occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether service-revenue growth, insurance-seller volume and revenue per vehicle remain durable after the unusually favorable period comparison.
- The sustainability of reported net income and EPS given the unusually low six-month effective tax rate from stock-option tax benefits.
- Whether capital expenditures and facility expansion generate sufficient incremental volume and returns, particularly after investing cash flow exceeded operating cash flow.
- The timing and refinancing implications of the July 2021 revolving-facility maturity and the company’s senior secured debt structure.
- The geographic availability of cash, including the $72.5 million held by foreign subsidiaries and potential repatriation taxes.
- Exposure to Brexit, foreign-exchange movements, international integration, seller concentration, yard capacity, weather and cybersecurity risks.