Copart, Inc. Form 10-Q Summary
Business Context and Reporting Period
Copart operates online vehicle auctions and vehicle remarketing services through its VB3 platform. Sellers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, in some locations, the general public. Operations span the United States and international markets including Canada, the United Kingdom, Brazil, Germany, Finland, Spain and the Middle East.
The filing covers the three and nine months ended April 30, 2019, Copart’s fiscal 2019 third quarter. Results are unaudited. Comparisons are with the three and nine months ended April 30, 2018, unless otherwise stated.
Key Financial Metrics
| Metric | Three Months Ended April 30, 2019 | Year-over-Year Change | Nine Months Ended April 30, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $553.1 million | +15.7% | $1.499 billion | +10.5% |
| Service revenue | $473.7 million | +15.3% | $1.285 billion | +8.3% |
| Vehicle sales | $79.4 million | +17.8% | $214.1 million | +26.2% |
| Operating income | $207.5 million | +18.8% | $523.7 million | +16.5% |
| Operating margin | 37.5% | Approximately +1.0 percentage point | 34.9% | Approximately +1.8 percentage points |
| Net income attributable to Copart | $192.7 million | +51.4% | $438.2 million | +42.2% |
| Diluted earnings per share | $0.81 | +55.8% | $1.82 | +42.2% |
| Effective tax rate | 5.6% | Down from 25.6% | 15.4% | Down from 28.3% |
Revenue growth was driven primarily by higher U.S. volumes, new and expanded insurance-company contracts, increased total-loss frequency, and higher average auction selling prices. International growth also benefited from increased volumes and selling prices, although reported results were reduced by foreign-exchange effects.
Nine-month net cash provided by operating activities was $453.5 million, compared with $377.2 million in the prior-year period. Investing cash flow was a use of $242.2 million, including $259.3 million of property and equipment purchases. Financing cash flow was a use of $382.8 million, primarily reflecting $365.0 million of share repurchases and $45.6 million of employee stock-based tax withholding payments.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $102.8 million at April 30, 2019, down from $274.5 million at July 31, 2018.
- Working capital was $316.7 million, down from $431.9 million at July 31, 2018.
- Total debt and capital lease obligations were approximately $406.4 million, consisting primarily of $400.0 million of senior secured notes and $7.0 million drawn under the revolving facility, partially offset by debt discounts and current classifications.
- The revolving credit facility has total commitments of $850.0 million and matures July 21, 2021. The April 30, 2019 borrowing rate was one-month LIBOR of 2.47% plus a 1.00% margin.
- The consolidated total net leverage ratio was 0.43:1, and management reported minimum liquidity of approximately $0.9 billion. Copart was in compliance with its debt covenants.
- Management believes available cash and operating cash flow will be sufficient for operating and working-capital requirements for at least the next 12 months. Approximately $72.7 million of cash was held by foreign subsidiaries and was intended to remain permanently invested outside the United States.
Material Changes Versus the Prior Comparable Period
- Operating income increased faster than revenue, with operating margin improving to 37.5% in the quarter and 34.9% year to date.
- Yard operations expense increased 14.4% in the quarter and 2.7% year to date. The prior-year nine-month period included $68.6 million of abnormal Hurricane Harvey-related costs, including temporary storage, subhauler, overtime, travel and equipment expenses.
- Cost of vehicle sales increased 23.4% in the quarter and 30.0% year to date, primarily due to higher international volumes and purchase prices.
- General and administrative expense declined 0.8% in the quarter but increased 6.1% year to date, reflecting growth initiatives, litigation costs and European expansion.
- Copart repurchased 7.6 million shares for $365.0 million during the nine months, while no shares were repurchased in the prior-year comparable period. The program had 81.5 million shares remaining for repurchase at April 30, 2019.
- ASC 606 revenue recognition was adopted on August 1, 2018 using the modified retrospective method. The adoption reduced opening retained earnings by $23.0 million but did not materially affect current-quarter or year-to-date earnings.
- Net income benefited from a substantially lower effective tax rate, including $10.2 million of discrete tax benefits related to amended returns and $29.1 million of excess tax benefits from stock-option exercises in the quarter.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide quantitative revenue or earnings guidance. Management expects continued investment in new and existing facilities, acquisitions and expansion. New yards may cost approximately $3.0 million to $50.0 million depending on size, location and infrastructure requirements; future expansion may require additional revolver borrowings or equity financing.
Management identifies seasonality, accident frequency, total-loss frequency, used-car values, commodity prices, foreign exchange, vehicle supply, weather, transportation costs and product mix as important operating drivers. Winter conditions typically increase facility processing volumes by 10% to 30%, while extreme weather can create both additional vehicle supply and abnormal operating costs.
- Revenue depends substantially on relationships with major vehicle sellers, although no single customer represented more than 10% of consolidated revenue during the nine months ended April 30, 2019.
- International expansion, acquisitions, facility integration and implementation of proprietary systems may increase costs and execution risk.
- Online auction operations face cybersecurity, system availability, privacy and data-protection risks.
- Foreign-exchange movements reduced reported international service revenue by approximately $4.2 million in the quarter and $9.5 million year to date.
- Pending litigation involving KPIT includes court awards and counterclaims; the ultimate liability or recovery cannot be determined with certainty, although management does not expect the outcome to be material.
- The company had $33.6 million of liabilities for unrecognized tax benefits and was under examination by certain U.S. taxing authorities for fiscal years 2014 through 2017.
- Goodwill was $337.7 million. Management reported no material current risk of goodwill impairment, but future impairment testing remains sensitive to operating and market conditions.
Investor Verification Checklist
- Verify the sustainability of revenue growth from increased vehicle volumes, new contracts and higher auction selling prices.
- Assess whether margins remain elevated after the comparison benefit from Hurricane Harvey-related costs in the prior year.
- Review the cash impact and authorization remaining under the $365.0 million share-repurchase program.
- Confirm the availability of cash held by foreign subsidiaries and the potential tax consequences of repatriation.
- Evaluate facility expansion and capital-expenditure requirements relative to operating cash flow.
- Monitor international execution, foreign-exchange exposure and the effect of principal-based vehicle sales on margins and inventory risk.
- Review the status and potential financial impact of the KPIT litigation, tax examinations and unrecognized tax benefits.