Copart, Inc. 2018 Form 10-K Summary
Business context and reporting period
Copart provides online vehicle auctions and remarketing services through its VB3 platform. Its primary sellers are insurance companies, and its buyers include dismantlers, rebuilders, repair businesses, dealers, exporters and, in certain markets, the general public. Operations span the United States, Canada, the United Kingdom, Brazil, Ireland, Germany, Finland, the United Arab Emirates, Oman, Bahrain and Spain.
The filing covers the fiscal year ended July 31, 2018. The filing also reports unaudited fourth-quarter results for the quarter ended July 31, 2018; “2018 Q4” is therefore a fiscal fourth quarter within the annual report, not a calendar-year quarter.
Key financial metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $1.806 billion | $1.448 billion | +24.7% |
| Service revenue | $1.579 billion | $1.286 billion | +22.7% |
| Vehicle sales | $227.2 million | $161.7 million | +40.5% |
| Operating income | $584.3 million | $461.3 million | +26.7% |
| Income before taxes | $562.5 million | $440.1 million | +27.8% |
| Net income attributable to Copart | $417.9 million | $394.2 million | +6.0% |
| Diluted EPS | $1.73 | $1.66 | +4.2% |
| Operating cash flow | $535.1 million | $492.1 million | +8.7% |
- Operating margin was approximately 32.4%, compared with approximately 31.9% in fiscal 2017.
- Net margin attributable to Copart was approximately 23.1%, compared with approximately 27.2% in fiscal 2017. The comparison was affected by the prior-year benefit from excess tax benefits related to employee stock-option exercises.
- U.S. revenue was $1.491 billion, or 82.6% of total revenue; International revenue was $314.7 million, or 17.4%.
- Cash and cash equivalents were $274.5 million, up from $210.1 million. Working capital was $431.9 million, up from $285.1 million.
- Total debt was approximately $399.9 million, consisting primarily of $400 million of senior secured notes. The revolving credit facility had no outstanding borrowings at year-end, compared with $231 million at July 31, 2017.
- Total assets were $2.308 billion and stockholders’ equity was $1.581 billion.
Material changes versus the prior comparable period
- U.S. service revenue increased 22.7%, driven by higher vehicle volume, new and expanded insurance-company contracts, higher revenue per vehicle and increased total-loss frequency.
- Hurricane Harvey generated an extraordinary volume of flood-damaged vehicles and contributed to higher revenue, but also produced $68.6 million of abnormal operating costs for temporary storage, subhaulers, overtime, travel, lodging and equipment leases.
- International service revenue increased 22.9%, including a $9.4 million favorable foreign-currency impact. International vehicle sales increased 24.5%, including a $7.9 million favorable currency impact.
- Yard operations expense increased 24.8% to $846.9 million, while general and administrative expense increased 16.9% to $176.9 million.
- Fiscal 2018 included a $1.1 million impairment charge, compared with a $19.4 million impairment charge in fiscal 2017, primarily related to capitalized business operating software.
- Income tax expense increased to $144.5 million from $45.8 million. The effective tax rate rose to 25.7% from 10.4%, largely because fiscal 2017 included unusually large excess tax benefits from employee stock-option exercises.
- Capital expenditures increased to $287.9 million from $172.2 million. Acquisition spending declined to $8.8 million from $160.8 million; fiscal 2018 included the $8.9 million acquisition of Finnish salvage auction company Autovahinkokeskus Oy.
- Copart repaid $231 million of revolving borrowings during fiscal 2018 and did not repurchase shares under its repurchase program.
Fourth-quarter information
| Metric | Fiscal Q4 2018 | Fiscal Q4 2017 |
|---|---|---|
| Revenue | $449.2 million | $378.6 million |
| Operating income | $134.8 million | $110.8 million |
| Income before taxes | $132.7 million | $106.4 million |
| Net income attributable to Copart | $109.7 million | $70.3 million |
| Diluted EPS | $0.45 | $0.30 |
Fiscal fourth-quarter revenue increased approximately 18.7% and operating income increased approximately 21.7%. The year-over-year net-income comparison was also influenced by substantially different tax effects.
Liquidity, outlook and risks
- Management stated that cash, cash generated from operations and available borrowing capacity should be sufficient for operating and working-capital requirements for at least the next 12 months.
- The revolving facility provides commitments of up to $850 million and matures July 21, 2021. The company also has $400 million of senior secured notes maturing between 2024 and 2029.
- Management expects to continue developing and acquiring facilities, expanding capacity, pursuing vehicle-supply agreements and extending VB3 and related services internationally. No specific revenue or earnings guidance was provided.
- Operations are seasonal: facilities generally process 10% to 30% more vehicles during winter months, increasing working-capital needs.
- Key risks include dependence on major vehicle sellers, competition, vehicle supply and salvage-frequency fluctuations, weather events and yard-capacity constraints, fuel and commodity prices, foreign-exchange volatility, international integration, regulatory and environmental liabilities, cybersecurity and system disruptions, and changes in used-vehicle values.
- The Georgia Department of Revenue tax dispute had been reduced from an initial $73.8 million assessment to $2.6 million of principal plus interest; litigation remained pending. Management had provided for its best estimate but warned that an adverse outcome could be material.
- The company reported a post-trial dispute with KPIT involving awards to both parties; further proceedings, including prejudgment interest, were expected. Management did not expect the ultimate liability to materially affect results, financial position or cash flows.
- The company recorded a provisional $12.4 million transition-tax charge under the Tax Cuts and Jobs Act and stated that its accounting was not yet complete. It expected future GILTI tax effects to begin in fiscal 2019.
- Adoption of the new revenue-recognition standard in fiscal 2019 was expected to reduce beginning retained earnings by approximately $10 million to $15 million, without a material earnings impact. The new lease standard was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Confirm the sustainability of revenue growth excluding Hurricane Harvey, favorable currency effects and changes in vehicle mix.
- Assess whether the $68.6 million of Harvey-related abnormal costs and related capacity pressures have fully normalized.
- Reconcile net-income and EPS trends after removing unusual tax benefits and the provisional Tax Act impacts.
- Review debt maturities, interest-rate exposure and covenant capacity, including the $400 million senior-note balance and unused revolving facility.
- Monitor the Georgia sales-tax proceeding, KPIT litigation and related reserves or cash settlements.
- Evaluate the effect of ASC 606 and the new lease standard on revenue timing, retained earnings, assets, liabilities and operating metrics.
- Review international expansion, foreign-currency exposure and the company’s ability to integrate new facilities and deploy its proprietary systems.