Copart, Inc. Fiscal 2012 Form 10-K Summary
Business context and reporting period
Copart provides online vehicle auctions and remarketing services in the United States, Canada and the United Kingdom through its VB2 platform. Customers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters and, at certain locations, the general public. The filing covers the fiscal year ended July 31, 2012; the fourth-quarter information is unaudited.
- At July 31, 2012, Copart operated 155 facilities: 136 in the United States, 4 in Canada and 15 in the U.K.
- Insurance-company vehicles represented 82% of units processed, unchanged from fiscal 2011.
- North America generated $731.5 million of revenue and the U.K. generated $192.7 million.
Financial performance and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $924.2 million | $872.2 million | +6.0% |
| Service revenue | $757.3 million | $713.1 million | +6.2% |
| Vehicle sales | $166.9 million | $159.2 million | +4.8% |
| Operating income | $286.4 million | $265.3 million | +7.9% |
| Net income | $182.1 million | $166.4 million | +9.5% |
| Diluted EPS | $1.39 | $1.08 | +28.7% |
| Cash flow from operations | $229.7 million | $242.9 million | -5.5% |
- Operating margin was approximately 31.0%, compared with 30.4% in fiscal 2011. Net margin was approximately 19.7%, compared with 19.1%.
- Cash and cash equivalents were $140.1 million, versus $74.0 million at July 31, 2011. Working capital was $134.9 million.
- Total debt was $444.1 million, including $443.8 million outstanding under the term loan. The company had no revolver borrowings and was in compliance with all debt covenants.
- The term loan matures December 14, 2015, with scheduled quarterly amortization of $18.8 million. Interest-rate swaps covered the term-loan balance.
- Capital expenditures were $54.8 million, down from $70.2 million. Net cash used in investing activities was $48.1 million.
- Copart repurchased 8.9 million shares for $203.3 million at an average price of $22.51. The remaining repurchase authorization was 48.2 million shares.
- The company does not pay a cash dividend and stated that it expects to retain earnings for operations and growth.
Material changes versus the prior comparable period
- Revenue growth was driven by higher unit volume, new and expanded insurance relationships, dealer-related business, higher average vehicle selling prices and continued migration of certain U.K. contracts from the principal model to the agency model.
- Yard operating expenses increased only 0.9% to $377.6 million despite higher volume, reflecting lower processing cost per vehicle. General and administrative expense increased 6.4% to $114.5 million, including higher depreciation and amortization.
- Interest expense increased to $11.3 million from $4.1 million because of higher borrowings. The effective tax rate declined to 34.5% from 36.9%.
- Fiscal 2012 included an $8.8 million impairment charge related primarily to real estate, computer hardware and private aircraft held for sale. Headquarters relocation costs and other restructuring charges also affected results.
- No significant acquisitions were completed during fiscal 2012. In August 2012, after year-end, Copart acquired Ride Safely Middle East Auction in Dubai for an immaterial amount.
- The company capitalized $55.0 million of software costs at July 31, 2012, compared with $46.8 million a year earlier, as it continued its phased ERP implementation.
Outlook, risks, contingencies and unusual items
The filing does not provide quantitative revenue, earnings or margin guidance. Management’s stated strategy is to expand through facility acquisitions and development, national and regional seller agreements, broader services and further application of VB2 in new markets.
- Seasonality is significant: winter weather generally increases accident frequency and facility volumes by approximately 10% to 30%, while mild weather can reduce salvage supply.
- International expansion exposes Copart to foreign-exchange, regulatory, integration, market-structure and principal-model inventory risks. The company does not hedge translation exposure.
- The Georgia Department of Revenue proposed a $73.8 million sales and use tax assessment, including penalties and interest, for January 2007 through June 2011. Copart disputes the assessment, has not accrued it, and is pursuing an administrative appeal.
- ERP implementation is scheduled to continue through fiscal 2013 and 2014; system interruptions or implementation failures could disrupt vehicle processing and online auctions.
- Goodwill was $196.4 million at year-end. Management reported that fiscal 2012 goodwill testing identified no impairment.
- Foreign subsidiaries held $58.8 million of cash intended to remain permanently reinvested outside the United States.
- Contractual obligations included $443.8 million of term debt, $105.3 million of operating lease commitments, $24.4 million of scheduled debt interest and $6.7 million of letters of credit.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Review the Georgia tax assessment, appeal status and potential cash or earnings exposure.
- Reconcile reported earnings growth with the decline in operating cash flow and the company’s continued share repurchases and debt amortization.
- Assess leverage, required term-loan repayments and compliance with credit-facility covenants through the December 2015 maturity.
- Monitor the cost, timing and operational risk of the ERP conversion and the level of capitalized software costs.
- Evaluate exposure to insurance-company seller concentration, salvage volumes, commodity and used-vehicle prices, weather and foreign exchange.
- Confirm the impact of the U.K. agency-model migration and the Dubai acquisition on future revenue mix, margins and inventory risk.