Copart, Inc. — Fiscal 2012 First-Quarter 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. Its sellers are primarily insurance companies, while buyers include dismantlers, rebuilders, dealers, exporters, and, at certain locations, the general public. The report covers the three months ended October 31, 2011, compared with the three months ended October 31, 2010. The financial statements are unaudited.
Copart operated 154 facilities as of October 31, 2011. The company continued expanding through acquisitions and new facilities, including a new facility in Atlanta, Georgia, opened in August 2011. The company also planned to relocate its corporate headquarters to the Dallas, Texas metropolitan area in 2012.
Key Financial Metrics
| Metric | Three Months Ended Oct. 31, 2011 | Three Months Ended Oct. 31, 2010 | Change |
|---|---|---|---|
| Total revenue | $225.6 million | $212.7 million | Up 6.1% |
| Service revenue | $185.6 million | $179.6 million | Up 3.4% |
| Vehicle sales | $40.0 million | $33.1 million | Up 20.8% |
| Operating income | $65.4 million | $59.6 million | Up 9.7% |
| Net income | $41.1 million | $37.8 million | Up 8.8% |
| Diluted earnings per share | $0.62 | $0.45 | Up $0.17 |
| Net cash from operating activities | $64.2 million | $77.5 million | Down $13.4 million |
| Capital expenditures | $7.3 million | $14.8 million | Down $7.5 million |
- Operating margin was approximately 29.0%, compared with 28.0% in the prior-year quarter.
- Net margin was approximately 18.2%, compared with 17.8% in the prior-year quarter.
- Cash and cash equivalents were $212.7 million at October 31, 2011, compared with $74.0 million at July 31, 2011.
- Working capital was $175.6 million at October 31, 2011.
- Total debt and capital lease obligations were approximately $500.7 million, including $75.4 million classified as current and $425.3 million classified as long-term.
- The company had no outstanding borrowings under its $100 million revolving credit facility and stated that it was in compliance with all credit agreement covenants.
- Accounts receivable increased to $136.3 million from $122.9 million at July 31, 2011.
- Total assets were $1.226 billion and shareholders’ equity was $554.8 million at October 31, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher unit volume, increased average vehicle selling prices, new and expanded insurance-company contracts, growth from franchise and independent dealerships, and the continued migration of certain UK contracts from the principal model to the agency model.
- Vehicle sales increased faster than service revenue, partly reflecting higher average selling prices and commodity pricing.
- The company’s adoption of ASU 2009-13 affected comparability. Certain towing, titling, preparation, and related revenues and expenses were recognized when services were performed rather than when the related vehicle was sold. Management estimated that this reduced year-over-year service revenue growth by approximately $7.0 million.
- Operating income increased despite higher yard operating costs and vehicle sales costs. General and administrative expense, excluding depreciation and amortization, declined by approximately 3.8%.
- Interest expense increased to $2.2 million from $15 thousand, primarily because of the term loan funded in January 2011 and expanded to $500 million in September 2011.
- The effective tax rate declined to 35.5% from 37.1%, primarily due to the geographic allocation of income and new elective tax law.
- Operating cash flow declined despite higher earnings, primarily because of changes in operating assets and liabilities, including accounts receivable and vehicle pooling costs.
- Financing cash flow was $82.3 million, compared with a use of $74.9 million in the prior-year quarter. The change primarily reflected $125.0 million of additional debt proceeds and lower share repurchases.
- Copart repurchased 1.1 million shares for approximately $43.6 million at an average price of $40.73 per share. The board increased the total repurchase authorization to 49 million shares, with 27.5 million shares remaining available at quarter-end.
- Restructuring costs of $1.5 million were recognized for headquarters relocation and employee severance.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide specific quantitative revenue or earnings guidance. It stated that available cash and operating cash flow should be sufficient to meet operating and working-capital requirements for at least the next 12 months, while noting that significant future growth could require additional debt or equity financing.
- The business is seasonal: winter weather typically increases accident frequency and vehicle volumes, but extreme weather can also create capacity constraints and abnormal operating costs.
- One customer represented approximately 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 issued a proposed assessment of $73.8 million, including penalties and interest, for allegedly unremitted sales and use taxes for the period January 2007 through June 2011. Copart has not accrued the assessment, believes it has strong defenses, and has filed an administrative appeal. An adverse outcome could materially affect results and financial condition.
- Copart was involved in ordinary-course litigation, including employment and wage-related matters. Management believed the claims were without merit and stated that any ultimate liability was not expected to materially affect consolidated results, although amounts and timing could not be determined with certainty.
- The company had $197.1 million of goodwill, primarily associated with UK acquisitions, and identified potential impairment risk if operating performance or market conditions deteriorate.
- A $375 million interest-rate swap hedged part of the $500 million variable-rate term loan. The swap fixed the hedged portion at 85 basis points plus the applicable credit-facility margin. The company recognized a $0.6 million liability for the swap’s fair value.
- Foreign exchange remains a risk because the company does not hedge translation exposure. Management estimated that a uniform 10% change in the U.S. dollar against the Canadian dollar and British pound would change quarterly revenue by approximately $5.0 million.
- Principal risks include dependence on vehicle supply, competition, commodity and used-car prices, fuel costs, foreign exchange, facility capacity, acquisitions and international operations, regulatory and environmental compliance, self-insurance claims, ERP implementation, and the ability to maintain the benefits of the VB2 online auction platform.
- Management reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Resolution and potential cash exposure from the $73.8 million Georgia sales-tax assessment, which was not accrued.
- Debt repayment schedule, covenant compliance, variable-rate exposure, and the effectiveness of the interest-rate swap.
- Whether revenue and margin trends remain comparable after the ASU 2009-13 revenue-recognition change and the continued shift between UK principal and agency models.
- Customer concentration, renewal terms, and changes in vehicle volumes from major insurance-company sellers.
- Performance and integration costs of UK acquisitions and newly opened facilities, including the Atlanta facility.
- Progress, cost, and operational risk associated with the planned headquarters relocation and phased ERP implementation through 2013.
- Potential goodwill impairment, self-insurance claims, environmental liabilities, and employment-related litigation exposure.