Copart, Inc. Fiscal 2017 Form 10-K Summary
Business context and reporting period
Copart operates online vehicle auctions and vehicle remarketing services in the U.S., Canada, the U.K., Ireland, Brazil, Germany, the Middle East, India and Spain. Its primary sellers are insurance companies, and its buyers include dismantlers, rebuilders, dealers, exporters and, in some markets, the general public. The company primarily uses its VB3 online auction platform and generally operates as an agent, although it purchases and resells vehicles on a principal basis in parts of the U.K.
The filing covers the fiscal year ended July 31, 2017. The filing also provides unaudited quarterly information, including the fourth quarter ended July 31, 2017. All share and per-share information reflects the April 2017 two-for-one stock split.
Financial performance and key metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $1,448.0 million | $1,268.4 million | 14.2% increase |
| Service revenue | $1,286.3 million | $1,104.4 million | 16.5% increase |
| Vehicle sales | $161.7 million | $164.1 million | 1.4% decrease |
| Operating income | $461.3 million | $406.5 million | 13.5% increase |
| Operating margin | 31.9% | 32.0% | Broadly stable |
| Income before taxes | $440.1 million | $395.9 million | 11.2% increase |
| Net income attributable to Copart | $394.2 million | $270.4 million | 45.8% increase |
| Diluted EPS | $1.66 | $1.11 | 49.5% increase |
| Operating cash flow | $492.1 million | $332.5 million | 48.0% increase |
Revenue growth was driven primarily by higher U.S. vehicle volume from new and expanded insurance contracts, growth from existing suppliers, increased salvage frequency and modestly higher revenue per vehicle. Management attributed higher auction selling prices partly to higher commodity prices. International service revenue increased 7.8% as reported, but would have increased approximately 19.1% excluding a $16.4 million foreign-exchange headwind.
The approximate gross margin, calculated from reported revenue less yard operations and cost of vehicle sales, was 43.6% in fiscal 2017 versus 43.0% in fiscal 2016. The net margin was approximately 27.2% versus 21.3%, substantially aided by a lower effective tax rate.
- Effective tax rate was 10.4%, compared with 31.7% in fiscal 2016. The decrease primarily reflected $107.6 million of excess tax benefits from employee stock-option exercises and the geographic mix of taxable income.
- Fiscal 2017 included a $19.4 million impairment charge, primarily for previously capitalized business-operating software costs.
- Cash and cash equivalents were $210.1 million, up from $155.8 million. Working capital was $285.1 million, up from $220.5 million.
- Total debt was approximately $633.0 million, including $231.0 million drawn under the revolving facility and $400.0 million of senior secured notes, net of related discounts and other obligations.
- The company reported a consolidated total net leverage ratio of 0.83:1 and minimum liquidity of $803.2 million, and stated that it was in compliance with debt covenants.
- Capital expenditures were $172.2 million. Investing cash outflows totaled $335.8 million, including $160.8 million for acquisitions.
Fourth-quarter information
| Metric | Fiscal Q4 2017 | Fiscal Q4 2016 |
|---|---|---|
| Revenue | $378.6 million | $332.7 million |
| Gross margin | $167.5 million | $141.5 million |
| Operating income | $110.8 million | $106.2 million |
| Income before taxes | $106.4 million | $106.0 million |
| Net income attributable to Copart | $70.3 million | $84.1 million |
| Diluted EPS | $0.30 | $0.35 |
Fourth-quarter revenue increased approximately 13.8% and operating income increased approximately 4.3%. Net income and EPS declined, reflecting the unusually low fiscal 2017 effective tax rate benefiting earlier quarters from excess tax benefits, while the fiscal 2016 fourth quarter benefited from a different tax profile. The filing does not provide a separate quarterly cash-flow statement.
Material changes versus the prior comparable period
- U.S. service revenue increased 17.8% to $1,129.0 million; International service revenue increased 7.8% to $157.3 million.
- Service revenue represented 89% of total revenue, up from 87%, while vehicle sales declined to 11% from 13%, reflecting a greater mix of agency-based revenue.
- Yard operations expense increased 16.4% to $678.4 million, broadly tracking volume growth. General and administrative expense increased 9.6% to $151.4 million.
- Other expense increased to $21.2 million from $10.6 million, primarily because of lower international currency gains and changes in the currencies held in cash.
- Cash from operations rose $159.6 million, while financing cash outflows declined substantially because the company made no share repurchases under its program in fiscal 2017 and made no term-loan principal repayment.
- The company acquired National Powersport Auctions through Cycle Express, LLC, and acquired excavation-related assets. The combined net purchase price was $160.8 million, including $79.3 million of goodwill and $70.9 million of intangible assets.
- Goodwill increased to $340.2 million from $260.2 million, primarily because of the acquisitions. No goodwill impairment was recorded.
- The company exercised 18 million stock options in the first quarter and remitted $134.6 million for employee stock-based tax withholdings, compared with $15.0 million in fiscal 2016.
Guidance, outlook, commentary and risks
The filing does not provide quantitative revenue, earnings or margin guidance. Management expects available cash and operating cash flow to fund operating and working-capital requirements for at least the next 12 months, while continuing to develop facilities, expand capacity, pursue seller agreements and consider acquisitions. Management stated that additional revolver borrowings or equity could be used to fund expansion.
- Growth strategy centers on new and acquired facilities, national and regional insurance-seller agreements, international expansion and broader use of online auction and remarketing services.
- Seasonality is material: facilities generally process 10% to 30% more vehicles during winter months, which increases working-capital needs.
- Key operating sensitivities include salvage-vehicle availability, accident and total-loss frequency, used-vehicle and commodity prices, buyer participation, foreign exchange, fuel and towing costs, weather events and yard capacity.
- International expansion exposes the company to currency volatility, Brexit-related uncertainty, differing regulatory regimes, integration risk, anti-bribery compliance and principal-model inventory risk.
- Cybersecurity, system availability and implementation of the internally developed operating system remain significant risks. The company disclosed prior unauthorized access attempts and a 2015 data-security incident.
- The Georgia Department of Revenue tax dispute was reduced from a $96.1 million assessment to $2.6 million of principal tax plus interest after the company established that many transactions qualified for the resale exemption. The matter remained unresolved, although the company had provided for its best estimate of the probable outcome.
- The company is litigating claims against, and defending claims by, KPIT relating to the terminated enterprise-resource-planning implementation. Management stated that any ultimate liability was not expected to be material, but the amount and timing cannot be determined with certainty.
- The company had $152.8 million of future operating-lease commitments, $631.0 million of stated debt-related future payments based on management’s repayment assumptions, and $15.8 million of outstanding letters of credit.
- The company has not paid cash dividends since becoming public and did not repurchase shares under its repurchase program in fiscal 2017.
Important facts for investors to verify
- Whether the unusually low 10.4% effective tax rate, including $107.6 million of excess tax benefits, is nonrecurring and how it affects future EPS comparability.
- Underlying operating growth excluding the $19.4 million software impairment and the effect of foreign-currency movements.
- Volume growth, average selling prices, salvage frequency and the sustainability of new or expanded insurance-seller contracts.
- The integration, profitability and purchase-accounting assumptions for National Powersport Auctions and the excavation-assets acquisition.
- Future capital expenditures, facility capacity requirements, acquisition spending and the company’s intended use of its $850 million revolving facility.
- The final resolution and potential cash exposure from the Georgia sales-tax dispute and KPIT litigation.
- Potential changes from adoption of the new revenue-recognition and lease-accounting standards, including the expected increase in balance-sheet lease assets and liabilities.
- Foreign-currency sensitivity, principal-model exposure in the U.K. and the company’s ability to protect online systems and customer data.