Copart, Inc. — Fiscal 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Copart provides online vehicle auctions and remarketing services through its VB3 platform. Its customers primarily include insurance companies, while buyers include dismantlers, rebuilders, repair businesses, used-vehicle dealers, exporters and, in some locations, the general public. The company operates in the United States, Canada, the United Kingdom, Brazil, the Middle East, Germany, Ireland, Spain and India.
The filing covers the three months ended October 31, 2016, corresponding to fiscal 2017 first quarter. The financial statements are unaudited and should be read with the fiscal 2016 Form 10-K.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total service revenues and vehicle sales | $346.0 million | $288.8 million | Up 19.8% |
| Service revenues | $307.1 million | $251.0 million | Up 22.4% |
| Vehicle sales | $38.9 million | $37.9 million | Up 2.8% |
| Operating income | $104.8 million | $86.2 million | Up 21.6% |
| Operating margin | 30.3% | 29.9% | Up approximately 40 bps |
| Income before taxes | $102.5 million | $81.8 million | Up 25.4% |
| Net income | $167.3 million | $52.6 million | Up 218.0% |
| Diluted EPS | $1.41 | $0.41 | Up $1.00 |
| Operating cash flow | $74.3 million | $76.8 million | Down 3.3% |
| Capital expenditures | $38.2 million | $20.2 million | Up 89.5% |
Operating expenses were $241.2 million, or 69.7% of revenue, compared with 70.1% in the prior-year quarter. Yard operations increased 23.3% to $167.6 million, cost of vehicle sales increased 3.2% to $33.1 million, and general and administrative expense increased 16.9% to $40.5 million.
Net margin was 48.3%, compared with 18.2% in the prior-year quarter, but the comparison is significantly distorted by a $64.7 million income tax benefit. The effective tax rate was negative 63.1%, primarily because of $101.4 million of excess tax benefits from employee stock-option exercises, compared with $0.2 million in the prior-year period.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $168.4 million at October 31, 2016, up from $155.8 million at July 31, 2016.
- Working capital was $273.0 million, up from $220.5 million at July 31, 2016.
- Operating cash flow of $74.3 million was substantially offset by $39.1 million of investing cash outflows and $16.7 million of financing cash outflows, producing a $12.6 million increase in cash.
- Accounts receivable increased to $294.4 million from $266.3 million, while income taxes receivable increased to $110.9 million from $18.8 million, largely reflecting the stock-option-related tax benefit.
- The secured revolving credit facility had commitments of $850.0 million and outstanding borrowings of $341.9 million, leaving approximately $508.1 million of stated borrowing capacity before other limitations.
- Senior secured notes had aggregate principal of $400.0 million, with maturities ranging from 2024 through 2029. Total debt and capital lease obligations on the balance sheet were approximately $744.2 million, net of discounts and fees.
- The revolving facility matures July 21, 2021 and bore interest at one-month LIBOR of 0.53% plus a 1.25% margin at October 31, 2016. The company was in compliance with its debt covenants.
- Management stated that cash, cash generated from operations and available financing should be sufficient for operating and working-capital requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- U.S. service revenue increased 24.3%, driven by higher volume from new and expanded insurance-company contracts, growth from existing suppliers and a marginally higher revenue per vehicle.
- International service revenue increased 10.0% as reported; management stated that growth excluding foreign-exchange effects was approximately 24.8%.
- Foreign-currency movements reduced international service revenue by approximately $5.0 million and international vehicle sales by approximately $4.3 million.
- Operating income grew faster than total revenue, producing a modest operating-margin improvement despite continued facility and technology investment.
- Capital expenditures nearly doubled to $38.2 million, primarily for facility development, land and lease buyouts, equipment, and software development.
- Financing activity included $103.9 million of net revolving-facility borrowings and $14.0 million of proceeds from stock-option exercises. The company remitted $134.6 million for employee stock-based tax withholdings.
- No shares were repurchased under the standing repurchase program during the quarter. The program had 44.5 million shares remaining available as of October 31, 2016.
- The company opened or developed additional facilities, including a new location in Bad Fallingbostel, Germany, and continued expansion in the United States and other international markets.
Outlook, Commentary, Risks and Unusual Items
Management expects continued expansion through new facilities, facility improvements, acquisitions, additional seller agreements, broader services and international deployment of its auction technology. No specific revenue, earnings or margin guidance was provided.
- Business activity is seasonal; winter weather typically increases accident frequency and salvage volumes, but severe weather can create yard-capacity constraints and abnormal operating costs.
- Results depend on total-loss frequency, salvage and used-vehicle prices, commodity prices, accident rates, vehicle supply, buyer participation, product mix and foreign-exchange rates.
- The company relies on a limited number of major vehicle sellers, although no single customer represented more than 10% of consolidated revenue in the quarter. Seller agreements are generally cancellable on 30 to 90 days’ notice.
- The Georgia Department of Revenue issued a $96.1 million sales-tax assessment, including penalties and interest, related to 2007–2011 transactions. Copart appealed the assessment and believes it has adequately provided for the probable outcome, but an adverse resolution could materially affect results and financial condition.
- Copart is involved in litigation with KPIT relating to a terminated enterprise-resource-planning implementation agreement and related intellectual-property allegations. Management does not currently expect a material ultimate liability, but the outcome cannot be determined with certainty.
- International expansion exposes the company to integration, regulatory, political, currency, Brexit-related and operational risks. The company does not hedge foreign-currency exposure.
- Online operations and the proprietary auction platform create cybersecurity, privacy, system availability and technology-implementation risks.
- Adoption of the forthcoming lease standard is expected to significantly increase reported assets and liabilities when operating leases are recognized on the balance sheet; the ultimate effect on results and disclosures was still under evaluation.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $101.4 million employee-stock-option excess tax benefit and the resulting $64.7 million tax benefit.
- Track whether U.S. volume growth and new insurance-company contracts continue to offset international currency pressure and expansion costs.
- Monitor cash conversion, the sharp increase in capital expenditures, and the $341.9 million revolving debt balance.
- Assess the potential cash and earnings exposure from the $96.1 million Georgia sales-tax assessment and the company’s recorded provision.
- Review future effects of foreign-exchange movements, Brexit-related uncertainty, severe weather, salvage supply, commodity prices and used-car values.
- Evaluate execution of new-yard development, international integration and internally developed operating systems.
- Confirm future accounting effects from lease and revenue-recognition standards and whether those changes materially affect reported leverage or operating metrics.