01—Abstract
Summary
Summary of the 10-K filed October 17, 2003. Cited figures are marked; the original filing is the authoritative source.
Copart, Inc. (CPRT) reported fiscal 2003 (year ended July 31, 2003) results that show a leading salvage vehicle auction operator still growing, but at a slower pace.
Revenue rose 10% to $347.4 milliona from $316.5 million, while operating income was essentially flat at $90.8 million versus $89.9 million, as yard and fleet costs were held to 58.3% of revenue and depreciation jumped 57% to $25.5 million. Net income was $57.2 million, or $0.62 per diluted share, roughly flat versus $57.4 million ($0.63) in fiscal 2002. Management attributed the slower revenue growth to slower growth in units sold, and noted that revenue growth had fallen from 25% in fiscal 2002.
The company operated 102 facilities in 40 states at year-end, adding six new salvage sites and one acquisition during the year, and it remains in an early stage of building a public automobile auction business whose revenues are not yet material. The balance sheet is conservative. Cash and equivalents were $116.7 millionb, shareholders' equity was $525.6 million, and total debt was only about $0.1 million, against a $95 million undrawn revolving credit facility with $88.5 million available.
Operating cash flow was $79.1 millionc, and capital expenditures were $70.7 million. The board authorized repurchase of up to 9 million shares in February 2003; about 2.7 million shares were bought back by July 31, 2003 (and 3.7 million more by October 16, 2003), and the company adopted a shareholder rights plan in March 2003. Investors should weigh several governance and operating risks.
Executive officers and directors own roughly 26% of the stock, the poison pill could deter acquirers, and key executives are at-will with no non-compete agreements. The company depends on a few large insurance suppliers (State Farm accounted for 13% of revenue), its growth has relied heavily on acquisitions, and unionization efforts by the Teamsters are ongoing at several facilities. Stock traded between $6.99d and $14.89 during fiscal 2003, well below the $23.67 to $25.83 quarterly highs of fiscal 2002, reflecting the earnings slowdown.
02—Key points
Key Highlights
- Revenue grew 10% to $347.4M in FY2003, down from 25% growth in FY2002, as unit volume growth slowed.
- Operating income was essentially flat at $90.8M (26.1% margin vs. 28.4% a year earlier), with depreciation and amortization up 57% to $25.5M.
- Net income was $57.2M, or $0.62 diluted EPS, versus $57.4M ($0.63) in FY2002.
- The balance sheet is strong: $116.7M cash, $525.6M equity, and essentially no debt (about $0.1M), with $88.5M available under a $95M credit line.
- Management is returning capital through buybacks: 9M-share authorization, with 2.7M shares repurchased by year-end and 3.7M more by October 16, 2003.
- The network expanded to 102 facilities in 40 states, including six new salvage sites and one acquisition, and the company is building a public auto auction business that is not yet material to revenue.
- Governance and concentration risks are notable: insiders hold about 26% of shares, a poison pill was adopted in March 2003, and State Farm supplied about 13% of revenue.
03—Questions
Frequently Asked Questions
Why did Copart's revenue growth slow so much in fiscal 2003?
Revenue grew 10% to $347.4M, compared with 25% growth in fiscal 2002. Management attributed the slowdown mainly to slower growth in units sold. Existing facilities contributed about $24.1M of the increase and new facilities about $6.9M. Mild weather, which reduces the supply of salvage vehicles, is a recognized risk to unit volumes.
Is Copart's profitability improving or deteriorating?
Profitability was roughly flat in absolute dollars but weaker as a percentage of revenue. Operating income was $90.8M versus $89.9M, and the operating margin fell from 28.4% to 26.1%. Net income was $57.2M versus $57.4M. Higher depreciation from new facilities and capital spending, plus a 57% rise in D&A, absorbed the gains from better yard and fleet cost control.
How strong is Copart's balance sheet and liquidity?
Very strong. The company held $116.7M in cash at July 31, 2003, had total debt of only about $0.1M, and reported $525.6M in shareholders' equity. Working capital was $171.6M. The company said its cash, operating cash flow, and credit facilities should cover operating needs for at least the next 12 months.
What are the main risks for shareholders?
Key risks include dependence on a small number of insurance suppliers (State Farm accounted for about 13% of revenue, and the top two suppliers for 21%), intense competition from ADESA, Manheim, and others, and reliance on acquisitions for growth. Insiders own about 26% of the stock, which could let them block a takeover. The poison pill adopted in March 2003 could also deter acquirers. Union organizing by the Teamsters at several facilities and environmental liabilities are additional concerns.
What is Copart doing with its capital and share count?
The board authorized repurchases of up to 9 million shares in February 2003. By July 31, 2003, 2.7M shares had been bought back for about $20.4M, and by October 16, 2003, total repurchases reached about 3.7M shares at an average price of $8.49, leaving about 5.3M shares authorized. The company paid no dividends and said it intends to retain earnings for the business.
04—Continue