01—Abstract
Summary
Summary of the 10-K filed October 31, 2006. Cited figures are marked; the original filing is the authoritative source.
Copart, Inc. (CPRT) reported fiscal 2006 (year ended July 31, 2006) revenue of $528.6 milliona, up 18.1% from $447.7 million in fiscal 2005, and income from continuing operations before taxes of $174.5 million.
Growth came from higher unit volume, including vehicles displaced by Hurricanes Katrina and Rita, from new and acquired yards, and from higher auction proceeds per vehicle, which raise buyer and certain seller fees. Net income fell to $96.9 millionb (diluted EPS $1.04) from $102.1 million (diluted EPS $1.10), because of a $17.9 million pre-tax loss from discontinuing the Motors Auction Group (MAG) public auction business, which was driven mainly by a $21.8 million goodwill write-down. Operating margin declined to 32.4% from 34.9%, reflecting $14.1 million of abnormal hurricane-related costs, higher yard expenses, and a 29% increase in G&A tied to VB2 technology and Sarbanes-Oxley compliance.
The company ended the year with 122 facilities across the U.S. and Canada, no debt, $275.3 millionc in cash and short-term investments, and $809.97 million in shareholders' equity. Operating cash flow was $141.9 million. Management reported that its internal controls over financial reporting were effective and that its liquidity is sufficient for at least the next 12 months.
Investors should weigh the strong cash generation and balance sheet against concentration risk, since the two largest suppliers accounted for about 21%d of revenue, and against the pending litigation. That litigation includes a patent dispute with Manheim, which was dismissed in June 2006, and several class actions that management considers without merit.
02—Key points
Key Highlights
- Revenue rose 18.1% to $528.6 million, driven by higher unit volume (including hurricane-related vehicles) and higher gross proceeds per vehicle
- Operating income was $171.6 million, but operating margin fell to 32.4% from 34.9% because of abnormal hurricane costs (~$14.1 million) and higher G&A
- Net income declined to $96.9 million ($1.04 diluted EPS) from $102.1 million, mainly due to a $15.7 million after-tax loss from discontinued MAG operations, including a $21.8 million goodwill write-down
- Balance sheet is strong: no debt, $275.3 million in cash and short-term investments, and shareholders' equity of $810.0 million
- Operating cash flow was $141.9 million; the company repurchased only 366,000 shares ($8.9 million) during fiscal 2006 under a 9 million share authorization with about 5.0 million shares remaining
- Expansion continued with 7 acquired and 4 newly opened facilities in fiscal 2006, bringing the network to 122 locations
- Customer concentration remains a risk: State Farm was 14% of revenue, and the two largest suppliers together accounted for about 21%
03—Questions
Frequently Asked Questions
Why did net income decline even though revenue grew 18%?
Net income fell to $96.9 million from $102.1 million because of a $17.9 million pre-tax loss from discontinuing the Motors Auction Group (MAG) business, which included a $21.8 million goodwill write-down. Continuing operations were strong: income from continuing operations rose to $112.7 million from $101.8 million. Operating margin compressed as well, to 32.4% from 34.9%, due to hurricane-related abnormal costs and higher G&A.
How much did the 2005 hurricanes affect Copart's results?
Hurricanes Katrina and Rita added unit volume, which increased revenue, but they also created about $14.1 million of abnormal yard costs under SFAS 151, including extra subhauling, payroll, equipment and facility expenses. As of July 31, 2006, about 28% of the incremental hurricane vehicles remained unsold, and management expects most to be sold within two quarters, assuming no new Gulf Coast storms.
Is Copart's customer base concentrated?
Yes. State Farm accounted for 14% of fiscal 2006 revenue, and the two largest vehicle suppliers together accounted for about 21%. Supplier agreements are generally cancelable on 30 to 90 days' notice, so losing a major supplier could materially affect results.
What does the VB2 internet sales model mean for the company's risk profile?
Copart converted all salvage sales to VB2, its internet auction-style platform, in fiscal 2004. This has broadened the buyer base and supported higher sale prices, but it adds dependence on proprietary technology and network uptime. It also raises the importance of intellectual property protection, and management says future gains from VB2 are unlikely to match recent rates.
Does Copart have liquidity to fund growth and shareholder returns?
Yes. The company had no debt, $275.3 million in cash and short-term investments, and $328.0 million of working capital at July 31, 2006, and management believes these resources plus operating cash flow are sufficient for at least 12 months. The company has not paid cash dividends since its 1994 IPO. It is considering additional buybacks, dividends, or acquisitions for surplus cash.
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