How did Copart perform financially in fiscal 2007?

Revenue grew 6% to $560.7 million and operating income grew 18% to $203.1 million. Net income reached $136.3 million, or $1.46 per diluted share, up from $96.9 million, or $1.04, in fiscal 2006. Fiscal 2006 included hurricane-related costs and losses from discontinued operations, so part of the improvement reflects a weak prior-year comparison.

Why did Copart acquire UK businesses, and what risks come with them?

The UK acquisitions of Universal Salvage (about $120.0 million, June 2007) and Century Salvage (about $9.1 million, August 2007) mark Copart's first operations outside North America and add ten UK facilities. Risks include lower margins, because the UK buys vehicles outright on a principal basis; inventory losses from theft, devaluation, or obsolescence; foreign currency exposure, which Copart does not hedge; integration challenges; and a lack of prior international experience.

How strong is Copart's balance sheet and how is it returning capital?

Copart had $201.0 million in cash and short-term investments at July 31, 2007 against $2.8 million of total debt, and shareholders' equity was $880.9 million. It repurchased about $89.6 million of stock during fiscal 2007 and has not paid cash dividends since going public in 1994. Management said it is considering additional buybacks, dividends, and acquisitions as uses for excess cash.

What are the biggest concentration and governance risks?

State Farm Insurance accounted for 11% of fiscal 2007 revenue, and supplier contracts can typically be cancelled on 30 to 90 days' notice. Executive officers and directors together own about 20% of the stock, which gives them significant influence over votes and potential takeovers. The board also adopted a shareholder rights plan (poison pill) in 2003, which could deter acquisition attempts.

Are there material legal or environmental liabilities?

Management says the pending lawsuits over storage liens (Gray and Green), the Foreign Car Sales antitrust/contract suit, and the Dallas, Texas lead-contamination matter are not expected to have a material effect on financial position, results, or cash flows. However, the TCEQ has declined to issue a no-further-action letter for Dallas until additional sampling is completed, and the outcome of these matters cannot be predicted with certainty.

CPRT 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed October 1, 2007. Cited figures are marked; the original filing is the authoritative source.

Copart, Inc. (CPRT) closed fiscal 2007 (year ended July 31, 2007) with revenue of $560.7 million^a, up 6% from $528.6 million in fiscal 2006, and operating income of $203.1 million, up 18% from $171.6 million.

Net income rose to $136.3 million^b, or $1.46 per diluted share, compared with $96.9 million, or $1.04 per diluted share, in fiscal 2006. Fiscal 2006 was depressed by about $14.1 million of hurricane Katrina and Rita costs and a $17.7 million after-tax loss from discontinued MAG auction operations, so the year-over-year comparison flatters underlying growth somewhat, though same-store North American revenue growth was still a solid $15.1 million. Gross margin in North America improved to 48.1% from 43.6%, reflecting the absence of hurricane costs and efficiency from the Internet-based VB2 sales model.

The most important strategic development is the entry into the United Kingdom. Copart acquired Universal Salvage plc on June 14, 2007 for about $120.0 million^c in cash, and Century Salvage Sales Limited for about $9.1 million on August 1, 2007. The UK business operates largely on a principal basis, buying vehicles outright, which lowers gross margin (29.6% in the UK versus 48.1% in North America) and adds inventory and foreign currency risk.

Management has also warned that UK results will complicate period-to-period comparisons. Balance sheet strength remains a key feature: the company holds $201.0 million^d in cash and short-term investments against total debt of only $2.8 million, and it repurchased about 3.0 million shares for $89.6 million during the year, leaving 1.97 million shares authorized under the buyback.

Investors should weigh the strong profitability and cash generation (operating cash flow of $182.1 million) against several risks disclosed in the filing: concentration among suppliers (State Farm alone was 11% of revenue), dependence on Internet sales technology (VB2), the unproven international expansion, and a 20% insider ownership stake that could influence corporate transactions alongside a shareholder rights plan. Pending environmental questions at the Dallas, Texas facility and several storage-lien and antitrust suits are not expected to be material, according to management.

02—Key points

Key Highlights

Fiscal 2007 revenue rose 6% to $560.7 million and operating income rose 18% to $203.1 million, with North American gross margin expanding to 48.1% from 43.6%.
Diluted EPS increased to $1.46 from $1.04, though fiscal 2006 included about $14.1 million in hurricane-related costs and a $15.7 million loss from discontinued MAG operations, which inflates the year-over-year improvement.
Copart entered the UK market with the June 2007 acquisition of Universal Salvage plc (about $120.0 million) and the August 2007 acquisition of Century Salvage (about $9.1 million), adding ten UK facilities by late September 2007.
UK operations run on a principal basis with a 29.6% gross margin, which management expects to weigh on consolidated gross margins and make results harder to compare across periods.
Strong balance sheet with $201.0 million in cash and short-term investments and only $2.8 million of total debt; operating cash flow was $182.1 million.
Aggressive capital return: 2,995,405 shares repurchased in fiscal 2007 for $89.6 million at a weighted average price of $29.91, with 1,966,295 shares remaining under the authorization. No cash dividends have been paid since the 1994 IPO.
Concentration and execution risks include State Farm at 11% of revenue, reliance on internally developed VB2 technology, and an unproven international business. Executive officers and directors own about 20% of shares, and a poison pill is in place.

03—Questions

Frequently Asked Questions

How did Copart perform financially in fiscal 2007?
Revenue grew 6% to $560.7 million and operating income grew 18% to $203.1 million. Net income reached $136.3 million, or $1.46 per diluted share, up from $96.9 million, or $1.04, in fiscal 2006. Fiscal 2006 included hurricane-related costs and losses from discontinued operations, so part of the improvement reflects a weak prior-year comparison.
Why did Copart acquire UK businesses, and what risks come with them?
The UK acquisitions of Universal Salvage (about $120.0 million, June 2007) and Century Salvage (about $9.1 million, August 2007) mark Copart's first operations outside North America and add ten UK facilities. Risks include lower margins, because the UK buys vehicles outright on a principal basis; inventory losses from theft, devaluation, or obsolescence; foreign currency exposure, which Copart does not hedge; integration challenges; and a lack of prior international experience.
How strong is Copart's balance sheet and how is it returning capital?
Copart had $201.0 million in cash and short-term investments at July 31, 2007 against $2.8 million of total debt, and shareholders' equity was $880.9 million. It repurchased about $89.6 million of stock during fiscal 2007 and has not paid cash dividends since going public in 1994. Management said it is considering additional buybacks, dividends, and acquisitions as uses for excess cash.
What are the biggest concentration and governance risks?
State Farm Insurance accounted for 11% of fiscal 2007 revenue, and supplier contracts can typically be cancelled on 30 to 90 days' notice. Executive officers and directors together own about 20% of the stock, which gives them significant influence over votes and potential takeovers. The board also adopted a shareholder rights plan (poison pill) in 2003, which could deter acquisition attempts.
Are there material legal or environmental liabilities?
Management says the pending lawsuits over storage liens (Gray and Green), the Foreign Car Sales antitrust/contract suit, and the Dallas, Texas lead-contamination matter are not expected to have a material effect on financial position, results, or cash flows. However, the TCEQ has declined to issue a no-further-action letter for Dallas until additional sampling is completed, and the outcome of these matters cannot be predicted with certainty.

04—Continue

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