Why did gross margin decline so sharply in fiscal 2008?

The UK business operates primarily on a principal basis, buying salvage vehicles outright and reselling them for its own account. Because the full purchase price is recorded in yard operations expense, UK revenue carries a much lower gross margin percentage (9.4%) than the agency-based North American business (51.0%). Management expects this mix shift to keep consolidated gross margin percentages lower in future periods.

How is Copart funding its share buybacks and acquisitions, and is it taking on debt?

In fiscal 2008 the company funded buybacks and acquisitions largely from existing cash, which fell by roughly $171 million, and from operating cash flow of $194 million. It has essentially no debt: total debt was $2.2 million, and the new $200 million Bank of America revolver was undrawn at July 31, 2008. Management believes existing cash, operating cash flow and the revolver will cover needs for at least the next 12 months.

What are the main risks to Copart's business that investors should watch?

Key risks include reliance on a limited number of insurance-company sellers (the largest seller was about 10% of revenue, and sellers can cancel on 30 to 90 days' notice); execution risk in integrating UK acquisitions and operating outside North America for the first time; dependence on the VB2 internet platform and its patent; weather and accident-rate swings in supply; and the possibility of goodwill impairment. Pending litigation includes a $4.7 million CARS breach-of-contract suit and a Texas environmental matter at the Dallas facility that could require further remediation.

Is Copart paying dividends, and how much stock has it been buying back?

Copart has never paid a cash dividend since going public in 1994 and says it intends to retain earnings. Instead it returns capital through repurchases. In fiscal 2008 it bought back 6,615,764 shares at a weighted average price of $40.70, reducing shares outstanding from 88.3 million to 83.3 million. The company has said it is also considering dividends, additional buybacks and acquisitions as uses of its cash.

What drove revenue growth beyond the UK acquisitions?

North American same-store revenue grew about $46.7 million, or roughly 8.6% of the prior-year North American base, while new North American facilities added about $4.4 million. Growth was supported by growing vehicle volumes, higher sale prices, and the expansion of VB2 and new programs such as Copart Dealer Services and CopartDirect, which target dealers and the general public respectively.

CPRT 10-K FY2008 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 29, 2008. Cited figures are marked; the original filing is the authoritative source.

Copart, Inc. (CPRT) closed fiscal 2008 (year ended July 31, 2008) with revenue of $784.8 million^a, up 40% from $560.7 million in fiscal 2007, and operating income of $237.9 million, up about 17%.

Net income rose to $156.9 million^b ($1.75 diluted EPS) from $136.3 million. Growth was driven largely by the UK, which contributed $187.9 million of revenue after the June 2007 Universal Salvage acquisition and three further UK acquisitions. However, the UK operates on a principal basis (buying vehicles outright), which sharply lowers gross margin: consolidated gross margin fell to 41.1% from 47.6%, with the UK earning only 9.4%.

Management has said this mix will continue to weigh on consolidated margins. The balance sheet shifted meaningfully toward capital return and expansion. Cash and short-term investments fell to about $39 million^c from $210 million, as the company spent $269 million on share repurchases (6.6 million shares at an average of $40.70), $38 million on acquisitions and $113 million on capital expenditures.

Shares outstanding fell to 83.3 million from 88.3 million. Shareholders' equity declined to $799 million^d.

The company remains debt-free apart from minor UK facilities and has a new undrawn $200 million Bank of America revolving credit facility, and management believes liquidity is sufficient for at least 12 months. Key risks for investors include dependence on insurance-company sellers (State Farm was 10% of revenue), UK integration and foreign currency exposure, goodwill of about $177 million, an unresolved UK environmental matter in Dallas, several pending lawsuits (including a $4.7 million CARS claim and an antitrust suit Copart filed against AASC and its co-conspirators), and a VB2 internet-auction model that management no longer expects to deliver the same rate of improvement as in prior years.

02—Key points

Key Highlights

Revenue grew 40% to $784.8 million, with the UK contributing $173.1 million of the $224.2 million increase.
Gross margin (revenue less yard operations expense) fell to 41.1% from 47.6%, driven by the lower-margin UK principal-based model; UK gross margin was 9.4% versus North America's 51.0%.
Net income rose 15% to $156.9 million; diluted EPS was $1.75 versus $1.46 in fiscal 2007.
Company repurchased 6.6 million shares for $269 million in fiscal 2008 and has 15.4 million shares remaining under its 29 million-share authorization.
Cash and short-term investments dropped to $39.0 million from $210.2 million, and working capital fell to $84.5 million from $247.9 million.
Two large CEO-related repurchases occurred: 600,000 shares at $47.55 in June 2008 and 1.5 million shares at $40.00 in July 2008 ($60 million), both from Chairman and CEO Willis J. Johnson.
Goodwill rose to $177 million after UK acquisitions, and the company's VB2 internet-auction patent was issued in January 2008.

03—Questions

Frequently Asked Questions

Why did gross margin decline so sharply in fiscal 2008?
The UK business operates primarily on a principal basis, buying salvage vehicles outright and reselling them for its own account. Because the full purchase price is recorded in yard operations expense, UK revenue carries a much lower gross margin percentage (9.4%) than the agency-based North American business (51.0%). Management expects this mix shift to keep consolidated gross margin percentages lower in future periods.
How is Copart funding its share buybacks and acquisitions, and is it taking on debt?
In fiscal 2008 the company funded buybacks and acquisitions largely from existing cash, which fell by roughly $171 million, and from operating cash flow of $194 million. It has essentially no debt: total debt was $2.2 million, and the new $200 million Bank of America revolver was undrawn at July 31, 2008. Management believes existing cash, operating cash flow and the revolver will cover needs for at least the next 12 months.
What are the main risks to Copart's business that investors should watch?
Key risks include reliance on a limited number of insurance-company sellers (the largest seller was about 10% of revenue, and sellers can cancel on 30 to 90 days' notice); execution risk in integrating UK acquisitions and operating outside North America for the first time; dependence on the VB2 internet platform and its patent; weather and accident-rate swings in supply; and the possibility of goodwill impairment. Pending litigation includes a $4.7 million CARS breach-of-contract suit and a Texas environmental matter at the Dallas facility that could require further remediation.
Is Copart paying dividends, and how much stock has it been buying back?
Copart has never paid a cash dividend since going public in 1994 and says it intends to retain earnings. Instead it returns capital through repurchases. In fiscal 2008 it bought back 6,615,764 shares at a weighted average price of $40.70, reducing shares outstanding from 88.3 million to 83.3 million. The company has said it is also considering dividends, additional buybacks and acquisitions as uses of its cash.
What drove revenue growth beyond the UK acquisitions?
North American same-store revenue grew about $46.7 million, or roughly 8.6% of the prior-year North American base, while new North American facilities added about $4.4 million. Growth was supported by growing vehicle volumes, higher sale prices, and the expansion of VB2 and new programs such as Copart Dealer Services and CopartDirect, which target dealers and the general public respectively.

04—Continue

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