01—Abstract
Summary
Summary of the 10-K filed September 29, 2014. Cited figures are marked; the original filing is the authoritative source.
Copart's fiscal 2014 10-K (year ended July 31, 2014) shows a company growing revenue and expanding internationally while absorbing a one-time technology write-off.
Total service revenues and vehicle sales rose 11.2% to $1.163 billiona, with service revenues up 12.8% to $958.4 million, driven mainly by North American volume and U.K. growth. Operating income was essentially flat at $274.9 million (down from $283.0 million), because a $29.1 million impairment from abandoning the KPIT/SAP-based enterprise system and higher G&A (up 19.3%) offset revenue gains. Net income declined slightly to $178.7 million, and diluted EPS fell to $1.36 from $1.39.
Cash generation and balance sheet strengthened meaningfully. Operating cash flow rose 31.7% to $262.6 millionb, cash and equivalents more than doubled to $158.7 million, and total debt fell to $302.9 million from $372.5 million after $75 million of term loan repayments. Stockholders' equity increased to $1.0 billion.
Management did not repurchase shares during fiscal 2014 and retained a $47.7 millionc buyback authorization, and it has never paid a cash dividend. Investors should weigh several risks: an unresolved Georgia sales tax assessment of $73.8 million including penalties and interest, a pending litigation dispute with KPIT, a goodwill base of $283.8 million that depends on acquisitions in new international markets, and a reliance on insurance-company sellers (81% of vehicles processed). The company is also replacing its enterprise operating system with an internally developed one, which carries execution risk.
02—Key points
Key Highlights
- Revenue grew 11.2% to $1.163 billion, led by a 12.8% increase in service revenues to $958.4 million, with North America contributing $76.7 million of the service revenue increase.
- Operating income was $274.9 million, down slightly from $283.0 million, after a $29.1 million impairment tied to abandoning the KPIT enterprise software project and G&A rising 19.3% to $164.5 million.
- Net income was $178.7 million and diluted EPS was $1.36, versus $1.39 in fiscal 2013; the effective tax rate fell to 33.8% from 35.0%.
- Operating cash flow rose 31.7% to $262.6 million, and cash and equivalents increased to $158.7 million from $63.6 million.
- Total debt was reduced to $302.9 million from $372.5 million through $75.0 million in term loan repayments; the term loan of $293.8 million matures December 14, 2015.
- Management repurchased no shares in fiscal 2014 and retains 47.7 million shares of buyback authorization; the company has not paid a cash dividend since its 1994 IPO.
- Key legal exposure includes a Georgia Department of Revenue sales tax assessment of $73.8 million, which management believes it has adequately provided for and intends to contest.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Copart Inc kept $0.15.
- Revenue$1.16B100.0%
- Cost of revenue−$174.5M15.0%
- Gross profit$989.0M85.0%
- Operating costs−$714.1M61.4%
- Operating income$274.9M23.6%
- Interest, other & tax−$96.2M8.3%
- Net income$178.7M15.4%
Where FY2014 revenue went
$1.16B- Operating costs: $714.1M, 61% of revenue
- Net income: $178.7M, 15% of revenue
- Cost of revenue: $174.5M, 15% of revenue
- Interest, other & tax: $96.2M, 8.3% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed September 29, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $1.16B$1.05B | +11.2% |
| Cost of Revenue | $174.49M$167.24M | +4.3% |
| Gross Profit | $989.00M$879.15M | +12.5% |
| Operating Income | $274.93M$282.99M | −2.8% |
| Interest Expense | $8.77M$10.27M | −14.6% |
| Net Income | $178.69M$180.03M | −0.7% |
| EPS (Basic) | $0.18$0.18 | −1.4% |
| EPS (Diluted) | $0.17$0.17 | −2.2% |
| Shares Outstanding (Basic) | 1.01B999.30M | +0.6% |
| Shares Outstanding (Diluted) | 1.05B1.04B | +1.1% |
05—Questions
Frequently Asked Questions
Why did operating income decline even though revenue grew more than 11%?
Operating expenses grew faster than revenue, up 16.4% to $888.6 million. The main drivers were a $29.1 million impairment of capitalized software from the terminated KPIT project, a $26.6 million increase in general and administrative expense (including $7.5 million of lease termination, severance and relocation costs), and yard operations costs up 13.6% from acquisition integration and volume growth.
How strong is Copart's balance sheet and liquidity position?
Liquidity improved notably. Cash rose to $158.7 million, working capital increased to $168.0 million from $67.9 million, and total debt fell to $302.9 million. Management states that current cash and operating cash flow are sufficient for at least the next 12 months. Of the cash balance, $57.0 million is held by foreign subsidiaries, which management intends to reinvest outside the U.S.
What is the biggest legal or regulatory risk disclosed?
The Georgia Department of Revenue has assessed $73.8 million in uncollected sales taxes, including penalties and interest, for January 2007 through June 2011. Copart disputes the assessment on the basis of an outside counsel opinion and has filed a protest, and it has provided for the potential liability. A adverse resolution could be materially negative. Separately, the company is in litigation with KPIT over the terminated ERP implementation.
What growth drivers and risks should investors focus on going forward?
Growth is driven by acquisitions and new facilities (including Brazil, the U.A.E., Germany, Spain and Canada), rising salvage frequency in North America, and the ongoing shift of U.K. contracts toward an agency model. Risks include international expansion where insurers have less involvement in salvage disposition, dependence on a limited number of insurance-company sellers, weather-driven volume swings, and execution risk in replacing the enterprise operating system. Goodwill of $283.8 million is also exposed to impairment if acquired international businesses underperform.
Is the company returning capital to shareholders?
Not through dividends, which Copart has never paid. Capital return in fiscal 2014 consisted of no buybacks, versus $13.9 million in fiscal 2013 and $199.9 million in fiscal 2012. Management is weighing additional repurchases, debt repayment, dividends and acquisitions for its remaining cash, and the 47.7 million-share authorization remains available.
06—Continue