01—Abstract
Summary
Summary of the 10-K filed September 25, 2015. Cited figures are marked; the original filing is the authoritative source.
Copart's fiscal 2015 (year ended July 31, 2015) showed solid operating performance with total revenue of $1.146 billiona, down 1.5% from $1.163 billion in fiscal 2014, while operating income rose 25% to $344.4 million from $274.9 million.
The revenue decline was driven entirely by a 21.6% drop in vehicle sales (principal-basis purchases, largely in the U.K.), while service revenues grew 2.8% to $985.4 millionb on higher North American and U.K. volumes. Fiscal 2014 operating income was depressed by a $29.1 million software impairment tied to the terminated KPIT ERP project, so the year-over-year margin improvement is partly a comparison effect. Net income increased 23% to $219.8 million, and diluted EPS rose to $1.67 from $1.36.
Balance sheet and capital allocation changed meaningfully. In December 2014 Copart raised $700 millionc of debt (a $300 million secured term loan and $400 million of senior notes due 2024-2029) and used the proceeds to repay the $275 million prior facility and fund a $225.1 million modified Dutch auction tender offer at $36.00 per share in July 2015. Total debt rose to $645.8 million from $302.9 million, and cash climbed to $456.0 million.
Stockholders' equity declined to $964.5 milliond because of the buyback and a $68.5 million cumulative translation loss, reflecting the strengthening U.S. dollar against the British pound and other foreign currencies. Key risks for investors include a Georgia Department of Revenue sales tax assessment of $96.1 million (including penalties and interest) that the company is contesting and believes it has adequately provided for, ongoing litigation with KPIT, expansion into international markets with different operating models, and exposure to vehicle supply concentration, weather, and used-car and commodity price cycles. Management reports that its controls were effective as of July 31, 2015.
02—Key points
Key Highlights
- Operating income rose 25.3% to $344.4 million (30% operating margin) versus $274.9 million in fiscal 2014, which included a $29.1 million impairment charge.
- Diluted EPS increased to $1.67 from $1.36 (up 22.8%), and net income reached $219.8 million versus $178.7 million.
- Service revenues grew 2.8% to $985.4 million, led by North America (+$18.6 million) and the U.K. (+$6.4 million), while lower-margin vehicle sales fell 21.6% to $160.7 million.
- Total debt more than doubled to $645.8 million after a $700 million debt raise in December 2014 that funded debt refinancing and the $225.1 million July 2015 tender offer.
- Cash and equivalents rose to $456.0 million from $158.7 million, though $82.0 million of it is held by foreign subsidiaries.
- A $96.1 million Georgia sales tax assessment (issued August 2015, appealed September 2015) is the most significant contingent liability; management says it has adequately provided for the exposure.
- No cash dividends have been paid since the 1994 IPO; the company intends to retain earnings, with buybacks and debt repayment as alternative uses of cash.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Copart Inc kept $0.19.
- Revenue$1.15B100.0%
- Cost of revenue−$136.4M11.9%
- Gross profit$1.01B88.1%
- Operating costs−$665.3M58.0%
- Operating income$344.4M30.1%
- Interest, other & tax−$124.6M10.9%
- Net income$219.8M19.2%
Where FY2015 revenue went
$1.15B- Operating costs: $665.3M, 58% of revenue
- Net income: $219.8M, 19% of revenue
- Cost of revenue: $136.4M, 12% of revenue
- Interest, other & tax: $124.6M, 11% of revenue
Kept 19% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed September 25, 2015Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $1.15B$1.16B | −1.5% |
| Cost of Revenue | $136.41M$174.49M | −21.8% |
| Gross Profit | $1.01B$989.00M | +2.1% |
| Operating Income | $344.40M$274.93M | +25.3% |
| Interest Expense | $18.12M$8.77M | +106.7% |
| Net Income | $219.78M$178.69M | +23.0% |
| EPS (Basic) | $0.22$0.18 | +22.5% |
| EPS (Diluted) | $0.21$0.17 | +23.5% |
| Shares Outstanding (Basic) | 1.01B1.01B | +0.2% |
| Shares Outstanding (Diluted) | 1.05B1.05B | +0.1% |
05—Questions
Frequently Asked Questions
Why did revenue decline while operating income increased sharply?
Total revenue fell 1.5% to $1.146 billion because vehicle sales, which are recorded at gross selling price for vehicles Copart buys for its own account (mainly in the U.K.), dropped 21.6%. Service revenues, which carry higher margins and are fee-based, grew 2.8%. Operating income also benefited from the absence of fiscal 2014's $29.1 million impairment and a $25.6 million (15.5%) reduction in general and administrative expenses, partly due to integration and relocation costs in 2014 that did not recur.
How much debt does Copart carry and when does it come due?
Total debt was $645.8 million at July 31, 2015. The $300 million secured Term Loan had $243.8 million outstanding, amortizing $18.8 million per quarter through December 2015 and $7.5 million per quarter thereafter, with the balance due December 3, 2019. The $400 million of senior secured notes carry fixed rates of 4.07% to 4.35% and mature in 2024 through 2029. A $300 million revolver was undrawn. Scheduled principal payments total $52.5 million in fiscal 2016 and $643.8 million in total over the life of the debt.
What is the Georgia sales tax matter and how material is it?
The Georgia Department of Revenue audited sales and use taxes for January 2007 through June 2011 and initially proposed $73.8 million in assessments on sales to non-U.S. resellers. After negotiations, the DOR's revised work papers computed a $2.7 million liability before interest and penalties, but in August 2015 the DOR issued a formal assessment of $96.1 million including penalties and interest. Copart appealed to the Georgia Tax Tribunal and says it has adequately provided for the assessment and has strong defenses. The outcome is uncertain, and an adverse resolution could materially affect results and financial position. It is equal to roughly 44% of fiscal 2015 net income, so investors should monitor it closely.
What drove the share buyback and tender offer, and how did it affect shareholders?
On July 9, 2015, Copart completed a modified Dutch auction tender offer, purchasing 6,254,061 shares at $36.00 per share for $225.1 million, which reduced shares outstanding to about 120.2 million from 126.1 million at July 31, 2014. The tender was funded with proceeds of the December 2014 debt issuance rather than cash on hand. Separately, the company repurchased 231,500 shares under its ongoing program during fiscal 2015, leaving 47.5 million shares available under the 98 million-share authorization. Repurchases tend to increase EPS and support the stock price, but they also raise leverage and reduce equity, which fell to $964.5 million.
What are the main risks to Copart's growth in international markets?
International expansion into the U.K., U.A.E., Brazil, Germany, Spain, Oman, and Bahrain carries execution, regulatory, and currency risks. Some markets operate on a principal basis, which exposes Copart to inventory risk and lower gross margins. In many new markets, insurers have not historically been central to salvage disposition, so the company's model may not be adopted. Anti-bribery compliance (FCPA, U.K. Bribery Act, Brazil Clean Companies Act) and possible U.K. Competition and Markets Authority review of acquisitions add further exposure. Copart does not hedge foreign currency or translation exposure, and a 10% adverse dollar move would have reduced fiscal 2015 operating income by about $5.6 million. Foreign currency translation losses reached $68.5 million cumulatively and reduced equity during the year.
06—Continue