01—Abstract
Summary
Summary of the 10-K filed September 28, 2016. Cited figures are marked; the original filing is the authoritative source.
Copart's fiscal 2016 10-K (year ended July 31, 2016) shows a company growing revenue and profit while leaning more heavily on debt and buybacks.
Total service revenues and vehicle sales rose 10.7% to $1.27 billiona, and operating income rose 18% to $406.5 million, or 32% of revenue versus 30% a year earlier. Net income increased 23% to $270.4 million, and diluted EPS was $2.21 versus $1.67. Growth was driven mainly by the U.S. business, where service revenues climbed 13% on higher volume, partly offset by lower average auction selling prices tied to weaker commodity prices.
International service revenue grew 6.3% on a reported basis, though currency headwinds cut about $11.8 millionb from that figure. Capital allocation was aggressive. Copart spent roughly $458 million on share repurchases, including two Dutch Auction tender offers, and about $174 million on capital expenditures, funded in part by a $500 million increase in revolving credit commitments to $850 million.
Cash fell from $456 million to $156 millionc, and stockholders' equity dropped to $774 million from $964 million. Subsequent to year-end, the company drew $135 million on the revolver and issued about 3.7 million net shares to executives upon option exercises, which is relevant to dilution and liquidity.
Key risks for investors include customer concentration in insurance sellers (83% of vehicles processed), international expansion execution and Brexit-related currency exposure, a pending $96.1 milliond Georgia sales tax assessment and an ongoing KPIT litigation, and sensitivity to salvage frequency, used-car prices, and commodity prices. Management characterized internal controls as effective, and Ernst & Young issued an unqualified audit opinion.
02—Key points
Key Highlights
- Revenue of $1.27 billion, up 10.7% year over year; U.S. service revenues grew 13.0% on volume, offset partly by lower auction selling prices.
- Operating income rose 18% to $406.5 million, expanding operating margin to 32% from 30%; net income grew 23% to $270.4 million.
- Diluted EPS of $2.21 vs. $1.67, helped by share repurchases that reduced weighted average shares from 131.4 million to 122.1 million diluted.
- Shareholder returns of about $458 million in buybacks in fiscal 2016, including $325 million in a December 2015 Dutch Auction tender at $39.00 per share.
- Balance sheet strain: cash fell to $155.8 million from $456.0 million, total debt was $640.5 million, and the revolver was expanded to $850 million with $238 million drawn at year-end.
- Georgia Department of Revenue seeks $96.1 million in sales taxes, penalties and interest; management believes the company has adequately provided for any assessment.
- Adopted ASU 2016-09 early, which lifted tax expense benefits by $14.7 million and reduced the effective tax rate to 31.7%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Copart Inc kept $0.21.
- Revenue$1.27B100.0%
- Cost of revenue−$141.0M11.1%
- Gross profit$1.13B88.9%
- Operating costs−$721.0M56.8%
- Operating income$406.5M32.0%
- Interest, other & tax−$136.1M10.7%
- Net income$270.4M21.3%
Where FY2016 revenue went
$1.27B- Operating costs: $721.0M, 57% of revenue
- Net income: $270.4M, 21% of revenue
- Cost of revenue: $141.0M, 11% of revenue
- Interest, other & tax: $136.1M, 11% of revenue
Kept 21% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed September 28, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $1.27B$1.15B | +10.7% |
| Cost of Revenue | $140.96M$136.41M | +3.3% |
| Gross Profit | $1.13B$1.01B | +11.7% |
| Operating Income | $406.47M$344.40M | +18.0% |
| Interest Expense | $23.61M$18.12M | +30.3% |
| Net Income | $270.36M$219.78M | +23.0% |
| EPS (Basic) | $0.29$0.22 | +35.6% |
| EPS (Diluted) | $0.28$0.21 | +32.1% |
| Shares Outstanding (Basic) | 915.38M1.01B | −9.1% |
| Shares Outstanding (Diluted) | 977.18M1.05B | −7.1% |
05—Questions
Frequently Asked Questions
How much of Copart's revenue depends on insurance company sellers?
Insurance companies supplied about 83% of the vehicles processed in fiscal 2016 and 2015. No single customer exceeded 10% of revenue in fiscal 2016, 2015 or 2014, but arrangements are typically cancellable on 30 to 90 days' notice, so the loss of a major seller could materially affect results.
Why did cash decline so sharply in fiscal 2016?
Cash fell by $300 million, driven by $458 million of stock repurchases, including tender offers, and $174 million of capital expenditures. These outflows were partly offset by $332 million of operating cash flow and $238 million of net revolver borrowings.
What is the status of the Georgia sales tax dispute?
The Georgia DOR issued a $96.1 million assessment in August 2015, which Copart appealed to the Georgia Tax Tribunal. The DOR's August 2016 response denied the company's allegations. Copart believes it has strong defenses and has recorded an adequate provision, but the outcome is uncertain and an adverse result could materially affect results.
How exposed is Copart to currency and Brexit risk?
International operations represented about 20% of revenue. A hypothetical 10% adverse move in the U.S. dollar against the currencies of its foreign operations would have reduced fiscal 2016 operating income by about $6.6 million. The company does not hedge, and it recorded a $109.2 million cumulative translation loss in equity. Post-Brexit uncertainty adds volatility risk.
Could the company's debt load or share issuance pressure future results?
Total debt was $640 million at year-end, with about $400 million of 4.07% to 4.35% fixed-rate senior notes due 2024 to 2029 and a variable-rate revolver maturing in 2021. Interest expense rose to $23.6 million from $18.1 million. After year-end, executives exercised options for a net 3.67 million shares, and the company drew another $135 million on the revolver to cover tax withholding and working capital, which adds to leverage and dilution considerations.
06—Continue