01—Abstract
Summary
Summary of the 10-K filed September 28, 2017. Cited figures are marked; the original filing is the authoritative source.
Copart (CPRT) closed fiscal 2017 (year ended July 31, 2017) with record results: revenue rose 14.2% to $1.45 billiona and operating income rose 13.5% to $461.3 million.
Net income climbed 45.8% to $394.3 millionb, but the jump was flattered by a one-time tax benefit. The effective tax rate fell to 10.4% (from 31.7%) because of $107.6 million of excess tax benefits from employee stock option exercises under ASU 2016-09. Diluted EPS was $1.66 versus $1.11 a year earlier, and the company generated $492.1 million of operating cash flow.
Investors should view the bottom-line growth as stronger than the underlying operating trend, since the normalized tax rate is closer to 30–33%. Growth was driven primarily by the U.S. segment, where service revenues rose 17.8% on higher unit volume from insurance-company contracts and a higher salvage frequency. International service revenues grew 7.8% on a constant-currency basis of roughly 26%, but reported growth was dampened by about $16.4 millionc of British pound weakness.
The company continued aggressive expansion, opening roughly 20 facilities and acquiring Cycle Express (National Powersport Auctions) for about $161 milliond, which added goodwill and intangibles. Yard operations costs rose 16.4%, and a $19.4 million impairment on capitalized business-operating software was recorded, which is a reminder that the company's ERP replacement effort carries execution risk. The balance sheet strengthened.
Stockholders' equity rose to $1.10 billion from $774 million, and the consolidated net leverage ratio was a modest 0.83x. The company made no share repurchases during fiscal 2017 and paid no dividends, retaining cash for expansion. Long-term risks include concentration among insurance-company sellers, the unresolved Georgia sales tax assessment (remaining principal of $2.6 million plus interest), the KPIT litigation, Brexit-related currency exposure, and the cyclical link between salvage volume, used-car prices and accident frequency.
02—Key points
Key Highlights
- Revenue grew 14.2% to $1,447.98 million, and operating income rose 13.5% to $461.3 million, with operating margin steady at about 32%.
- Net income increased 45.8% to $394.3 million, but this was boosted by $107.6 million of excess tax benefits from stock option exercises. The effective tax rate fell to 10.4% from 31.7%.
- Diluted EPS was $1.66, up from $1.11 in fiscal 2016. Excluding the discrete tax benefit, earnings growth would have been considerably lower.
- U.S. service revenues rose 17.8% to $1,129 million on volume growth from insurance contracts and higher salvage frequency. International service revenues rose 7.8% reported (about 26% excluding a $16.4 million FX headwind).
- Operating cash flow increased 48% to $492.1 million. Free cash flow after $172.2 million of capex was roughly $320 million.
- Expansion continued with about 20 new facilities and the $160.8 million acquisition of Cycle Express (NPA). The company also recorded a $19.4 million impairment on capitalized business-operating software.
- Balance sheet is solid: cash of $210.1 million, total debt of $633 million, net leverage of 0.83x, and no share repurchases or dividends in fiscal 2017. Stockholders' equity grew to $1.10 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Copart Inc kept $0.27.
- Revenue$1.45B100.0%
- Cost of revenue−$137.6M9.5%
- Gross profit$1.31B90.5%
- Operating costs−$849.1M58.6%
- Operating income$461.3M31.9%
- Interest, other & tax−$67.1M4.6%
- Net income$394.2M27.2%
Where FY2017 revenue went
$1.45B- Operating costs: $849.1M, 59% of revenue
- Net income: $394.2M, 27% of revenue
- Cost of revenue: $137.6M, 9.5% of revenue
- Interest, other & tax: $67.1M, 4.6% of revenue
Kept 27% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed September 28, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $1.45B$1.27B | +14.2% |
| Cost of Revenue | $137.55M$140.96M | −2.4% |
| Gross Profit | $1.31B$1.13B | +16.2% |
| Operating Income | $461.30M$406.47M | +13.5% |
| Interest Expense | $23.78M$23.61M | +0.7% |
| Net Income | $394.23M$270.36M | +45.8% |
| EPS (Basic) | $0.43$0.29 | +45.8% |
| EPS (Diluted) | $0.41$0.28 | +49.5% |
| Shares Outstanding (Basic) | 914.74M915.38M | −0.1% |
| Shares Outstanding (Diluted) | 948.08M977.18M | −3.0% |
05—Questions
Frequently Asked Questions
How much of the fiscal 2017 net income increase came from the lower tax rate rather than operations?
A large share. Pre-tax income rose about 11% to $440.1 million, while net income rose about 46%. The gap comes mainly from the tax line, where the effective rate fell to 10.4% because of $107.6 million of excess tax benefits from stock option exercises. Those benefits are tied to employee exercise activity and are not a recurring operating earnings driver, so investors should normalize EPS for them when assessing run-rate profitability.
What is driving growth, and is it sustainable?
Growth is driven mainly by volume gains in the U.S. from new and expanded insurance-company contracts and a rise in salvage frequency, along with modestly higher average selling prices tied to commodity prices. Expansion into new greenfield yards also contributes. Sustainability depends on continued salvage frequency, used-car values, and the company's ability to win and retain seller contracts, which can be cancelled on 30 to 90 days' notice. Management notes that mild weather or falling used-car prices could reduce supply.
What are the most significant legal and regulatory risks?
The main items are the Georgia Department of Revenue sales tax dispute, where the original $96.1 million assessment has been reduced to $2.6 million of principal plus interest and remains pending before the Georgia Tax Tribunal, and the ongoing litigation with KPIT over the terminated ERP project. Management believes any ultimate liability will not be material, but the Georgia case could be costly if resolved adversely. International expansion also exposes the company to FCPA and anti-bribery compliance risk, Brexit-related effects, and possible UK Competition and Markets Authority review of acquisitions.
Does the company pay dividends or repurchase stock, and how does its balance sheet support that?
Copart has not paid a cash dividend since its 1994 IPO and did not repurchase any shares in fiscal 2017. It had $89.1 million of remaining repurchase authorization. Management is retaining cash for expansion and acquisitions. Balance sheet capacity is ample: net leverage was 0.83x, minimum liquidity was $803.2 million, and the credit agreement permits unlimited dividends if net leverage stays below 3.25x. Capital returns could therefore expand in future years if management chooses.
06—Continue