01—Abstract
Summary
Summary of the 10-K filed October 1, 2018. Cited figures are marked; the original filing is the authoritative source.
Copart's fiscal 2018 10-K (year ended July 31, 2018) shows a company operating at high profitability and expanding its footprint.
Revenue rose 24.7% to $1.81 billiona from $1.45 billion, driven mainly by U.S. volume growth (new insurance contracts, existing supplier growth, and Hurricane Harvey flood-damaged vehicles) and higher average selling prices tied to commodity prices and vehicle mix. Operating income climbed 26.6% to $584.3 million, with operating margin holding at roughly 32%. Net income rose 6.0% to $418.0 million, but the effective tax rate jumped to 25.7% from 10.4%, largely because the prior year benefited from $107.6 million of excess stock-option tax benefits versus $21.3 million this year, and the Tax Cuts and Jobs Act added a provisional transition tax charge.
Diluted EPS was $1.73b versus $1.66. The balance sheet strengthened considerably. Cash rose to $274.5 million, the revolver was fully repaid (zero drawn at year-end versus $231.0 million a year earlier), and total debt fell to $399.9 million.
Net leverage was 0.21x, and stockholders' equity increased to $1.58 billionc. Operating cash flow was $535.1 million, while capital expenditures more than doubled... to $287.9 million, reflecting facility buildouts, land purchases, and technology investment. Management has not repurchased shares in fiscal 2018 or 2017 and has not paid a cash dividend since 1994, though it cites repurchases, debt repayment, dividends, and acquisitions as possible uses of cash.
Key risks for investors include concentration in insurance company sellers (78% of vehicles processed), international expansion execution (Germany, Brazil, Middle East, Finland), a pending Georgia sales tax dispute ($2.6 milliond principal in dispute, after an original $73.8 million assessment), an ongoing KPIT litigation outcome, cybersecurity exposure, and the upcoming ASC 606 adoption, which is expected to reduce retained earnings by $10–15 million on August 1, 2018. Insider ownership of 15.9% and the anti-takeover provisions in the charter also merit attention.
02—Key points
Key Highlights
- Revenue grew 24.7% to $1,805.7 million, with U.S. service revenues up 22.7% on volume gains from new and expanded insurance contracts and Hurricane Harvey volumes.
- Operating income rose 26.6% to $584.3 million, holding a steady operating margin of about 32%, though U.S. yard operations costs included $68.6 million of abnormal Hurricane Harvey expenses.
- Net income increased 6.0% to $418.0 million and diluted EPS to $1.73 from $1.66, but the effective tax rate rose to 25.7% from 10.4% because of smaller excess stock-option tax benefits ($21.3 million vs. $107.6 million).
- Total debt fell to $399.9 million from $633.0 million after the $231.0 million revolver balance was fully repaid; net leverage stood at 0.21x with $1.1 billion of minimum liquidity.
- Operating cash flow reached $535.1 million, and capital expenditures rose to $287.9 million, signaling continued investment in yards and technology.
- No share repurchases in fiscal 2018 or 2017 (about 89.1 million shares remain authorized), and no cash dividends have been paid since 1994.
- Pending items include the Georgia sales tax dispute (remaining $2.6 million in principal), the KPIT litigation post-trial proceedings, and the ASC 606 transition expected to reduce retained earnings by $10–15 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Copart Inc kept $0.23.
- Revenue$1.81B100.0%
- Cost of revenue−$196.5M10.9%
- Gross profit$1.61B89.1%
- Operating costs−$1.02B56.8%
- Operating income$584.3M32.4%
- Interest, other & tax−$166.5M9.2%
- Net income$417.9M23.1%
Where FY2018 revenue went
$1.81B- Operating costs: $1.02B, 57% of revenue
- Net income: $417.9M, 23% of revenue
- Cost of revenue: $196.5M, 11% of revenue
- Interest, other & tax: $166.5M, 9.2% of revenue
Kept 23% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed October 1, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $1.81B$1.45B | +24.7% |
| Cost of Revenue | $196.46M$137.55M | +42.8% |
| Gross Profit | $1.61B$1.31B | +22.8% |
| Operating Income | $584.35M$461.30M | +26.7% |
| Interest Expense | $20.37M$23.78M | −14.3% |
| Net Income | $417.87M$394.23M | +6.0% |
| EPS (Basic) | $0.45$0.43 | +4.7% |
| EPS (Diluted) | $0.43$0.41 | +4.2% |
| Shares Outstanding (Basic) | 927.17M914.74M | +1.4% |
| Shares Outstanding (Diluted) | 967.51M948.08M | +2.0% |
05—Questions
Frequently Asked Questions
What drove Copart's revenue growth in fiscal 2018?
Revenue increased $357.7 million, or 24.7%, to $1.81 billion. U.S. service revenues rose $256.2 million on increased unit volume from new and expanded insurance contracts, growth with existing suppliers, and Hurricane Harvey flood-damaged vehicles, along with higher average selling prices linked to commodity prices and vehicle mix. International service revenues rose $36.0 million, aided by $9.4 million of favorable currency effects. Vehicle sales revenue grew 40.5% to $227.2 million.
Why did the effective tax rate increase so sharply, and how does that affect earnings quality?
The effective rate rose to 25.7% from 10.4%, mainly because fiscal 2017 included $107.6 million of excess tax benefits from employee stock option exercises, compared with $21.3 million in fiscal 2018. The Tax Cuts and Jobs Act also contributed a provisional transition tax charge, later raised to $12.4 million, partly offset by a deferred tax remeasurement benefit. Pre-tax income grew 27.8%, so underlying operating performance improved faster than reported net income, which was held back by the tax comparison.
How strong is Copart's balance sheet and liquidity position?
Liquidity is strong. Cash and equivalents were $274.5 million, working capital was $431.9 million, and the revolving facility (capacity $850 million, maturing July 2021) was undrawn at year-end. Total debt was $399.9 million, consisting of $400 million in senior notes at fixed rates from 4.07% to 4.35%, due 2024 to 2029. The consolidated net leverage ratio was 0.21x against covenant limits of 3.25x. Notably, $115.5 million of cash sits in foreign subsidiaries, which management intends to reinvest outside the U.S.
What are the most significant risks investors should monitor?
Key risks include dependence on insurance company sellers, which supplied 78% of vehicles processed; execution risk in international expansion, particularly Germany, where insurers have historically been less involved in salvage disposition; reliance on a new proprietary enterprise operating system; cybersecurity and data privacy exposure, including GDPR compliance; and sensitivity to weather, used car prices, and commodity prices. Legal and regulatory matters include the Georgia sales tax dispute, the KPIT litigation with post-trial proceedings still pending, and possible U.K. competition review of acquisitions. Management believes none of these is likely to be material, but outcomes remain uncertain.
Does Copart plan to return capital to shareholders?
Not currently through dividends or buybacks. Copart has not paid a cash dividend since becoming public in 1994 and made no repurchases in fiscal 2018 or 2017, though 89.1 million shares remain under the existing authorization. Management says it is evaluating uses of excess cash, including repurchases, debt repayment, dividends, and acquisitions, and credit agreement covenants would permit dividends under the leverage tests. Given the rapid debt paydown and growing cash balance, capital return programs are a plausible future consideration, but none has been announced.
06—Continue