(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), including forward-looking statements concerning the potential impact of the COVID-19 pandemic on our business, operations, and operating results. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "intend," "forecast," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part II, Item 1A. under the caption entitled "Risk Factors" in this Form 10-Q and those discussed elsewhere in this Form 10-Q. Unless the context otherwise requires, references in this Form 10-Q to "Copart," the "Company," "we," "us," or "our" refer to Copart, Inc. We encourage investors to review these factors carefully together with the other matters referred to herein, as well as in the other documents we file with the Securities and Exchange Commission (the SEC). We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us. Although we believe that, based on information currently available to us and our management, the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. Overview We are a leading provider of online auctions and vehicle remarketing services with operations in the United States ("U.S."), Canada, the United Kingdom ("U.K."), Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates ("U.A.E."), Oman, Bahrain, and Spain. Our goals are to generate sustainable profits for our stockholders, while also providing environmental and social benefits for the world around us. With respect to our environmental stewardship, we believe our business is a critical enabler for the global re-use and recycling of vehicles, parts, and raw materials. Many of the cars we process and remarket are subsequently restored to drivable condition, reducing the new vehicle manufacturing burden the world would otherwise face. Many of our cars are purchased by dismantlers, who recycle and refurbish parts for vehicle repairs, again reducing new and aftermarket parts manufacturing. And finally, some of our vehicles are returned to their raw material inputs through scrapping, reducing the need for further de novo resource extraction. In each case, our business has reduced the carbon and other environmental footprint of the global transportation industry. Beyond our environmental stewardship, we also support the world's communities in two important ways. First, we believe that we contribute to economic development and well-being by enabling more affordable access to mobility around the world. For example, many of the automobiles sold through our auction platform are purchased for use in developing countries where affordable transportation is a critical enabler of education, health care, and well-being more generally. Secondly, because of the special role we play in responding to catastrophic weather events, we believe we contribute to disaster recovery and resilience in the communities we serve. For example, we mobilized our people, entered into emergency leases, and engaged with a multitude of service providers to timely retrieve, store, and remarket tens of thousands of flood-damaged vehicles in the Houston, Texas metropolitan area in the wake of Hurricane Harvey in the summer of 2017. We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers, and vehicles sourced directly from individual owners. We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and, at certain locations, to the general public. The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss; not economically repairable by the insurance companies; or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that help expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price through the online auction process. In the U.S., Canada, Brazil, the Republic of Ireland, Finland, the U.A.E., Oman, and Bahrain, we sell vehicles primarily as an agent and derive revenue primarily from auction and auction related sales transaction fees charged for vehicle remarketing services as well as fees for services subsequent to the auction, such as delivery and storage. In the U.K., Germany, and Spain, we operate both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles for our own account. In Germany and Spain, we also derive revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle's residual value and/or to facilitate a sale for the insured. Table of Contents We monitor and analyze a number of key financial performance indicators in order to manage our business and evaluate our financial and operating performance. Such indicators include: Service and Vehicle Sales Revenue: Our service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. These auction and auction related services may include a combination of vehicle purchasing fees, vehicle listing fees, and vehicle selling fees that can be based on a predetermined percentage of the vehicle sales price, tiered vehicle sales price driven fees, or at a fixed fee based on the sale of each vehicle regardless of the selling price of the vehicle; transportation fees for the cost of transporting the vehicle to or from our facility; title processing and preparation fees; vehicle storage fees; bidding fees; and vehicle loading fees. These fees are recognized as net revenue (not gross vehicle selling price) at the time of auction in the amount of such fees charged. Purchased vehicle revenue includes the gross sales price of the vehicles which we have purchased or are otherwise considered to own. We have certain contracts with insurance companies, primarily in the U.K., in which we act as a principal, purchasing vehicles and reselling them for our own account. We also purchase vehicles in the open market, primarily from individuals, and resell them for our own account. Our revenue is impacted by several factors, including total loss frequency and the average vehicle auction selling price, as a significant amount of our service revenue is associated in some manner with the ultimate selling price of the vehicle. Vehicle auction selling prices are driven primarily by: (i) domestic and market demand for rebuildable, drivable vehicles; (ii) used car pricing, which we also believe has an impact on total loss frequency; (iii) end market demand for recycled and refurbished parts as reflected in demand from dismantlers; (iv) the mix of cars sold; (v) changes in the U.S. dollar exchange rate to foreign currencies, which we believe has an impact on auction participation by international buyers; and (vi) changes in commodity prices, particularly the per ton price for crushed car bodies, as we believe this has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling. We cannot specifically quantify the financial impact that commodity pricing, used car pricing, and product sales mix has on the selling price of vehicles, our service revenues, or financial results. Total loss frequency is the percentage of cars involved in accidents that insurance companies salvage rather than repair and is driven by the relationship between repair costs, used car values, and auction returns. Over the last several years, we believe there has been an increase in overall growth in the salvage market driven by an increase in total loss frequency. The increase in total loss frequency may have been driven by the decline in used car values relative to repair costs, which we believe are generally trending upward. Conversely, increases in used car prices, such as occurred during the most recent recession, may decrease total loss frequency and adversely affect our growth rate. Used car values are determined by many factors, including used car supply, which is tied directly to new car sales, and the average age of cars on the road. The average age of cars on the road continued to increase, growing from 9.6 years in 2002 to 11.8 years in 2019. The factors that can influence repair costs, used car pricing, and auction returns are many and varied and we cannot predict their movements. Accordingly, we cannot predict future trends in total loss frequency. Beginning in March 2020, our business and operations began to experience the impact of the worldwide COVID-19 pandemic, first within our European operations and as the month progressed throughout the balance of our global operations. In materially all of our jurisdictions, we have been deemed by local authorities an essential business because our operations ensure the removal of vehicles from repair shops, impound yards, and streets and highways, enabling the critical function of our world's road infrastructure. As a result, we have continued to operate our facilities as well as our online-only auctions, while following appropriate health and safety protocols to ensure safe working conditions for our employees as well as for our sellers, buyers, and other business partners with whom we come in contact. From a financial perspective, our operating results were adversely affected by lower processed vehicle volume during the quarter ended April 30, 2020. We received and sold fewer vehicles in the quarter than we otherwise would have due to the effect of the pandemic, and at times during the crisis experienced lower selling prices for vehicles at our auctions, therefore lowering revenues within the quarter. We attribute these volume declines principally to fewer accidents occurring as a result of fewer miles being driven in response to state and national shelter-in-place orders, and price effects principally due to a substantially strengthened U.S. dollar, global demand for vehicles given economic uncertainty, and potential logistics challenges in exporting vehicles. We minimized, but did not make material modifications to, our operating expenses to be able to continue providing employment for our employees, service to our sellers, and process incoming vehicles for sale in future quarters. We expect the pandemic to have an adverse effect on our quarterly revenues in future quarters, with the magnitude and timing of these effects dependent upon the extent and duration of suspended economic activity across our markets. The longer-term impact on our business will depend on any additional outbreaks of the pandemic, governmental responses to those outbreaks, disruptions of governmental administrative operations due to COVID-19 outbreaks that adversely impact our core business activities, such as vehicle title processing; a reduction in miles driven due to one or more factors relating to the COVID-19 pandemic, deteriorating economic conditions generally, and the potential availability, among other things, of vaccines or treatments, none of which we can predict. For a further discussion of risks to our business and operating results arising from the pandemic, please see the section of this Quarterly Report on Form 10-Q captioned "Risk Factors." Table of Contents On March 20, 2020, we filed a Current Report on Form 8-K to announce our draw down of funds under our available credit facilities in order to ensure financial flexibility given current uncertainties; we subsequently repaid all outstanding borrowings under these facilities. As of April 30, 2020, we had cash and cash equivalents of $306.4 million, an increase of $212.9 million over January 31, 2020, and had $1.1 billion of liquidity. These incremental available cash equivalents may be used for investments in land, technology, acquisitions, working capital, share repurchases, or general corporate purposes as permitted by the applicable credit agreements. Operating Costs and Expenses: Yard operations expenses consist primarily of operating personnel (which includes yard management, clerical, and yard employees), rent, contract vehicle transportation, insurance, fuel, equipment maintenance and repair, and costs of vehicles sold under the purchase contracts. General and administrative expenses consist primarily of executive management, accounting, data processing, sales personnel, human resources, professional fees, information technology, and marketing expenses. Other Income and Expense: Other income primarily includes foreign exchange rate gains and losses, and gains and losses from the disposal of assets, which will fluctuate based on the nature of these activities each period. Other expense consists primarily of interest expense on long-term debt. See Notes to Unaudited Consolidated Financial Statements, Note 6 - Long-Term Debt. Liquidity and Cash Flows: Our primary source of working capital is cash operating results and debt financing. The primary source of our liquidity is our cash and cash equivalents and Revolving Loan Facility. The primary factors affecting cash operating results are: (i) seasonality; (ii) market wins and losses; (iii) supplier mix; (iv) accident frequency; (v) total loss frequency; (vi) increased volume from our existing suppliers; (vii) commodity pricing; (viii) used car pricing; (ix) foreign currency exchange rates; (x) product mix; (xi) contract mix to the extent applicable; and (xii) our capital expenditures. These factors are further discussed in the Results of Operations and Risk Factors sections of this Quarterly Report on Form 10-Q. Potential internal sources of additional working capital and liquidity are the sale of assets or the issuance of shares through option exercises and shares issued under our Employee Stock Purchase Plan. A potential external source of additional working capital and liquidity is the issuance of additional debt with new lenders and equity. However, we cannot predict if these sources will be available in the future or on commercially acceptable terms. Table of Contents Acquisitions and New Operations As part of our overall expansion strategy of offering integrated services to vehicle sellers, we anticipate acquiring and developing facilities in new regions, as well as the regions currently served by our facilities. We believe that these acquisitions and openings will strengthen our coverage, as we have facilities located in the U.S., Canada, the U.K., Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain with the intention of providing national coverage for our sellers. The following tables set forth operational facilities that we have opened and began operations from August 1, 2018 through April 30, 2020: United States Locations Date Spartanburg, South Carolina August 2018 Madison, Wisconsin September 2018 Harleyville, South Carolina January 2019 Macon, Georgia January 2019 Mocksville, North Carolina January 2019 Antelope, California January 2019 Sacramento, California March 2019 Fredericksburg, Virginia April 2019 West Mifflin, Pennsylvania May 2019 Hartford, Connecticut July 2019 Buffalo, New York July 2019 Fort Wayne, Indiana February 2020 Concord, North Carolina March 2020 International Locations Geographic Service Area Date Curitiba, Paran� Brazil September 2018 Mannheim, Rhineland-Palatinate Germany October 2018 Stuttgart, Baden-W�rttemberg Germany November 2018 Frankfurt, Hessen Germany November 2018 Itzehoe, Schleswig-Holstein (Hamburg) Germany November 2018 Furth, Bavaria (Nuremberg) Germany November 2018 Massen, Brandenburg (Berlin) Germany November 2018 Friesack, Brandenburg (Berlin) Germany December 2018 Niederlehme, Brandenburg (Berlin) Germany November 2019 Pilsting, Bavaria (Munich) Germany December 2019
The following table sets forth operational facilities obtained through business acquisitions from August 1, 2018 through April 30, 2020:
The period-to-period comparability of our consolidated operating results and financial position is affected by business acquisitions, new openings, weather, and product introductions during such periods.
Results of Operations The following table shows certain data from our consolidated statements of income expressed as a percentage of total service revenues and vehicle sales for the three and nine months ended April 30, 2020 and 2019: Nine Months Ended Three Months Ended April 30, April 30, 2020 2019 2020 2019 Service revenues and vehicle sales: Service revenues 89 % 86 % 89 % 86 % Vehicle sales 11 % 14 % 11 % 14 % Total service revenues and vehicle sales 100 % 100 % 100 % 100 % Operating expenses: Yard operations 46 % 41 % 45 % 43 % Cost of vehicle sales 10 % 13 % 10 % 13 % General and administrative 8 % 8 % 9 % 9 % Total operating expenses 64 % 62 % 64 % 65 % Operating income 36 % 38 % 36 % 35 % Other expense (1) % (1) % (1) % - % Income before income taxes 35 % 37 % 35 % 35 % Income taxes 8 % 2 % 4 % 5 % Net income 27 % 35 % 31 % 30 %
Comparison of the Three and Nine Months Ended April 30, 2020 and 2019 The following table presents a comparison of service revenues for the three and nine months ended April 30, 2020 and 2019:
Three Months Ended April 30, Nine Months Ended April 30, (In thousands) 2020 2019 Change % Change 2020 2019 Change % Change Service revenues United States $ 431,875 $ 416,874 $ 15,001 3.6 % $ 1,310,023 $ 1,122,470 $ 187,553 16.7 % International 59,707 56,808 2,899 5.1 % 179,449 162,825 16,624 10.2 % Total service revenues $ 491,582 $ 473,682 $ 17,900 3.8 % $ 1,489,472 $ 1,285,295 $ 204,177 15.9 %
Service Revenues. The increase in service revenues during the three months ended April 30, 2020 of $17.9 million, or 3.8%, as compared to the same period last year resulted from (i) an increase in the U.S. of $15.0 million and (ii) an increase in International of $2.9 million. The growth in the U.S. was driven primarily by (i) increased volume and (ii) an increase in revenue per car. The increase in volume in the U.S. was derived from (i) growth in the number of units sold from new and expanded contracts with insurance companies and (ii) growth from existing suppliers, driven by what we believe was an increase in total loss frequency. Excluding the detrimental impact of $2.8 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and Brazilian real to U.S. dollar exchange rates, the growth in International of $5.7 million was driven primarily by an increase in revenue per car.
Three Months Ended April 30, Nine Months Ended April 30, (In thousands) 2020 2019 Change % Change 2020 2019 Change % Change Vehicle sales United States $ 35,323 $ 31,325 $ 3,998 12.8 % $ 104,076 $ 87,010 $ 17,066 19.6 % International 23,455 48,109 (24,654) (51.2) % 86,376 127,077 (40,701) (32.0) % Total vehicle sales $ 58,778 $ 79,434 $ (20,656) (26.0) % $ 190,452 $ 214,087 $ (23,635) (11.0) %
Vehicle Sales. The decrease in vehicle sales during the three months ended April 30, 2020 of $20.7 million, or 26.0%, as compared to the same period last year resulted from (i) a decrease in International of $24.7 million partially offset by (ii) an increase in the U.S. of $4.0 million. The increase in the U.S. was primarily the result of increased volume and higher average auction selling prices, which we believe was due to a change in the mix of vehicles sold and increased demand. The decline in International of $24.7 million was primarily the result of decreased volume driven by contractual shift from purchase contracts to fee based service contracts and a change in mix of vehicles sold. The decrease in vehicle sales for the nine months ended April 30, 2020 of $23.6 million, or 11.0%, as compared to the same period last year resulted from (i) a decrease in International of $40.7 million partially offset by (ii) an increase in the U.S. of $17.1 million. The increase in the U.S. was primarily the result of increased volume and higher average auction selling prices, which we believe was due to a change in the mix of vehicles sold and increased demand. Excluding a detrimental impact of $2.2 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and European Union euro to U.S. dollar exchange rates, the decline in International of $38.5 million was primarily the result of decreased volume driven by contractual shift from purchase contracts to fee based service contracts and a change in mix of vehicles sold.
May 28, 2020
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