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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Copart, Inc.    CPRT

COPART, INC.

(CPRT)
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COPART : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/20/2020 | 04:58pm EST
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. We are not responsible for the carbon emissions resulting from new
vehicle manufacturing, governmental fuel emissions standards or vehicle use by
consumers. Each vehicle that enters our business operations is an existing fact,
with whatever fuel technology and efficiency it was designed and built to have,
and the substantial carbon emissions associated with the vehicle's manufacture
are already sunk costs. However, upon our receipt of an existing vehicle, we
help decrease its total environmental impact by extending its useful life and
thereby avoiding the carbon emissions associated with the alternative of new
vehicle and auto parts manufacturing. For example, 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 new resource extraction. In each of
these cases, our business reduces 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 from
individuals. We sell the vehicles principally to licensed vehicle dismantlers,
rebuilders, repair licensees, used vehicle dealers, exporters, and in some
jurisdictions, 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.
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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.
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) 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 change in used car values and repair costs, which we believe
are generally trending upward. Changes in used car prices and repair costs, may
impact total loss frequency and 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 11.9 years
in 2020. Repair costs are generally based on damage severity, vehicle
complexity, repair parts availability, repair parts costs, labor costs, and
repair shop lead times. 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 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, but these adverse effects were more than offset
by corresponding increases in vehicle average sales prices. Although we
initially saw substantial declines in vehicle assignments following the onset of
the COVID-19 pandemic, which we attribute principally to reduced accident volume
as miles driven dramatically declined in response to shelter-in-place orders
across the globe, we are now seeing vehicle assignment volumes recovering and
approaching pre-pandemic levels. We cannot predict how the pandemic will
continue to develop, whether and to what extent new shelter-in-place orders will
be issued, or to what extent the pandemic may have longer term unanticipated
impacts on our markets, including, for example, the risk of long-term reductions
in miles driven.
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Although we have been deemed an "essential business" in the jurisdictions in
which we operate and have largely been able to continue our yard operations, we
have been required to make adjustments in our business processes that may reduce
efficiency or increase operating expenses, particularly if the pandemic
continues over a long period of time. We adjusted, 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. The pandemic may have an adverse effect on
our future revenues, with the magnitude and timing of these effects dependent
upon the extent and duration of suspended economic activity across our markets.
We believe that he longer-term impact on our business will depend on potential
adverse operational impacts from outbreaks of COVID-19 at any of our locations;
additional outbreaks of COVID-19 in one or more of our geographic markets; a
reduction in miles driven due to one or more factors relating to the COVID-19
pandemic; any further government actions in response to COVID-19 outbreaks that
restrict business activity or travel; disruptions of governmental administrative
operations due to COVID-19 outbreaks that adversely impact our core business
activities, such as vehicle title processing; and 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."
Operating Costs and Expenses: Yard operations expenses consist primarily of
operating personnel (which includes yard management, clerical, and yard
employees); rent; vehicle transportation; insurance; property related taxes;
fuel; equipment maintenance and repair; marketing costs directly related to the
auction process; and costs of vehicles sold under the purchase contracts.
General and administrative expenses consist primarily of executive management;
accounting; data processing; sales personnel; professional services; marketing
expenses; and system maintenance and enhancements.
Other (Expense) Income: Other (expense) income consists primarily of interest
expense on long-term debt, see Notes to Unaudited Consolidated Financial
Statements, Note 6 - Long-Term Debt; foreign exchange rate gains and losses;
gains and losses from the disposal of assets, which will fluctuate based on the
nature of these activities each period; and earnings from unconsolidated
affiliates.
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) 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; (xii) our capital expenditures; and
(xiii) other macroeconomic factors such as COVID-19. 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 or
equity. However, we cannot predict if these sources will be available in the
future or on commercially acceptable terms.
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 global coverage for our sellers. All of these
acquisitions have been accounted for using the purchase method of accounting.
The following tables set forth operational facilities that we have opened and
began operations from August 1, 2019 through October 31, 2020:
                      United States Locations            Date
                     Fort Wayne, IndianaFebruary 2020Concord, North CarolinaMarch 2020Salt Lake City, UtahMay 2020Redding, CaliforniaAugust 2020Dothan, AlabamaAugust 2020Jacksonville, FloridaAugust 2020Milwaukee, WisconsinSeptember 2020


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